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Annual Report 2016
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
83
1777 Ala Moana Boulevard
Honolulu, HI 96815
Tel: 808.800.4320
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
As of March 8, 2017, the
Company had 194 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 16, 2017, 9:00 a.m. ET
Harvard Club of New York City
35 West 44th Street
New York, NY 10036
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
Investor Information Services
iStar Inc. 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
Email:
investors@istar.com
iStar Website:
www.istar.com
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2016 was a year of tangible progress for iStar. The company set out to grow its earnings,
capture unrecognized value and build a foundation for improved shareholder returns.
As you will see in the following report, earnings grew substantially, significant gains were
generated on asset sales and a sizable percentage of outstanding shares were retired
or repurchased. Now we must continue this progress and see it reflected in an increased
share price.
iStar also continued to work on finding attractive gaps in the market where its combination
of real estate, capital markets and corporate finance expertise can set it apart from other
capital providers and help drive attractive risk-adjusted returns. We look to make tangible
progress on this front in 2017.
Lastly, we began re-engineering the company to become more efficient, more focused and
more accessible to investors. With a unique platform, decades of experience and a reputation
for finding off market investments and excess return opportunities, we believe the potential
for iStar going forward is exceptional.
We appreciate your interest and support.
Strong earnings
growth
iStar’s earnings grew substantially in 2016, with
net income reaching $44 million, or $0.55 per
diluted common share, and adjusted income
climbing to $113 million, or $1.15 per share.¹
2016 net income
$44M
2015 net income
$(53)M
¹ An explanation of adjusted income and table
reconciling the calculation of net income to adjusted
income can be found on pages 34–35.
2016 adjusted income
$113M
2015 adjusted income
$30M
Growing
investment pipeline
iStar’s platform combines real estate
capabilities that extend from entitlement,
design and construction to asset management,
leasing and operating through finance,
structuring and marketing. As part of its new
iStar 3.0 strategy, the company is using the
power of this fully-integrated platform to
identify attractive risk-adjusted investment
opportunities and to build value within its
development projects. Since the beginning
of 2013, 77% of iStar’s investment fundings
are within its core businesses of Real Estate
Finance and Net Lease.
Real estate finance and net lease
Operating and land
$2.8B total
investments under
iStar 3.0
Transformed
finance portfolio
Over the past three years, iStar has
transformed its real estate finance portfolio
from primarily legacy loans that were made
prior to the credit crisis to a portfolio comprised
primarily of new loan originations. These post
crisis, iStar 3.0 loans have demonstrated strong
credit performance with no specific reserves
and no losses through 2016.
Legacy
iStar 3.0
$1,156M
$244M
2013
$767M
$644M
2014
$1,196M
$1,223M
$442M
2015
$250M
2016
Residential gains
realized
Over the past several years, iStar has
successfully implemented its strategy to
complete and reposition a significant
residential/condominium portfolio. Using
its in-house capabilities in construction,
design and development, and identifying
best practices across its portfolio, iStar
has been able to extract substantial profits.
The bottom line: iStar has monetized
approximately 95% of these assets with a
book value of $1.6 billion, generating nearly
$300 million in profits.
$1,858M total proceeds
$296M profits
$1,562M basis sold
Gross book value¹ at 12/31/16
$83M basis remaining
¹ Represents the company’s book
value, gross of accumulated
depreciation and general loan
loss reserves.
Commercial
gains realized
iStar repositioned and stabilized its
commercial operating properties utilizing
largely the same successful strategy the
company employed for its residential
projects. iStar took $1.7 billion of transitional
commercial properties and used intensive
asset management and investment efforts
to lease up and stabilize them, leaving only
$189 million of assets still in transition. The
bottom line: iStar has recognized $130 million
of profits from commercial property sales
and its stabilized projects generated
an attractive weighted average yield of
8.5% in 2016.
$1,767M of total sales and
assets stabilized
$130M profit
$1,300M basis sold
$337M stabilized
Transitional at 12/31/16¹
$189M basis remaining
¹ Represents the company’s book
value, gross of accumulated
depreciation and general loan
loss reserves.
1101 Ocean
Asbury Park, NJ
Under construction
1000 South Clark
Chicago, IL
Completed construction
Improved land
position
iStar has invested significantly in its land
portfolio, bringing assets closer to monetization.
Since 2013, iStar has sold or transferred
into stabilized operating properties land with
a book value of $351 million and realized
$134 million of profits. However, the balance
of land has also grown 16% since 2013 as the
company has invested nearly $250 million
in development as it works toward capturing
the highest economic return. Through this
effort and its 30-person land team, iStar
has secured entitlements on 90% of its
portfolio and converted three quarters of
the portfolio into projects with either sales or
development underway.
Land status as of today
43%
24%
23%
10%
Land status at
foreclosure
20%
80%
Entitled for best use / legal resolution
Not entitled for best use / legal issues
Sales underway / proceeds exceed CapEx
Development or stabilization underway
Sales 1/1/13–12/31/16
$134M profits
$38M add’l capex
$313M same store book value
Land book value $965M at 1/1/13
Land portfolio $1,036M at 12/31/16
$243M add’l capex
$91M assets transferred-in
$652M same store book value
$965M same store book value
Enhanced capital
structure
Since the company’s last rating agency
upgrade in October of 2012, iStar has
significantly reduced its total debt outstanding
and leverage. At the same time, iStar has
extended its debt maturity profile while
unencumbering the majority of its balance
sheet. The company also arranged a revolving
credit facility which provides iStar additional
liquidity, cash efficiency and flexibility.
Cash and credit available
Weighted average debt maturity¹
Unencumbered assets %
$749M
3.3 years
73%
2.6 years
$505M
48%
9/30/12
12/31/16
9/30/12
12/31/16
9/30/12
12/31/16
Leverage²
2.5x
Secured debt %
54%
2.0x
¹ Pro forma for the company’s March 2017 senior
unsecured bond issuance and the use of the net
proceeds to repay and redeem outstanding debt.
22%
² Leverage is calculated as total net debt divided
by total common equity and preferred equity,
gross of accumulated depreciation and general
loan loss reserves.
9/30/12
12/31/16
9/30/12
12/31/16
Amplified
potential
Over the past 18 months, iStar has
repurchased 17 million shares of common
stock and common stock equivalents
for $178 million, representing a reduction
of 20% in basic shares outstanding. The
company has also retired a significant portion
of its outstanding convertible securities,
resulting in a 34% reduction in fully diluted
shares outstanding.
132.6M at 6/30/15
44.2M dilutive shares
34%
reduction
88.1M fully diluted shares at 12/31/16
16.1M convertible shares
88.4M basic shares
72.0M basic shares
Building a solid foundation for the future
Results
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Performance Graph
Dividends
Directors and Officers
Corporate Information
24
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4 1
4 1
42
43
44
45
46
47
48
8 1
8 1
82
83
23
SELECTED FINANCIAL DATA
The following table sets forth selected financial data on a consolidated historical basis for the Company. This information should be read in con-
junction 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 development revenue
Total revenue
Interest expense
Real estate expense
Land development 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 benefit (expense)
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 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 Inc. from continuing
operations:
Basic
Diluted
Net income (loss) attributable to iStar Inc.:
Basic
Diluted
Dividends declared per common share
2016
2015
2014
2013
2012
$ 213,018
129,153
46,515
88,340
477,026
221,398
138,422
62,007
54,329
84,027
(12,514)
14,484
5,883
568,036
(91,010)
(1,619)
77,349
–
(15,280)
10,166
(5,114)
–
–
105,296
100,182
(4,876)
95,306
(51,320)
$ 229,720
134,687
49,931
100,216
514,554
224,639
146,750
67,382
65,247
81,277
36,567
10,524
6,374
638,760
(124,206)
(281)
32,153
–
(92,334)
(7,639)
(99,973)
–
–
93,816
(6,157)
3,722
(2,435)
(51,320)
$ 243,100
122,704
81,033
15,191
462,028
224,483
163,389
12,840
73,571
88,287
(1,714)
34,634
6,340
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
–
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)
$ 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)
(14)
$ 43,972
1,080
$ (52,675)
1,129
$ (33,722)
5,202
$ (155,769)
9,253
$ (272,997)
$
$
$
$
$
0.60
0.55
0.60
0.55
–
$
$
$
$
$
(0.62)
(0.62)
(0.62)
(0.62)
–
$
$
$
$
$
(0.40)
(0.40)
(0.40)
(0.40)
–
$
$
$
$
$
(2.09)
(2.09)
(1.83)
(1.83)
–
$
$
$
$
$
(3.37)
(3.37)
(3.26)
(3.26)
–
24
For the Years Ended December 31,
2016
2015
2014
2013
2012
(In thousands, except per share data and ratios)
Supplemental Data:
Ratio of earnings to fixed charges(3)
Ratio of earnings to fixed charges and preferred dividends(3)
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
Cash flows (used in) from:
Operating activities
Investing activities
Financing activities
–
–
–
–
–
–
–
–
73,453
98,467
84,987
84,987
85,031
85,031
84,990
84,990
–
–
83,742
83,742
$ 20,004
466,543
(868,911)
$ (59,947)
184,028
114,481
$ (10,342)
159,793
(190,958)
$ (180,465)
893,447
(455,758)
$ (191,932)
1,267,047
(1,175,597)
As of December 31,
2016
2015
2014
2013
2012
(In thousands)
Balance Sheet Data:
Total real estate(4)
Land and development, net(4)
Loans receivable and other lending investments, net
Total assets
Debt obligations, net
Total equity
Explanatory Notes:
$ 1,575,516
945,565
1,450,439
4,825,514
3,389,908
1,059,684
$ 1,731,257
1,001,963
1,601,985
5,597,792
4,118,823
1,101,330
$ 1,983,734
978,962
1,377,843
5,426,483
3,986,034
1,248,348
$ 2,224,664
932,034
1,370,109
5,608,604
4,124,718
1,301,465
$ 2,409,864
965,100
1,829,985
6,133,687
4,665,182
1,313,154
(1) All of the Company’s outstanding HPUs were repurchased and retired on August 13, 2015 (see “Financial Statements and Supplemental Data – Note 13). Participating Security holders
are non- employee directors who hold unvested common stock equivalents and restricted stock awards granted under the Company’s Long Term Incentive Plans that are eligible to
participate in dividends (see “Financial Statements and Supplemental Data – Note 14 and 15).
(2) See “Financial Statements and Supplemental Data – Note 15.”
(3) This ratio of earnings to fixed charges is calculated in accordance with SEC Regulation S-K Item 503. For the years ended December 31, 2016, 2015, 2014, 2013 and 2012, earnings were
not sufficient to cover fixed charges by $49,706, $99,825, $89,948, $240,912 and $305,450, respectively, and earnings were not sufficient to cover fixed charges and preferred dividends
by $101,026, $151,145, $141,268, $289,932 and $347,770, respectively. The Company’s unsecured debt securities have a fixed charge coverage covenant which is calculated differently in
accordance with the terms of the agreements governing such securities.
(4) Prior to December 31, 2015, land and development assets were recorded in total real estate. Prior year amounts have been reclassified to conform to the current period presentation.
25
26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion summarizes the significant factors affecting our
consolidated operating results, financial condition and liquidity during the
three-year period ended December 31, 2016. This discussion should be read
in conjunction with our consolidated financial statements and related notes
for the three-year period ended December 31, 2016 included elsewhere in
this Annual Report on Form 10-K. These historical financial 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.
Introduction
We finance, invest in and develop real estate and real estate
related projects as part of our fully- integrated investment platform. We have
invested more than $35 billion over the past two decades and are structured
as a REIT with a diversified portfolio focused on larger assets located in
major metropolitan markets. Our primary business segments are real estate
finance, net lease, operating properties and land and development.
Our real estate finance portfolio is comprised of senior and mezza-
nine 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 business entities, particularly entities engaged in real estate or real
estate related businesses, and may be either secured or unsecured. Our
real estate finance portfolio includes whole loans, loan participations and
debt securities.
Our net lease portfolio is primarily comprised of properties owned
by us and leased to single creditworthy tenants where the properties are
subject to long-term leases. Most of the leases provide for expenses at the
facilities to be paid by the tenants on a triple net lease basis. The properties
in this portfolio are diversified by property type and geographic location. In
addition to net lease properties owned by us, we partnered with a sovereign
wealth fund in 2014 to form a venture in which the partners would contribute
equity to acquire and develop net lease assets.
