iStar
Financial
Annual Report
2014
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At iStar, we seek the white space
beyond commodity capital. After
20 years in the business, we’ve
had success, learned from our
challenges and remain resilient,
opportunistic and true to our word.
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, 2015,
the Company had 182 employees.
Independent Auditors
PricewaterhouseCoopers LLP
New York, NY
Registrar & 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 20, 2015, 9:00 a.m. ET
Sofitel Hotel of New York City
45 West 44th Street
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
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2014 was a turning point for
our company. Actively focused on making new
investments, and extracting value from our existing port-
folio, we began putting in place a plan to expand our presence
in the market and identify areas of competitive advantage and growth.
(In other words, we made money last year and are pretty excited for the
years ahead.) What’s important now is to create a path forward that will give
us a significant position in our industry and the investment world. • Let me review
some of our key successes in the past year. We began the year with several goals: to
accelerate our investment activity, to extend and shift our debt profile to a mostly unsecured
structure and to position the company for increasing profitability. I am very pleased with how
we performed on all three fronts. Our investment activity during the year totaled over $1.3 billion
and centered on our themes of large transactions (less competition), heavily invested sponsors
(lower risk) and gateway cities (better capital flows). On the liability side we executed a refinancing
of our $1.3 billion in short term secured debt with the same amount of longer term unsecured
debt, freeing up almost $2 billion in previously encumbered collateral. An unsecured balance
sheet not only gives us additional flexibility in terms of raising capital, but it also supports the
needs of our contrarian and adaptable investment strategy. And perhaps most importantly,
we generated significant income from three of our business lines to push adjusted income
solidly into positive territory. And while land continued to be a drag on earnings, we should
begin to see several projects in that segment produce positive earnings in 2015 and
progress made on others. • With land beginning to contribute, and our investment
team uncovering interesting opportunities to deploy our cash holdings, we
look forward to the coming years with renewed excitement. We’ve been
working to get each of our business lines to the point where all
can be a positive part of the iStar story, and can now see
that beginning to happen. We truly appreciate
your patience and support.
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our businesses
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Real Estate Finance
iStar excels where high expecta-
tions demand premium, tailored
financing solutions and thought-
ful execution. Delivering what
the capital markets can’t or won’t
provide, we have pioneered
forward thinking and non-com-
modity investment themes for
more than 20 years.
Not many deals go through as
many twists and turns as the W
Fort Lauderdale, but it exempli-
fies the creative tenacity it takes
to see complex projects through.
We created an innovative struc-
ture to finance the separate hotel
and condo-hotel components,
despite both being constructed
concurrently, and partnered with
another lender to split the deal.
When markets turned difficult,
we offered flexibility through
multiple modifications as the
sponsor continued to support
the deal through the infusion
of fresh equity. When our co-
lender expressed interest in
exiting the deal, we opportunisti-
cally acquired their position. We
were confident in our basis and
value of the property, believing
it was just a question of when
and not if the property would sell.
Four months later, the property
sold at full value, generating a
strong return on our opportunis-
tic acquisition.
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Net Lease
At the intersection of corporate
credit, capital market pricing and
real estate disciplines, iStar has
completed more than $4 billion
of net lease transactions across
office, industrial, retail, hotel,
entertainment and other prop-
erty types — facilities we own
and lease long-term primarily to
single corporate tenants in order
to generate stable, long-term
and inflation-hedged cash flow.
The key lies in zeroing in on prop-
erties that are mission-critical to
the business. When Solo Cup
sought to refinance debt taken
on in a significant merger, they
turned to iStar. Our net lease
transaction involved six of their
manufacturing facilities that rep-
resented roughly three-fourths of
Solo’s EBIDTA and included their
most state-of-the-art produc-
tion lines. We saw through to
the underlying business and rec-
ognized the stability of the cash
flows due to the high switching
costs of their customers. In 2014,
following Solo’s acquisition by
Dart Container, the new owners
bought us out of the lease, gen-
erating a significant round-trip
return on our investment.
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Operating Properties
Reimagined commercial and
residential assets form the core
of iStar’s operating properties
portfolio. We unlock their value
through inventive redesign, the
infusion of capital, repositioning
and intensive asset management
efforts.
Operating and revitalizing such
properties in major cities across
the U.S. has further honed our
skills, making iStar stronger in all
parts of our business. For exam-
ple, The Ilikai Hotel, an iconic
Hawaiian hotel, had fallen into
neglect and was mired in contro-
versy. When iStar took ownership
of the hotel portion of the 30-story
tower, we worked hard to rebuild
trust with the hotel employees
and condo owners, while invest-
ing in upgrades and a lobby/
retail experience worthy of The
Ilikai’s name. We secured per-
mission to add kitchens to the
hotel units as per the original
design and began selling them
as condos. It took a full mix of
iStar disciplines — architecture
and engineering, legal, public
relations, finance, operations —
working in concert to bring to
life The Ilikai’s inherent value and
best use.
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Land & Development
Creating communities. Reimag-
ining landscapes and the urban
core. Breaking new ground. iStar’s
land business focuses our creative
energies and agile disciplines on
transforming bare spaces into
unique developments.
Our land portfolio consists
primarily of master planned com-
munity projects, urban infill sites
and waterfront parcels, located
across the U.S. Successful devel-
opment often comes down to
finding the right partners. 1000
South Clark, a 2.5 acre site in
Chicago’s South Loop, had been
slated to become luxury condos,
but we saw it as better suited
for premium rentals. When iStar
took ownership, we had the land
and capital, but needed a local
builder’s vision and “know-how.”
JDL had the local experience,
expertise and complementary
ideas but needed a flexible capi-
tal solution. Most importantly, we
were on the same page from day
one — quickly structuring a mutu-
ally beneficial joint venture, with
iStar as both equity investor and
lender. As the 29-story tower
has risen, our knowledge of the
local market and our partner’s
capabilities has grown, further-
ing the potential for additional
partnerships.
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financials
12
Selected Financial Data
14
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)
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Performance Graph
Dividends
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30
30
31
32
33
34
35
36
37
71
71
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Directors and Officers
Corporate Information
72
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SELECTED FINANCIAL DATA
The following table sets forth selected financial data on a consolidated historical basis for iStar Financial Inc. (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.”
For the Years Ended December 31,
(In thousands, except per share data and ratios)
Operating Data:
Operating lease income
Interest income
Other income
Land sales revenue
Total revenue
Interest expense
Real estate expense
Land cost of sales
Depreciation and amortization
General and administrative
Provision for (recovery of) 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 real estate
Net income (loss)
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):
2014
2013
2012
2011
2010
$ 243,100
122,704
81,033
15,191
462,028
224,483
163,389
12,840
73,571
88,806
(1,714)
34,634
5,821
601,830
(139,802)
(25,369)
94,905
–
(70,266)
(3,912)
(74,178)
–
–
89,943
15,765
704
16,469
(51,320)
$ 234,567
108,015
48,208
$ 216,291
133,410
47,838
$ 195,872
226,871
39,722
–
390,790
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)
–
397,539
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)
–
462,465
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)
$ 183,443
364,094
51,069
–
598,606
313,766
121,036
–
56,668
109,526
331,487
12,809
16,055
961,347
(362,741)
108,923
51,908
–
(201,910)
(7,023)
(208,933)
18,757
270,382
–
80,206
(523)
79,683
(42,320)
1,129
5,202
9,253
1,997
$ (33,722)
$ (155,769)
$ (272,997)
$ (62,387)
(1,084)
$ 36,279
$
$
(0.40)
(0.40)
$
$
(2.09)
(1.83)
$
$
(3.37)
(3.26)
$
$
(0.91)
(0.70)
$
$
(2.62)
0.39
14
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
$
(75.27)
$ (396.07)
$ (638.27)
$ (173.66)
$ (497.13)
$
$
(75.27)
–
$ (346.80)
–
$
$ (616.87)
–
$
$ (133.13)
–
$
$
$
72.27
–
For the Years Ended December 31,
2014
2013
2012
2011
2010
(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:
Operating activities
Investing activities
Financing activities
$ 109,377
398,717
$ (21,677)
$
298,833
(53,847)
349,754
$
(3,316)
376,464
$ 360,525
767,663
1.4x
–
–
0.9x
–
–
0.9x
–
–
1.0x
–
–
85,031
15
84,990
15
83,742
15
88,688
15
2.0x
–
–
93,244
15
$ (10,342)
$ (180,465)
$ (191,932)
$
159,793
(190,958)
893,447
(455,758)
1,267,047
(1,175,597)
(28,577)
1,461,257
(1,580,719)
$
(45,883)
3,738,823
(3,412,707)
As of December 31,
2014
2013
2012
2011
2010
(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:
$ 2,676,714
285,982
1,377,843
5,463,133
4,022,684
1,248,348
$ 2,796,181
360,517
1,370,109
5,642,011
4,158,125
1,301,465
$ 2,739,099
635,865
1,829,985
6,159,999
4,691,494
1,313,154
$ 2,893,482
677,458
2,860,762
7,523,083
5,837,540
1,573,604
$ 2,599,203
746,081
4,587,352
9,175,681
7,345,433
1,694,659
(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 22 and 23.
(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, 2014, 2013, 2012, 2011 and 2010,
earnings were not sufficient to cover fixed charges by $89,948, $240,912, $305,450, $65,842 and $221,634, respectively, and earnings were not sufficient to cover fixed charges and
preferred dividends by $141,268, $289,932, $347,770, $108,162 and $263,954, respectively.
15
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 identified by
the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,”
“strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,”
“will likely result,” and similar expressions. Forward- looking statements
are based on current expectations and assumptions that are subject
to risks and uncertainties which may cause actual results or outcomes
to differ materially from those contained in the forward- looking state-
ments. Important factors that the Company believes might cause such
differences are discussed in the section entitled, “Risk Factors” in
Part I, Item 1a of the Company’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, 2014. This discussion
should be read in conjunction with our consolidated financial state-
ments and related notes for the three-year period ended December 31,
2014 included elsewhere in this Annual Report. These historical finan-
cial statements may not be indicative of our future performance.
Certain prior year amounts have been reclassified in the Company’s
Consolidated Financial Statements and the related notes to conform to
the current period presentation.
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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. In 2014, the Company partnered with a sovereign
wealth fund to form a venture in which the partners plan to contribute
equity to acquire and develop net lease assets.
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, hotel and other property types. The residential
properties within this portfolio are generally luxury condominium proj-
ects 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, 15 infill land parcels and 6 waterfront land parcels
located throughout the United States. Master planned communities rep-
resent 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 par-
cels 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,
2014, we had 6 land projects in production, 13 in development and 13 in
the pre- development phase.
Executive Overview
In conjunction with improving economic and commercial real
estate market conditions, we have continued to make meaningful prog-
ress towards achieving a number of our strategic corporate objectives.
We increased investment originations to $1.27 billion in 2014 focused pri-
marily within our core business segments of real estate finance and net
lease, which we anticipate should drive future revenue growth. Through
strategic ventures, we have partnered with other providers of capital
within our net lease segment and with developers with homebuilding
expertise within our land segment. In addition, we have made significant
investments within our operating property and land portfolios in order
to better position assets for sale.
Access to the capital markets has allowed us to extend our
debt maturity profile, lower our cost of capital and become primarily an
unsecured borrower. During 2014, we fully repaid our largest secured
credit facility using proceeds from unsecured notes issuances. This
repayment unencumbered $2.0 billion of collateral and provides us
with additional liquidity as we now retain 100% of the proceeds from
sales and repayments of these previously encumbered assets, rather
than directing them to repay the facility. At December 31, 2014, we had
$472.1 million of cash, which we expect to be used primarily to fund
future investment activities.
Over the past two years, we have significantly reduced our
level of non- performing loans. Non- performing loans, net of specific
reserves, declined 68% to $65.0 million at December 31, 2014 from
$203.6 million at December 31, 2013 as loans were repaid, sold or fore-
closed on.
During the year ended December 31, 2014, three of our four
business segments, including real estate finance, net lease and operating
properties, contributed positively to our earnings. We continue to work
on repositioning or redeveloping our transitional operating properties
and progressing on the entitlement and development of our land assets
in order to maximize their value. We intend to continue these efforts,
with the objective of having these assets contribute positively to earn-
ings in the future. For the year ended December 31, 2014, we recorded
net loss allocable to common shareholders of $(33.7) million, compared
to a loss of $(155.8) million during the prior year. Adjusted income (loss)
allocable to common shareholders for the year ended December 31,
2014 was $109.4 million, compared to $(21.7) million during the prior year.
17
Results of Operations for the Year Ended December 31, 2014 compared to the Year Ended December 31, 2013
For the Years Ended December 31,
2014
2013
$ Change
% Change
(in thousands)
Operating lease income
Interest income
Other income
Land sales revenue
Total revenue
Interest expense
Real estate expenses
Cost of land sales
Depreciation and amortization
General and administrative
Provision for (recovery of) 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 real estate
Net income (loss)
$ 243,100
122,704
81,033
15,191
462,028
224,483
163,389
12,840
73,571
88,806
(1,714)
34,634
5,821
601,830
(25,369)
94,905
–
(3,912)
–
–
89,943
$ 15,765
$ 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
$ (111,233)
$ 8,533
14,689
32,825
15,191
71,238
(41,742)
5,948
12,840
2,305
(3,308)
(7,203)
22,045
(2,229)
(11,344)
7,821
53,385
7,373
(4,571)
(644)
(22,233)
3,285
$ 126,998
4%
14%
68%
100%
18%
(16)%
4%
100%
3%
(4)%
>(100)%
>100%
(28)%
(2)%
24%
>100%
100%
>(100)%
(100)%
(100)%
4%
>100%
Revenue – Operating lease income, which primarily includes
income from net lease assets and commercial operating properties,
increased to $243.1 million in 2014 from $234.6 million in 2013.
Operating lease income from net lease assets increased to
$151.9 million in 2014 from $147.3 million in 2013. The net lease portfolio
generated an unleveraged yield of 7.5% for 2014 as compared to 7.2% for
2013 as rental rates for new leases were greater than rental rates for
leases that terminated since December 31, 2013. Operating lease income
for same store net lease assets, defined as net lease assets we owned
on or prior to January 1, 2013 and were in service through December 31,
2014, increased to $148.3 million in 2014 from $146.2 million in 2013 due
primarily to an increase in rent per occupied square foot for same store
net lease assets, which was $9.86 for 2014 as compared to $9.62 for
2013. The increase in operating lease income was also due to higher
occupancy rates for same store net lease assets, which was 95.2% at
December 31, 2014 as compared to 93.0% at December 31, 2013. We had
two net lease assets which were sold to our Net Lease Venture in 2014
that, prior to their sale, contributed an additional $2.0 million of operating
lease income in 2014 as compared to 2013.
Operating lease income from commercial operating properties
increased to $87.7 million in 2014 from $86.4 million in 2013 as rental
rates for new leases were greater than leases that terminated since
December 31, 2013. Operating lease income for same store commer-
cial operating properties, defined as commercial operating properties,
excluding hotels, we owned on or prior to January 1, 2013 and were in
service through December 31, 2014, decreased to $81.6 million in 2014
from $84.9 million in 2013 due primarily to a decline in rent per occupied
square foot for same store commercial operating properties, which was
$24.52 for 2014 and $26.06 for 2013. The decline was partially offset by
an increase in occupancy rates for same store commercial operating
properties, which increased to 65.0% at December 31, 2014 from 62.8%
at December 31, 2013. In addition, we acquired title to additional com-
mercial operating properties in 2014, which contributed $4.5 million to
operating lease income in 2014. Ancillary operating lease income for
residential operating properties increased $2.6 million in 2014 as com-
pared to 2013.
Interest income increased to $122.7 million in 2014 as com-
pared to $108.0 million in 2013 due primarily to increases in the volume
and interest rates of performing loans. New investment originations
and additional fundings of existing loans raised our average balance
of performing loans to $1.27 billion for 2014 from $1.23 billion for 2013.
The weighted average yield of our performing loans increased to 9.1%,
excluding $6.3 million amortization of discounts, for 2014 from 7.6% for
2013 due primarily to higher interest rates for new loan originations in
2014 and payoffs of loans with lower interest rates.
Other income increased to $81.0 million in 2014 as compared
to $48.2 million in 2013. The increase was due to gains on sales of
non- performing loans of $19.1 million as well as $16.5 million of income
related to asset related settlements, $3.8 million of ancillary income
from properties acquired in 2014 and $2.3 million of prior year tax
refunds. The increases were offset in part by a decline of $7.2 million
due primarily to the conversion of hotel rooms to residential units to
be sold at a property and $4.0 million received for the settlement of a
property- related lawsuit in 2013.
18
Land sales and costs – In 2014, we sold residential lots from
three of our master planned community properties for proceeds of
$15.2 million which had associated cost of sales of $12.8 million.
Costs and expenses – Interest expense decreased to $224.5 mil-
lion in 2014 as compared to $266.2 million in 2013 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 $4.08 billion for
2014 from $4.46 billion for 2013. Our weighted average effective cost of
debt decreased to 5.5% for 2014 from 5.9% for 2013. The decline was pri-
marily a result of the refinancing of higher interest rate senior unsecured
notes with lower interest rate senior unsecured notes during 2013.
Loss on early extinguishment of debt, net – In 2014 and 2013, we
incurred losses on early extinguishment of debt of $25.4 million and
$33.2 million, respectively. Together with cash on hand, net proceeds
from the 2014 issuances of our 4.00% senior unsecured notes due
November 2017 and our 5.00% senior unsecured notes due July 2019
were used to fully repay and terminate our secured credit facility entered
into in February 2013. As a result, in 2014, we expensed $22.8 million
relating to accelerated amortization of discount and fees associated with
the payoff of that secured credit facility. We also recorded $2.6 million of
losses related to the accelerated amortization of discounts and fees in
connection with amortization payments that we made on our secured
credit facilities.
Real estate expenses increased to $163.4 million in 2014 as
compared to $157.4 million in 2013. Expenses for commercial operating
properties increased to $87.9 million in 2014 from $81.1 million in 2013.
In 2014, expenses for same store commercial operating properties,
excluding hotels, increased to $53.3 million from $51.7 million in 2013 due
primarily to higher operating expenses at two properties. We acquired
title to additional commercial operating properties in 2014, which
contributed $9.2 million to real estate expenses in 2014. Additionally,
expenses for hotel properties decreased to $22.7 million in 2014 from
$28.5 million in 2013 due primarily to the conversion of hotel rooms to
residential units being sold at a hotel property. Costs associated with
residential units increased to $25.6 million in 2014 from $19.8 million in
2013 due to sales assessments at one of our residential properties and
carrying costs for additional residential units where construction was
completed, offset by a reduction of expenses due to the sale of resi-
dential units since December 31, 2013. Carry costs and other expenses
on our land assets decreased to $26.9 million in 2014 as compared to
$33.8 million in 2013, primarily related to a decrease in costs incurred
on certain land assets prior to development.