Our operating properties portfolio is comprised of commercial
and residential properties which represent a diverse pool of assets across
a broad range of geographies and property types. We generally seek to
reposition or redevelop our transitional properties with the objective of
maximizing their value through the infusion of capital and/or intensive asset
management efforts. The commercial properties within this portfolio include
office, retail, hotel and other property types. The residential properties within
this portfolio are generally luxury condominium projects located in major
U.S. cities where our strategy is to sell individual units through retail distribu-
tion channels.
Our land and development portfolio is primarily comprised of land
entitled for master planned communities as well as waterfront and urban
infill land parcels located throughout the United States. Master planned
communities represent large-scale residential projects that we will entitle,
plan and/or develop and may sell through retail channels to home builders
or in bulk. Waterfront parcels are generally entitled for residential projects
and urban infill parcels are generally entitled for mixed-use projects. We
may develop these properties ourself or sell to or partner with commercial
real estate developers.
Executive Overview
2016 was a year of solid progress for iStar. We continued to invest
in attractive investment opportunities in our real estate finance and net
lease businesses while making significant progress in stabilizing and/or
monetizing our commercial and residential operating properties. Our land
portfolio continues to make significant progress with almost all of our land
projects being re- entitled and sales and leasing efforts gaining momentum.
Our investment activity has focused on new originations within our core
business segments of real estate finance and net lease. In addition, we
continue to make significant investments within our operating property and
land and development portfolios in order to better position assets for sale
and maximize value for our shareholders. Through strategic ventures, we
have partnered with other providers of capital within our net lease segment
and with developers with residential building expertise within our land and
development segment. These partnerships have had a positive impact on
our business, particularly in our land and development segment.
We have continued to strengthen our balance sheet through our
financing activities. Access to the capital markets has allowed us to extend
our debt maturity profile and remain primarily an unsecured borrower. In
2016, we repaid $926.4 million of maturing unsecured notes and issued
$275.0 million of unsecured notes. In addition, we entered into a $500.0 mil-
lion senior secured credit facility and used the proceeds to repay other
secured debt. As of December 31, 2016, we had $328.7 million of cash, which
we expect to use primarily to fund future investment activities, pay down
debt and for general corporate purposes. In addition, we have additional
borrowing capacity of $420.0 million bringing total available liquidity to
$748.7 million at year end.
During the year ended December 31, 2016, 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 and development assets in
order to maximize their value. We intend to continue these efforts, with the
objective of increasing the contribution of these assets to our earnings in
the future. For the year ended December 31, 2016, we recorded net income
allocable to common shareholders of $44.0 million, compared to a net loss
of $52.7 million during the prior year. Adjusted income allocable to common
shareholders for the year ended December 31, 2016 was $112.6 million, com-
pared to $29.7 million during the prior year (see “Adjusted Income” for a
reconciliation of adjusted income to net income).
Portfolio Overview
As of December 31, 2016, based on gross carrying values, our total investment portfolio has the following characteristics:
Real Estate Finance
31.9%
Strategic Investments
0.7%
Land and Development
22.4%
Net Lease
31.9%
Operating Properties
13.1%
As of December 31, 2016, based on gross carrying values, our total investment portfolio has the following property/collateral type and geographic
characteristics ($ in thousands)(1):
Property Type
Property/Collateral Types
Land and Development
Office / Industrial
Hotel
Entertainment / Leisure
Condominium
Mixed Use / Mixed Collateral
Other Property Types
Retail
Strategic Investments
Total
Geography
Geographic Region
Northeast
West
Southeast
Mid- Atlantic
Southwest
Central
Various(2)
Strategic Investments(2)
Total
Explanatory Notes:
Real Estate
Finance
–
$
168,213
333,114
–
380,851
291,526
236,862
63,173
–
Net Lease
–
$
771,541
136,080
490,200
–
–
23,039
57,348
–
Operating
Properties
–
$
Land &
Development
$ 1,036,855
122,484
107,534
–
82,487
171,045
–
124,850
–
–
–
–
–
–
–
–
–
$ 1,473,739
$ 1,478,208
$ 608,400
$ 1,036,855
Total
$ 1,036,855
1,062,238
576,728
490,200
463,338
462,571
259,901
245,371
33,350
$ 4,630,552
% of Total
22.4%
22.9%
12.5%
10.6%
10.0%
10.0%
5.6%
5.3%
0.7%
100.0%
27
Real Estate
Finance
$ 790,113
87,037
126,814
168,213
77,378
150,829
73,355
Net Lease
$ 379,731
304,854
235,490
153,084
183,920
79,411
141,718
–
–
Operating
Properties
$ 47,322
37,518
150,066
53,774
239,297
65,869
14,554
–
Land &
Development
$ 233,672
362,578
156,326
218,982
28,393
31,500
5,404
–
$ 1,473,739
$ 1,478,208
$ 608,400
$ 1,036,855
Total
$ 1,450,838
791,987
668,696
594,053
528,988
327,609
235,031
33,350
$ 4,630,552
% of Total
31.3%
17.1%
14.4%
12.8%
11.4%
7.1%
5.2%
0.7%
100.0%
(1) Based on the carrying value of our total investment portfolio gross of accumulated depreciation and general loan loss reserves.
(2) Combined, strategic investments and the various category include $18.3 million of international assets.
Real Estate Finance
Our real estate finance business targets sophisticated and inno-
vative owner/operators of real estate and real estate related projects by
providing one-stop capabilities that encompass financing alternatives
ranging from full envelope senior loans to mezzanine and preferred equity
capital positions. As of December 31, 2016, our real estate finance port-
folio totaled $1.5 billion, gross of general loan loss reserves. The portfolio
included $1.2 billion of performing loans with a weighted average maturity
of 2.1 years.
The tables below summarize our loans and the reserves for loan losses associated with our loans ($ in thousands):
Performing loans
Non- performing loans
Total
Performing loans
Non- performing loans
Total
28
December 31, 2016
Number
Gross
Carrying
Value
35
6
41
$ 1,202,127
253,941
$ 1,456,068
Reserve for
Loan Losses
$ (23,300)
(62,245)
$ (85,545)
Carrying
Value
$ 1,178,827
191,696
$ 1,370,523
December 31, 2015
Number
Gross
Carrying
Value
40
6
46
$ 1,515,369
132,492
$ 1,647,861
Reserve for
Loan Losses
$ (36,000)
(72,165)
$ (108,165)
Carrying
Value
$ 1,479,369
60,327
$ 1,539,696
Reserve for
Loan Losses as
a % of Gross
Carrying Value
1.9%
24.5%
5.9%
% of Total
86.0%
14.0%
100.0%
Reserve for
Loan Losses as
a % of Gross
Carrying Value
2.4%
54.5%
6.6%
% of Total
96.1%
3.9%
100.0%
Performing Loans – The table below summarizes our performing
loans gross of reserves ($ in thousands):
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
Total
Weighted average LTV
Yield
December 31,
2016
$ 854,805
333,244
14,078
$ 1,202,127
64%
8.9%
December 31,
2015
$ 849,161
637,532
28,676
$ 1,515,369
67%
8.8%
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 we 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.
During the year ended December 31, 2016, the Company transferred a loan
with a gross carrying value of $157.2 million to non- performing status. As
of December 31, 2016, we had non- performing loans with an aggregate
carrying value of $191.7 million compared to non- performing loans with
an aggregate carrying value of $60.3 million as of December 31, 2015. 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
$85.5 million as of December 31, 2016, or 5.9% of total loans, compared
to $108.2 million or 6.6% as of December 31, 2015. For the year ended
December 31, 2016, the recovery of loan losses included recoveries of
specific reserves of $13.7 million and a reduction in the general reserve of
$12.7 million, partially offset by provisions on two non- performing loans of
$13.9 million. We expect that our level of reserve for loan losses will fluctu-
ate 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. We currently believe there is adequate col-
lateral and reserves to support the carrying values of the loans.
The reserve for loan losses includes an asset- specific component
and a formula-based component. An asset- specific reserve is established
for an impaired loan when the estimated fair value of the loan’s collat-
eral less costs to sell is lower than the carrying value of the loan. As of
December 31, 2016, asset- specific reserves decreased to $62.2 million
compared to $72.2 million as of December 31, 2015, due primarily to the
recovery of reserves on three previously impaired non- performing loans,
the charge-off of a reserve when we acquired, via deed-in-lieu, title to a
land asset that served as collateral for one of our loans, partially offset by
provisions on new and existing non- performing loans.
The formula-based general reserve is derived from estimated
principal default probabilities and loss severities applied to groups of per-
forming loans based upon risk ratings assigned to loans with similar 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 management’s current judg-
ments and future expectations 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 economics and geo-
graphical 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. We estimate loss rates based on historical realized losses
experienced within our portfolio and take into account current economic
conditions affecting the commercial real estate market when establishing
appropriate time frames to evaluate loss experience.
The general reserve decreased to $23.3 million or 1.9% of perform-
ing loans as of December 31, 2016, compared to $36.0 million or 2.4% of
performing loans as of December 31, 2015. The decrease was primarily
attributable to a loan being evaluated for asset- specific reserves as a result
of being classified to non- performing status during 2016.
Net Lease
Our net lease business seeks to create stable cash flows through
long-term net leases primarily to single tenants on our properties. We target
mission- critical facilities leased on a long-term basis to tenants, offering
structured solutions that combine our capabilities in underwriting, lease
structuring, asset management and build-to-suit construction. We invest in
new net lease investments primarily through our Net Lease Venture, in which
we hold a 51.9% interest. The Net Lease Venture has a right of first offer on
any new net lease investments that we source (refer to Note 7 in our consoli-
dated financial statements for more information on our Net Lease Venture).
As of December 31, 2016, our net lease portfolio, including equity
method investments, totaled $1.5 billion, gross of $368.7 million of accumu-
lated depreciation. The table below provides certain statistics for our net
lease portfolio.
Square feet (mm)(1)
Leased %(2)
Weighted average lease term (years)(3)
Yield(4)
Net Lease Statistics
December 31,
2016
17,214
98%
14.7
8.3%
December 31,
2015
17,807
96%
14.9
7.8%
Explanatory Notes:
(1) As of December 31, 2016 and 2015, includes 3,081 and 2,873 square feet at one of our
equity method investments of which we own 51.9%.
(2) Excluding equity method investments, our net lease portfolio was 98% and 96%
leased, respectively, as of December 31, 2016 and 2015.
(3) Excluding equity method investments, our weighted average lease term was 14.8 years
and 14.7 years, respectively, as of December 31, 2016 and 2015.
(4) Excludes equity method investments.
Operating Properties
As of December 31, 2016, our operating property portfolio, including equity method investments, totaled $608.4 million, gross of $46.2 million of
accumulated depreciation, and was comprised of $525.9 million of commercial and $82.5 million of residential real estate properties.
Commercial Operating Properties
Our commercial operating properties represent a diverse pool of assets across a broad range of geographies and collateral types including office,
retail and hotel properties. We generally seek to reposition our transitional properties with the objective of maximizing their values through the infusion of
capital and/or intensive asset management efforts resulting in value realization upon sale.
The table below provides certain statistics for our commercial operating property portfolio.
29
($ in millions)
Gross carrying value ($mm)(2)
Occupancy(3)
Yield
Explanatory Notes:
Stabilized Operating(1)
Commercial Operating Property Statistics
Transitional Operating(1)
Total
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
$337
86%
8.5%
$124
89%
8.8%
$189
54%
1.5%
$448
65%
2.8%
$526
74%
5.5%
$572
74%
4.4%
(1) Stabilized commercial properties generally have occupancy levels above 80% and/or generate yields resulting in a sufficient return based upon the properties’ risk profiles.
Transitional commercial properties are generally those properties that do not meet these criteria.
(2) Gross carrying value represents carrying value gross of accumulated depreciation.
(3) Occupancy is as of December 31, 2016 and 2015.
Residential Operating Properties
As of December 31, 2016, our residential operating portfolio was
comprised of 48 condominium units generally located within luxury projects
in major U.S. cities. The table below provides certain statistics for our resi-
dential operating property portfolio (excluding fractional units).
Residential Operating
Property Statistics
December 31,
2016
December 31,
2015
91
$ 96.2
$ 26.1
150
$ 126.2
$ 40.1
For the Years Ended
($ in millions)
Condominium units sold
Proceeds
Income from sales of real estate
Land and Development
As of December 31, 2016, our land and development portfolio,
including equity method investments, totaled $1.0 billion, with eight proj-
ects in production, nine in development and 14 in the pre- development
phase. These projects are collectively entitled for approximately 15,000 lots
and units. The following tables presents certain statistics for our land and
development portfolio.
Years Ended
(in millions)
Land development revenue
Land development cost of sales
Land development revenue less cost
of sales
Earnings from land development equity
method investments
Income from sales of real estate(1)
Total
Land and Development Statistics
December 31,
2016
December 31,
2015
$ 88.3
62.0
$ 100.2
67.4
$ 26.3
$ 32.8
30.0
8.8
$ 65.1
16.7
–
$ 49.5
Explanatory Note:
(1) During the year ended December 31, 2016, we sold a land and development asset to
a newly formed unconsolidated entity in which we own a 50.0% equity interest and
recognized a gain of $8.8 million, reflecting our share of the interest sold to a third
party, which was recorded as “Income from sales of real estate” in our consolidated
statement of operations.
30
Years Ended
(in millions)
Beginning balance
Asset sales(1)
Asset transfers in (out)(2)
Capital expenditures
Other
Ending balance(3)
Explanatory Notes:
Land and Development
Portfolio Rollforward
December 31,
2016
December 31,
2015
$ 1,002.0
(68.9)
(90.7)
109.5
(6.3)
$ 945.6
$ 979.0
(65.2)
1.4
95.0
(8.2)
$ 1,002.0
(1) Represents gross carrying value of the assets sold, rather than proceeds received.
(2) Assets transferred into land and development segment or out to another segment.
(3) Excludes $84.8 million and $100.4 million, respectively, of equity method investments as
of December 31, 2016 and 2015.
Results of Operations for the Year Ended December 31, 2016 compared to the Year Ended December 31, 2015
For the Years Ended December 31,
(in thousands)
Operating lease income
Interest income
Other income
Land development revenue
Total revenue
Interest expense
Real estate expenses
Land development cost of sales
Depreciation and amortization
General and administrative
(Recovery of) 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
Income tax benefit (expense)
Income from sales of real estate
Net income (loss)
2016
2015
$ Change
% Change
$ 213,018
129,153
46,515
88,340
477,026
221,398
138,422
62,007
54,329
84,027
(12,514)
14,484
5,883
568,036
(1,619)
77,349
10,166
105,296
$ 100,182
$ 229,720
134,687
49,931
100,216
514,554
224,639
146,750
67,382
65,247
81,277
36,567
10,524
6,374
638,760
(281)
32,153
(7,639)
93,816
$ (6,157)
$ (16,702)
(5,534)
(3,416)
(11,876)
(37,528)
(3,241)
(8,328)
(5,375)
(10,918)
2,750
(49,081)
3,960
(491)
(70,724)
(1,338)
45,196
17,805
11,480
$ 106,339
(7)%
(4)%
(7)%
(12)%
(7)%
(1)%
(6)%
(8)%
(17)%
3%
<(100%)
38%
(8)%
(11)%
>100%
>100%
>100%
12%
<(100%)
Revenue – Operating lease income, which primarily includes
income from net lease assets and commercial operating properties,
decreased to $213.0 million in 2016 from $229.7 million in 2015.
Operating lease income from net lease assets decreased slightly to
$148.0 million in 2016 from $151.5 million in 2015. The decrease was primarily
due to the sale of net lease assets in 2015 and 2016 partially offset by the
execution of new leases. Operating lease income for same store net lease
assets, defined as net lease assets we owned on or prior to January 1, 2015
and were in service through December 31, 2016, increased to $137.0 million
in 2016 from $132.7 million in 2015 due primarily to an increase in rent per
occupied square foot, which was $10.07 for 2016 and $9.72 for 2015, partially
offset by a slight decrease in the occupancy rate, which was 98.0% as of
December 31, 2016 and 98.2% as of December 31, 2015.
Operating lease income from operating properties decreased to
$64.6 million in 2016 from $77.5 million in 2015. The decrease was primarily
due to commercial operating property sales in 2015 and 2016, partially offset
by the execution of new leases. Operating lease income from same store
commercial operating properties, defined as commercial operating proper-
ties, excluding hotels, we owned on or prior to January 1, 2015 and were in
service through December 31, 2016, increased to $45.2 million in 2016 from
$42.1 million in 2015 due primarily to an increase in rent per occupied square
foot for same store commercial operating properties, which increased
to $24.62 in 2016 from $22.92 in 2015. The increase in rent per occupied
square foot was partially offset by a decrease in occupancy rates, which
decreased to 70.2% as of December 31, 2016 from 71.5% as of December 31,
2015. Ancillary operating lease income from land and development assets
decreased to $0.4 million in 2016 from $0.8 million in 2015.
Interest income decreased to $129.2 million in 2016 from $134.7 mil-
lion in 2015. The decrease in interest income was due primarily to a decrease
in the average balance of our performing loans to $1.40 billion for 2016 from
$1.52 billion for 2015. The weighted average yield of our performing loans
increased to 8.9% for 2016 from 8.8% for 2015.
31
Other income decreased to $46.5 million in 2016 from $49.9 million
in 2015. The decrease in 2016 was primarily due to a financing commitment
termination fee, lease termination fees and a guarantor settlement on an
operating property recognized in 2015, partially offset by an increase in
hotel income in 2016.
Land development revenue and cost of sales – In 2016, we sold
residential lots, units and parcels for proceeds of $88.3 million which had
associated cost of sales of $62.0 million. In 2015, we sold residential lots and
units for proceeds of $100.2 million which had associated cost of sales of
$67.4 million. The decrease in 2016 from 2015 was primarily due to the bulk
sale of two land parcels in 2015.
Costs and expenses – Interest expense decreased to $221.4 million
in 2016 from $224.6 million in 2015. The decrease in interest expense was
due to a lower average outstanding debt balance, partially offset by a
higher weighted average cost of debt. The average outstanding balance
of our debt decreased to $4.00 billion for 2016 from $4.18 billion for 2015. Our
weighted average cost of debt increased to 5.6% for 2016 from 5.4% for 2015.
Real estate expenses decreased to $138.4 million in 2016 from
$146.8 million in 2015. The decrease was due primarily to a decline in
expenses for commercial operating properties to $73.6 million in 2016 from
$81.7 million in 2015 due primarily to the sale of operating properties in
Earnings from equity method investments – Earnings from equity
method investments increased to $77.3 million in 2016 from $32.2 million
in 2015. In 2016, we recognized $33.2 million primarily from the sale of an
equity method investment in a commercial operating property, we recog-
nized $11.6 million of earnings primarily from the non- callable distribution
of non- recourse financing proceeds in excess of our carrying value at one
of our land equity method investments, $22.1 million related to sales activity
on a land development venture, $3.6 million related to leasing operations
at our Net Lease Venture and $6.8 million was aggregate income from our
remaining equity method investments. In 2015, we recognized $23.6 million
related to sales activity on a land development venture, $5.2 million related
to leasing operations at our Net Lease Venture and an aggregate $3.4 mil-
lion in earnings from our remaining equity method investments.
Income tax (expense) benefit – Income taxes are primarily gener-
ated by assets held in our TRS. An income tax benefit of $10.2 million was
recorded in 2016 and a $7.6 million income tax expense was recorded in
2015. The income tax benefit for 2016 primarily related to taxable losses
generated from sales of certain TRS properties. The income tax expense for
2015 primarily related to taxable income generated from the sales of certain
TRS properties. In each period, different TRS properties were sold, each with
a unique tax basis and sales value. The benefit, therefore, recognized in the
current period differs from the expense incurred during the same period in
the previous year.
Income from sales of real estate – Income from sales of real estate
increased to $105.3 million in 2016 from $93.8 million in 2015. In 2016, we
sold commercial operating properties resulting in gains of $49.3 million. In
2015, we sold a commercial operating property for $68.5 million to a newly
formed unconsolidated entity in which we own a 50% equity interest and
recognized a gain on sale of $13.6 million, reflecting our share of the inter-
est sold. In 2016 and 2015, we sold residential condominiums that resulted
in income of $26.1 million and $40.1 million, respectively. The decrease was
due primarily to our decreasing inventory of residential condominiums. In
2016 and 2015, we sold net lease assets resulting in gains of $21.1 million and
$40.1 million, respectively. In 2016, we sold a land and development asset
to a newly formed unconsolidated entity in which we own a 50.0% equity
interest and recognized a gain on sale of $8.8 million, reflecting our share
of the interest sold.
32
2016 and 2015. Expenses associated with residential units decreased to
$8.8 million in 2016 from $14.2 million in 2015 due to unit sales. Expenses for
same store commercial operating properties, excluding hotels, increased
slightly to $30.2 million in 2016 from $29.6 million in 2015. Expenses for net
lease assets decreased to $19.1 million in 2016 from $21.9 million in 2015. This
decrease was primarily due to asset sales during 2015 and 2016. Expenses
for same store net lease assets increased slightly to $17.1 million in 2016 from
$17.0 million for 2015. Carry costs and other expenses on our land and devel-
opment assets increased to $37.0 million in 2016 from $29.0 million in 2015,
primarily related to an increase in costs incurred on certain land and devel-
opment projects prior to development and an increase in marketing costs.
Depreciation and amortization decreased to $54.3 million in 2016
from $65.2 million for the same period in 2015. The decrease was primarily
due to the sale of net lease assets and commercial operating properties in
2015 and 2016.
General and administrative expenses increased to $84.0 million in
2016 from $81.3 million in 2015. The increase was primarily due to an increase
in payroll related costs.
Net recovery of loan losses was $12.5 million in 2016 as compared
to a net provision for loan losses of $36.6 million in 2015. Included in the net
recovery for 2016 were recoveries of specific reserves of $13.7 million and
a decrease in the general reserve of $12.7 million, partially offset by new
specific reserves of $13.9 million. Included in the net provision for 2015 were
provisions for specific reserves of $34.1 million due primarily to one new
nonperforming loan and an increase in the general reserve of $2.5 million
due primarily to new investment originations.
In 2016, we recorded impairments of $14.5 million comprised of
$3.8 million on a land asset resulting from a change in business strategy,
$5.8 million on residential operating properties resulting from unfavorable
local market conditions and $4.9 million on the sale of net lease assets. In
2015, we recorded impairments on real estate assets totaling $10.5 million
resulting from a change in business strategy on one land and develop-
ment asset and two commercial operating properties and unfavorable local
market conditions for one residential property.
Other expense decreased to $5.9 million in 2016 from $6.4 million in
2015. The decrease was primarily the result of costs recognized in 2015 due to
a decrease in the fair value of an interest rate cap that was not designated
as a cash flow hedge, partially offset by third party expenses incurred in
2016 in connection with the refinancing of our 2012 Secured Tranche A-2
Facility with our 2016 Senior Secured Credit Facility (see “Liquidity and
Capital Resources”).
Loss on early extinguishment of debt, net – In 2016 and 2015, we
incurred losses on early extinguishment of debt of $1.6 million and $0.3 mil-
lion, respectively. In 2016, we incurred losses on early extinguishment of
debt resulting from repayments of our 2012 Secured Tranche A-2 Facility
and unsecured notes prior to maturity. In 2015, net losses on the early extin-
guishment of debt related to accelerated amortization of discounts and
fees in connection with amortization payments of our 2012 Secured Tranche
A-2 Facility.