General and administrative expenses decreased to $88.8 mil-
lion in 2014 as compared to $92.1 million in 2013, primarily due to a
reduction in stock-based compensation expense, based on the full
amortization of certain previously issued awards, which were fully
amortized in 2013.
The net recovery of loan losses was $1.7 million in 2014 as
compared to a net provision for loan losses of $5.5 million in 2013.
Included in the net recovery for 2014 were recoveries of previously
recorded loan loss reserves of $10.1 million, provisions for specific
reserves of $4.1 million and an increase of $4.3 million in the general
reserve due primarily to new investment originations. Included in the net
recovery for 2013 were specific reserves of $72.5 million, which were
established on non- performing loans, offset by recoveries of previously
recorded loan loss reserves of $63.1 million during the year.
In 2014, we recorded impairments on real estate assets total-
ing $34.6 million resulting from changes in business strategies for a
residential property and a land asset, continued unfavorable local market
conditions at two real estate properties and the sale of net lease assets.
In 2013, we recorded $14.4 million of impairments on real estate assets,
including $1.8 million recorded in discontinued operations, due primarily
to a changes in local market conditions and a change in business strat-
egy for a residential property.
In 2013, we incurred $7.7 million of losses on the early extin-
guishment of debt due to the accelerated amortization of discounts and
fees in connection with the refinancing of a secured credit facility. We
also recorded $13.2 million of losses related to the accelerated amortiza-
tion of discounts and fees in connection with amortization payments that
we made on our secured credit facilities. We also redeemed our 5.95%
senior unsecured notes due October 2013 and 5.70% senior unsecured
notes due March 2014 prior to maturity and incurred $12.3 million of
losses related to prepayment penalties and the acceleration of amorti-
zation of discounts.
Earnings from equity method investments – Earnings from equity
method investments increased to $94.9 million in 2014 as compared
to $41.5 million in 2013. In 2014, we recognized $56.8 million of income
resulting from asset sales by two of our equity method investees and
a legal settlement received by one of the investees. We also recog-
nized $14.7 million of earnings related to sales activity from an equity
method investee and $9.0 million of income related to carried interest
from a previously held strategic investment. The increase was offset
by $12.0 million of income primarily related to asset sales by one of
our strategic investments in 2013 and the sale of our interest in LNR
Property Corp. in April 2013. We had no equity in earnings from LNR
during 2014 as compared to 2013 in which we recorded net equity in
earnings of $14.5 million.
Loss on transfer of interest to unconsolidated subsidiary – In 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 million loss.
Income tax (expense) benefit – Income taxes are primarily gen-
erated by assets held in our taxable REIT subsidiaries (“TRS’s”). Income
taxes increased to a net tax expense of $3.9 million in 2014 as compared
to a tax benefit of $0.7 million in 2013. The period to period difference was
due primarily to taxable income generated by sales of TRS properties.
19
Discontinued operations – In 2014, we adopted ASU 2014-08
(see Note 3), which raised the threshold for discontinued operations
reporting to disposals of components that are considered strategic
shifts in a company’s business. There were no disposals that met this
threshold during 2014. Income (loss) from discontinued operations in
2013 includes operating results from net lease assets and commer-
cial operating properties held for sale or sold as of December 31, 2013.
During 2013, we sold commercial operating properties with a total
carrying value of $72.6 million, which resulted in a net gain of $18.6 mil-
lion and net lease assets with a total carrying value of $18.7 million which
resulted in a net gain of $2.2 million.
Income from sales of real estate – In 2014 and 2013, we sold
residential condominiums for total net proceeds of $236.2 million and
$269.7 million, respectively, that resulted in income of $79.1 million and
$82.6 million, respectively. In 2014, we sold net lease assets with a car-
rying value of $8.0 million resulting in a net gain of $5.7 million and a
commercial operating property with a carrying value of $29.4 million
resulting in a gain of $4.6 million. In 2013, we 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, 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 real estate
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%
Revenue – Operating lease income, which includes income
from net lease assets and commercial operating properties, increased
to $234.6 million in 2013 from $216.3 million in 2012.
Operating lease income from net lease assets decreased to
$147.3 million in 2013 from $149.1 million in 2012. The net lease port-
folio generated a weighted average effective yield of 7.2% for 2013 as
compared to 7.5% for 2012 as rental rates for new leases were less
than rental rates for leases that terminated since December 31, 2012.
Operating lease income for same store net lease assets, defined as
net lease assets we owned on or prior to January 1, 2012 and were
in service through December 31, 2013, decreased to $146.8 million in
2013 from $149.1 million in 2012 due primarily to a decline in occupancy
rates for same store net lease assets, which was 93.1% at December 31,
2013 as compared to 93.8% at December 31, 2012. The decrease was
partially offset by an increase in rent per occupied square foot for same
store net lease assets, which was $9.50 for 2013 as compared to $9.28
for 2012. Additionally, a new net lease asset commenced in 2013, which
resulted in an additional $0.5 million of operating lease income in 2013
as compared to 2012.
Operating lease income from commercial operating proper-
ties increased to $86.4 million in 2013 from $65.7 million in 2012 due
primarily to the acquisition of a commercial operating property at the
end of 2012. Operating lease income for same store commercial operat-
ing properties, defined as commercial operating properties, excluding
hotels, we owned on or prior to January 1, 2012 and were in service
through December 31, 2013, increased to $70.2 million in 2013 from
$64.5 million in 2012 due primarily to an increase in occupancy for
same store commercial operating properties, which was 55.9% at
December 31, 2013 and 50.1% at December 31, 2012. The increase was
also due to higher rent per occupied square foot for same store com-
mercial operating properties, which increased to $28.64 for 2013 from
$27.12 at December 31, 2012. In addition, 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.
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 for 2013 from $1.67 billion for
2012. The decrease in performing loans was primarily due to loan repay-
ments received during 2013. Offsetting the decline were new investment
originations that increased our weighted average effective yield and our
interest income. For 2013, performing loans generated a weighted aver-
age effective yield of 7.6% as compared to 7.5% for 2012.
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
20
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 aver-
age cost of debt. The average outstanding balance of our debt declined
to $4.46 billion for 2013 from $5.49 billion for 2012. Due to an upgrade
in our credit ratings in late 2012 and strong credit markets in 2013, we
refinanced our largest senior secured credit facility to a lower inter-
est 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% for 2013
as compared to 6.5% for 2012.
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.
For 2013, expenses for same store commercial operating properties,
excluding hotels, increased to $41.5 million from $41.0 million for 2012
due primarily to increased operating expenses at a property. At the end
of 2012, we acquired title to a property, which contributed $10.3 million to
real estate expenses for 2013. The increase was 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’ associa-
tion 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 improvements in collectability of receivables
in 2013. For 2013 and 2012, expenses for same store net lease assets
were $22.7 million as there was no significant changes year over year.
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.
Provision for loan losses declined to $5.5 million 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 in 2013 resulted from changes in local
market conditions and business strategy for certain assets and con-
sisted 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 discontinued operations in 2013. In
2012, we recorded impairments of $27.7 million 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.
Loss on early extinguishment of debt, net – In 2013, we incurred
losses on the early extinguishment of debt due to accelerated amortiza-
tion 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.
In 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 was 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.
21
Loss on transfer of interest to unconsolidated subsidiary – In 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 million 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 – In 2013, we sold commercial operat-
ing 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 carrying value
of $18.7 million which resulted in a net gain of $2.2 million. In 2012, we
sold net lease assets with a carrying value of $115.5 million and recorded
gains of $27.3 million.
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. In 2013 and 2012, income
(loss) from discontinued operations includes impairment of assets of
$1.8 million and $22.6 million, respectively.
Income from sales of real estate – In 2013 and 2012, we sold
residential condominiums for total net proceeds of $269.7 million and
$319.3 million, respectively, that resulted in income from sales of resi-
dential properties totaling $82.6 million and $63.5 million, respectively.
In 2013, we also sold land for proceeds of $36.7 million that resulted in
income of $4.0 million.
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
(recovery of) loan losses, impairment of assets, loss on transfer of inter-
est to unconsolidated 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 inter-
est expense, income taxes, depreciation and amortization, provision for
(recovery of) loan losses, impairment of assets, loss on transfer of inter-
est to unconsolidated subsidiary, stock-based compensation expense
and 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,
2014
2013
2012
2011
2010
(in thousands)
Adjusted income
Net income (loss) allocable to common shareholders
Add: Depreciation and amortization(1)
Add/Less: Provision for (recovery of) loan losses
Add: Impairment of assets(2)
Add: Loss on transfer of interest to unconsolidated
subsidiary
Add: Stock-based compensation expense
Add: Loss (gain) on early extinguishment of debt, net(3)
Less: HPU/Participating Security allocation
Adjusted income (loss) allocable to common shareholders
22
$ (33,722)
$ (155,769)
$ (272,997)
$ (62,387)
76,287
(1,714)
34,634
72,439
5,489
14,353
70,786
81,740
36,354
63,928
46,412
22,386
–
13,314
25,369
(4,791)
$ 109,377
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)
$
$ 36,279
70,786
331,487
22,381
–
19,355
(110,075)
(9,688)
$ 360,525
Explanatory Notes:
(1) For the years ended December 31, 2013, 2012, 2011 and 2010, depreciation and amortization includes $264, $2,016, $5,837 and $14,117, 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 invest-
ments and excludes the portion of depreciation and amortization expense allocable to noncontrolling interests.
(2) For the years ended December 31, 2013, 2012, 2011 and 2010, impairment of assets includes $1,764, $22,576, $9,147 and $9,572, respectively, of impairment of assets reclassified to
discontinued operations.
(3) For the years ended December 31, 2013, 2012 and 2010, loss on early extinguishment of debt excludes the portion of losses paid in cash of $13,535, $15,411 and $1,152, respectively.
For the Years Ended December 31,
2014
2013
2012
2011
2010
(in thousands)
Adjusted EBITDA
Net income (loss)
Add: Interest expense(1)
Add: Income tax expense (benefit)
Add: Depreciation and amortization(2)
EBITDA
Add: Provision for (recovery of) loan losses
Add: Impairment of assets(3)
Add: Loss on transfer of interest to unconsolidated
subsidiary
Add: Stock-based compensation expense
Add: Loss (gain) on early extinguishment of debt, net(4)
Adjusted EBITDA
Explanatory Notes:
$ 15,765
228,395
3,912
79,042
327,114
(1,714)
34,634
–
13,314
25,369
$ 398,717
$ (111,233)
$ (241,430)
$ (25,693)
269,921
(659)
74,673
232,702
5,489
14,353
356,161
8,445
70,786
193,962
81,740
36,354
345,914
(4,719)
63,928
379,430
46,412
22,386
7,373
19,261
19,655
$ 298,833
–
–
15,293
22,405
$ 349,754
29,702
(101,466)
$ 376,464
$ 80,206
346,500
7,023
70,786
504,515
331,487
22,381
–
19,355
(110,075)
$ 767,663
(1) For the years ended December 31, 2012, 2011 and 2010, interest expense includes $1,064, $3,728 and $32,734, respectively, of interest expense reclassified to discontinued opera-
tions. Interest expense includes our proportionate share of interest for equity method investments.
(2) For the years ended December 31, 2013, 2012, 2011 and 2010 depreciation and amortization includes $264, $2,016, $5,837 and $14,117, respectively, of depreciation and amor-
tization 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 and 2010 impairment of assets includes $1,764, $22,576, $9,147 and $9,572, respectively, of impairment of assets reclassified to
discontinued operations.
(4) For the years ended December 31, 2013, 2012 and 2010, loss on early extinguishment of debt excludes the portion of losses paid in cash of $13,535, $15,411 and $1,152, respectively.
Risk Management
Loan Credit Statistics – The table below summarizes our non-
performing loans and the reserves for loan losses associated with our
loans ($ in thousands):
As of December 31,
2014
2013
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
As a percentage of total loans before
loan loss reserves
$65,047
5.5%
$203,604
16.6%
$64,990
$348,004
46.5%
$98,490
46.3%
$377,204
7.6%
23.5%
Explanatory Note:
(1) As of December 31, 2014 and 2013, carrying values of non- performing loans are
net of asset- specific reserves for loan losses of $64.2 million and $317.0 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, 2014, we had non- performing loans with an
aggregate carrying value of $65.0 million compared to non- performing
loans of $203.6 million at December 31, 2013. Our non- performing
loans decreased during the year ended December 31, 2014 as we sold
two non- performing loans with a total carrying value of $30.8 million
and received title to and equity interests in properties that served as
collateral in full satisfaction for other non- performing loans with a
total carrying value of $103.7 million. 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
$98.5 million as of December 31, 2014, or 7.6% of total loans, compared
to $377.2 million or 23.5% at December 31, 2013. The reduction in the
balance of the reserve was the result of $277.0 million of charge-offs
associated with the resolutions of non- performing loans and $10.1 mil-
lion of recoveries of loan losses during the year ended December 31,
2014. For the year ended December 31, 2014, the provision for loan
losses includes recoveries of previously recorded loan loss reserves
of $10.1 million offset by provisions for specific reserves of $4.1 million
and an increase of $4.3 million in the general reserve due primarily to
new investment originations. 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 $19.5 million as of December 31,
2014, 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 carrying values of the loans.
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, 2014, asset- specific reserves decreased to
$65.0 million compared to $348.0 million at December 31, 2013, primarily
due to charge-offs on non- performing loans that were sold and non-
performing loans where we received title to properties that served as
collateral in full satisfaction of such loans.
23
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 increased to $33.5 million or 2.9% of per-
forming loans as of December 31, 2014, compared to $29.2 million or
2.7% of performing loans at December 31, 2013. This increase was pri-
marily attributable to the increase in the balance of performing loans,
which was driven by new investment originations.
Risk concentrations – Concentrations of credit risks arise
when a number of borrowers or tenants related to our 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 us, to be simi-
larly 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, 2014, the only states with a concentration greater than
10.0% were California with 14.6% and New York with 13.9%. As of that
date, we also had approximately 26.3% of the carrying value of our assets
related to properties located in the northeastern U.S., 19.2% related
to properties located in the western U.S., 15.2% related to properties
located in the mid- Atlantic U.S., 14.7% related to properties located in the
southeastern U.S. and 13.4% related to properties located in the south-
western region of the U.S. In addition, as of December 31, 2014, we had
$25.5 million of European assets. As of December 31, 2014, our portfolio
contains concentrations in the following asset types: office/industrial
26.7%, land 21.7%, mixed use/mixed collateral 13.0% and entertainment/
leisure 11.0%. Additional information regarding property/collateral type
and geographical region for each segment is in Item 1 – “Business.”
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, 2014, our five largest borrowers or tenants
collectively accounted for approximately 21% of our 2014 revenues, of
which no single customer accounts for more than 6%.
24
Liquidity and Capital Resources
During the year ended December 31, 2014, we committed to
new investments totaling $1.27 billion, of which we funded $905.8 million.
The fundings included $624.1 million in lending and other investments,
$116.3 million to acquire and invest in net lease assets and $165.4 mil-
lion of capital to reposition or redevelop our operating properties and
develop our land assets. Also during the year ended December 31, 2014,
we generated $1.10 billion of proceeds from loan repayments and asset
sales within our portfolio, comprised of $584.2 million from real estate
finance, $272.7 million from operating properties, $118.4 million from
other investments, $103.6 million from net lease assets and $22.2 million
from land. These amounts are inclusive of fundings and proceeds from
both consolidated and equity method investments. As of December 31,
2014, we had unrestricted cash of $472.1 million.
The following table outlines our capital expenditures on
real estate assets reflected in our Consolidated Statements of Cash
Flows for the years ended December 31, 2014 and 2013, by segment
($ in thousands):
For the Years Ended December 31,
Land
Operating Properties
Net Lease
2014
2013
$ 74,323 $ 36,346
43,329
29,728
58,631
9,833
Total capital expenditures on real
estate assets
$ 142,787 $ 109,403
Our primary cash uses over the next 12 months are expected
to be capital expenditures, repayments of debt, funding of investments
and funding ongoing business operations. We have debt maturities of
$105.8 million due before December 31, 2015. Over the next 12 months,
we currently expect to fund in the range of $200 million to $275 million of
capital expenditures within our portfolio. The majority of these amounts
relate to our land, multifamily and residential development activities and
operating properties. The amount spent will depend on the pace of our
development activities as well as the extent to which we strategically
partner with others to complete these projects. As of December 31,
2014, we also had approximately $630 million of maximum unfunded
commitments under our investments, assuming borrowers and tenants
meet all milestones and performance hurdles and all other conditions
to fundings are met. See “Unfunded Commitments” below. Our capital
sources to meet expected cash uses through the next 12 months will
primarily include cash on hand, income from our portfolio, loan repay-
ments from borrowers, proceeds from asset sales and capital raised
through debt refinancings or equity capital transactions.
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 continued to improve, 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, 2014 (see Note 8 of the Notes to 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
$ 358,504
3,326,890
248,955
100,000
4,034,349
704,202
32,065
$ 4,770,616
–
$
105,765
8,723
$ 358,504
1,851,125
19,132
–
$
1,370,000
49,427
–
–
–
114,488
207,079
5,598
$ 327,165
2,228,761
324,699
10,580
$ 2,564,040
1,419,427
126,711
7,621
$ 1,553,759
$
–
–
169,296
–
169,296
26,203
6,809
$ 202,308
$
–
–
2,377
100,000
102,377
19,510
1,457
$ 123,344
(1) All variable-rate debt assumes a 3-month LIBOR rate of 0.23%.
(2) We also have issued letters of credit totaling $3.7 million in connection with our investments. See Unfunded Commitments below, for a discussion of certain unfunded commitments
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.
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 “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.
During the year ended December 31, 2014, net proceeds from
the issuances of our $550.0 million aggregate principal amount of 4.00%
senior unsecured notes and $770.0 million aggregate principal amount of
5.00% senior unsecured notes, together with cash on hand, were used
to fully repay and terminate the February 2013 Secured Credit Facility.
The transaction supported our strategy to become primarily an unse-
cured borrower. The refinancing allowed us to reduce our percentage
of secured debt outstanding down to 16% of total debt from 49% prior
to the transaction. Through the transaction, we also unencumbered
$2.0 billion of collateral, which included more than $1.5 billion of net lease
assets and performing loans. Furthermore, the transaction provides us
with additional liquidity as we will now retain 100% of proceeds from the
sales and repayments of these previously encumbered assets rather
than directing them to repay the February 2013 Secured Credit Facility.
From February 2013 through full payoff in June 2014, we made
cumulative amortization repayments of $388.5 million. During the year
ended December 31, 2014 and 2013, amortization repayments made
by us resulted in losses on early extinguishment of debt of $1.1 million
and $7.0 million, respectively, related to the accelerated amortization of
discounts and unamortized deferred financing fees on the portion of the
facility that was repaid. In connection with the repayment and termina-
tion of the facility in 2014, we recorded a loss on early extinguishment
of debt of $22.8 million related to unamortized discounts and financing
fees at the time of refinancing. These amounts were included in “Loss
on early extinguishment of debt, net” on our Consolidated Statements
of Operations.