Results of Operations for the Year Ended December 31, 2015 compared to the Year Ended December 31, 2014
For the Years Ended December 31,
(in thousands)
Operating lease income
Interest income
Other income
Land development revenue
Total revenue
Interest expense
Real estate expenses
Land development cost of 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
Income tax expense
Income from sales of real estate
Net income (loss)
2015
2014
$ Change
% Change
$ 229,720
134,687
49,931
100,216
514,554
224,639
146,750
67,382
65,247
81,277
36,567
10,524
6,374
638,760
(281)
32,153
(7,639)
93,816
$ (6,157)
$ 243,100
122,704
81,033
15,191
462,028
224,483
163,389
12,840
73,571
88,287
(1,714)
34,634
6,340
601,830
(25,369)
94,905
(3,912)
89,943
$ 15,765
$ (13,380)
11,983
(31,102)
85,025
52,526
156
(16,639)
54,542
(8,324)
(7,010)
38,281
(24,110)
34
36,930
25,088
(62,752)
(3,727)
3,873
$ (21,922)
(6)%
10%
(38)%
>100%
11%
–%
(10)%
>100%
(11)%
(8)%
<(100%)
(70)%
1%
6%
(99)%
(66)%
95%
4%
<(100%)
33
Revenue – Operating lease income, which primarily includes
income from net lease assets and commercial operating properties,
decreased to $229.7 million in 2015 from $243.1 million in 2014.
Operating lease income from net lease assets decreased slightly
to $151.5 million in 2015 from $151.9 million in 2014. The decrease in operat-
ing lease income was driven primarily by a decrease related to asset sales
offset by an increase in operating lease income from same store net lease
assets. Operating lease income for same store net lease assets, defined
as net lease assets we owned on or prior to January 1, 2014 and were in
service through December 31, 2015, increased to $140.3 million in 2015 from
$137.3 million in 2014 due primarily to an increase in rent per occupied square
foot, which was $9.84 for 2015 and $9.56 for 2014, and an increase in the
occupancy rate, which was 95.7% as of December 31, 2015 and 95.0% as
of December 31, 2014.
Operating lease income from operating properties decreased to
$77.5 million in 2015 from $90.3 million in 2014. This decrease was primarily
due to the sale of a leasehold interest in an operating property and other
asset sales, partially offset by additional income in 2015 for three commercial
operating properties acquired in 2014 and an increase in leasing activity at
other properties. Operating lease income for same store commercial oper-
ating properties, defined as commercial operating properties, excluding
hotels, we owned on or prior to January 1, 2014 and were in service through
December 31, 2015, increased to $60.7 million in 2015 from $56.8 million in
2014 due primarily to an increase in occupancy rates, which increased to
74.7% as of December 31, 2015 from 68.2% as of December 31, 2014. The
increase was partially offset by a decline in rent per occupied square foot
for same store commercial operating properties, which was $21.64 for 2015
and $23.01 for 2014. Ancillary operating lease income from land and devel-
opment assets was $0.8 million in 2015 and 2014.
Interest income increased to $134.7 million in 2015 from $122.7 million
in 2014 due primarily to an increase in the size of the loan portfolio, partially
offset by $6.3 million of income recognized in 2014 from the acquisition and
repayment of a loan. New investment originations and additional fund-
ings on existing loans raised our average balance of performing loans to
$1.52 billion for 2015 from $1.27 billion for 2014. The weighted average yield of
our performing loans decreased to 8.8% for 2015 from 9.1% for 2014, exclud-
ing $6.3 million of income recognized from the acquisition and repayment
of a loan, due primarily to lower interest rates on loan originations in 2015
and payoffs of loans with higher interest rates.
Other income decreased to $49.9 million in 2015 from $81.0 million
in 2014. The decrease in 2015 was due to gains on sales of non- performing
loans of $19.1 million, income related to a lease modification fee of $5.3 mil-
lion and income related to an early termination fee of $3.4 million all
recognized in 2014. The decrease was partially offset by a $5.5 million
financing commitment termination fee recognized in 2015.
Land development revenue and cost of sales – In 2015, we sold
residential lots, units and parcels for proceeds of $100.2 million which had
associated cost of sales of $67.4 million. In 2014, we sold residential lots and
units for proceeds of $15.2 million which had associated cost of sales of
$12.8 million. The increase in 2015 from 2014 was primarily due to the pro-
gression of our land and development projects in 2015, including the sale of
two land parcels for land development revenue of $62.8 million resulting in
a gross margin of $24.2 million.
Costs and expenses – Interest expense remained constant at
$224.6 million in 2015 from $224.5 million in 2014. This was due to a higher
average outstanding debt balance offset by a lower weighted average
cost of debt. The average outstanding balance of our debt increased to
$4.18 billion for 2015 from $4.08 billion for 2014. Our weighted average cost
of debt decreased to 5.4% for 2015 from 5.5% for 2014.
Real estate expenses decreased to $146.8 million in 2015 from
$163.4 million in 2014. The decrease was primarily related to expenses asso-
ciated with residential units, which decreased to $14.2 million in 2015 from
$25.6 million in 2014 due to unit sales. The decrease was also related to a
decline in expenses for commercial operating properties to $81.7 million in
2015 from $87.9 million in 2014 which was primarily due to the sale of operat-
ing properties in 2015 and late 2014. Expenses for same store commercial
operating properties, excluding hotels, increased slightly to $39.7 mil-
lion from $39.2 million in 2015. Expenses for net lease assets decreased to
$21.9 million in 2015 from $23.0 million in 2014. This decrease was primarily
due to asset sales during 2014. Expenses for same store net lease assets
increased to $20.2 million in 2015 from $19.9 million for 2014. Carry costs and
other expenses on our land and development assets increased to $29.0 mil-
lion in 2015 from $26.9 million in 2014, primarily related to an increase in costs
incurred on certain land and development projects prior to development
and an increase in marketing costs.
Depreciation and amortization decreased to $65.2 million during
the year ended December 31, 2015 from $73.6 million for the same period
in 2014. The decrease was primarily due to the sale of a leasehold interest
in an operating property and other asset sales in 2015 and accelerated
depreciation related to terminated leases during 2014.
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 in 2014 related to the accelerated amortiza-
tion of discounts and fees in connection with amortization payments that we
made on our secured credit facilities.
Earnings from equity method investments – Earnings from equity
method investments decreased to $32.2 million in 2015 from $94.9 million
in 2014. In 2015, we recognized $23.6 million related to sales activity on a
land development venture, $5.2 million related to leasing operations at
our Net Lease Venture and an aggregate $3.4 million in earnings from our
remaining equity method investments. 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 recognized
$14.7 million of earnings related to sales activity on a land and development
venture, $9.0 million of income related to carried interest from a previously
held strategic investment and an aggregate $14.4 million related to earnings
from our remaining equity method investments.
Income tax (expense) benefit – Income taxes are primarily gener-
ated by assets held in our TRS. Income tax expense increased to $7.6 million
in 2015 from $3.9 million in 2014. The increase in current income tax expense
relates primarily to taxable income generated by the sales of TRS properties.
34
General and administrative expenses decreased to $81.3 million in
2015 from $88.3 million in 2015, primarily due to a decrease in compensation
related costs pertaining to annual performance based bonuses.
Net provision for loan losses was $36.6 million in 2015 as compared
to a net recovery of loan losses of $1.7 million in 2014. Included in the net
provision for 2015 were provisions for specific reserves of $34.1 million due
primarily to one new non- performing loan and an increase in the general
reserve of $2.5 million due primarily to new investment originations. 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 invest-
ment originations.
In 2015, we recorded impairments on real estate assets totaling
$10.5 million resulting from a change in business strategy on one land and
development asset and two commercial operating properties and unfa-
vorable local market conditions for one residential property. In 2014, we
recorded impairments on real estate assets totaling $34.6 million resulting
from changes in business strategies for one residential property and one
land and development asset, continued unfavorable local market conditions
at two real estate properties and the sale of net lease assets.
Loss on early extinguishment of debt, net – In 2015 and 2014, we
incurred losses on early extinguishment of debt of $0.3 million and $25.4 mil-
lion, respectively. In 2015, net losses on the early extinguishment of debt
related to accelerated amortization of discounts and fees in connection
with amortization payments of our 2012 Secured Credit Facilities. In 2014,
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
Income from sales of real estate – Income from sales of real estate
increased to $93.8 million in 2015 from $89.9 million in 2014. In 2015, we sold
12 net lease assets resulting in gains of $40.1 million. We also sold a commer-
cial operating property for $68.5 million to a newly formed unconsolidated
entity in which we own a 50% equity interest and recognized a gain on sale
of $13.6 million, reflecting our share of the interest sold. In 2015 and 2014, we
sold residential condominiums that resulted in income of $40.1 million and
$79.1 million, respectively. In 2014, we sold net lease assets with a carrying
value of $8.0 million resulting in a gain of $6.2 million and a commercial
operating property with a carrying value of $29.4 million resulting in a gain
of $4.6 million.
Adjusted Income
In addition to net income (loss) prepared in conformity with gen-
erally accepted accounting principles in the United States of America
(“GAAP”), we use adjusted income, a non-GAAP financial measure, to mea-
sure our operating performance. Adjusted income is used internally as a
supplemental performance measure adjusting for certain non-cash GAAP
measures to give management a view of income more directly derived from
current period activity. Until the second quarter 2016, adjusted income was
calculated as net income (loss) allocable to common shareholders, prior to
the effect of depreciation and amortization, provision for (recovery of) loan
losses, impairment of assets, stock-based compensation expense, and the
non-cash portion of gain (loss) on early extinguishment of debt. Effective in
the second quarter 2016, we modified our presentation of adjusted income
to reflect the effect of gains or losses on charge-offs and dispositions on car-
rying value gross of loan loss reserves and impairments (“Adjusted Income”).
Adjusted Income should be examined in conjunction with net
income (loss) as shown in our consolidated statements of operations.
Adjusted Income should not be considered as an alternative to net income
(loss) (determined in accordance with GAAP), or to cash flows from operat-
ing activities (determined in accordance with GAAP), as a measure of our
liquidity, nor is Adjusted Income indicative of funds available to fund our
cash needs or available for distribution to shareholders. Rather, Adjusted
Income is an additional measure we use to analyze our business perfor-
mance because it excludes the effects of certain non-cash charges that we
believe are not necessarily indicative of our operating performance while
including the effect of gains or losses on investments when realized. It should
be noted that our manner of calculating Adjusted Income may differ from
the calculations of similarly- titled measures by other companies.
For the Years Ended December 31,
2016
2015
Adjusted Income
Net income (loss) allocable to common
shareholders
Add: Depreciation and amortization(1)
Add/Less: (Recovery of) provision for loan losses
Add: Impairment of assets(2)
Add: Stock-based compensation expense
Add: Loss on early extinguishment of debt, net
Less: Losses on charge-offs and dispositions(3)
Less: HPU/Participating Security allocation
Adjusted income allocable to common shareholders(4)
$ 43,972 $ (52,675)
72,132
36,567
18,509
12,013
281
(55,437)
(1,706)
$ 112,562 $ 29,684
64,447
(12,514)
18,999
10,889
1,619
(14,827)
(23)
Explanatory Notes:
(1) Depreciation and amortization also includes our proportionate share of depreciation
and amortization expense for equity method investments and excludes the portion of
depreciation and amortization expense allocable to noncontrolling interests.
(2) For the year ended December 31, 2016, impairment of assets includes impairments on
equity method investments recorded in “Earnings from equity method investments” in
our consolidated statements of operations. For the year ended December 31, 2015,
impairment of assets includes impairments on cost and equity method investments
recorded in “Other income” and “Earnings from equity method investments,” respec-
tively, in our consolidated statements of operations.
(3) Represents the impact of charge-offs and dispositions realized during the period.
These charge-offs and dispositions were on assets that were previously impaired for
GAAP and reflected in net income but not in Adjusted Income.
(4) For the year ended December 31, 2015, Adjusted Income under the previous presenta-
tion was $84.0 million.
Liquidity and Capital Resources
As of December 31, 2016, we had unrestricted cash of $328.7 million.
During the year ended December 31, 2016, we committed to new invest-
ments totaling $691.8 million and invested $767.3 million in new investments,
prior financing commitments and ongoing development. Total investments
included $474.0 million in real estate finance, $135.9 million to develop our
land and development assets, $69.9 million of capital to reposition or rede-
velop our operating properties, $86.9 million to invest in net lease assets and
$0.6 million in other investments. Also during the year ended December 31,
2016, we generated $1.3 billion from loan repayments and asset sales
within our portfolio, comprised of $614.2 million from real estate finance,
$377.2 million from operating properties, $123.4 million from net lease assets,
$134.8 million from land and development assets and $32.1 million from
other investments. These amounts are inclusive of fundings and proceeds
from both consolidated investments and our pro rata share from equity
method investments.
The following table outlines our capital expenditures on real estate
and land and development assets as reflected in our consolidated state-
ments of cash flows for the years ended December 31, 2016 and 2015, by
segment ($ in thousands):
For the Years Ended December 31,
Operating Properties
Net Lease
2015
$ 65,934 $ 74,540
6,985
Total capital expenditures on real estate assets $ 69,810 $ 81,525
$ 103,806 $ 88,219
3,876
2016
Land and Development
35
Total capital expenditures on land and
development assets
$ 103,806 $ 88,219
Our primary cash uses over the next 12 months are expected to
be repayments of debt, funding of investments, capital expenditures and
funding ongoing business operations. Over the next 12 months, we currently
expect to fund in the range of approximately $150 million to $200 million
of capital expenditures within our portfolio. The majority of these amounts
relate to our land and development and operating properties business
segments and include multifamily and residential development activities
which are expected to include approximately $80 million in vertical con-
struction. 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, 2016, we also had approxi-
mately $452 million of maximum unfunded commitments associated with
our investments of which we expect to fund the majority of over the next
two years, assuming borrowers and tenants meet all milestones and perfor-
mance hurdles and all other conditions to fundings are met. See “Unfunded
Commitments” below. Our capital sources to meet cash uses through the
next 12 months and beyond will primarily be expected to include capital
raised through debt and/or equity capital raising transactions, cash on
hand, income from our portfolio, loan repayments from borrowers, proceeds
from asset sales and sales of interests in business lines.
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 stabilized, it is not possible for us to predict whether these trends will
continue or to quantify the impact of these or other trends on our finan-
cial results.
During the year ended December 31, 2016, we repaid in full the
$339.7 million 2012 Secured Tranche A-2 Facility, the $265.0 million principal
amount of senior unsecured notes due July 2016, the $261.4 million principal
amount of senior unsecured notes due March 2016, the $200.0 million princi-
pal amount of 1.5% senior unsecured convertible notes due November 2016
and the $200.0 million principal amount of 3.0% senior unsecured convert-
ible notes due November 2016 by repaying $190.4 million principal amount
with available cash and issuing 0.8 million shares of common stock on the
conversion of $9.6 million principal amount of the notes. We have other debt
maturities of $924.7 million due before December 31, 2017.
Contractual Obligations – The following table outlines the contractual obligations related to our long-term debt obligations, loan participations
payable and operating lease obligations as of December 31, 2016 (see “Financial Statements and Supplemental Data – Note 10”).
(in thousands)
Long-Term Debt Obligations:
Unsecured notes
Secured credit facilities
Mortgages
Trust preferred securities
Total principal maturities
Interest Payable(1)
Loan Participations Payable(2)
Operating Lease Obligations
Total
Explanatory Notes:
Total
Less Than 1 Year
1–3 Years
3–5 Years
5–10 Years
After 10 Years
Amounts Due By Period
$ 2,569,722
498,648
249,987
100,000
3,418,357
509,676
160,251
22,594
$ 4,110,878
$ 924,722
4,968
10,378
$ 1,370,000
9,788
50,574
–
–
940,068
178,555
–
5,463
$ 1,124,086
1,430,362
220,389
157,424
8,244
$ 1,816,419
$ 275,000
483,892
118,012
–
876,904
70,104
2,827
5,135
$ 954,970
$
–
–
59,276
–
59,276
17,626
–
3,752
$ 80,654
$
–
–
11,747
100,000
111,747
23,002
–
–
$ 134,749
36
Variable-rate debt assumes 1-month LIBOR of 0.77% and 3-month LIBOR of 0.89% that were in effect as of December 31, 2016.
(1)
(2) Refer to Note 9 to the consolidated financial statements.
2016 Senior Secured Credit Facility – In June 2016, we entered into
a senior secured credit facility of $450.0 million (the “2016 Senior Secured
Credit Facility”). In August 2016, we upsized the facility to $500.0 million. The
initial $450.0 million of the 2016 Senior Secured Credit Facility was issued at
99% of par and the upsize was issued at par. The 2016 Senior Secured Credit
Facility bears interest at a floating rate of LIBOR plus 4.50% with a 1.00%
LIBOR floor. Subsequent to December 31, 2016, we repriced the 2016 Senior
Secured Credit Facility to LIBOR plus 3.75% with a 1.00% LIBOR floor. The
2016 Senior Secured Credit Facility is collateralized 1.25x by a first lien on a
fixed pool of assets. Proceeds from principal repayments and sales of collat-
eral are applied to amortize the 2016 Senior Secured Credit Facility. Proceeds
received for interest, rent, lease payments and fee income are retained by
us. We may also make optional prepayments, subject to prepayment fees,
and are required to repay 0.25% of the principal amount outstanding on the
first business day of each quarter beginning on October 3, 2016. Proceeds
from the 2016 Senior Secured Credit Facility, together with cash on hand,
were primarily used to repay in full the remaining $323.2 million 2012 Secured
Tranche A-2 Facility and repay the $245.0 million balance outstanding on
the 2015 Secured Revolving Credit Facility (as defined below).
2016 Secured Term Loan – In December 2016, we arranged a
$170.0 million delayed draw secured term loan (the “2016 Secured Term
Loan”). The 2016 Secured Term Loan bears interest at a rate of LIBOR +
1.50%. As of December 31, 2016, we had not yet drawn on the 2016 Secured
Term Loan.
2015 Secured Revolving Credit Facility – On March 27, 2015, we
entered into our 2015 Secured Revolving Credit Facility. Borrowings under
this credit facility bear interest at a floating rate indexed to one of sev-
eral base rates plus a margin which adjusts upward or downward based
upon our corporate credit rating. An undrawn credit facility commitment fee
ranges from 0.375% to 0.50%, based on average utilization each quarter.
During the year ended December 31, 2016, the weighted average cost of the
credit facility was 3.19%. Commitments under the revolving facility mature
in March 2018. At maturity, we may convert outstanding borrowings to a
one year term loan which matures in quarterly installments through March
2019. As of December 31, 2016, we had $250.0 million of borrowing capacity
available under the 2015 Secured Revolving Credit Facility.
Unsecured Notes – In March 2016, we repaid our $261.4 million
principal amount of 5.875% senior unsecured notes at maturity using avail-
able cash. In addition, we issued $275.0 million principal amount of 6.50%
senior unsecured notes due July 2021. Proceeds from the offering were pri-
marily used to repay in full the $265.0 million principal amount of senior
unsecured notes due July 2016 and repay $5.0 million of the 2015 Secured
Revolving Credit Facility. In addition, we retired our $200.0 million principal
amount of 3.0% senior unsecured convertible notes due November 2016
with available cash after the conversion of $9.6 million principal amount
into 0.8 million shares of our common stock. We also retired our $200.0 mil-
lion principal amount of 1.50% senior unsecured convertible notes due
November 2016 using available cash. During the year ended December 31,
2016, repayments of unsecured notes prior to maturity resulted in losses
on early extinguishment of debt of $0.4 million. This amount is included in
“Loss on early extinguishment of debt, net” in our consolidated statements
of operations.
Encumbered/Unencumbered Assets – As of December 31, 2016 and 2015, the carrying value of our encumbered and unencumbered assets by
asset type are as follows ($ in thousands):
As of December 31,
2016
2015
Real estate, net
Real estate available and held for sale
Land and development, net
Loans receivable and other lending investments, net(1)(2)
Other investments
Cash and other assets
Total
Encumbered Assets Unencumbered Assets
$ 881,212
–
35,165
172,581
–
–
$ 1,088,958
$ 610,540
83,764
910,400
1,142,050
214,406
639,588
$ 3,600,748
$ 816,721
10,593
17,714
170,162
22,352
Encumbered Assets Unencumbered Assets
$ 777,262
126,681
984,249
1,314,823
231,820
1,008,415
$ 4,443,250
$ 1,037,542
–
Explanatory Notes:
(1) As of December 31, 2016 and 2015, the amounts presented exclude general reserves for loan losses of $23.3 million and $36.0 million, respectively.
(2) As of December 31, 2016 and 2015, the amounts presented exclude loan participations of $159.1 million and $153.0 million, respectively.
Debt Covenants
Our outstanding unsecured debt securities contain corporate level
covenants that include a covenant to maintain a ratio of unencumbered
assets to unsecured indebtedness of at least 1.2x and a covenant not to incur
additional indebtedness (except for incurrences of permitted debt), if on a
pro forma basis, our consolidated fixed charge coverage ratio, determined
in accordance with the indentures governing our debt securities, is 1.5x or
lower. 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. If our ability to incur additional indebtedness under the
fixed charge coverage ratio is limited, we are permitted to incur indebt-
edness for the purpose of refinancing existing indebtedness and for other
permitted purposes under the indentures.
The 2016 Senior Secured Credit Facility and the 2015 Secured
Revolving Credit Facility contain certain covenants, including covenants
relating to collateral coverage, dividend payments, restrictions on funda-
mental changes, transactions with affiliates, matters relating to the liens
granted to the lenders and the delivery of information to the lenders. In
particular, the 2016 Senior Secured Credit Facility requires us to maintain
collateral coverage of at least 1.25x outstanding borrowings on the facil-
ity. The 2015 Secured Revolving Credit Facility is secured by a borrowing
base of assets and requires us to maintain both collateral coverage of at
least 1.5x outstanding borrowings on the facility and a consolidated ratio
of cash flow to fixed charges of at least 1.5x. The 2015 Secured Revolving
Credit Facility does not require that proceeds from the borrowing base be
used to pay down outstanding borrowings provided the collateral cover-
age remains at least 1.5x outstanding borrowings on the facility. To satisfy
this covenant, we have the option to pay down outstanding borrowings
or substitute assets in the borrowing base. In addition, for so long as we
maintain our qualification as a REIT, the 2016 Senior Secured Credit Facility
and the 2015 Secured Revolving Credit Facility permit us to distribute 100%
of our REIT taxable income on an annual basis (prior to deducting certain
cumulative NOL carryforwards).
37
38
Derivatives – Our use of derivative financial instruments is primar-
ily limited to the utilization of interest rate swaps, interest rate caps or other
instruments to manage interest rate risk exposure and foreign exchange
contracts to manage our risk to changes in foreign currencies. See “Financial
Statements and Supplemental Data – Note 12” for further details.
share. During the year ended December 31, 2015, we repurchased 5.7 mil-
lion shares of our common stock for $70.4 million, at an average cost of
$12.25 per share. As of December 31, 2016, we had remaining authorization
to repurchase up to $50.0 million of common stock under our stock repur-
chase program.
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 “Financial
Statements and Supplemental Data – Note 7” 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 project
if we approve of the expansion or addition in our sole discretion. We refer
to these arrangements as Discretionary Fundings. Finally, we have commit-
ted to invest capital in several real estate funds and other ventures. These
arrangements are referred to as Strategic Investments. As of December 31,
2016, 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 capital committed to Strategic Investments
is drawn down, are as follows (in thousands):
Loans
and Other
Lending
Investments(1)
Real
Estate
Other
Investments
$366,287
–
$366,287
$14,616
–
$14,616
$25,574
45,540
$71,114
Total
$406,477
45,540
$452,017
Performance-Based
Commitments
Strategic Investments
Total(2)
Explanatory Notes:
(1) Excludes $158.7 million of commitments on loan participations sold that are not
our obligation.
(2) We did not have any Discretionary Fundings as of December 31, 2016.
Stock Repurchase Program – In February 2016, after having sub-
stantially utilized the remaining availability previously authorized, our Board
of Directors authorized a new $50.0 million stock repurchase program. After
having substantially utilized the availability authorized in February 2016,
our Board of Directors authorized an increase to the stock repurchase pro-
gram to $50.0 million, effective August 4, 2016. The program authorizes the
repurchase of common stock from time to time in open market and privately
negotiated purchases, including pursuant to one or more trading plans.