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.
25
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 us. We may also make optional prepay-
ments, subject to prepayment fees. The 2012 Tranche A-1 Facility was
fully repaid in August 2013. Additionally, through December 31, 2014, we
made cumulative amortization repayments of $111.5 million on the 2012
Tranche A-2 Facility. For the years ended December 31, 2014 and 2013,
repayments of the 2012 Tranche A-2 Facility prior to maturity resulted
in losses on early extinguishment of debt of $1.5 million and $1.0 million,
respectively, related to the accelerated amortization of discounts and
unamortized deferred financing fees on the portion of the facility that
was repaid. These amounts were included in “Loss on early extinguish-
ment of debt, net” on our Consolidated Statements of Operations.
Repayments of the 2012 Tranche A-1 Facility prior to sched-
uled amortization dates 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. These amounts were included in “Loss on
early extinguishment of debt, net” on our Consolidated Statements
of Operations.
Unsecured Notes – In June 2014, we issued $550.0 million
aggregate principal amount of 4.00% senior unsecured notes due
November 2017 and $770.0 million aggregate principal amount of
5.00% senior unsecured notes due July 2019. Net proceeds from these
transactions, together with cash on hand, were used to fully repay and
terminate the February 2013 Secured Credit Facility which had an out-
standing balance of $1.32 billion.
In November 2013, we issued $200.0 million aggregate princi-
pal 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 connection with the repayment of
the 5.70% senior unsecured notes, we incurred $2.8 million of losses
related to a prepayment penalty and the accelerated amortization of
discounts, which was recorded in “Loss on early extinguishment of debt,
net” on our Consolidated Statements of Operations for the year ended
December 31, 2013.
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 $9.5 million of losses related to a prepayment penalty and the
accelerated amortization of discounts, which was recorded in “Loss on
early extinguishment of debt, net” on the our Consolidated Statements
of Operations for the year ended December 31, 2013.
Encumbered/Unencumbered Assets – As of December 31, 2014 and 2013, the carrying value of our encumbered and unencumbered assets
by asset type are as follows ($ in thousands):
As of December 31,
2014
2013
Real estate, net
Real estate available and held for sale
Loans receivable and other lending investments, net(1)
Other investments
Cash and other assets
Total
Encumbered
Assets
$ 620,378
10,496
46,515
17,708
–
$ 695,097
Unencumbered
Assets
$ 2,056,336
275,486
1,364,828
336,411
768,475
$ 4,801,536
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
Explanatory Note:
(1) As of December 31, 2014 and 2013, the amounts presented exclude general reserves for loan losses of $33.5 million and $29.2 million, respectively.
26
Debt Covenants
Our outstanding unsecured debt securities contain corporate
level covenants that include a covenant to maintain a ratio of unencum-
bered 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 covenants 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 our
ability to incur new indebtedness under the fixed charge coverage ratio
is currently limited, which may put limitations on our ability to make new
investments, we are 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 contain certain cov-
enants, including covenants relating to collateral coverage, dividend
payments, restrictions on fundamental changes, transactions with affili-
ates, matters 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 March 2012 Secured
Credit Facilities permit us to distribute 100% of our REIT taxable income
on an annual basis. We may not pay common dividends if we cease to
qualify as a REIT.
Our March 2012 Secured Credit Facilities contain cross default
provisions that would allow the lenders to declare an event of default
and accelerate 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 other-
wise 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 curren-
cies. In 2013, we entered into a $500 million notional interest rate cap
agreement to reduce exposure to expected increases in future interest
rates and the resulting payments associated with variable interest rate
debt. The agreement was effective in July 2014, matures in July 2017
and has a LIBOR interest rate cap of 1.00%. See Note 10 of the Notes to
Consolidated Financial Statements.
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 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, 2014, 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
Other
Investments
Total
Performance-Based
Commitments
Strategic Investments
Discretionary Fundings
Total
$537,924 $14,667
–
–
$542,924 $14,667
–
5,000
$27,004 $579,595
45,714
5,000
$72,718 $630,309
45,714
–
Stock Repurchase Programs – In September 2013, our Board
of Directors approved an increase in the repurchase limit under our
previously approved stock repurchase program to $50.0 million. The
program authorizes the repurchase of Common Stock from time to time
in open market and privately negotiated purchases, including pursu-
ant 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 $21.0 million, at an average cost of $12.35 per share. There
were no stock repurchases during the year ended December 31, 2014.
As of December 31, 2014, we had up to $29.0 million of Common Stock
available to repurchase under our Board authorized stock repur-
chase program.
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 2014, 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 Consolidated Financial Statements. The following is a summary of
accounting policies that require more significant management estimates
and judgments:
27
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. If we determine that the collateral value is less
than the carrying value of a collateral- dependent loan, we will record a
reserve. The reserve is increased (decreased) through “Provision for
(recovery of) loan losses” on our Consolidated Statements of Operations
and is decreased by charge-offs. During delinquency and the foreclosure
process, there are typically numerous points of negotiation with the bor-
rower as we work toward a settlement or other alternative resolution,
which can impact the potential for loan repayment or receipt of collat-
eral. Our policy is to charge off a loan when we determine, based on a
variety of factors, that all commercially reasonable means of recovering
the loan balance have been exhausted. This may occur at different times,
including when we receive cash or other assets in a pre- foreclosure
sale or take control of the underlying collateral in full satisfaction of
the loan upon foreclosure or deed-in-lieu, or when we have otherwise
ceased significant collection efforts. We consider circumstances such
as the foregoing to be indicators that the final steps in the loan collec-
tion process have occurred and that a loan is uncollectible. At this point,
a loss is confirmed and the loan and related reserve will be charged
off. 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
economic conditions affecting 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. 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.
The provision for (recovery of) loan losses for the years
ended December 31, 2014, 2013 and 2012 were $(1.7) million, $5.5 mil-
lion and $81.7 million, respectively. The total reserve for loan losses
at December 31, 2014 and 2013, included asset specific reserves of
$65.0 million and $348.0 million, respectively, and general reserves of
$33.5 million and $29.2 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, 2014, 2013 and 2012, we
received title to properties in satisfaction of senior mortgage loans with
fair values of $77.9 million, $31.1 million and $267.5 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
available and held for sale” on our Consolidated Balance Sheets. The
difference between the estimated fair value less costs to sell and the
28
carrying value will be recorded as an impairment charge. Impairment
for real estate assets disposed of or classified as held for sale on or
before December 31, 2013 are included in “Income (loss) from discon-
tinued operations” on our Consolidated Statements of Operations.
Impairment for real estate assets disposed of or classified as held for
sale after December 31, 2013 are included in “Impairment of assets” on
our Consolidated Statements of Operations. Once the asset is classified
as held for sale and represents a strategic shift, depreciation expense
is no longer recorded and historical operating results are reclassified
to “Income (loss) from discontinued operations” on our 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 year ended December 31, 2014, the Company
recorded impairments on real estate assets totaling $34.6 million
resulting from continued unfavorable local market conditions, changes
in business strategy and the sale of a property. During the years ended
December 31, 2013 and 2012, the Company recorded impairments on
real estate assets totaling $14.4 million and $35.4 million, respectively,
resulting from changes in local market conditions and business strat-
egy for certain assets. Of these amounts, $1.8 million and $22.6 million
for the years ended December 31, 2013 and 2012, respectively, have
been recorded in “Income (loss) from discontinued operations” on the
Company’s Consolidated Statements of Operations due to the assets
being disposed of or classified as held for sale as of December 31, 2013.
Identified intangible assets and liabilities – We record intan-
gible assets and liabilities acquired at their estimated fair values, and
determine whether such intangible assets and liabilities have finite or
indefinite lives. As of December 31, 2014, 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 lia-
bilities 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 circumstances 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 $54.3 million and $56.0 million as of December 31, 2014 and
2013, 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 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 measure-
ment techniques and estimates involved.
29
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
connection 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
interest- 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 con-
trol. We monitor the spreads between our interest- earning assets and
interest- 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 inter-
est rate- related derivative contracts. Such strategies are designed to
reduce our exposure, 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 pur-
poses 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.
30
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, 2014.
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)
$
(713)
–
4,680
10,438
(1) We have an overall net variable-rate asset position, which results in an increase in
net income when rates increase and a decrease in net income when rates decrease.
As of December 31, 2014, $282.5 million of our floating rate loans have a cumulative
weighted average interest rate floor of 0.4% and $358.5 million of our floating rate debt
has a cumulative weighted average interest rate floor of 1.25%.
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 2013 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, 2014.
The Company's internal control over financial reporting as
of December 31, 2014, has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their
report which appears on page 31.
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 operations, comprehen-
sive 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, 2014 and
December 31, 2013, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
2014 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, 2014, based on criteria established in Internal
Control – Integrated Framework (2013) 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.
As discussed in Note 3 to the consolidated financial state-
ments, the Company adopted accounting standards update (“ASU”)
No. 2014-08, “Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity”, which changed the criteria for
reporting discontinued operations in 2014.
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
March 2, 2015
31
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
Total real estate
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, 145,807 issued and 85,191 outstanding at December 31,
2014 and 144,334 issued and 83,717 outstanding at December 31, 2013
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, 2014 and December 31, 2013
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.
32
2014
2013
$ 3,145,563 $ 3,220,634
(424,453)
2,796,181
360,517
3,156,698
1,370,109
207,209
513,568
48,769
14,941
92,737
237,980
$ 5,463,133 $ 5,642,011
(468,849)
2,676,714
285,982
2,962,696
1,377,843
354,119
472,061
19,283
16,367
98,262
162,502
4,022,684
4,203,586
$ 180,902 $ 170,831
4,158,125
4,328,956
–
11,590
11,199
–
22
4
9,800
22
4
9,800
146
4,007,514
(2,556,469)
(971)
(262,954)
1,197,092
51,256
1,248,348
144
4,022,138
(2,521,618)
(4,276)
(262,954)
1,243,260
58,205
1,301,465
$ 5,463,133 $ 5,642,011
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
(In thousands, except per share data)
Revenues:
Operating lease income
Interest income
Other income
Land sales revenue
Total revenues
Costs and expenses:
Interest expense
Real estate expense
Land cost of sales
Depreciation and amortization
General and administrative
Provision for (recovery of) loan losses
Impairment of assets
Other expense
Total costs and expenses
Income (loss) before earnings from equity method investments and other items
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 real estate
Net income (loss)
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(2)(3)
Net income (loss) allocable to common shareholders
Per common share data(1):
2014
2013
2012
$ 243,100
122,704
81,033
15,191
462,028
$ 234,567
108,015
48,208
–
390,790
224,483
163,389
12,840
73,571
88,806
(1,714)
34,634
5,821
601,830
(139,802)
(25,369)
94,905
–
(70,266)
(3,912)
(74,178)
–
–
89,943
15,765
704
16,469
(51,320)
1,129
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)
5,202
$ (33,722)
$ (155,769)
$ 216,291
133,410
47,838
–
397,539
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)
9,253
$ (272,997)
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
(0.40)
$
$
(0.40)
85,031
$
$
(2.09)
(1.83)
84,990
$
$
(3.37)
(3.26)
83,742
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 share – Basic and diluted
$
$
(75.27)
(75.27)
15
$ (396.07)
$ (346.80)
15
$ (638.27)
$ (616.87)
15
Explanatory Notes:
(1)
Income (loss) from continuing operations attributable to iStar Financial Inc. was $(73.5) million, $(221.5) million and $(313.2) million for the years ended December 31, 2014, 2013 and
2012, respectively. See Note 13 for details on the calculation of earnings per share.
(2) HPU holders are current and former Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program.
(3) Participating Security holders are non- employee directors who hold common stock equivalents granted under the Company’s Long Term Incentive Plans that are eligible to partici-
33
pate 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)
Realization 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)
Comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income (loss) attributable to iStar Financial Inc.
2014
2013
2012
$ 15,765
$ (111,233)
$ (241,430)
(90)
4,116
968
3,367
(5,187)
131
3,305
19,070
710
$ 19,780
(859)
310
–
(44)
(1,310)
(302)
(255)
(675)
(3,091)
(114,324)
(718)
$ (115,042)
–
278
(1,335)
244
(857)
(242,287)
1,500
$ (240,787)
Explanatory Notes:
(1) For the years ended December 31, 2014 and 2013, $90 and $266, respectively, are included in “Other income” on the Company’s Consolidated Statements of Operations. For the year
ended December 31, 2013, $593 is included in “Earnings from equity method investments” on the Company’s Consolidated Statements of Operations.
(2) For the year ended December 31, 2014, $3,634 is included in “Other expense” on the Company’s Consolidated Statements of Operations (see Note 10) and $420 is included in
“Earnings from equity method investments” on the Company’s Consolidated Statements of Operations. Included in “Interest expense” on the Company’s Consolidated Statements of
Operations are $62, $310 and $(44) for years ended December 31, 2014, 2013 and 2012, respectively.
Included in “Earnings from equity method investments” on the Company’s Consolidated Statements of Operations.
(3)
The accompanying notes are an integral part of the consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
iStar Financial Inc. Shareholders’ Equity
For the Years Ended
December 31, 2014, 2013 and 2012
Balance at December 31, 2011
Dividends declared – preferred
Repurchase of stock
Issuance of stock/restricted stock unit
Preferred
Preferred
Stock
Stock(1)
$22
–
–
Series J(1) HPU’s
$ 9,800
–
–
$–
–
–
Accumulated
Other Com-
prehensive
Income
(Loss)
Common
Stock at
Par
Additional
Paid-In
Capital
Retained
Earnings
(Deficit)
$ 140 $ 3,834,460 $ (2,078,397)
(42,320)
–
–
–
–
–
Treasury
Stock at
Cost
Non-
controlling
Interests
Total
Equity
$ (328) $ (237,341) $ 45,248 $ 1,573,604
(42,320)
(4,628)
–
(4,628)
–
–
–
–
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 income (loss) for the period(2)
Change in accumulated other
comprehensive income (loss)
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
Dividends declared – preferred
Issuance of stock/restricted stock unit
amortization, net
Net income for the period(2)
Change in accumulated other
comprehensive income (loss)
Additional paid in capital attributable to
redeemable noncontrolling interest
Contributions from noncontrolling
interests
Distributions to noncontrolling
interests
Change in noncontrolling interests(6)
Balance at December 31, 2014
–
–
–
–
–
–
–
$22
–
–
–
–
–
–
–
–
–
$22
–
–
–
–
–
–
–
–
$22
–
–
–
–
–
–
–
–
–
–
–
–
3
–
–
–
–
–
2,705
–
–
(239,930)
–
(2,728)
(1,657)
–
–
–
–
–
–
–
(857)
–
–
–
–
–
–
–
–
–
–
(688)
2,708
(240,618)
–
–
–
(857)
(2,728)
(1,657)
32,654
32,654
–
$–
4
–
–
–
$ 9,800
–
–
–
–
–
–
$ 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)
–
–
–
–
(3,091)
(2,772)
–
–
–
–
–
–
–
–
–
–
–
3,837
(1,375)
(108,114)
–
–
(3,091)
(2,772)
10,264
10,264
–
–
$4 $ 9,800
–
–
–
–
–
$ 144 $ 4,022,138 $ (2,521,618)
(51,320)
–
–
–
(30,106)
$ (4,276) $ (262,954) $ 58,205 $ 1,301,465
(51,320)
(30,106)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
(13,091)
–
–
16,469
–
(1,533)
–
–
–
–
–
–
3,305
–
–
–
–
–
–
–
–
1,221
(13,089)
17,690
–
–
3,305
(1,533)
565
565
–
–
–
–
$4 $9,800
–
–
–
–
–
–
$146 $4,007,514 $(2,556,469)
–
–
(4,820)
(3,915)
$ (971) $(262,954) $51,256 $1,248,348
(4,820)
(3,915)
–
–
35
Explanatory Notes:
(1) See Note 11 for details on the Company’s Cumulative Redeemable Preferred Stock.
(2) For the years ended December 31, 2014, 2013 and 2012 net (loss) income shown above excludes $(1,925), $(3,119) and $(812) of net loss attributable to redeemable
noncontrolling interests.
Includes $27.3 million of land assets contributed by a noncontrolling partner.
Includes an $8.8 million payment to redeem a noncontrolling member’s interest (see Note 4).
Includes $9.4 million of operating property assets contributed by a noncontrolling partner.
(3)
(4)
(5)
(6) During the year ended December 31, 2014, the Company sold its 72% interest in a previously consolidated entity to one of its unconsolidated ventures (see Note 4 and Note 6).
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2014
2013
2012
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
Provision for (recovery of) 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
(Gain) loss from sales of loans
Earnings from equity method investments
Distributions from operations of equity method investments
Deferred operating lease income
Income from sales of real estate
Gain from discontinued operations
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
Capital expenditures on real estate assets
Acquisitions of 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
Preferred dividends paid
Proceeds from issuance of preferred stock
Payments for deferred financing costs
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:
36
$
15,765 $ (111,233)
$ (241,430)
(1,714)
34,634
–
73,571
(21,250)
13,314
16,891
(59,747)
(19,067)
(94,905)
80,116
(8,492)
(92,294)
–
25,369
(14,888)
31,935
5,489
14,507
7,373
71,530
(14,098)
19,261
20,915
(37,383)
596
(41,520)
17,252
(12,077)
(86,658)
(22,233)
19,655
(24,001)
6,917
81,740
38,077
–
70,786
(12,589)
15,293
31,981
(40,912)
(6,367)
(103,009)
105,586
(11,812)
(63,472)
(27,257)
22,405
(74,712)
9,427
(1,426)
4,601
7,245
2,310
(23,012)
5,945
$ (180,465)
1,337
1,271
11,725
$ (191,932)
$
(10,342)
$
$ (622,428)
(142,787)
(4,666)
512,528
65,438
419,527
(47,603)
(83,070)
(9,750)
728,657
56,998
562,705
–
78,238
(10,640)
(5,127)
(3,361)
$ 159,793 $ 893,447 $ 1,267,047
$ (257,600)
(109,403)
(102,364)
613,615
81,614
437,817
220,281
36,918
(12,784)
(19,388)
4,741
29,283
1,291
(159,424)
61,031
–
1,349,822
(1,471,174)
(51,320)
–
(19,595)
3,498,794
1,444,565
(4,608,133)
(1,984,102)
(42,320)
(49,020)
–
193,510
(21,662)
(17,539)
(2,276)
(43,172)
$ (455,758)
$ (1,175,597)
$ 257,224 $ (100,482)
356,826
$ 472,061 $ 513,568 $ 256,344
$ (190,958)
(41,507)
$
513,568
256,344
1,309
Cash paid during the period for interest, net of amount capitalized
$ 194,605 $ 237,457 $ 329,546
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 (see Note 15).
Organization – The Company began its business in 1993 through
the management of private investment funds and became publicly traded
in 1998. Since that time, the Company has grown through the origination
of new investments, as well as through corporate acquisitions.
Note 2 – Basis of Presentation and Principles of Consolidation
Basis of Presentation – The accompanying 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 Company’s Consolidated Financial Statements and the related notes
to conform to the current period presentation.
During the year ended December 31, 2014, the Company deter-
mined that its classification of proceeds received from land sales for the
quarterly periods ended March 31, June 30 and September 30, 2014
was incorrectly classified as a component of cash flows from operating
activities rather than cash flows from investing activities. The Company
evaluated the impact on the previously issued statements of cash flows
for the aforementioned periods and concluded that it was not material.
However, in order to correctly present such cash flows, the Company
will revise the amounts as those financial statements are presented in
future filings. The impact of the correction is as follows:
As
Previously
Reported
Change
As
Revised
Cash flows from operating activities:
Three months ended
March 31, 2014
Six months ended
June 30, 2014
Nine months ended
September 30, 2014
$ (60,678)
$ (4,143)
$ (64,821)
(83,477)
(8,630)
(92,107)
1,570
(11,920)
(10,350)
Cash flows from investing activities:
Three months ended
March 31, 2014
Six months ended
June 30, 2014
Nine months ended
September 30, 2014
$ 31,318
$ 4,143
$ 35,461
58,691 8,630
67,321
295,785 11,920 307,705
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,” “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 those VIEs that it was not previously
contractually required to provide.
Consolidated VIEs – As of December 31, 2014, the Company
consolidated 4 VIEs for which it is considered the primary beneficiary.
At December 31, 2014, the total assets of these consolidated VIEs
were $156.3 million and total liabilities were $10.3 million. The clas-
sifications of these assets are primarily within “Real estate, net” and
“Other investments” on the Company’s Consolidated Balance Sheets.
The classifications of liabilities are primarily within “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, 2014.
Unconsolidated VIEs – As of December 31, 2014, 26 of the
Company’s investments were in VIEs where it is not the primary ben-
eficiary and accordingly the VIEs have not been consolidated in the
Company’s Consolidated Financial Statements. As of December 31,
2014, the Company’s maximum exposure to loss from these invest-
ments does not exceed the sum of the $177.3 million carrying value
of the investments, which are classified in “Other investments” on the
Company’s Consolidated Balance Sheets, and $20.5 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. For real estate projects, the Company begins to capitalize qualified
development and construction costs, including interest, real estate taxes,
compensation and certain other carrying costs incurred which are spe-
cifically identifiable to a development project once activities necessary to
get the asset ready for its intended use have commenced. If specific allo-
cation of costs is not practicable, the Company will allocate costs based
on relative fair value prior to construction or relative sales value, relative
size or other value methods as appropriate during construction. The
Company ceases capitalization on the portions substantially completed
and ready for their intended use. Repairs and maintenance costs 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.
37
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
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 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 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 consid-
ers 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. Impairments of real estate assets that are
disposed of or classified as held for sale after December 31, 2013 and
which do not represent a strategic shift that has (or will have) a major
effect on the Company’s operations and financial results are also
recorded in “Impairments 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 sold at the lower of their carrying amount or esti-
mated 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 car-
rying value, the difference will be recorded as an impairment charge.
Impairment for real estate assets sold or classified as held for sale on
or before December 31, 2013 are included in “Income (loss) from dis-
continued operations” on the Company’s Consolidated Statements of
Operations. Impairment for real estate assets disposed of or classified
as held for sale after December 31, 2013 are included in “Impairment
of assets” on the Company’s Consolidated Statements of Operations.
Once a real estate asset is classified as held for sale and represents a
strategic shift, depreciation expense is no longer recorded and histori-
cal 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 – Revenue from sales of land and gains or losses
on the sale of other real estate assets, including residential property,
are recognized in accordance with Accounting Standards Codification
(“ASC”) 360-20, Real Estate Sales. Sales of land and the associated gains
on sales for residential property 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 per-
manent financing for which the seller is responsible has been arranged
and all conditions for closing have been performed. The Company pri-
marily uses specific identification and the relative sales value method to
allocate costs. Revenues from sales of land are included in “Land sales
revenue” and costs of land sales are included in “Land cost of sales”
on the Company’s Consolidated Statements of Operations. Gains on
sales of net lease assets or commercial operating properties disposed
of or classified as held for sale on or before December 31, 2013 are
recorded in “Gains from discontinued operations” on the Company’s
Consolidated Statements of Operations. Gain on sales of net lease
38
assets or commercial operating properties disposed of or classified as
held for sale after December 31, 2013 and profits on sales of residential
property within the operating property segment are included in “Income
from sales of real estate” 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, preferred equity investments and debt securities.
Management considers 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
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 subsid-
iary is recorded at the Company’s cost basis in the assets that were
contributed to the unconsolidated subsidiary. To the extent that the
Company’s cost basis is different from the basis reflected at the sub-
sidiary level, when required, the basis difference is amortized over the
life of the related assets and included in the Company’s share of equity
in net income (loss) of the unconsolidated subsidiary, as appropriate.
The Company recognizes gains on the contribution 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 comparison 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
39
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. Amortization of leasing costs is included in
“Depreciation and amortization” 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 acquisition of
a business, the Company records intangible assets or liabilities acquired
at their estimated fair values and determines whether such intangible
assets or liabilities have finite or indefinite lives. As of December 31,
2014, 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 intan-
gible 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 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. As of December 31, 2014 and 2013, the allowance for doubt-
ful accounts related to real estate tenant receivables was $1.3 million
and $3.4 million, respectively, and the allowance for doubtful accounts
related to deferred operating lease income was $2.4 million and $2.4 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” or “Other expense” 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
40
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.
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. Other income
also includes gains from sales of loans, lease termination fees and other
ancillary income.
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. If the Company determines that the col-
lateral value is less than the carrying value of a collateral- dependent
loan, the Company will record a reserve. The reserve is increased
(decreased) through “Provision for (recovery of) loan losses” on the
Company’s Consolidated Statements of Operations and is decreased
by charge-offs. During delinquency and the foreclosure process, there
are typically numerous points of negotiation with the borrower as the
Company works toward a settlement or other alternative resolution,
which can impact the potential for loan repayment or receipt of collat-
eral. The Company’s policy is to charge off a loan when it determines,
based on a variety of factors, that all commercially reasonable means of
recovering the loan balance have been exhausted. This may occur at dif-
ferent times, including when the Company receives cash or other assets
in a pre- foreclosure sale or takes control of the underlying collateral in
full satisfaction of the loan upon foreclosure or deed-in-lieu, or when
the Company has otherwise ceased significant collection efforts. The
Company considers circumstances such as the foregoing to be indica-
tors that the final steps in the loan collection process have occurred and
that a loan is uncollectible. At this point, a loss is confirmed and the loan
and related reserve will be charged off. The Company has one portfolio
segment, represented by commercial real estate lending, whereby it uti-
lizes 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.
Loss on debt extinguishments – The Company recognizes the
difference between the reacquisition price of debt and the net carrying
amount of extinguished debt currently in earnings. Such amounts may
include prepayment penalties or the write-off of unamortized debt issu-
ance costs, and are recorded in “Loss on early extinguishment of debt,
net” on the Company’s Consolidated Statements of Operations.
41
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, 2014 is $909.3 million. The Company intends to operate in
a manner consistent with, and its election to be treated as, a REIT for tax
purposes. As of December 31, 2013, the Company had $759.8 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 2033 if unused. The amount of net
operating loss carryforwards as of December 31, 2014 will be subject
to finalization of the Company’s 2014 tax return. During the year ended
December 31, 2014, the Company did not have REIT taxable income. The
Company recognizes 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 subsidiaries
(“TRSs”), is engaged in various real estate related opportunities, primar-
ily related to managing activities related to certain foreclosed assets,
as well as managing various investments in equity affiliates. As of
December 31, 2014, $541.7 million of the Company’s assets were owned
by TRS entities. The Company’s TRS entities are not consolidated for
federal income tax purposes and are taxed as corporations. For finan-
cial reporting purposes, current and deferred taxes are provided for on
the portion of earnings recognized by the Company with respect to its
interest in TRS entities.
The following represents the Company’s TRS income tax
expense ($ in thousands):
For the Years Ended December 31,
Current tax (expense) benefit
Deferred tax (expense) benefit
Total income tax (expense) benefit
2014
$ (3,912)
–
$ (3,912)
2013
2012
$ 659 $ (8,445)
–
$ 659 $ (8,445)
–
During the year ended December 31, 2014, the Company’s TRS
entities generated taxable income of $19.3 million, which was partially
offset by the utilization of net operating loss carryforwards, resulting in a
current tax expense of $3.9 million. During the year ended December 31,
2013, the Company’s TRS entities generated taxable loss of $1.8 mil-
lion, which was partially offset by the utilization of net operating loss
carryforwards, resulting in current tax benefit of $0.7 million. During
the year ended December 31, 2012, the Company’s TRS entities gener-
ated taxable income of $42.2 million, which was partially offset by the
utilization of net operating loss carryforwards, resulting in a current tax
expense of $8.4 million.
Total cash paid for taxes for the years ended December 31,
2014, 2013 and 2012 was $1.3 million, $9.2 million and $5.5 mil -
lion, respectively.
Deferred income taxes reflect the net tax effects of tempo-
rary differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes, as well as operating loss and tax credit carryforwards. The
Company evaluates the realizability of its deferred tax assets and rec-
ognizes a valuation allowance if, based on the available evidence, both
positive and negative, it is more likely than not that some portion or
all of its deferred tax assets will not be realized. When evaluating the
42
realizability of its deferred tax assets, the Company considers, among
other matters, estimates of expected future taxable income, nature of
current and cumulative losses, existing and projected book/tax differ-
ences, tax planning strategies available, and the general and industry
specific economic outlook. This realizability analysis is inherently sub-
jective, as it requires the Company to forecast its business and general
economic environment in future periods. Based on an assessment of all
factors, including historical losses and continued volatility of the activities
within the TRS entities, it was determined that full valuation allowances
were required on the net deferred tax assets as of December 31, 2014
and 2013, respectively. Changes in estimates of deferred tax asset real-
izability, if any, are included in “Income tax (expense) benefit” on the
Consolidated Statements of Operations.
Deferred tax assets and liabilities of the Company’s TRS enti-
ties were as follows ($ in thousands):
As of December 31,
Deferred tax assets(1)
Valuation allowance
Net deferred tax assets (liabilities)
2014
2013
$ 54,318 $ 55,962
(55,962)
–
(54,318)
–
$
$
Explanatory Note:
(1) Deferred tax assets as of December 31, 2014 include timing differences related pri-
marily to real estate basis of $39.3 million, investment basis of $5.9 million and net
operating loss carryforwards of $4.1 million. Deferred tax assets as of December 31,
2013, include timing differences related to real estate basis of $33.0 million, invest-
ment basis of $8.1 million, and net operating loss carryforwards of $14.9 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 common stock equivalents granted under its Long-Term
Incentive Plans that are eligible to participate in dividends are considered
Participating Securities and have been included in the two-class method
when calculating EPS.
New accounting pronouncements – In April 2014, the FASB
issued ASU 2014-08, Reporting Discontinued Operations and Disclosures
of Disposals of Components of an Entity (“ASU 2014-08”). This guidance
requires disposals of a component of an entity or group of components
of an entity that represent a strategic shift that has (or will have) a major
effect on an entity’s operations and financial results to be reported as
discontinued operations. Assets and liabilities of a disposal group that
includes a discontinued operation must be presented separately in
asset and liability sections, respectively, of the Company’s Consolidated
Balance Sheets for each comparative period. Expanded disclosures
about the assets, liabilities, revenues and expenses of discontinued
operations are also required. For individually significant disposals that
do not qualify as discontinued operations, disclosure of pre-tax income
is required. ASU 2014-08 is effective for interim and annual periods
beginning on or after December 15, 2014. Early adoption is permitted for
disposals (or classifications as held for sale) that have not been reported
in previously- issued financial statements. The Company has elected to
early adopt ASU 2014-08 beginning with disposals and classifications of
assets as held for sale that occurred after December 31, 2013.
In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers (“ASU 2014-09”) which supersedes existing
industry- specific guidance, including ASC 360-20, Real Estate Sales. The
new standard is principles-based and requires more estimates and
judgment than current guidance. Certain contracts with customers,
including lease contracts and financial instruments and other contrac-
tual rights, are not within the scope of the new guidance. ASU 2014-09
is effective for interim and annual reporting periods beginning after
December 15, 2016. Early adoption is not permitted. Management is
evaluating the impact of the guidance on the Company’s Consolidated
Financial Statements.
In June 2014, the FASB issued ASU 2014-12, Accounting
for Share-Based Payments When the Terms of an Award Provide That a
Performance Target Could Be Achieved after the Requisite Service Period
(“ASU 2014-12”) which requires a performance target that affects
vesting and that could be achieved after the requisite service period
be treated as a performance condition in accordance with Topic 718,
Compensation – Stock Compensation. ASU 2014-12 is effective for
interim and annual reporting periods beginning after December 15,
2015. Early adoption is permitted. Management does not believe the
guidance will have a significant impact on the Company’s Consolidated
Financial Statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(“ASU 2014-15”) which requires management to evaluate whether there
is substantial doubt that the Company is able to continue operating as
a going concern within one year after the date the financial statements
are issued or available to be issued. If there is substantial doubt, addi-
tional disclosure is required, including the principal condition or event
that raised the substantial doubt, the Company’s evaluation of the con-
dition or event in relation to its ability to meet its obligations and the
Company’s plan to alleviate (or, which is intended to alleviate) the sub-
stantial doubt. ASU 2014-15 is effective for interim and annual reporting
periods beginning after December 15, 2016. Early adoption is permitted.
Management does not believe the guidance will have a significant impact
on the Company’s Consolidated Financial Statements.
In November 2014, the FASB issued ASU 2014-16, Determining
Whether the Host Contract in a Hybrid Financial Instrument Issued in the
Form of a Share is More Akin to Debt or to Equity (“ASU 2014-16”) which
eliminates the diversity in practice for the accounting for hybrid financial
43
instruments issued in the form of a share. ASU 2014-16 requires man-
agement to consider all terms and features, whether stated or implied,
of a hybrid instrument when determining whether the nature of the
instrument is more akin to a debt instrument or an equity instrument.
Embedded derivative features, which are accounted for separately from
host contracts, should also be considered in the analysis of the hybrid
instrument. ASU 2014-16 is effective for interim and annual reporting
periods beginning after December 15, 2015. Early adoption is permitted.
Management does not believe the guidance will have a significant impact
on the Company’s Consolidated Financial Statements.
In February 2015, the FASB issued ASU 2015-02, Amendments
to the Consolidation Analysis (“ASU 2015-02”) which updates the con-
solidation model for limited partnerships and similar legal entities. ASU
2015-02 includes the evaluation of fees paid to a decision maker as
a variable interest and amends the effect of fee arrangements and
related parties on the primary beneficiary determination. The guid-
ance is effective for interim and annual reporting periods beginning
after December 15, 2015. Early adoption is permitted. Management is
evaluating the impact of the guidance on the Company’s Consolidated
Financial Statements.
Note 4 – Real Estate
The Company’s real estate assets were comprised of the following ($ in thousands):
As of December 31, 2014
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, 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
Real Estate Available and Held for Sale – As of December 31,
2014 and 2013 the Company had $155.8 million and $221.0 million,
respectively, of residential properties available for sale in its operating
properties portfolio.
During the year ended December 31, 2014, the Company
reclassified land with a carrying value of $6.5 million from held for sale
to held for investment due to a change in the Company’s strategy and
its plan to re- entitle the property. The asset is included in “Real estate,
net” on the Company’s Consolidated Balance Sheets. There were no
operations to reclassify on the Company’s Consolidated Statements
of Operations as a result of this change. During the same period, the
Company reclassified units with a carrying value of $56.7 million to held
for sale due to the conversion of hotel rooms to residential units to be
sold. The Company also reclassified net lease assets with a carrying
value of $4.0 million to held for sale due to executed contracts with
third parties.
44
Net Lease
Operating
Properties
Land
Total
$ 311,890
1,240,593
(364,323)
1,188,160
4,521
$ 1,192,681
$ 350,817
1,346,071
(338,640)
1,358,248
–
$ 1,358,248
$ 146,417
578,013
(96,159)
628,271
162,782
$ 791,053
$ 132,934
587,574
(82,420)
638,088
228,328
$ 866,416
$ 868,650 $ 1,326,957
1,818,606
(468,849)
2,676,714
285,982
$ 978,962 $ 2,962,696
–
(8,367)
860,283
118,679
$ 803,238 $ 1,286,989
1,933,645
(424,453)
2,796,181
360,517
$ 932,034 $ 3,156,698
–
(3,393)
799,845
132,189
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 in “Discontinued Operations” below). The three land
properties were sold during the year ended December 31, 2013 for a
gain of $0.6 million. These gains were recorded in “Income from sales of
real estate” on the Company’s Consolidated Statements of Operations.
Acquisitions – The following acquisitions of real estate were
reflected in the Company’s Consolidated Statements of Cash Flows for
the years ended December 31, 2014, 2013 and 2012 ($ in thousands):
For the Years Ended December 31,
2014(1)
2013(2)(3)
2012(4)
Acquisitions of real estate assets
$4,666
$102,364
$9,750
Explanatory Notes:
(1) During the year ended December 31, 2014, the Company purchased two condominium
units for $3.0 million and one land parcel for $1.7 million.
(2) During the year ended December 31, 2013, the Company acquired a net lease asset
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, which
was leased back to the seller. The Company concluded that the transaction was a real
estate asset acquisition and capitalized the acquisition- related costs. The intangible
assets were included in “Deferred expenses and other assets, net” and the intangible
liabilities were included in “Accounts payable, accrued expenses and other liabili-
ties” on the Company’s Consolidated Balance Sheets. The lease was classified as an
operating lease. During the year ended December 31, 2014, the net lease asset was
sold to its Net Lease Venture for net proceeds of $93.7 million, which approximated
carrying value.
(3) During the year ended December 31, 2013, the Company paid $8.8 million to redeem a
noncontrolling member’s interest.
(4) During the year ended December 31, 2012, the Company acquired approximately 900
parking spaces adjacent to an owned property for $9.8 million.