During the year ended December 31, 2016, we repurchased 10.2 million
shares of our common stock for $98.4 million, at an average cost of $9.67 per
HPU Repurchase – In August 2015, we repurchased and retired
all of our outstanding 14,888 HPUs, representing 2.8 million common stock
equivalents. We repurchased these HPUs at fair value from current and
former employees through an arms- length exchange offer. HPU holders
could have elected to receive $9.30 in cash or 0.7 shares of iStar common
stock, or a combination thereof, per common stock equivalent underlying
the HPUs. Approximately 37% of the outstanding HPUs were exchanged for
$9.8 million in cash and approximately 63% of the outstanding HPUs were
exchanged for 1.2 million shares of our common stock with a fair value of
$15.2 million, representing the number of shares issued at the closing price of
our common stock on August 13, 2015. The transaction value in excess of the
HPUs carrying value of $9.8 million was recorded as a reduction to retained
earnings (deficit) in our consolidated statements of changes in equity.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP
requires management to make estimates and judgments in certain circum-
stances that affect amounts reported as assets, liabilities, revenues and
expenses. We have established detailed policies and control procedures
intended to ensure that valuation methods, including any judgments made
as part of such methods, are well controlled, reviewed and applied consis-
tently from period to period. We base our estimates on historical corporate
and industry experience and various other assumptions that we believe to
be appropriate under the circumstances. For all of these estimates, we cau-
tion that future events rarely develop exactly as forecasted, and, therefore,
routinely require adjustment.
During 2016, management reviewed and evaluated these
critical accounting estimates and believes they are appropriate. Our sig-
nificant accounting policies are described in “Financial Statements and
Supplemental Data – Note 3.” The following is a summary of accounting pol-
icies that require more significant management estimates and judgments:
Reserve for loan losses – The reserve for loan losses reflects man-
agement’s estimate of loan losses inherent in the loan portfolio as of the
balance sheet date. If we determine that the collateral fair value less costs
to sell 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” in 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 borrower
as we work toward a settlement or other alternative resolution, which can
impact the potential for loan repayment or receipt of collateral. 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 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. 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 estimated.
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 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 management’s current judgments about their credit qual-
ity 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 economics and geographical location as well as national and
regional economic factors. This methodology results in loans being seg-
mented 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. 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 fac-
tors. 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 our impaired loans are collateral dependent and
impairment is measured using the estimated fair value of collateral, 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 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 we grant a conces-
sion 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 (recovery of) provision for loan losses for the years ended
December 31, 2016, 2015 and 2014 were $(12.5) million, $36.6 million
and $(1.7) million, respectively. The total reserve for loan losses as of
December 31, 2016 and 2015, included asset specific reserves of $62.2 mil-
lion and $72.2 million, respectively, and general reserves of $23.3 million and
$36.0 million, respectively.
Acquisition of real estate – We generally acquire real estate assets
or land and development assets through purchases or through foreclosure
or deed-in-lieu of foreclosure in full or partial satisfaction of non- performing
loans. When we acquire assets these properties are classified as “Real
estate, net” or “Land and development, net” 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 classi-
fied as “Real estate available and held for sale.” When we purchase assets
the properties are recorded at cost. Foreclosed assets classified as real
estate and land and development 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, 2016, 2015 and 2014, we
received title to properties in satisfaction of mortgage loans with fair values
of $40.6 million, $13.4 million and $77.9 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 avail-
able and held for sale” on our consolidated balance sheets. The difference
between the estimated fair value less costs to sell and the carrying value will
be recorded as an impairment charge. Impairment for real estate assets are
included in “Impairment of assets” in our consolidated statements of opera-
tions. Once the asset is classified as held for sale, depreciation expense is
no longer recorded.
We periodically review real estate to be held and used and land
and development assets for impairment in value whenever events or
changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. The asset’s value 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 antic-
ipated holding period of the asset) is less than the carrying value. Such
39
estimate of cash flows considers factors such as expected future operating
income, trends and prospects, as well as the effects of demand, competi-
tion and other economic factors. To the extent impairment has occurred,
the loss will be measured as the excess of the carrying amount of the prop-
erty over the fair value of the asset and reflected as an adjustment to the
basis of the asset. Impairments of real estate and land and development
assets are recorded in “Impairment of assets” in our consolidated statements
of operations.
During the year ended December 31, 2016, we recorded impair-
ments on real estate and land and development assets totaling $14.5 million
resulting from a change in business strategy, unfavorable local market con-
ditions for certain assets and sales of net lease assets. During the years
ended December 31, 2015 and 2014, we recorded impairments on real estate
and land and development assets totaling $10.5 million and $34.6 mil-
lion, respectively, resulting from unfavorable local market conditions and
changes in business strategy for certain assets.
Identified intangible assets and liabilities – We record intangible
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, 2016, all such acquired intangible assets and liabilities
have finite lives. We amortize finite lived intangible assets and liabilities over
the period which the assets and liabilities are expected to contribute directly
or indirectly to the future cash flows of the business acquired. We review
finite lived intangible assets for impairment whenever events or changes in
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” in 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 carryfor-
wards. 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 evaluating 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 pro-
jected book/tax differences, tax planning strategies available, and the
general and industry specific economic outlook. This realizability analysis is
inherently subjective, 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”
in the consolidated statements of operations.
40
While certain entities with 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 allowance of $66.5 million and $53.9 million as of December 31,
2016 and 2015, 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 ben-
eficiary. 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 certain subjective deci-
sions 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 liabilities
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 16 for a complete discussion on how we determine fair
value of financial and non- financial assets and financial liabilities and the
related measurement techniques and estimates involved.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market Risks
Market risk is the exposure to loss resulting from changes in inter-
est rates, foreign currency exchange rates, commodity prices and equity
prices. In pursuing 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 eco-
nomic 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 a material 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 govern-
mental monetary and tax policies, domestic and international economic and
political conditions, and other factors beyond our control. We monitor the
spreads between our interest- earning assets and 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 interest 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 purposes or as a hedge against changes in our credit risk or
the credit risk of our borrowers.
While a REIT may utilize derivative instruments to hedge interest
rate risk on its liabilities incurred to acquire or carry real estate assets without
generating non- qualifying income, use of derivatives for other purposes will
generate non- qualified income for REIT income test purposes. This includes
hedging asset related risks such as credit, foreign exchange and 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 materially adversely affected during any period as a result of changing
interest rates.
The following table quantifies the potential changes in annual
net income should interest rates increase by 10, 50 or 100 basis points and
decrease by 10 basis points, assuming no change in our interest earning
assets, interest bearing liabilities or the shape of the yield curve (i.e., relative
interest rates). The base interest rate scenario assumes the one-month LIBOR
rate of 0.77% as of December 31, 2016. Actual results could differ significantly
from those estimated in the table.
Estimated Change In Net Income
($ in thousands)
Change in Interest Rates
-10 Basis Points
Base Interest Rate
+10 Basis Points
+50 Basis Points
+100 Basis Points
Explanatory Note:
$
Net Income(1)
(998)
–
1,096
5,485
10,974
41
(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, 2016, $657.9 million of our floating rate loans have a cumulative
weighted average interest rate floor of 0.2% and $658.9 million of our floating rate
debt has a cumulative weighted average interest rate floor of 0.8%.
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, including the
Chief Executive Officer and Chief Financial Officer, management carried
out its evaluation of the effectiveness of the Company’s internal 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, 2016.
The Company’s internal control over financial reporting as of
December 31, 2016, has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report
which appears on page 42.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those poli-
cies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and disposi-
tions 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 com-
pany; and (iii) provide reasonable 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, projections of any
evaluation of effectiveness to future periods are subject to the risk that con-
trols may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
New York, New York
February 24, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Shareholders of iStar 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 Inc. and its subsidiaries at
December 31, 2016 and December 31, 2015, and the results of their opera-
tions and their cash flows for each of the three years in the period ended
December 31, 2016 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
reporting as of December 31, 2016, 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 man-
agement 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 financial reporting based on our inte-
grated 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 reason-
able assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial report-
ing was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the account-
ing principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a mate-
rial 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.
42
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
Land and development, net
Loans receivable and other lending investments, net
Other investments
Cash and cash equivalents
Accrued interest and operating lease income receivable, net
Deferred operating lease income receivable, net
Deferred expenses and other assets, net
Total assets
Liabilities And Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities
Loan participations payable, net
Debt obligations, net
Total liabilities
Commitments and contingencies (refer to Note 11)
Redeemable noncontrolling interests (refer to Note 5)
Equity:
iStar Inc. shareholders’ equity:
Preferred Stock Series D, E, F, G and I, liquidation preference $25.00 per share (refer to Note 13)
Convertible Preferred Stock Series J, liquidation preference $50.00 per share (refer to Note 13)
Common Stock, $0.001 par value, 200,000 shares authorized, 72,042 and 81,109 shares issued and outstanding as of
December 31, 2016 and 2015, respectively
Additional paid-in capital
Retained earnings (deficit)
Accumulated other comprehensive income (loss) (refer to Note 13)
Total iStar Inc. shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
2016
2015
$ 1,906,592
(414,840)
1,491,752
83,764
1,575,516
945,565
1,450,439
214,406
328,744
14,775
96,420
199,649
$ 4,825,514
$ 2,050,541
(456,558)
1,593,983
137,274
1,731,257
1,001,963
1,601,985
254,172
711,101
18,436
97,421
181,457
$ 5,597,792
$ 211,570
159,321
3,389,908
3,760,799
–
5,031
$ 214,835
152,086
4,118,823
4,485,744
–
10,718
22
4
22
4
72
3,602,172
(2,581,488)
(4,218)
1,016,564
43,120
1,059,684
$ 4,825,514
81
3,689,330
(2,625,474)
(4,851)
1,059,112
42,218
1,101,330
$ 5,597,792
43
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 development revenue
Total revenues
Costs and expenses:
Interest expense
Real estate expense
Land development cost of sales
Depreciation and amortization
General and administrative
(Recovery of) provision for loan losses
Impairment of assets
Other expense
Total costs and expenses
44
Income (loss) before earnings from equity method investments and other items
Loss on early extinguishment of debt, net
Earnings from equity method investments
Income (loss) from operations before income taxes
Income tax benefit (expense)
Income (loss) from operations
Income from sales of real estate
Net income (loss)
Net (income) loss attributable to noncontrolling interests
Net income (loss) attributable to iStar Inc.
Preferred dividends
Net (income) loss allocable to HPU holders and Participating Security holders(1)(2)
Net income (loss) allocable to common shareholders
Per common share data:
Income (loss) attributable to iStar Inc. from operations:
Basic
Diluted
Net income (loss) attributable to iStar Inc.:
Basic
Diluted
Weighted average number of common shares:
Basic
Diluted
Per HPU share data(1):
Income (loss) attributable to iStar Inc. from operations – Basic and diluted
Net income (loss) attributable to iStar Inc. – Basic and diluted
Weighted average number of HPU share – Basic and diluted
2016
2015
2014
$ 213,018
129,153
46,515
88,340
477,026
221,398
138,422
62,007
54,329
84,027
(12,514)
14,484
5,883
568,036
(91,010)
(1,619)
77,349
(15,280)
10,166
(5,114)
105,296
100,182
(4,876)
95,306
(51,320)
(14)
$ 43,972
$ 229,720
134,687
49,931
100,216
514,554
224,639
146,750
67,382
65,247
81,277
36,567
10,524
6,374
638,760
(124,206)
(281)
32,153
(92,334)
(7,639)
(99,973)
93,816
(6,157)
3,722
(2,435)
(51,320)
1,080
$ (52,675)
$
$
$
$
0.60
0.55
0.60
0.55
$
$
$
$
(0.62)
(0.62)
(0.62)
(0.62)
$ 243,100
122,704
81,033
15,191
462,028
224,483
163,389
12,840
73,571
88,287
(1,714)
34,634
6,340
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
$ (33,722)
$
$
$
$
(0.40)
(0.40)
(0.40)
(0.40)
73,453
98,467
84,987
84,987
85,031
85,031
$
$
–
–
–
$ (120.00)
$ (120.00)
9
$
$
(75.27)
(75.27)
15
Explanatory Notes:
(1) All of the Company’s outstanding High Performance Units (“HPUs”) were repurchased and retired on August 13, 2015 (refer to Note 13).
(2) Participating Security holders are non- employee directors who hold common stock equivalents (“CSEs”) and restricted stock awards granted under the Company’s Long Term
Incentive Plans that are eligible to participate in dividends (refer to Note 14 and Note 15).
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 Inc.