During the year ended December 31, 2014, the Company
acquired, via deed-in-lieu, title to three commercial operating properties
and a land asset, which had a total fair value of $77.9 million and previ-
ously served as collateral for loans receivable held by the Company. No
gain or loss was recorded in connection with these transactions. The
following unaudited table summarizes the Company’s pro forma rev-
enues and net income for the years ended December 31, 2014 and 2013,
as if the acquisition of these properties acquired during the year ended
December 31, 2014 was completed on January 1, 2013 ($ in thousands):
For the Years Ended December 31,
Pro forma total revenues
Pro forma net income (loss)
2014
$466,327
(245)
2013
$399,885
(112,355)
From the date of acquisition in May 2014 through December 31,
2014, $8.3 million in total revenues and $2.9 million in net loss associ-
ated with the properties were included in the Company’s Consolidated
Statements of Operations. The pro forma revenues and net income are
presented for informational purposes only and may not be indicative of
what the actual results of operations of the Company would have been
assuming the transaction occurred on January 1, 2013, nor do they pur-
port to represent the Company’s results of operations for future periods.
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 for
loans receivable held by the Company. The total fair value of the land
properties was $15.6 million. The Company contributed the residential
operating property, which had a fair value of $25.5 million, to an entity of
which it owns 63%. Based on the control provisions in the partnership
agreement, the Company consolidates the entity and reflects its part-
ner’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 connection with this transaction.
Dispositions – During the years ended December 31, 2014, 2013
and 2012, the Company sold residential condominiums for total net pro-
ceeds of $236.2 million, $269.7 million and $319.3 million, respectively,
and recorded income from sales of real estate totaling $79.1 million,
$82.6 million and $63.5 million, respectively. During the year ended
December 31, 2014, the Company sold residential lots from three of
our master planned community properties for proceeds of $15.2 mil-
lion which had associated cost of sales of $12.8 million. During the
same period, the Company also sold properties with a carrying value of
$6.8 million for proceeds that approximated carrying value.
During the year ended December 31, 2014, the Company
sold net lease assets with a carrying value of $8.0 million resulting in a
net gain of $5.7 million. The Company also sold a commercial operat-
ing property with a carrying value of $29.4 million resulting in a gain
of $4.6 million. These gains were recorded as “Income from sales of
real estate” in the Company’s Consolidated Statements of Operations.
Additionally, during the same period, the Company sold a net lease asset
for net proceeds of $7.8 million. The Company recorded an impairment
loss of $3.0 million in connection with the sale.
During the year ended December 31, 2014, the Company sold
its 72% interest in a previously consolidated entity, which owned a net
lease asset subject to a non- recourse mortgage of $26.0 million at the
time of sale, to its Net Lease Venture for net proceeds of $10.1 million
that approximated carrying value. During the same period, the Company
contributed land with a carrying value of $9.5 million to a newly formed
unconsolidated entity. See Note 6.
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 the sold interest, which
was recorded as “Income from sales of real estate” in 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” in the Company’s
Consolidated Statements of Operations. The Company also sold other
land assets with a carrying value of $14.8 million resulting in a gain of
45
$0.6 million. During the year ended December 31, 2013, the Company
transferred title of net lease assets with a carrying value of $8.7 million
to its tenant for consideration that approximated our carrying value.
Discontinued Operations – The Company has elected to early
adopt ASU 2014-08 beginning with disposals and classifications of
assets as held for sale that occurred after December 31, 2013. During
the year ended December 31, 2014, there were no disposals or assets
classified as held for sale which were individually significant or repre-
sented a strategic shift that has (or will have) a major effect on the
Company’s operations and financial results.
The following table summarizes income (loss) from discon-
tinued operations for the years ended December 31, 2013 and 2012
($ in thousands):
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,
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)
2014
2013
$ 737,535 $ 1,071,662
60,679
473,045
1,605,386
(377,204)
1,228,182
141,927
53,331
497,796
1,288,662
(98,490)
1,190,172
187,671
$ 1,377,843 $ 1,370,109
Explanatory Note:
(1) The Company’s recorded investment in loans as of December 31, 2014 and 2013
also includes accrued interest of $7.0 million and $6.5 million, respectively, which
are included in “Accrued interest and operating lease income receivable, net” on the
Company’s Consolidated Balance Sheets.
During the years ended December 31, 2014, 2013 and 2012,
the Company sold loans with total carrying values of $30.8 million,
$95.1 million and $53.9 million, respectively, which resulted in a real-
ized gain of $19.1 million, a net realized loss of $0.6 million and a net
gain of $6.4 million, respectively. Gains and losses on sales of loans are
included in “Other income” on the Company’s Consolidated Statements
of Operations.
Reserve for Loan Losses – Changes in the Company’s reserve
for loan losses were as follows ($ in thousands):
For the Years Ended December 31,
2014
2013
2012
Reserve for loan losses at
beginning of period
Provision for (recovery of) loan
losses(1)
Charge-offs
Reserve for loan losses at end
$ 377,204 $ 524,499 $ 646,624
(1,714)
(277,000)
5,489
(152,784)
81,740
(203,865)
of period
$ 98,490 $ 377,204 $ 524,499
Explanatory Note:
(1) For the years ended December 31, 2014, 2013 and 2012, the provision for loan
losses includes recoveries of previously recorded loan loss reserves of $10.1 million,
$63.1 million and $4.6 million, respectively.
For the Years Ended December 31,
Revenues
Total expenses
Impairment of assets
Income (loss) from discontinued operations
2013
2012
$ 5,545 $ 14,132
(9,037)
(22,576)
$ 644 $ (17,481)
(3,138)
(1,763)
Impairments – During the year ended December 31, 2014, the
Company recorded impairments on real estate assets totaling $34.6 mil-
lion, of which $15.6 million resulted from changes in business strategies
for a residential property and a land asset, $15.4 million resulted from
continued unfavorable local market conditions for two real estate
properties and $3.6 million resulted from the sale of net lease assets.
During the years ended December 31, 2013 and 2012, the Company
recorded impairments on real estate assets totaling $14.4 million and
$35.4 million, respectively, resulting from changes in local market con-
ditions and business strategy for certain assets. Of these amounts,
$1.8 million and $22.6 million for the years ended December 31, 2013
and 2012, respectively, have been recorded in “Income (loss) from dis-
continued 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 were $30.0 million, $31.8 million and $30.9 mil-
lion for the years ended December 31, 2014, 2013 and 2012, respectively.
These amounts are included in “Operating lease income” on the
Company’s Consolidated Statements of Operations.
46
Future Minimum Operating Lease Payments – Future minimum
operating lease payments under non- cancelable leases, excluding cus-
tomer reimbursements of expenses, in effect at December 31, 2014, are
as follows ($ in thousands):
Year
2015
2016
2017
2018
2019
Net Lease
Assets
$126,316
125,653
120,918
118,384
116,348
Operating
Properties
$52,823
51,437
49,592
44,288
38,707
The Company’s recorded investment in loans (comprised of a loan’s carrying value plus accrued interest) and the associated reserve for
loan losses were as follows ($ in thousands):
As of December 31, 2014
Loans
Less: Reserve for loan losses
Total
As of December 31, 2013
Loans
Less: Reserve for loan losses
Total
Explanatory Notes:
Individually
Evaluated for
Impairment(1)
Collectively
Evaluated for
Impairment(2)
Loans Acquired
with Deteriorated
Credit Quality(3)
$ 139,672
(64,990)
$ 74,682
$ 752,425
(348,004)
$ 404,421
$ 1,156,031
(33,500)
$ 1,122,531
$ 849,613
(29,200)
$ 820,413
$
$
–
–
–
$ 9,889
–
$ 9,889
Total
$ 1,295,703
(98,490)
$ 1,197,213
$ 1,611,927
(377,204)
$ 1,234,723
(1) The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net discount of $0.2 million and a net premium of $0.5 million as
of December 31, 2014 and 2013, 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 $10.6 million and $4.6 million as of December 31,
2014 and 2013, respectively.
(3) The carrying value of the loan includes unamortized discounts, premiums, deferred fees and costs aggregating to a net premium of $0.4 million as of December 31, 2013. The loan had
a cumulative principal balance of $10.2 million as of December 31, 2013. The loan was repaid during the year ended December 31, 2014.
Credit Characteristics – As part of the Company’s process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio
assessment and assigns risk ratings to each of its performing loans. Risk ratings are based on judgments which are inherently uncertain and there
can be no assurance that actual performance will be similar to current expectation.
The Company’s recorded investment in performing loans, presented by class and by credit quality, as indicated by risk rating, was as fol-
lows ($ in thousands):
As of December 31,
2014
2013
Senior mortgages
Subordinate mortgages
Corporate/Partnership loans
Total
$ 611,009
53,836
501,620
$ 1,166,465
2.73
2.87
3.88
3.23
Performing Loans
Weighted Average
Risk Ratings
Performing Loans
Weighted Average
Risk Ratings
2.50
3.37
3.88
3.11
$ 591,145
61,364
438,831
$ 1,091,340
As of December 31, 2014, 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
Explanatory Note:
Current
$ 644,190
53,836
501,620
$ 1,199,646
Less Than and
Equal to 90 Days
$ –
–
–
$ –
Greater Than
90 Days(1)
$ 96,057
Total Past Due
$ 96,057
–
–
–
–
$ 96,057
$ 96,057
Total
$ 740,247
53,836
501,620
$ 1,295,703
47
(1) As of December 31, 2014, the Company had three loans which were greater than 90 days delinquent and were in various stages of resolution, including legal proceedings, environ-
mental concerns and foreclosure- related proceedings, and ranged from 5.0 to 6.0 years outstanding.
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
With an allowance recorded:
Senior mortgages
Corporate/Partnership loans
Subtotal
Total:
Senior mortgages
Corporate/Partnership loans
Total
Explanatory Note:
As of December 31, 2014
As of December 31, 2013
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
$
–
$
–
$
–
$ 3,012
$ 2,992
$
–
130,645
9,027
139,672
129,744
9,057
138,801
(64,440)
(550)
(64,990)
650,337
99,076
749,413
645,463
99,067
744,530
(304,544)
(43,460)
(348,004)
130,645
9,027
$ 139,672
129,744
9,057
$ 138,801
(64,440)
(550)
$ (64,990)
653,349
99,076
$ 752,425
648,455
99,067
$ 747,522
(304,544)
(43,460)
$ (348,004)
(1) All of the Company’s non- accrual loans are considered impaired and included in the table above. In addition, as of December 31, 2014 and 2013, certain loans modified through trou-
bled debt restructurings with a recorded investment of $10.4 million and $231.8 million, respectively, are also included as impaired loans in accordance with GAAP although they are
performing and on accrual status.
The Company’s average recorded investment in impaired loans and interest income recognized, presented by class, were as follows
($ in thousands):
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,
2014
2013
2012
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$ 35,659
–
35,659
$ 1,922
–
1,922
$ 31,409
8,062
39,471
$ 9,269
6,050
15,319
$ 162,093
10,110
172,203
334,351
–
52,963
387,314
370,010
–
52,963
$ 422,973
158
–
181
339
2,080
–
181
$ 2,261
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
11,245
–
6,373
$ 17,618
1,226,138
52,208
72,358
$ 1,350,704
$ 2,765
160
2,925
3,865
–
312
4,177
6,630
–
472
$ 7,102
48
There was no interest income related to the resolution of non- performing loans recorded during the years ended December 31, 2014 and
2012. During the year ended December 31, 2013, the Company recorded interest income of $13.3 million related to the resolution of non- performing
loans. Interest income was not previously recorded while the loans were on non- accrual status.
Troubled Debt Restructurings – During the years ended December 31, 2014 and 2013, the Company modified loans that were determined
to be troubled debt restructurings. The recorded investment in these loans was impacted by the modifications as follows, presented by class
($ in thousands):
For the Years Ended December 31,
2014
Pre-
Modification
Outstanding
Recorded
Investment
$7,040
Post-
Modification
Outstanding
Recorded
Investment
$7,040
2013
Pre-
Modification
Outstanding
Recorded
Investment
$179,030
Post-
Modification
Outstanding
Recorded
Investment
$154,278
Number of
Loans
6
Number of
Loans
1
Senior mortgages
During the year ended December 31, 2014, the Company
restructured one non- performing loan with a recorded investment of
$7.0 million to grant a maturity extension of one year and included con-
ditional extension options.
During the year ended December 31, 2013, the Company
restructured six loans that were considered troubled debt
restructurings. The Company restructured two performing loans
with a combined recorded investment of $4.6 million to grant maturity
extensions of one year each. 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 $15.4 million of paydowns and accepted discounted payoff
options on these loans. At the time of the restructuring, the Company
reclassified the loans from non- performing to performing status as the
Company believed the borrowers would perform under the modified
terms of the agreements. The loans were repaid in January 2014 and
July 2014 at the discounted payoff amount.
Generally when granting concessions, the Company will seek
to protect its position by requiring incremental pay downs, additional
collateral or guarantees and in some cases lookback features or equity
kickers to offset concessions granted should conditions impacting the
loan improve. The Company’s determination of credit losses is impacted
by troubled debt restructurings whereby loans that have gone through
troubled debt restructurings are considered impaired, assessed for
specific reserves, and are not included in the Company’s assessment
of general loan loss reserves. Loans previously restructured under
troubled debt restructurings that subsequently default are reassessed
to incorporate the Company’s current assumptions on expected cash
flows and additional provision expense is recorded to the extent neces-
sary. As of December 31, 2014, there were no unfunded commitments
associated with modified loans considered troubled debt restructurings.
Securities – Other lending investments – securities includes the following ($ in thousands):
As of December 31, 2014
Available-for-Sale Securities
Municipal debt securities
Held-to- Maturity Securities
Corporate debt securities
Total
As of December 31, 2013
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
$ 1,020
$ 1,020
$ 147
$ 1,167
$ 1,167
176,254
$ 177,274
186,504
$ 187,524
–
$ 147
190,199
$ 191,366
186,504
$ 187,671
$ 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
49
As of December 31, 2014, 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
–
$
186,504
–
$
190,199
–
–
–
–
$ 186,504
$ 190,199
$
–
–
–
1,020
$ 1,020
$
–
–
–
1,167
$ 1,167
The Company’s other investments and its proportionate share of results from equity method investments were as follows ($ in thousands):
Real estate equity investments
Madison Funds
Other equity method investments(1)(2)
Oak Hill Funds
LNR
Total equity method investments
Other
Total other investments
Explanatory Notes:
Carrying Value
Equity in Earnings
As of December 31,
For the Years Ended December 31,
2014
$ 244,886
45,971
30,415
17,658
–
338,930
15,189
$ 354,119
2013
$ 62,205
67,782
45,954
21,366
–
197,307
9,902
$ 207,209
2014
$ 53,428
3,092
35,172
3,213
–
$ 94,905
2013
$ 2,753
14,796
3,332
4,174
16,465
$ 41,520
2012
$ 21,636
10,246
4,614
5,844
60,669
$ 103,009
(1) During the year ended December 31, 2014, the Company recognized $23.4 million of earnings from equity method investments resulting from asset sales and a legal settlement by one
(2)
of its equity method investees.
In conjunction with the sale of the Company’s interests in Oak Hill Advisors, L.P. in 2011, the Company retained interests in its share of carried interest related to various funds. During
the year ended December 31, 2014, the Company recognized $9.0 million of carried interest income.
Real Estate Equity Investments – During the year ended
December 31, 2014, the Company partnered with a sovereign wealth
fund to form a new unconsolidated entity in which the Company has
a noncontrolling equity interest of approximately 51.9%. This entity is
not a VIE and the Company does not have controlling interest due to
substantive participating rights of its partner. The partners plan to con-
tribute up to an aggregate $500 million of equity to acquire and develop
net lease assets over time. The Company is responsible for sourcing
new opportunities and managing the venture and its assets in exchange
for a promote and management fee. Several of the Company’s senior
executives whose time is substantially devoted to the net lease venture
own a total of 0.6% equity ownership in the venture via co- investment.
These executives are also entitled to an amount equal to 50% of any
promote payment received based on the 47.5% partner’s interest. During
the year ended December 31, 2014, the Company sold a net lease asset
for net proceeds of $93.7 million, which approximated carrying value,
to the venture. The Company also sold its 72% interest in a previously
consolidated entity, which owned a net lease asset subject to a non-
recourse mortgage of $26.0 million at the time of sale, to the venture
for net proceeds of $10.1 million, which approximated carrying value.
During the same period, the venture purchased a portfolio of 58 net
lease assets for a purchase price of $200.0 million from a third party. As
of December 31, 2014, the venture’s carrying value of total assets was
$348.1 million and the Company had a recorded equity interest in the
venture of $125.4 million.
During the year ended December 31, 2014, an unconsolidated
entity for which the Company held a 50.0% noncontrolling equity inter-
est sold all of its properties. As a result of the transaction, the Company
received net proceeds of $48.1 million and recognized a gain of $33.3 mil-
lion, which is included in “Earnings from equity method investments” in
its Consolidated Statements of Operations. As of December 31, 2014 and
2013, the Company had an equity interest in the entity of $0.2 million and
$16.4 million, respectively.
During the year ended December 31, 2014, the Company
contributed land to a newly formed unconsolidated entity in which the
Company received an initial equity interest of 85.7%. This entity is a
VIE and the Company does not have controlling interest due to shared
power of the entity with its partner. As of December 31, 2014, the
Company had a recorded equity interest of $9.4 million. Additionally, the
Company committed to provide $45.7 million of mezzanine financing to
the entity. As of December 31, 2014, the loan balance was $14.6 million
50
and is included in “Loans receivable and other lending investments, net”
on the Company’s Consolidated Balance Sheets.
During the year ended December 31, 2014, the Company and a
consortium of co- lenders formed a new unconsolidated entity, in which
the Company received an initial 15.7% equity interest, which acquired,
via foreclosure sale, title to a land asset which previously served as
collateral for a loan receivable held by the consortium. This entity is not
a VIE and the Company does not have controlling interest in the entity
as the Company’s voting rights is based on its ownership percentage in
the entity. As a result of the transaction, the Company recorded an addi-
tional provision of $2.8 million in “Provision for (recovery of) loan losses”
in its Consolidated Statements of Operations. As of December 31, 2014,
the Company had a recorded equity interest of $23.5 million.
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 had a preferred partnership interest and a
47.5% equity interest. This entity is a VIE and the Company does not have
controlling interest due to shared power of the entity with its partner.
The Company’s proportionate share of the assets retained on a car-
ryover basis on the date of sale was $10.6 million. The Company held a
preferred partnership interest of $6.6 million, which was repaid and no
longer outstanding at December 31, 2013. During 2014, the Company
acquired an additional preferred partnership interest in the entity of
$10.0 million and recognized $14.7 million of income related to sales
activity, which is included in “Earnings from equity method investments”
in its Consolidated Statements of Operations. As of December 31, 2014
and 2013, the Company had a recorded equity interest of $30.7 million
and $5.5 million, respectively.
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, 2014
and 2013, the Company had a recorded equity interest of $21.1 mil-
lion and $18.0 million, respectively. 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, 2014 and 2013, the Company had
a recorded equity interest of $7.8 million and $3.5 million, respectively.
These entities are VIEs and the Company does not have controlling
interests due to shared power of the entities with its partners.
As of December 31, 2014, the Company’s other real estate
equity investments included equity interests in real estate ventures
ranging from 31% to 70%, comprised of investments of $13.2 million in
operating properties and $13.8 million in land assets. As of December 31,
2013, the Company’s real estate equity investments included $16.0 mil-
lion in operating properties and $2.7 million in land assets.
Madison Funds – As of December 31, 2014, the Company
owned a 29.5% interest in Madison International Real Estate Fund II,
LP, a 32.9% interest in Madison International Real Estate Liquidity
Fund III, LP (“MIRELF III”), a 32.9% interest in Madison International Real
Estate Liquidity Fund III AIV, LP (“MIRELF III AIV”) and a 29.5% interest
in Madison GP1 Investors, LP (collectively, the “Madison Funds”). The
Madison Funds invest in ownership positions of entities that own real
estate assets. The Company determined that these entities are VIEs and
that the Company is not the primary beneficiary.
Oak Hill Funds – As of December 31, 2014, the Company owned
a 5.9% interest in OHA Strategic Credit Master Fund, L.P. (“OHASCF”).
OHASCF was formed to acquire and manage a diverse portfolio of
assets, investing in distressed, stressed and undervalued loans, bonds,
equities and other investments. The Company determined that this
entity is a VIE and that the Company is not the primary beneficiary.
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 $25.2 million of
net proceeds, which were placed in escrow for potential indemnification
obligations, were released to the Company in April 2014.
51
The following table represents investee level summarized financial information for LNR ($ in thousands)(1):
Income Statements
Total revenue(2)
Income tax (expense) benefit
Net income attributable to LNR(3)
iStar’s ownership percentage
iStar’s equity in earnings from LNR
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
For the
Period from
October 1,
2012 to
April 19, 2013
For the
Year Ended
September 30,
2012
$ 179,373
(2,137)
113,478
24%
$ 45,375
$ (127,075)
(36,543)
217,241
53,623
–
24%
–
$
$ 332,902
(6,731)
253,039
24%
$ 60,669
$ (85,909)
(55,686)
229,634
88,039
61,179
24%
$ 14,690
Explanatory Notes:
(1) The Company recorded its investment in LNR, which was sold in April 2013, on a one
quarter lag. Therefore, the amounts in the Company’s financial statements for the
year ended December 31, 2013 was 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
statements for the year ended December 31, 2012 are based on the balances and
results from LNR for the year ended September 30, 2012.
(2) LNR consolidates certain commercial mortgage- backed securities and collateral-
ized debt obligation trusts that are considered VIEs (and for which it is the primary
beneficiary), that have been included in the amounts presented above. Total rev-
enue presented above includes $55.5 million and $95.4 million for the period from
October 1, 2012 to April 19, 2013 and for the year ended September 30, 2012, respec-
tively, 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) Subsequent to the sale of the Company’s interest in LNR, LNR reported a reduction in
their earnings of $66.2 million related to a purchase price allocation adjustment. The
reduction was reflected in LNR’s operations for the three months ended March 31,
2013, which resulted in a net loss for the period. Because the Company recorded its
investment in LNR on a one quarter lag, the adjustment was reflected in the quarter
ended June 30, 2013. There was no net impact on the Company’s previously reported
equity in earnings as the Company limited its proportionate share of earnings from
LNR pursuant to the definitive sale agreement as described above.
The following table reconciles the activity related to the Company’s investment in LNR for the three months ended March 31, 2013 and
June 30, 2013, the six months ended December 31, 2013 and the year ended December 31, 2013 ($ 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) During the year ended December 31, 2013, the Company recorded an other than temporary impairment of $30.9 million. Subsequent to the sale of the Company’s interest in LNR, LNR
reported a reduction in their earnings of $66.2 million related to a purchase price allocation adjustment. The reduction was reflected in LNR’s operations for the three months ended
March 31, 2013, which resulted in a net loss for the period. Because the Company recorded its investment in LNR on a one quarter lag, the adjustment was reflected in the quarter
ended June 30, 2013. There was no net impact on the Company’s previously reported equity in earnings as the Company limited its proportionate share of earnings from LNR pursu-
ant to the definitive sale agreement 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) and (b), and $1.7 million of income
recognized for the release of other comprehensive income related to
LNR upon sale, or $16.5 million.
52
Other Investments – As of December 31, 2014, the Company
also had smaller investments in real estate related funds and other stra-
tegic investments in several other entities that were accounted for under
the equity method or cost method.
Summarized investee financial information – The following tables
present the investee level summarized financial information of the
Company’s equity method investments, excluding LNR which is pre-
sented above ($ in thousands):
Revenues
Expenses
Net Income
Attributable
to Parent
Entities
As of December 31,
Balance Sheets
Total assets
Total liabilities
Noncontrolling interests
Total equity
2014
2013
$3,464,984
479,298
3,297
2,982,389
$2,980,737
303,100
333
2,677,304
Note 7 – Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the follow-
$ 233,130 $ (15,433) $ 217,697
ing items ($ in thousands):
114,125
78,262
(77,120)
(951)
37,005
77,311
25,760
20,293
(224)
(1,401)
25,536
18,846
13,826
(9,917)
3,691
As of December 31,
Intangible assets, net(1)
Other assets
Deferred financing fees, net(2)
Leasing costs, net(3)
Other receivables
Corporate furniture, fixtures and
equipment, net(4)
Deferred expenses and other assets, net
2014
2013
$ 50,088 $ 100,652
40,726
33,591
21,799
34,655
37,085
36,774
20,031
13,115
5,409
6,557
$ 162,502 $ 237,980
For the Year Ended
December 31, 2014
Alinda Infrastructure Fund I, L.P.
(“Alinda”)(1)
Marina Palms, LLC
(“Marina Palms”)
OHASCF
Moor Park Real Estate
Partners II L.P., Incorporated
(“Moor Park”)
MIRELF III
iStar Net Lease I LLC
(“Net Lease Venture”)(2)
Outlets at Westgate, LLC
(“Westgate”)
MIRELF III AIV
Other
Total
For the Year Ended
December 31, 2013
Alinda(1)
OHASCF
MIRELF III AIV
MIRELF III
Westgate
Moor Park
Marina Palms(3)
Other
Total
For the Year Ended
December 31, 2012
OHASCF
Alinda(1)
MIRELF III
Westgate
Moor Park
MIRELF III AIV
Other
Total
Explanatory Notes:
13,118
(1,194)
128,719
3,500
(1,578)
58,202
$ 626,039 $ (185,603) $ 440,210
(9,618)
(384)
(70,555)
$ 123,447 $ (17,927) $ 105,520
70,671
25,181
17,739
3,558
1,069
(3,452)
(14,088)
$ 284,513 $ (77,633) $ 206,198
72,313
26,348
19,460
12,447
1,373
73
29,052
(1,642)
(1,167)
(1,675)
(8,889)
(304)
(3,525)
(42,504)
$ 109,234 $
104,364
13,490
1,935
1,225
(12,762)
184,384
(2,700) $ 106,534
87,430
9,550
(267)
790
(14,493)
115,416
$ 401,870 $ (95,391) $ 304,960
(16,934)
(3,894)
(2,202)
(435)
(1,731)
(67,495)
(1) The Company recorded its 1% investment in Alinda on a quarter lag. Therefore, the
amounts in the Company’s financial statements for the years ended December 31,
2014, 2013 and 2012 were based on balances and results from Alinda for the years
ended September 30, 2014, 2013 and 2012, respectively.
(2) The Company began accounting for its investment in Net Lease Venture under the
equity method of accounting on February 13, 2014. The amounts in the Company’s
financial statements for the year ended December 31, 2014 are based on the bal-
ances and results from Net Lease Venture for the period from February 13, 2014 to
December 31, 2014.
(3) The Company began accounting for its investment in Marina Palms under the equity
method of accounting on April 17, 2013. The amounts in the Company’s financial state-
ments for the year ended December 31, 2013 are based on the balances and results
from Marina Palms for the period from April 17, 2013 to December 31, 2013.
Explanatory Notes:
(1)
Intangible assets, net are primarily related to the acquisition of real estate assets.
Accumulated amortization on intangible assets was $45.1 million and $38.1 mil-
lion as of December 31, 2014 and 2013, respectively. The amortization of above
market leases decreased operating lease income on the Company’s Consolidated
Statements of Operations by $7.7 million, $7.0 million and $5.8 million for the years
ended December 31, 2014, 2013, and 2012, respectively. The amortization expense
for other intangible assets was $6.7 million, $8.2 million and $7.0 million for the years
ended December 31, 2014, 2013, and 2012, 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 $15.4 million and $9.9 mil-
lion as of December 31, 2014 and 2013, respectively.
(3) Accumulated amortization on leasing costs was $9.0 million and $7.1 million as of
December 31, 2014 and 2013, respectively.
(4) Accumulated depreciation on corporate furniture, fixtures and equipment was
$7.1 million and $6.2 million as of December 31, 2014 and 2013, respectively.
Accounts payable, accrued expenses and other liabilities con-
sist of the following items ($ in thousands):
As of December 31,
Accrued expenses
Accrued interest payable
Other liabilities(1)
Intangible liabilities, net(2)
Accounts payable, accrued expenses and
2014
2013
$ 62,866 $ 58,840
40,015
45,753
26,223
57,895
48,256
11,885
other liabilities
$ 180,902 $ 170,831
Explanatory Notes:
(1) As of December 31, 2014, “Other liabilities” includes $6.8 million related to a profit
sharing payable to a developer for residential units sold. “Other liabilities” also
includes $7.7 million related to tax increment financing (“TIF”) bonds which were
issued by a governmental entity to fund the installation of infrastructure within one of
the Company’s master planned community developments. The balance represents a
special assessment associated with each individual land parcel, which will decrease
as the Company sells parcels.
Intangible liabilities, net are primarily related to the acquisition of real estate assets.
Accumulated amortization on intangible liabilities was $6.2 million and $4.6 million as
of December 31, 2014 and 2013, respectively. The amortization of intangible liabili-
ties increased operating lease income on the Company’s Consolidated Statements
of Operations by $2.5 million, $2.8 million and $1.4 million for the years ended
December 31, 2014, 2013 and 2012, respectively.
(2)
53
Intangible assets and liabilities – The estimated aggregate amor-
tization costs of lease intangible assets and liabilities for each of the five
succeeding fiscal years are as follows ($ in thousands):
2015
2016
2017
2018
2019
$5,929
5,677
5,308
4,987
4,830
Note 8 – Debt Obligations, net
As of December 31, 2014 and 2013, the Company’s debt obligations were as follows ($ in thousands):
Secured credit facilities and term loans:
2012 Tranche A-2 Facility
February 2013 Secured Credit Facility
Term loans collateralized by net lease assets
Total secured credit facilities and term loans
Unsecured notes:
6.05% senior notes
5.875% senior notes
3.875% senior notes
3.0% senior convertible notes(4)
1.50% senior convertible notes(5)
5.85% senior notes
9.0% senior notes
4.00% senior notes
7.125% senior notes
4.875% senior notes
5.00% senior notes
Total unsecured notes
Other debt obligations:
Other debt obligations
Total debt obligations
Debt discounts, net
Total debt obligations, net
Explanatory Notes:
Carrying Value as of December 31,
2014
2013
Stated Interest Rates
Scheduled Maturity Date
$ 358,504
–
248,955
607,459
$ 431,475
1,379,407
278,817
2,089,699
LIBOR + 5.75%(1)
LIBOR + 3.50%(2)
4.851% – 7.26%(3)
March 2017
–
Various through 2026
105,765
261,403
265,000
200,000
200,000
99,722
275,000
550,000
300,000
300,000
770,000
3,326,890
105,765
261,403
265,000
200,000
200,000
99,722
275,000
–
300,000
300,000
–
2,006,890
100,000
4,034,349
(11,665)
$ 4,022,684
100,000
4,196,589
(38,464)
$ 4,158,125
6.05%
5.875%
3.875%
3.0%
1.50%
5.85%
9.0%
4.00%
7.125%
4.875%
5.00%
April 2015
March 2016
July 2016
November 2016
November 2016
March 2017
June 2017
November 2017
February 2018
July 2018
July 2019
LIBOR + 1.50%
October 2035
54
(1) The loan has a LIBOR floor of 1.25%. As of December 31, 2014, inclusive of the floor, the 2012 Tranche A-2 Facility loan incurred interest at a rate of 7.00%.
(2) This loan had a LIBOR floor of 1.00%.
(3) As of December 31, 2014 and 2013, includes a loan with a floating rate of LIBOR plus 2.00%. As of December 31, 2013, includes a loan with a floating rate of LIBOR plus 2.75%. As of
December 31, 2014, the weighted average interest rate of these loans is 5.3%.
(4) The Company’s 3.0% senior convertible fixed rate notes due November 2016 (“3.0% Convertible Notes”) are convertible at the option of the holders, into 85.0 shares per $1,000 prin-
cipal amount of 3.0% Convertible Notes, at any time prior to the close of business on November 14, 2016.
(5) The Company’s 1.50% senior convertible fixed rate notes due November 2016 (“1.50% Convertible Notes”) are convertible at the option of the holders, into 57.8 shares per $1,000
principal amount of 1.50% Convertible Notes, at any time prior to the close of business on November 14, 2016.
Future Scheduled Maturities – As of December 31, 2014, future
scheduled maturities of outstanding long-term debt obligations are as
follows ($ in thousands):
the time of refinancing. These amounts were included in “Loss on early
extinguishment of debt, net” on the Company’s Consolidated Statements
of Operations.
2015
2016
2017
2018
2019
Thereafter
Total principal maturities
Unamortized debt discounts, net
Total long-term debt obligations,
$
Unsecured
Debt
$ 105,765
926,403
924,722
600,000
770,000
100,000
3,426,890
(8,371)
Secured
Debt
–
–
Total
$ 105,765
926,403
358,504 1,283,226
15,239 615,239
32,312 802,312
201,404 301,404
607,459 4,034,349
(11,665)
(3,294)
net
$ 3,418,519 $ 604,165 $ 4,022,684
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.
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 “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.
During the year ended December 31, 2014, net proceeds
from the issuances of the Company’s $550.0 million aggregate principal
amount of 4.00% senior unsecured notes and $770.0 million aggre-
gate principal amount of 5.00% senior unsecured notes, together with
cash on hand, were used to fully repay and terminate the February
2013 Secured Credit Facility. From February 2013 through full payoff
in June 2014, the Company made cumulative amortization repayments
of $388.5 million. During the year ended December 31, 2014 and 2013,
amortization repayments made by the Company resulted in losses on
early extinguishment of debt of $1.1 million and $7.0 million, respectively,
related to the accelerated amortization of discounts and unamortized
deferred financing fees on the portion of the facility that was repaid.
In connection with the repayment and termination of the facility in
2014, the Company recorded a loss on early extinguishment of debt
of $22.8 million related to unamortized discounts and financing fees at
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 repay-
ments and sales of collateral are applied to amortize the March 2012
Secured Credit Facilities. Proceeds received for interest, rent, lease pay-
ments and fee income are retained by the Company. The Company may
also make optional prepayments, subject to prepayment fees. The 2012
Tranche A-1 Facility was fully repaid in August 2013. Additionally, through
December 31, 2014, the Company made cumulative amortization repay-
ments of $111.5 million on the 2012 Tranche A-2 Facility. For the years
ended December 31, 2014 and 2013, repayments of the 2012 Tranche
A-2 Facility prior to maturity resulted in losses on early extinguishment
of debt of $1.5 million and $1.0 million, respectively, related to the accel-
erated amortization of discounts and unamortized deferred financing
fees on the portion of the facility that was repaid. These amounts were
included in “Loss on early extinguishment of debt, net” on the Company’s
Consolidated Statements of Operations.
Repayments of the 2012 Tranche A-1 Facility prior to sched-
uled amortization dates 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. These amounts were included in “Loss on early
extinguishment of debt, net” on the Company’s Consolidated Statements
of Operations.
Unsecured Notes – In June 2014, the Company issued
$550.0 million aggregate principal amount of 4.00% senior unsecured
notes due November 2017 and $770.0 million aggregate principal
amount of 5.00% senior unsecured notes due July 2019. Net proceeds
from these transactions, together with cash on hand, were used to fully
repay and terminate the February 2013 Secured Credit Facility which
had an outstanding balance of $1.32 billion.
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, were used to fully repay the remaining $200.6 million of outstanding
55
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 acceler-
ated amortization of discounts, which was recorded in “Loss on early
extinguishment of debt, net” on the Company’s Consolidated Statements
of Operations for the year ended December 31, 2013.
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 $9.5 million of losses
related to a prepayment penalty and the accelerated amortization of
discounts, which was recorded in “Loss on early extinguishment of debt,
net” on the Company’s Consolidated Statements of Operations for the
year ended December 31, 2013.
Encumbered/Unencumbered Assets – As of December 31, 2014 and 2013, the carrying value of the Company’s encumbered and unencum-
bered assets by asset type are as follows ($ in thousands):
As of December 31,
2014
2013
Real estate, net
Real estate available and held for sale
Loans receivable and other lending investments, net(1)
Other investments
Cash and other assets
Total
Encumbered
Assets
$ 620,378
10,496
46,515
17,708
–
$ 695,097
Unencumbered
Assets
$ 2,056,336
275,486
1,364,828
336,411
768,475
$ 4,801,536
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
Explanatory Note:
(1) As of December 31, 2014 and 2013, the amounts presented exclude general reserves for loan losses of $33.5 million and $29.2 million, respectively.
Debt Covenants
The Company’s outstanding unsecured debt securities con-
tain 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 securi-
ties unless a waiver or modification is agreed upon with the requisite
percentage of the bondholders. While the Company’s ability to incur new
indebtedness under the fixed charge coverage ratio is currently limited,
which may put limitations on its ability to make new investments, it is
permitted to incur indebtedness for the purpose of refinancing existing
indebtedness and for other permitted purposes under the indentures.
56
The Company’s March 2012 Secured Credit Facilities contain
certain covenants, including covenants relating to collateral coverage,
dividend payments, restrictions on fundamental changes, transactions
with affiliates, matters relating to the liens granted to the lenders and
the delivery of information to the lenders. In particular, the Company is
required to maintain collateral coverage of 1.25x outstanding borrow-
ings. In addition, for so long as the Company maintains its qualification
as a REIT, the March 2012 Secured Credit Facilities permit the Company
to distribute 100% of its REIT taxable income on an annual basis. The
Company may not pay common dividends if it ceases to qualify as a REIT.
The Company’s March 2012 Secured Credit Facilities con-
tain cross default provisions that would allow the lenders to declare
an event of default and accelerate the Company’s indebtedness to
them if the Company fails to pay amounts due in respect of its other
recourse indebtedness in excess of specified thresholds or if the lenders
under such other indebtedness are otherwise permitted to acceler-
ate 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 expansion
or addition in its sole discretion. The Company refers to these arrange-
ments as Discretionary Fundings. Finally, the Company has committed
to invest capital in several real estate funds and other ventures. These
arrangements are referred to as Strategic Investments.