2016
2015
2014
$ 100,182
$ (6,157)
$ 15,765
–
598
–
274
(85)
(154)
633
100,815
(4,876)
$ 95,939
(2,576)
921
–
(532)
(1,202)
(491)
(3,880)
(10,037)
3,722
$ (6,315)
(90)
4,116
968
3,367
(5,187)
131
3,305
19,070
710
$ 19,780
Explanatory Notes:
(1) Reclassified to “Other income” in the Company’s consolidated statements of operations.
(2) Reclassified to “Interest expense” in the Company’s consolidated statements of operations are $217, $456 and $62 for the years ended December 31, 2016, 2015 and 2014, respectively.
Reclassified to “Other Expense” in the Company’s consolidated statements of operations is $3,634 for the year ended December 31, 2014 (refer to Note 12). Reclassified to “Earnings
from equity method investments” in the Company’s consolidated statements of operations are $381, $465 and $420, respectively, for the years ended December 31, 2016, 2015 and 2014.
(3) Reclassified to “Earnings from equity method investments” in the Company’s consolidated statements of operations.
The accompanying notes are an integral part of the consolidated financial statements.
45
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
iStar Inc. Shareholders’ Equity
For the Years Ended December 31, 2016, 2015
and 2014
Balance as of December 31, 2013
Dividends declared – preferred
Issuance of stock/restricted stock unit
amortization, net
Net income (loss) for the period(3)
Change in accumulated other
comprehensive income (loss)
Change in additional paid in capital
attributable to redeemable noncontrolling
interest
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Change in noncontrolling interest(4)
Balance as of December 31, 2014
Dividends declared – preferred
Issuance of stock/restricted stock unit
amortization, net
Net income (loss) for the period(3)
Change in accumulated other
comprehensive income (loss)
Repurchase of stock
Redemption of HPUs
Change in additional paid in capital
attributable to noncontrolling interests(5)
Contributions from noncontrolling interests
Distributions to noncontrolling interests(5)
Balance as of December 31, 2015
Dividends declared – preferred
Issuance of stock/restricted stock unit
amortization, net
Issuance of common stock for conversion of
senior unsecured convertible notes
Net income (loss) for the period(3)
Change in accumulated other
comprehensive income (loss)
Repurchase of stock
Change in additional paid in capital
attributable to redeemable noncontrolling
interests
Contributions from noncontrolling interests
Distributions to noncontrolling interests(6)
Balance as of December 31, 2016
Explanatory Notes:
Preferred
Stock(1)
$22
–
–
–
–
–
–
–
–
$22
–
–
–
–
–
–
–
–
–
$22
–
–
–
–
–
–
–
–
–
$22
Preferred
Stock
Series J(1)
$4
–
–
–
–
–
–
–
–
$4
–
–
–
–
–
–
–
–
–
$4
–
–
–
–
–
–
–
–
–
$4
46
Common
Stock
at Par
Additional
Paid-In
Capital
Retained
Earnings
(Deficit)
$ 83 $ 3,759,245 $ (2,521,618)
(51,320)
–
–
HPU’s(2)
$ 9,800
–
Accumulated
Other
Comprehensive
Income (Loss)
$ (4,276)
–
Non-
controlling
Interests
$ 58,205
–
Total
Equity
$ 1,301,465
(51,320)
–
–
–
2
–
–
(13,091)
–
–
16,469
–
–
–
1,221
(13,089)
17,690
–
–
3,305
–
3,305
–
–
–
–
$ 9,800
–
–
–
–
–
(9,800)
–
–
–
$ –
–
–
–
–
–
–
–
–
–
–
–
(1,533)
–
–
–
–
–
–
$ 85 $ 3,744,621 $ (2,556,469)
(51,320)
–
–
–
–
–
(5)
1
4,961
–
–
(70,411)
15,238
–
(2,435)
–
–
(15,250)
–
–
–
–
(5,079)
–
–
–
–
$ 81 $ 3,689,330 $ (2,625,474)
(51,320)
–
–
–
1
–
2,031
9,595
–
–
(10)
–
(98,419)
–
–
95,306
–
–
–
–
–
–
$ (971)
–
–
565
(4,820)
(3,915)
$ 51,256
–
(1,533)
565
(4,820)
(3,915)
$ 1,248,348
(51,320)
–
–
–
(266)
4,961
(2,701)
(3,880)
–
–
–
–
–
$(4,851)
–
–
–
–
633
–
–
–
–
(3,880)
(70,416)
(9,811)
–
205
(8,977)
$ 42,218
–
(5,079)
205
(8,977)
$ 1,101,330
(51,320)
–
2,031
–
10,927
9,596
106,233
–
–
633
(98,429)
–
–
–
$ –
–
–
–
–
(365)
–
–
–
–
$ 72 $3,602,172 $(2,581,488)
–
–
–
$(4,218)
–
790
(10,815)
(365)
790
(10,815)
$ 43,120 $1,059,684
(1) Refer to Note 13 for details on the Company’s Preferred Stock.
(2) All of the Company’s outstanding HPUs were repurchased and retired on August 13, 2015 (refer to Note 13).
(3) For the years ended December 31, 2016, 2015 and 2014 net income (loss) shown above excludes $(6,051), $(3,456) and $(1,925) of net loss attributable to redeemable
noncontrolling interests.
(4) During the year ended December 31, 2014, the Company sold its 72% interest in a previously consolidated entity to one of its unconsolidated ventures (refer to Note 4 and Note 7).
(5) Includes a $6.4 million payment to acquire a noncontrolling interest (refer to Note 4).
(6) Includes payments of $10.8 million to acquire a noncontrolling interest (refer to Note 5).
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
(Recovery of) provision for loan losses
Impairment of assets
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 obligations, net
Amortization of discounts/premiums on loans, net
Deferred interest on loans, net
Gain from sales of loans
Earnings from equity method investments
Distributions from operations of other investments
Deferred operating lease income
Income from sales of real estate
Land development revenue in excess of cost of sales
Loss on early extinguishment of debt, net
Debt discount on repayments and repurchases of debt obligations
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, net
Cash flows provided by (used in) operating activities
Cash flows from investing activities:
Originations and fundings of loans receivable, net
Capital expenditures on real estate assets
Capital expenditures on land and development assets
Acquisitions of real estate assets
Repayments of and principal collections on loans receivable and other lending investments, net
Net proceeds from sales of loans receivable
Net proceeds from sales of real estate
Net proceeds from sales of land and development assets
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 provided by investing activities
Cash flows from financing activities:
Borrowings from debt obligations
Repayments and repurchases of debt obligations
Proceeds from loan participations payable
Preferred dividends paid
Repurchase of stock
Redemption of HPUs
Payments for deferred financing costs
Other financing activities, net
Cash flows provided by (used in) financing activities
Effect of exchange rate changes on cash
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:
Cash paid during the period for interest, net of amount capitalized
Supplemental disclosure of non-cash investing and financing activity:
Fundings and repayments of loan receivables and loan participations, net
Developer fee payable
Acquisitions of real estate and land and development assets through deed-in-lieu
Acquisitions of equity method investment assets through deed-in-lieu
Contributions of real estate and land and development assets to equity method investments, net
Accounts payable for capital expenditures on land and development assets
Accounts payable for capital expenditures on real estate assets
Conversion of senior unsecured convertible notes into common stock
Redemption of HPUs in exchange for common stock
Receivable from sales of real estate and land parcels
The accompanying notes are an integral part of the consolidated financial statements.
2016
2015
2014
$ 100,182
$
(6,157)
$
15,765
(12,514)
14,484
54,329
(1,451)
10,889
16,810
(14,873)
22,396
–
(77,349)
48,732
(9,921)
(105,296)
(26,333)
1,619
(5,381)
6,897
3,634
(6,397)
(453)
20,004
(410,975)
(69,810)
(103,806)
(38,433)
504,844
–
435,560
94,424
43,936
92,482
(58,197)
1,515
(24,997)
466,543
716,001
(1,437,557)
22,844
(51,320)
(99,335)
–
(9,980)
(9,564)
(868,911)
7
(382,357)
711,101
$ 328,744
36,567
10,524
65,247
(1,718)
12,013
17,352
(11,606)
(34,458)
–
(32,153)
29,999
(7,950)
(93,816)
(32,834)
281
(578)
5,889
(2,068)
2,631
(17,112)
(59,947)
(478,822)
(81,525)
(88,219)
–
273,454
6,655
362,530
81,601
–
119,854
(11,531)
(7,550)
7,581
184,028
549,000
(432,383)
138,075
(51,320)
(69,511)
(9,811)
(2,255)
(7,314)
114,481
478
239,040
472,061
$ 711,101
(1,714)
34,634
73,571
(21,250)
13,314
16,891
(12,367)
(22,196)
(19,067)
(94,905)
80,116
(8,492)
(89,943)
(2,351)
25,369
(14,888)
6,751
(1,426)
4,601
7,245
(10,342)
(622,428)
(68,464)
(74,323)
(4,666)
512,528
65,438
404,336
15,191
–
61,031
(159,424)
29,283
1,291
159,793
1,349,822
(1,471,174)
–
(51,320)
–
–
(19,595)
1,309
(190,958)
–
(41,507)
513,568
$ 472,061
$ 199,667
$ 207,972
194,605
$
(15,594)
9,478
40,583
–
8,828
3,674
–
9,596
–
7,509
$ 14,075
7,435
13,424
–
21,096
7,143
8,107
–
15,240
22,695
$
–
6,791
77,867
23,500
63,254
7,580
–
–
–
–
47
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Business and Organization
Business – iStar Inc. (the “Company”), doing business as “iStar,”
finances, invests in and develops real estate and real estate related proj-
ects as part of its fully- integrated investment platform. The Company has
invested more than $35 billion over the past two decades and is structured
as a real estate investment trust (“REIT”) with a diversified portfolio focused
on larger assets located in major metropolitan markets. The Company’s
primary business segments are real estate finance, land and development,
net lease and operating properties (refer to Note 17).
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 generally
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 and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified in the Company’s consoli-
dated financial statements and the related notes to conform to the current
period presentation.
Principles of Consolidation – The consolidated financial state-
ments include the financial statements of the Company, it’s wholly owned
subsidiaries, controlled partnerships and variable interest entities (“VIEs”)
for which the Company is the primary beneficiary. All significant intercom-
pany balances and transactions have been eliminated in consolidation.
The Company’s involvement with VIEs affects its financial performance and
cash flows primarily through amounts recorded in “Operating lease income,”
“Interest income,” “Earnings from equity method investments,” “Real estate
expense” and “Interest expense” in the Company’s consolidated statements
of operations. The Company has not provided financial support to those VIEs
that it was not previously contractually required to provide.
Consolidated VIEs – As of December 31, 2016, the Company
consolidates VIEs for which it is considered the primary beneficiary. As
of December 31, 2016, the total assets of these consolidated VIEs were
$450.3 million and total liabilities were $82.1 million. The classifications of
these assets are primarily within “Land and development, net” and “Real
estate, net” on the Company’s consolidated balance sheets. The classifica-
tions of liabilities are primarily within “Accounts payable, accrued expenses
and other liabilities” and “debt obligations, net” on the Company’s consoli-
dated 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 did not have any unfunded commitments related to consolidated
VIEs as of December 31, 2016.
Unconsolidated VIEs – As of December 31, 2016, the Company
has investments in VIEs where it is not the primary beneficiary, and accord-
ingly, the VIEs have not been consolidated in the Company’s consolidated
financial statements. As of December 31, 2016, the Company’s maximum
exposure to loss from these investments does not exceed the sum of the
$47.2 million carrying value of the investments, which are classified in “Other
investments” and “Loans receivable and other lending investments, net” on
the Company’s consolidated balance sheets, and $57.5 million of related
unfunded commitments.
Note 3 – Summary of Significant Accounting Policies
Real estate and land and development – Real estate and land
and development assets are recorded at cost less accumulated deprecia-
tion 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 specifi-
cally identifiable to a development project once activities necessary to get
the asset ready for its intended use have commenced. If specific allocation
of costs is not practicable, the Company will allocate costs based on rela-
tive fair value prior to construction or relative sales value, relative size or
other methods as appropriate during construction. The Company’s policy for
interest capitalization on qualifying real estate assets is to use the average
amount of accumulated expenditures during the period the asset is being
prepared for its intended use, which is typically when physical construction
commences, and a capitalization rate which is derived from specific bor-
rowings on the qualifying asset or the Company’s corporate borrowing rate
in the absence of specific borrowings. 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 facil-
ity improvements.