As of December 31, 2014, the maximum amount of fund-
ings the Company may be required to make under each category,
assuming all performance hurdles and milestones are met under the
Performance-Based Commitments, that it approves all Discretionary
Fundings and that 100% of its capital committed to Strategic Investments
is drawn down, are as follows ($ in thousands):
Loans
and Other
Lending
Investments
Real
Estate
Other
Investments
Total
Performance-Based
Commitments
Strategic Investments
Discretionary
Fundings
Total
$537,924
–
$14,667
–
$27,004
45,714
$579,595
45,714
5,000
$542,924
–
$14,667
–
$72,718
5,000
$630,309
Other Commitments – Total operating lease expense for the years
ended December 31, 2014, 2013 and 2012 were $5.8 million, $6.1 million
and $6.5 million, respectively. Future minimum lease obligations under
non- cancelable operating leases are as follows ($ in thousands):
2015
2016
2017
2018
2019
Thereafter
$5,598
5,598
4,982
4,179
3,442
8,266
The Company has also 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 con-
sidered 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 pro-
ceedings. In addition to such matters, the Company is a party to the
following legal proceedings:
On March 7, 2014, a shareholder action purporting to assert
derivative, class and individual claims was filed in the Circuit Court for
Baltimore City, Maryland naming the Company, a number of its cur-
rent and former senior executives (including its chief executive officer)
and current and former directors as defendants. The complaint sought
unspecified damages and other relief and alleged breach of fiduciary
duty, breach of contract and other causes of action arising out of shares
of common stock issued by the Company to its senior executives pur-
suant to restricted stock unit awards granted in December 2008 and
modified in July 2011. On October 30, 2014, the Court granted the
defendants’ Motions to Dismiss and plaintiffs’ claims against all of the
defendants in this action were dismissed. Plaintiffs have filed a notice
of appeal.
On January 22, 2015, the United States District Court for the
District of Maryland (the “Court”) entered a judgment in favor of the
Company in the matter of U.S. Home Corporation (“Lennar”) v. Settlers
Crossing, LLC, et al. (Civil Action No. DKC 08-1863). The litigation involved
a dispute over the purchase and sale of approximately 1,250 acres of
land in Prince George’s County, Maryland. The Court found that the
Company was entitled to specific performance and awarded dam-
ages to it in the aggregate amount of: (i) the remaining purchase price
to be paid by Lennar of $114.0 million; plus (ii) interest on the unpaid
amount at a rate of 12% per annum, calculated on a per diem basis,
from May 27, 2008, until Lennar proceeds to settlement on the land; plus
(iii) real estate taxes paid by the Company in the amount of approximately
$1.6 million; plus (iv) actual and reasonable attorneys’ fees and costs
incurred by the Company in connection with the litigation. The Court
ordered Lennar to proceed to settlement on the land and to pay the
total amounts awarded to the Company within 30 days of the judgment.
A third party is entitled to a 15% participation interest in all proceeds.
Lennar has filed a notice of appeal of the Court’s judgment, orders and
rulings in the action. There can be no assurance as to the timing or
actual receipt by the Company of amounts awarded by the Court or to
the outcome of any appeal.
The Company evaluates, on a quarterly basis, developments
in legal proceedings that could require a liability to be accrued and/
or disclosed. Based on its current knowledge, and after consultation
with legal counsel, the Company believes it is not a party to, nor are
any of its properties the subject of, any pending legal proceeding that
would have a material adverse effect on the Company’s Consolidated
Financial Statements.
57
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, 2014, the only states with a concentration greater
than 10.0% were California with 14.6% and New York with 13.9%. As of
December 31, 2014, the Company’s portfolio contains concentrations in
the following asset types: office/industrial 26.7%, land 21.7%, mixed use/
mixed collateral 13.0% and entertainment/leisure 11.0%.
The Company underwrites the credit of prospective borrow-
ers 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 tenants operate in a
variety of industries, to the extent the Company has a significant concen-
tration 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, 2014,
the Company’s five largest borrowers or tenants collectively accounted
for approximately $115 million of the Company’s 2014 revenues, of which
no single customer accounts for more than 6%.
Derivatives
The Company’s use of derivative financial instruments is
primarily limited to the utilization of interest rate swaps, interest rate
caps and foreign exchange contracts. The principal objective of such
financial instruments is to minimize the risks and/or costs associated
with the Company’s operating and financial structure and to manage its
exposure to interest rates and foreign exchange rates. Derivatives not
designated as hedges are not speculative and are used to manage the
Company’s exposure to interest rate movements, foreign exchange rate
movements, and other identified risks, but may not meet the strict hedge
accounting requirements.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated
Balance Sheets as of December 31, 2014 and 2013 ($ in thousands):
Derivative Assets as of December 31,
Derivative Liabilities as of December 31,
2014
2013
2014
2013
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Derivatives Designated in
Hedging Relationships
Foreign exchange contracts
Interest rate swaps
Interest rate cap
Total
Derivatives not Designated in
Hedging Relationships
Foreign exchange contracts
Interest rate cap
Total
Other Assets
Other Assets
Other Assets
Other Assets
Other Assets
$
$
–
52
–
52
$ 1,534
4,775
$ 6,309
58
Other Assets
Other Assets
Other Assets
$ 393 Other Liabilities
N/A
N/A
650
9,107
$ 10,150
$ 478
–
–
$ 478
N/A
N/A
N/A
Other Assets
N/A
$ 1,025
–
$ 1,025
N/A
N/A
$ – Other Liabilities
N/A
–
$ –
$
$
–
–
–
–
$ 1,653
–
$ 1,653
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations and
the Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012 ($ in thousands):
Derivatives Designated in
Hedging Relationships
Location of Gain (Loss)
Recognized in Income
For the Year Ended December 31, 2014
Interest rate cap
Interest rate cap
Interest rate cap
Interest rate swaps
Interest rate swap
Interest Expense
Other Expense
Earnings from equity method
investments
Interest Expense
Earnings from equity method
investments
Foreign exchange contracts
Earnings from equity method
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
investments
Interest Expense
Interest Expense
Earnings from equity method
investments
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)
Reclassified from
Accumulated Other
Comprehensive
Income into Earnings
(Ineffective Portion)
$
–
(2,984)
(9)
(970)
(753)
(471)
(1,517)
869
393
$ (56)
–
–
(6)
(420)
–
–
(310)
–
N/A
(3,634)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Interest Expense
(968)
44
N/A
Derivatives not Designated in
Hedging Relationships
Interest rate cap
Foreign exchange contracts
Location of Gain or (Loss)
Recognized in Income
Other Expense
Other Expense
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 U.S. dollar (“USD”)
to the respective foreign currency exchange rate for delivery of a
specified amount of foreign currency on a specified date. The foreign
exchange contracts are typically cash settled in USD for their fair value
at or close to their settlement date.
For derivatives designated as net investment hedges, the 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
Amount of Gain or (Loss) Recognized in Income
For the Years Ended December 31,
2014
$ (1,347)
7,257
2013
$ –
880
$
2012
–
(8,920)
when the hedged foreign entity is either sold or substantially liquidated.
In January 2014, the Company entered into a foreign exchange con-
tract to hedge its exposure in a subsidiary whose functional currency is
Indian rupee (“INR”). The foreign exchange contract replaced an existing
contract which matured in January 2014. As of December 31, 2014, the
Company had the following outstanding foreign currency derivatives that
were used to hedge its net investments in foreign operations that were
designated ($ in thousands):
Derivative Type
Sells INR/Buys USD
Forward
Notional
Amount
Notional (USD
Equivalent)
Maturity
Rs 456,000
$6,534
June 2015
59
For derivatives not designated as net investment hedges, the changes in the fair value of the derivatives are reported in the Company’s
Consolidated Statements of Operations within “Other Expense.” As of December 31, 2014, the Company had the following outstanding foreign cur-
rency derivatives that were used to hedge its net investments in foreign operations that were not designated ($ in thousands):
Derivative Type
Sells euro (“EUR”)/Buys USD Forward
Sells pound sterling (“GBP”)/Buys USD Forward
Sells Canadian dollar (“CAD”)/Buys USD Forward
Notional Amount
€18,800
£3,000
C$10,000
Notional (USD
Equivalent)
$ 23,807
$ 4,830
$ 8,933
Maturity
January 2015
January 2015
January 2015
The Company marks its foreign investments 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. The Company recorded net gains (losses) related to foreign investments of
$0.1 million, $(2.0) million and $(0.7) million during the years ended December 31, 2014, 2013 and 2012, respectively, in its Consolidated Statements
of Operations.
Interest Rate Hedges – For derivatives designated as interest rate hedges, the effective portion of changes in the fair value of the derivatives
are reported in Accumulated Other Comprehensive Income (Loss). The ineffective portion of the change in fair value of the derivatives is recognized
directly in earnings. In October 2012, the Company entered into an interest rate swap to convert its variable rate debt to fixed rate on a $28.0 mil-
lion secured term loan maturing in 2019. As of December 31, 2014, the Company had the following outstanding interest rate swap that was used
to hedge its variable rate debt that was designated ($ in thousands):
Derivative Type
Interest rate swap
Notional Amount
$27,456
Variable Rate
LIBOR + 2.00%
Fixed Rate
3.47%
Effective Date
October 2012
Maturity
November 2019
For derivatives not designated as interest rate hedges, the changes in the fair value of the derivatives are reported in the Company’s
Consolidated Statements of Operations within “Other Expense.” 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 June 2014, in
connection with the full repayment and termination of the Company’s February 2013 Secured Credit Facility referenced in Note 8, the Company
realized amounts in earnings from other comprehensive income (loss) as a portion of a hedge related to the Company’s variable rate debt was no
longer expected to be highly effective. The amount realized was a loss of $3.6 million recorded as a component of “Other expense” in the Company’s
Consolidated Statements of Operations. As of December 31, 2014, the Company had the following outstanding interest rate cap that was used to
hedge its variable rate debt that was not designated ($ in thousands):
Derivative Type
Interest rate cap
Notional Amount
$500,000
Variable Rate
LIBOR
Fixed Rate
1.00%
Effective Date
July 2014
Maturity
July 2017
Over the next 12 months, the Company expects that $0.1 mil-
lion related to terminated cash flow hedges will be reclassified from
“Accumulated other comprehensive income (loss)” into interest expense
and $0.7 million relating to other cash flow hedges will be reclassified
from “Accumulated other comprehensive income (loss)” into earnings.
In connection with its foreign currency derivatives, as of
December 31, 2014 and 2013, the Company has posted collateral of
$3.0 million and $7.2 million, respectively, which is included in “Restricted
cash” on the Company’s Consolidated Balance Sheets.
60
Credit Risk- Related Contingent Features – The Company has
agreements 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.
Note 11 – Equity
Preferred Stock – The Company had the following series of Cumulative Redeemable and Convertible Perpetual Preferred Stock outstand-
ing as of December 31, 2014 and 2013:
Series
D
E
F
G
I
J
Shares Issued and
Outstanding (in thousands)
4,000
5,600
4,000
3,200
5,000
4,000
25,800
Explanatory Notes:
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
(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 Cumulative Redeemable Preferred Stock
during the years ended December 31, 2014 and 2013. The Company declared and paid dividends of $9.0 million and $6.7 million on its Series J Convertible Perpetual Preferred Stock
during the years ended December 31, 2014 and 2013, respectively. 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.
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 distribute 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 eliminate entirely the Company’s obligation to pay divi-
dends for such periods in order to maintain its REIT qualification. As of
December 31, 2013, the Company had $759.8 million of net operating
loss carryforwards at the corporate REIT level that can generally be
used to offset both ordinary and capital taxable income in future years
and will expire through 2033 if unused. The amount of net operating
loss carryforwards as of December 31, 2014 will be determined upon
finalization of the Company’s 2014 tax return. Because taxable income
differs from cash flow from operations due to non-cash revenues and
expenses (such as depreciation and certain asset impairments), in cer-
tain circumstances, the Company may generate operating cash flow in
excess of its dividends or, alternatively, may need to make dividend pay-
ments in excess of operating cash flows. The Company’s 2012 Tranche
A-2 Facility permits the Company to distribute 100% of its REIT tax-
able income on an annual basis, for so long as the Company maintains
its qualification as a REIT. The 2012 Tranche A-2 Facility restricts 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, 2014 and 2013.
61
Stock Repurchase Programs – In September 2013, the
Company’s Board of Directors approved an increase in the repurchase
limit under the Company’s previously approved stock repurchase
program to $50.0 million. The program authorizes the repurchase of
Common Stock from time to time in open market and privately negoti-
ated purchases, including pursuant to one or more trading plans. During
the year ended December 31, 2013, the Company repurchased 1.7 mil-
lion shares of its outstanding Common Stock for $21.0 million, at an
average cost of $12.35 per share. There were no stock repurchases
during the year ended December 31, 2014. As of December 31, 2014, the
Company had up to $29.0 million of Common Stock available to repur-
chase under its Board authorized stock repurchase program.
Accumulated Other Comprehensive Income (Loss) – “Accumulated
other comprehensive income (loss)” reflected in the Company’s share-
holders’ equity is comprised of the following ($ in thousands):
As of December 31,
2014
2013
Unrealized gains (losses) on available-for-sale
securities
$ 2,983
Unrealized gains (losses) on cash flow hedges
Unrealized losses on cumulative translation
(409)
$
(294)
662
adjustment
(3,545)
(4,644)
Accumulated other comprehensive income
(loss)
$
(971)
$ (4,276)
Note 12 – Stock-Based Compensation Plans and Employee Benefits
On May 22, 2014, the Company’s shareholders approved the
2013 Performance Incentive Plan (“iPIP”) which is designed to provide,
primarily to senior executives and select professionals engaged in the
Company’s investment activities, long-term compensation which has
a direct relationship to the realized returns on investments included
in the plan. In 2014, the Company granted 83 iPIP points for the ini-
tial 2013-2014 investment pool. All decisions regarding the granting of
points under iPIP are made at the discretion of the Board of Directors
or a committee of the Board of Directors. The fair value of points are
determined using a model that forecasts the Company’s projected
investment performance. The payout of iPIP is based on the amount
of invested capital, investment performance and the Company’s total
shareholder return, or TSR, as compared to the average TSR of the
NAREIT All REIT Index and the Russell 2000 Index during the relevant
performance period for the investments in each pool. The Company,
as well as any companies not included in each index at the beginning
and end of the performance period, are excluded from calculation of
the performance of such index. Point holders will not receive a distri-
bution until the Company has received a full return of its capital plus
a preferred return distribution, which is based on a preferred return
hurdle rate of 9% per annum. Subject to certain vesting and employ-
ment requirements, point holders will be paid a combination of cash and
stock. iPIP is a liability- classified award which will be remeasured each
reporting period at fair value until the awards are settled. Compensation
costs relating to iPIP are included in “General and administrative” on the
Company’s Consolidated Statements of Operations.
The Company’s shareholders approved the Company’s 2009
Long-Term Incentive Plan (the “2009 LTIP”) which is designed to pro-
vide incentive compensation for officers, key employees, 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.
As of December 31, 2014, 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.
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.
Stock-Based Compensation – The Company recorded stock-
based compensation expense of $13.3 million, $19.3 million and
$15.3 million for the years ended December 31, 2014, 2013 and 2012 in
“General and administrative” on the Company’s Consolidated Statements
of Operations. As of December 31, 2014, there was $2.2 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 1.42 years. As of December 31, 2014,
approximately $8.7 million of stock-based compensation was included
in “Accounts payable, accrued expenses and other liabilities” on the
Company’s Consolidated Balance Sheets.
62
Restricted Stock Units
Changes in non- vested restricted stock units, or Units, during
the year ended December 31, 2014 were as follows ($ in thousands,
except per share amounts):
Weighted
Average Grant
Date Fair Value
Per Share
Number of
Shares
2,779
306
(2,757)
(8)
$ 5.85
$ 15.31
$ 6.09
$ 15.69
Aggregate
Intrinsic Value
$ 39,659
320
$ 12.57
$ 4,367
Non- vested at
December 31, 2013
Granted
Vested
Forfeited
Non- vested at
December 31, 2014
The total fair value of Units vested during the years ended
December 31, 2014, 2013 and 2012 was $39.2 million, $31.6 million and
$29.1 million, respectively.
2014 Activity – During the year ended December 31, 2014, the
Company issued a total of 1,369,809 shares of our Common Stock to
employees, net of statutory minimum required tax withholdings, upon
the vesting of 2,757,427 Units that were previously granted. These
vested Units were primarily comprised of the following:
– 1,696,053 service-based Units granted to certain employ-
ees in 2008 that vested in January 2014;
– 80,000 service-based Units granted to certain employees
in 2011 and 2013 that vested in 2014; and
– 600,000 service-based Units granted to the Company’s
Chairman and Chief Executive Officer in October 2011 that
vested in June 2014.
– 381,374 of per formance-based Units, granted on
February 1, 2013. The Units vested based on the Company’s
total shareholder return, or TSR, measured over a perfor-
mance period ending on the vesting date of December 31,
2014. Under the terms of these Units, vesting ranged 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) during the performance period. The Company
and any companies not included in the index at the begin-
ning and end of the performance period were excluded
from calculation of the performance of such index. Based
on the Company’s TSR performance, the Units vested in an
amount equal to 195.5% of the target amount of the original
awards of 195,076 Units resulting in an additional 186,298
shares granted.
During the year ended December 31, 2014, the Company
granted new stock-based compensation awards to certain employees
in the form of long-term incentive awards, comprised of the following:
– Effective January 10, 2014, the Company granted 67,637
service-based Units representing the right to receive an
equivalent number of shares of our Common Stock (after
deducting shares for minimum required statutory withhold-
ings) if and when the Units vest. The Units will cliff vest
in one installment on December 31, 2016, if the employee
remains employed by the Company on the vesting date,
subject to certain accelerated vesting rights. Dividends
will accrue as and when dividends are declared by the
Company on shares of its Common Stock, but will not be
paid unless and until the Units vest and are settled. As of
December 31, 2014, 64,552 of such service-based Units
were outstanding.
– Effective January 10, 2014, the Company granted 51,726
target amount of performance-based Units based on the
Company’s TSR measured over a performance period
ending on December 31, 2016, which is the date the awards
cliff vest. Vesting will range from 0% to 200% of the target
amount of the award, 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)
during the performance period. The Company, as well as
any companies not included in each index at the beginning
and end of the performance period, are excluded from cal-
culation 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
as and when dividends are declared by the Company on
shares of its Common Stock, but will not be paid unless
and until the Units vest and are settled. The fair values of
the performance-based Units were determined by utiliz-
ing 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 0.76% for risk-free inter-
est rate and 44.84% for expected stock price volatility. As
of December 31, 2014, 50,116 of such performance-based
Units were outstanding.
63
As of December 31, 2014, the Company had the following addi-
tional stock-based compensation awards outstanding:
– 194,582 service-based Units, granted on February 1, 2013,
representing the right to receive an equivalent number of
shares of the Company’s Common Stock (after deducting
shares for minimum required statutory withholdings) if and
when the Units vest. The Units will cliff vest in one install-
ment on February 1, 2016, 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 as and when dividends are declared
by the Company on shares of its Common Stock, but will
not be paid unless and until the Units vest and are settled.
– 10,666 service-based Units granted on various dates 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.
Dividends will accrue as and when dividends are declared
by the Company on shares of its Common Stock, but will
not be paid unless and until the Units vest and are settled.
Restricted Shares
– During the year ended December 31, 2014, the Company
granted 235,414 shares of our Common Stock to certain
employees as part of annual incentive awards that included
a mix of cash and equity awards. The weighted average
grant date fair value per share of these awards was $14.89
and the total fair value was $3.5 million. The shares are
fully- vested and 132,653 shares were issued net of statu-
tory minimum required tax withholdings. The employees
are restricted from selling these shares for up to two years
from the date of grant.
Note 13 – Earnings Per Share
Directors’ Awards – Non- employee directors are awarded
common stock equivalents, or 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, 2014, the Company
awarded a total of 8,602 CSEs and 39,570 restricted shares to non-
employee Directors pursuant to the Company’s Non- Employee
Directors Deferral Plan, at a fair value per share of $14.46 at the time
of grant. In addition, during the year ended December 31, 2014, the
Company issued 55,076 shares of our Common Stock to a former direc-
tor in settlement of previously vested CSE awards granted under the
Non- Employee Directors Deferral Plan. As of December 31, 2014, a total
of 278,471 CSEs and restricted shares of our Common Stock granted to
members of the Company’s Board of Directors remained outstanding
under such Plan, with an aggregate intrinsic value of $3.8 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 compen-
sation. The Company made gross contributions of $0.9 million each year
for the years ended December 31, 2014, 2013 and 2012.
EPS is calculated using the two-class method, which allocates earnings among common stock and participating securities to calculate EPS
when an entity’s capital structure includes either two or more classes of common stock or common stock and participating securities. HPU hold-
ers are current and former Company employees who purchased high performance common stock units under the Company’s High Performance
Unit (HPU) Program. These HPU units are treated as a separate class of common stock.
The following table presents a reconciliation of income (loss) from continuing operations used in the basic and diluted earnings per share
calculations ($ in thousands, except for per share data):
64
For the Years Ended December 31,
Income (loss) from continuing operations
Net (income) loss attributable to noncontrolling interests
Income from sales of real estate
Preferred dividends
Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to common
2014
$ (74,178)
704
89,943
(51,320)
2013
$ (220,768)
(718)
86,658
(49,020)
2012
$ (314,678)
1,500
63,472
(42,320)
shareholders, HPU holders and Participating Security Holders
$ (34,851)
$ (183,848)
$ (292,026)
For the Years Ended December 31,
Earnings allocable to common shares:
Numerator for basic and diluted earnings per share:
2014
2013
2012
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
$ (33,722)
–
–
$ (33,722)
$ (177,907)
623
21,515
$ (155,769)
$ (282,452)
(16,908)
26,363
$ (272,997)
Denominator for basic and diluted earnings per share:
Weighted average common shares outstanding for basic and diluted earnings per common share
85,031
84,990
83,742
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
$
$
(0.40)
–
–
(0.40)
$
$
(2.09)
0.01
0.25
(1.83)
$
$
(3.37)
(0.20)
0.31
(3.26)
For the Years Ended December 31,
Earnings allocable to High Performance Units:
Numerator for basic and diluted earnings per HPU share:
2014
2013
2012
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
$ (1,129)
–
–
$ (1,129)
$ (5,941)
21
718
$ (5,202)
$ (9,574)
(573)
894
$ (9,253)
Denominator for basic and diluted earnings per HPU share:
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
$ (75.27)
–
–
$ (75.27)
$ (396.07)
1.40
47.87
$ (346.80)
$ (638.27)
(38.20)
59.60
$ (616.87)
For the years ended December 31, 2014, 2013 and 2012, the following shares were not included in the diluted EPS calculation because
they were anti- dilutive (in thousands):
For the Years Ended December 31,
Joint venture shares
3.00% convertible senior unsecured notes
Series J convertible perpetual preferred stock
1.50% convertible senior unsecured notes
Explanatory Note:
2014 (1)
298
16,992
15,635
11,567
2013 (1)
298
16,992
15,635
11,567
2012 (1)
298
–
–
–
(1) For the years ended December 31, 2014, 2013 and 2012, the effect of the Company’s unvested Units, performance-based Units and CSEs were anti- dilutive.
65
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):
Fair Value Using
Quoted market
prices in active
markets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
As of December 31, 2014
Recurring basis:
Derivative assets
Derivative liabilities
Available-for-sale securities
Non- recurring basis:
Impaired loans(1)
Impaired real estate(2)
As of December 31, 2013
Recurring basis:
Derivative assets
Derivative liabilities
Available-for-sale securities
Non- recurring basis:
Impaired loans
Impaired real estate
Explanatory Notes:
$ 6,361
478
7,906
37,169
7,102
$ 11,175
1,653
505
115,423
35,680
$
–
–
7,906
–
–
$
–
–
505
–
–
$ 6,361
478
$
–
–
–
37,169
7,102
–
–
–
–
–
–
$ 11,175
1,653
$
–
–
5,744
115,423
29,936
66
(1) The Company recorded a recovery of loan losses on one loan with a fair value of $8.5 million based on the loan’s remaining term of 1.50 years and interest rate of 4.7% using dis-
counted cash flow analysis. The Company also recorded a provision for loan losses on one loan with a fair value of $5.2 million based on an appraisal. In addition, the Company
recorded a provision for loan losses on one loan, collateralized by a land asset, with a fair value of $23.5 million based upon a foreclosure sale agreement. The land asset was acquired
by an unconsolidated entity in which the Company is a partner.
(2) The Company recorded impairment on one real estate asset with a fair value of $7.1 million based on a discount rate of 15.0% using discounted cash flows over a 10 year lease term.
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 $4.1 billion, respectively, as of
December 31, 2014 and $1.4 billion and $4.5 billion, respectively, as
of December 31, 2013. 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.
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 valua-
tion 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 con-
sidered the impact of netting and any applicable credit enhancements,
such as collateral postings, thresholds, mutual puts and guarantees.
Derivative financial instruments subject to master netting agreements
are measured 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,
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 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, that fall within Level 2 of the fair value hierarchy
or broker quotes that fall within Level 3 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 and are considered Level 2 on the fair
value hierarchy. For debt obligations not traded in secondary markets,
the Company determines fair value using a discounted cash flow meth-
odology, whereby contractual cash flows are discounted at rates that
management determines best reflect current market interest rates that
would be charged for debt with similar characteristics and credit qual-
ity. 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.
67
The Company evaluates performance based on the following financial measures for each segment. The Company’s segment information
is as follows ($ in thousands):
Real Estate
Finance
Net Lease
Operating
Properties
Land
Corporate/
Other(1)
Company
Total
$ 151,934
$ 90,331
$
835
–
$
–
–
Year Ended December 31, 2014:
Operating lease income
Interest income
Other income
Land sales revenue
Total revenue
Earnings (loss) from equity method investments
Income from sales of real estate
Revenue and other earnings
Real estate expense
Land cost of sales
Other expense
Allocated interest expense
Allocated general and administrative(2)
Segment profit (loss)(3)
Other significant non-cash items:
Provision for (recovery of) loan losses
Impairment of assets
Depreciation and amortization
Capitalized expenditures
Year Ended December 31, 2013
Operating lease income
Interest income
Other income
Total revenue
Earnings (loss) from equity method investments
Income from sales of real estate
Income (loss) from discontinued operations(4)
Gain from discontinued operations
Revenue and other earnings
Real estate expense
Other expense
Allocated interest expense(5)
Allocated general and administrative(2)
Segment profit (loss)(3)
Other significant non-cash items:
Provision for (recovery of) loan losses
Impairment of assets(5)
Loss on transfer of interest to
unconsolidated subsidiary
Depreciation and amortization(5)
Capitalized expenditures
68
$ 243,100
122,704
81,033
15,191
462,028
94,905
89,943
646,876
(163,389)
(12,840)
(5,821)
(224,483)
(75,492)
$ 164,851
10,052
–
10,052
75,010
–
85,062
–
–
(5,578)
(25,384)
(22,588)
$ 31,512
$
–
–
1,148
–
$
(1,714)
34,634
73,571
145,238
$
–
–
3,572
3,572
38,606
–
–
–
42,178
–
(6,425)
(32,332)
(23,783)
$ (20,362)
$ 234,567
108,015
48,208
390,790
41,520
86,658
2,735
22,233
543,936
(157,441)
(8,050)
(266,225)
(72,853)
$ 39,367
3,327
15,191
19,353
14,966
–
34,319
(26,918)
(12,840)
–
(29,432)
(13,170)
$ (48,041)
–
$
22,814
1,440
80,119
902
–
1,474
2,376
(5,331)
4,055
–
–
1,100
(33,832)
–
(30,368)
(12,365)
$ (75,465)
–
–
4,437
42,000
–
–
156,371
3,260
6,206
165,837
(22,967)
–
–
(72,089)
(16,736)
$ 54,045
132,331
1,669
83,737
217,737
(113,504)
–
–
(39,535)
(9,684)
$ 55,014
$ (1,714)
–
–
–
–
$
3,689
38,841
3,933
$
–
8,131
32,142
61,186
$ 147,313
$ 86,352
$
–
250
147,563
2,699
–
1,484
3,395
155,141
(22,565)
–
(80,034)
(14,330)
$ 38,212
–
38,164
124,516
5,546
82,603
1,251
18,838
232,754
(101,044)
–
(49,114)
(9,189)
$ 73,407
–
$
122,704
21,217
–
143,921
–
–
143,921
–
–
(243)
(58,043)
(13,314)
$ 72,321
–
$
108,015
4,748
112,763
–
–
–
–
112,763
–
(1,625)
(74,377)
(13,186)
$ 23,575
$ 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
–
1,244
–
7,373
71,530
111,553
Revenue and other earnings
142,023
Year Ended December 31, 2012
Operating lease income
Interest income
Other income
Total revenue
Earnings (loss) from equity method investments
Income from sales of real estate
Income (loss) from discontinued operations(4)
Gain from discontinued operations
Real estate expense
Other expense
Allocated interest expense(5)
Allocated general and administrative(2)
Segment profit (loss)(3)
Other significant non-cash items:
Provision for (recovery of) loan losses
Impairment of assets(5)
Depreciation and amortization(5)
Capitalized expenditures
As of December 31, 2014
Real estate
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
As of December 31, 2013
Real estate
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
Explanatory Notes:
Real Estate
Finance
Net Lease
Operating
Properties
Corporate/
Other(1)
Company
Total
$
–
$ 149,058
133,410
8,613
142,023
–
–
–
–
–
(4,775)
(111,898)
(14,263)
11,087
$
$
–
–
149,058
2,632
–
7,289
27,257
186,236
(23,886)
–
(92,579)
(10,618)
59,153
$ 65,706 $
–
32,615
98,321
25,142
63,472
886
–
187,821
(100,258)
–
(69,259)
(7,572)
$ 10,732 $
Land
1,527
–
2,635
4,162
(6,138)
–
–
–
(1,976)
(27,314)
–
(44,125)
(7,405)
(80,820)
$
–
–
3,975
3,975
81,373
–
–
–
85,348
–
(12,491)
(38,300)
(25,705)
$ 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
$ 8,852 $
$
$
81,740
–
–
–
–
6,670
39,250
10,994
$
–
$
28,501
28,450
51,579
$
–
205
1,276
20,497
$
–
978
1,810
–
81,740
36,354
70,786
83,070
–
–
–
1,188,160
4,521
1,192,681
628,271
162,782
791,053
860,283
118,679
978,962
1,377,843
–
–
–
125,360
$ 1,377,843 $ 1,318,041
–
13,220
106,155
$ 804,273 $ 1,085,117
–
–
–
–
2,676,714
285,982
2,962,696
1,377,843
354,119
4,694,658
768,475
$ 5,463,133
109,384
$ 109,384
–
–
–
1,358,248
–
1,358,248
638,088
228,328
866,416
799,845
132,189
932,034
1,370,109
–
–
–
16,408
$ 1,370,109 $ 1,374,656
–
16,032
29,765
$ 882,448 $ 961,799
–
–
–
–
145,004
$ 145,004
2,796,181
360,517
3,156,698
1,370,109
207,209
4,734,016
907,995
$ 5,642,011
(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 included in the other reportable segments above.
(2) General and administrative excludes stock-based compensation expense of $13.3 million, $19.3 million and $15.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
(3) The following is a reconciliation of segment profit (loss) to net income (loss) ($ in thousands):
For the Years Ended December 31,
Segment profit (loss)
Less: (Provision for) recovery of loan losses
Less: Impairment of assets(4)
Less: Loss on transfer of interest to unconsolidated subsidiary
Less: Stock-based compensation expense
Less: Depreciation and amortization(4)
Less: Income tax (expense) benefit(4)
Less: Loss on early extinguishment of debt, net
Net income (loss)
2014
$ 164,851
1,714
(34,634)
–
(13,314)
(73,571)
(3,912)
(25,369)
$ 15,765
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)
69
(4) For the years ended December 31, 2013 and 2012, excludes certain amounts reclassified to discontinued operations on the Company’s Consolidated Statements of Operations.
(5) For the years ended December 31, 2013 and 2012, includes related amounts reclassified to discontinued operations on the Company’s Consolidated Statements of Operations.
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
2014:
Revenue
Net income (loss)
Earnings per common share data:
Net income (loss) attributable to iStar Financial Inc.
Basic(1)
Diluted(1)
Earnings per share
Basic
Diluted
Weighted average number of common shares
Basic
Diluted
Earnings per HPU share data:
Net income (loss) attributable to iStar Financial Inc.
Basic
Diluted
Earnings per share
December 31,
September 30,
June 30,
March 31,
$ 109,950
$ (1,955)
$ 113,486
$ 35,491
$ 129,843
$ (3,594)
$ 108,749
$ (14,177)
$ (13,270)
$ (13,270)
$ 22,327
$ 27,608
$ (16,207)
$ (16,207)
$ (26,572)
$ (26,572)
$
$
(0.16)
(0.16)
$
$
0.26
0.21
$
$
(0.19)
(0.19)
$
$
(0.31)
(0.31)
85,188
85,188
85,163
130,160
84,916
84,916
84,819
84,819
$
$
(442)
(442)
$
$
744
602
$
$
(542)
(542)
$
$
(889)
(889)
Basic
Diluted
Weighted average number of HPU shares – basic and diluted
$ (29.47)
$ (29.47)
15
$ 49.60
$ 40.13
15
$ (36.13)
$ (36.13)
15
$ (59.27)
$ (59.27)
15
2013:
Revenue
Net income (loss)
Earnings per common share data:
$ 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
$ (57,934)
(0.68)
$
84,617
$ (30,571)
(0.36)
$
85,392
$ (26,001)
(0.31)
$
85,125
$ (41,263)
(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
$
(1,939)
$ (129.26)
15
$
$
(1,016)
(67.73)
15
$
$
(866)
(57.74)
15
$
$
(1,381)
(92.07)
15
Explanatory Note:
(1) For the quarter ended September 30, 2014, includes net income attributable to iStar Financial Inc. and allocable to Participating Security Holders of $2 and $2 on a basic and dilutive
basis, respectively.
70
Performance Graph
Dividends
The following graph compares the total cumulative share-
holder returns on our Common Stock from December 31, 2009 to
December 31, 2014 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”).
$305.47
$206.64
$115.06
$117.48
$100.0
$112.13
$93.00
$318.36
$136.26
$119.73
$557.42
$533.20
$180.37
$162.34
$205.05
$186.98
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
iStar Financial
S&P 500
S&P 500 Financials
Source: Bloomberg
COMMON STOCK PRICE AND DIVIDENDS (UNAUDITED)
The Company’s Common Stock trades on the New York Stock
Exchange (“NYSE”) under the symbol “STAR.” The high and low sales
prices per share of Common Stock are set forth below for the peri-
ods indicated.
Quarter Ended
December 31
September 30
June 30
March 31
2014
High
$ 14.60
$ 15.27
$ 15.19
$ 15.91
Low
$ 12.30
$ 13.26
$ 13.94
$ 13.79
2013
High
$ 14.65
$ 12.25
$ 12.55
$ 11.00
Low
$ 11.57
$ 10.20
$ 9.99
$ 8.26
On February 20, 2015, the closing sale price of the Common
Stock as reported by the NYSE was $13.50 The Company had 2,094
holders of record of Common Stock as of February 20, 2015.
At December 31, 2014, 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.
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.
S&P 500
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
S&P 500 Financials
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
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.
SFI
The Company did not declare or pay dividends on its Common
Stock for the years ended December 31, 2014 and 2013. 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, 2014 and
2013. During the year ended December 31, 2014 and 2013, the Company
also declared and paid dividends of $9.0 million and $6.7 million, respec-
tively, on its Series J preferred stock, which was issued in March 2013.
All of the dividends qualified as return of capital for tax reporting pur-
poses. 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.
71
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.
Dale Anne Reiss (1) (3)
Senior Consultant,
Global Real Estate Center
Global & Americas Director of Real
Estate, Ernst & Young, LLP (Retired)
Robert W. Holman, Jr. (1) (2) (4)
Chairman & Chief Executive Officer,
National Warehouse
Investment Company
Barry W. Ridings (1) (2) (3)
Vice Chairman of
US Investment Banking
Lazard Freres & Co. LLC
Robin Josephs (2) (4)
Lead Director, iStar Financial Inc.
John G. McDonald (2) (3) (4)
Stanford Investors Professor,
Stanford University Graduate School
of Business
(1) Audit Committee
(2) Compensation Committee
(3) Investment Committee
(4) Nominating & Governance Committee
Executive Officers
Executive Vice Presidents
Jay Sugarman
Chairman &
Chief Executive Officer
Nina B. Matis
Executive Vice President,
Chief Investment Officer &
Chief Legal Officer
David M. DiStaso
Chief Financial Officer
Chase S. Curtis, Jr.
Credit
Karl Frey
Land & Development
Barclay G. Jones III
Investments
Michelle M. MacKay
Investments / Head of
Capital Markets
Steven Magee
Land & Development
Barbara Rubin
iStar Asset Services, Inc.
Vernon B. Schwartz
Investments
72
At iStar, we seek the white space
beyond commodity capital. After
20 years in the business, we’ve
had success, learned from our
challenges and remain resilient,
opportunistic and true to our word.
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, 2015,
the Company had 182 employees.
Independent Auditors
PricewaterhouseCoopers LLP
New York, NY
Registrar & 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 20, 2015, 9:00 a.m. ET
Sofitel Hotel of New York City
45 West 44th Street
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
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2014
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