Purchase price allocation – Upon acquisition of real estate, the
Company determines whether the transaction is a business combination,
which is accounted for under the acquisition method, or an acquisition of
assets. For both types of transactions, the Company recognizes and mea-
sures identifiable assets acquired, liabilities assumed and any noncontrolling
interest in the acquiree based on their relative fair values. For business com-
binations, 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 record-
ing 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 lease incentive assets, above- market leases and
in-place leases 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 liabili-
ties” on the Company’s consolidated balance sheets. In-place leases are
amortized over the remaining non- cancelable term and the amortization
expense is included in “Depreciation and amortization” in the Company’s
consolidated statements of operations. Lease incentive assets and 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 may also engage in sale/
leaseback transactions and execute leases with the occupant simultane-
ously with the purchase of the asset. These transactions are accounted for
as asset acquisitions.
Impairments – The Company reviews real estate assets to be held
and used and land and development assets, for impairment in value when-
ever 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 and land and development assets are impaired only if manage-
ment’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 considers factors such as expected future oper-
ating 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 and land and development
assets are recorded in “Impairment of assets” in 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
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. Impairment for
real estate assets disposed of or classified as held for sale are included in
“Impairment of assets” in the Company’s consolidated statements of opera-
tions. Once a real estate asset is classified as held for sale, depreciation
expense is no longer recorded.
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 clas-
sified 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.
Dispositions – Revenue from sales of land and development assets
and gains or losses on the sale of real estate assets, including residen-
tial property, are recognized in accordance with Accounting Standards
Codification (“ASC”) 360-20, Real Estate Sales. Sales of land and the asso-
ciated gains on sales of residential property are recognized for full profit
recognition upon closing of the sale transactions, when the profit is deter-
minable, the earnings process is virtually complete, the parties are bound
by the terms of the contract, all consideration has been exchanged, any
permanent financing for which the seller is responsible has been arranged
and all conditions for closing have been performed. The Company primarily
uses specific identification and the relative sales value method to allocate
costs. Gains on sales of real estate are included in “Income from sales of real
estate” in 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, corporate/partnership loans, subordinate
mortgages, 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 securi-
ties classified as held-to- maturity are reported at their outstanding unpaid
principal balance, and include unamortized acquisition premiums or dis-
counts 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 probable 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 histori-
cal cost or estimated fair value. The amount by which carrying value exceeds
fair value is recorded as a valuation allowance. Subsequent changes in the
valuation allowance are included in the determination of net income (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” in 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 suffered a credit loss, the impairment charge
will be separated. The credit loss component of the impairment will be
recorded as an “Impairment of assets” in the Company’s consolidated state-
ments of operations, and the remainder will be recorded in “Accumulated
other comprehensive income (loss)” on the Company’s consolidated bal-
ance sheets.
49
50
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 “Land and development,
net,” “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 partner-
ship 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” in the consolidated statements of opera-
tions. When the Company’s ownership 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 unconsoli-
dated subsidiary, the Company’s investment in the subsidiary is recorded at
the Company’s cost basis in the assets that were contributed to the uncon-
solidated subsidiary. To the extent that the Company’s cost basis is different
from the basis reflected at the subsidiary 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 sub-
sidiary, 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 smaller interest
in the subsidiary based on a comparison of the carrying amount of the prop-
erty 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 recoverable. The
Company will record an impairment charge to the extent that the estimated
fair value of an investment is less than its carrying value and the Company
determines the impairment is other-than- temporary. Impairment charges
are recorded in “Earnings from equity method investments” in 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. Restricted cash
is included in “Deferred expenses and other assets, net” on the Company’s
consolidated balance sheets.
Variable interest entities – The Company evaluates its investments
and other contractual arrangements to determine if they constitute variable
interests in a VIE. A VIE is an entity where a controlling 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 activities of the VIE and has the
obligation to absorb losses or the right to receive benefits of the VIE that
could potentially be significant to the VIE. This overall consolidation assess-
ment 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 assessment 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.
Deferred expenses and other assets – Deferred expenses and
other assets include certain non- tenant receivables, leasing costs, lease
incentives and financing fees associated with revolving-debt arrangements.
Financing fees associated with other debt obligations are recorded as a
reduction of the carrying value of “Debt obligations, net” and “Loan par-
ticipations payable, net” on the Company’s consolidated balance sheets.
Leasing costs include brokerage, legal and other costs which are amortized
over the life of the respective leases and presented as an operating activity
in the Company’s consolidated statements of cash flows. External fees and
costs incurred to obtain long-term debt 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” in 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, 2016, all such
intangible assets and liabilities acquired by the Company have finite lives.
Intangible assets are included in “Deferred expenses and other assets,
net” and intangible liabilities are included in “Accounts payable, accrued
expenses and other liabilities” on the Company’s consolidated balance
sheets. The Company amortizes finite lived intangible assets and liabili-
ties 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” in the Company’s
consolidated statements of operations.
Loan participations payable, net – The Company accounts for
transfers of financial assets under ASC Topic 860, “Transfers and Servicing,”
as either sales or secured borrowings. Transfers of financial assets that result
in sales accounting are those in which (1) the transfer legally isolates the
transferred assets from the transferor, (2) the transferee has the right to
pledge or exchange the transferred assets and no condition both constrains
the transferee’s right to pledge or exchange the assets and provides more
than a trivial benefit to the transferor, and (3) the transferor does not main-
tain effective control over the transferred assets. If the transfer does not
meet these criteria, the transfer is presented on the balance sheet as “Loan
participations payable, net”. Financial asset activities that are accounted for
as sales are removed from the balance sheet with any realized gain (loss)
reflected in earnings during the period of sale.
Revenue recognition – The Company’s revenue recognition policies
are as follows:
Operating lease income: The Company’s leases have all been
determined to be operating leases based on analyses 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, net” 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 respec-
tive property. This revenue is accrued in the same periods as the expense
is incurred and is recorded as “Operating lease income” in the Company’s
consolidated statements of operations. Revenue is also recorded from cer-
tain 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 balances as of
the balance sheet date and incorporates an asset- specific component, as
well as a general, formula-based reserve based on management’s evalua-
tion of the credit risks associated with these receivables. As of December 31,
2016 and 2015, the allowance for doubtful accounts related to real estate
tenant receivables was $1.3 million and $1.9 million, respectively, and the
allowance for doubtful accounts related to deferred operating lease income
was $1.3 million and $1.5 million, respectively.
Interest Income: Interest income on loans receivable is recognized
on an accrual basis using the interest method.
On occasion, the Company may acquire loans at premiums or dis-
counts. 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 immediately recognizes the unamor-
tized portion, which is included in “Other income” or “Other expense” in the
Company’s consolidated statements of operations.
The Company considers a loan to be non- performing and places
loans on non- accrual status at such time as: (1) the loan becomes 90
days delinquent; (2) the loan has a maturity default; or (3) management
determines it is probable that it will be unable to 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 contractually current and manage-
ment believes all amounts contractually owed will be received.
Certain of the Company’s loans contractually provide for accrual
of interest at specified rates that differ from current payment terms. Interest
is recognized on such loans at the accrual rate subject to management’s
determination that accrued interest and outstanding principal are ulti-
mately collectible, based on the underlying collateral and operations of
the borrower.
Prepayment penalties or yield maintenance payments from bor-
rowers are recognized as other 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 inter-
est 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, loan prepayment fees, yield mainte-
nance payments, lease termination fees and other ancillary income.
Land development revenue and cost of sales: Land development
revenue includes lot and parcel sales from wholly-owned properties and is
recognized for full profit recognition upon closing of the sale transactions,
when the profit is determinable, the earnings process is virtually complete,
the parties are bound by the terms of the contract, all consideration has
been exchanged, any permanent financing for which the seller is responsi-
ble has been arranged and all conditions for closing have been performed.
The Company primarily uses specific identification and the relative sales
value method to allocate costs.
Reserve for loan losses – The reserve for loan losses reflects man-
agement’s estimate of loan losses inherent in the loan portfolio as of the
balance sheet date. If the Company determines that the collateral fair value
less costs to sell 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” in the Company’s consoli-
dated 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 settle-
ment or other alternative resolution, which can impact the potential for loan
repayment or receipt of collateral. 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.
51
52
This may occur at different times, including when the Company receives
cash or other assets in a pre- foreclosure sale or takes control of the underly-
ing 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 utilizes
a uniform process for determining its reserve for loan losses. The reserve for
loan losses includes a general, formula-based component and an asset-
specific component.
The general reserve component covers performing loans and
reserves for loan losses are recorded when (i) available information as of
each balance sheet date indicates that it is probable a loss has occurred
in the portfolio and (ii) the amount of the loss can be reasonably estimated.
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 characteristics during
the Company’s quarterly loan portfolio assessment. During this assessment,
the Company performs a comprehensive analysis of its loan portfolio and
assigns risk ratings to loans that incorporate management’s current judg-
ments about their credit quality based on all known and relevant internal
and external factors that may affect collectability. The Company consid-
ers, 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. The Company estimates loss rates based on historical realized losses
experienced within its portfolio and takes 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. The Company considers a loan to be impaired when,
based upon current information and events, it believes that it is proba-
ble 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 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,
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, generally 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 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.
Loss on debt extinguishments – The Company recognizes the dif-
ference between the reacquisition price of debt and the net carrying amount
of extinguished debt currently in earnings. Such amounts may include pre-
payment penalties or the write-off of unamortized debt issuance costs, and
are recorded in “Loss on early extinguishment of debt, net” in the Company’s
consolidated statements of operations.
Derivative instruments and hedging activity – The Company’s
use of derivative financial instruments is primarily limited to the utilization of
interest rate swaps, interest rate caps or other instruments to manage inter-
est rate risk exposure and foreign exchange contracts to manage our risk to
changes in foreign currencies.
The Company recognizes derivatives as either assets or liabilities
on the Company’s consolidated balance sheets at fair value. If certain con-
ditions 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 trans-
lation adjustment. The ineffective portion of the change in fair value of the
derivatives is recognized directly in earnings. Amounts are reclassified out of
Accumulated Other Comprehensive Income into earnings when the hedged
net investment is either sold or substantially liquidated.
Derivatives that are not designated hedges are considered eco-
nomic hedges, with changes in fair value reported in current earnings in
“Other expense” in the Company’s consolidated statements of operations.
The Company does not enter into derivatives for trading 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 outcome of
awards with performance or service conditions through the requisite service
period. Compensation cost for market-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-based awards in which the service
conditions are met is recognized regardless of whether the market- condition
is satisfied. Compensation costs are recognized ratably over the applicable
vesting/service period and recorded in “General and administrative” in 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; the Company,
however, is allowed a deduction for the amount of dividends paid to its
shareholders, thereby subjecting the distributed net income of the Company
to taxation at the shareholder level only. While the Company must distribute
at least 90% of its taxable income to maintain its REIT status, the Company
typically distributes all of its taxable income, if any, to eliminate 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 depreciation 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. The Company intends to operate in a manner consistent with, and
its election to be treated as, a REIT for tax purposes. The Company made
foreclosure elections for certain properties acquired through foreclosure, or
an equivalent legal process, which allows the Company to operate these
properties within the REIT, but subjects net income from these assets to cor-
porate level tax. The carrying value of assets with foreclosure elections as
of December 31, 2016 is $578.1 million.
As of December 31, 2015, the Company had $902.9 million of REIT
net operating loss (“NOL”) carryforwards at the corporate REIT level, which
can generally be used to offset both ordinary taxable income and capital
gain net income in future years. The NOL carryforwards will expire begin-
ning in 2029 and through 2035 if unused. The amount of NOL carryforwards
as of December 31, 2016 will be subject to finalization of the Company’s 2016
tax return. The Company’s tax years from 2012 through 2016 remain subject to
examination by major tax jurisdictions. During the year ended December 31,
2016, the Company is expected to have REIT taxable income before the NOL
deduction. The Company recognizes interest expense and penalties related
to uncertain tax positions, if any, as “Income tax (expense) benefit” in the
Company’s consolidated statements of operations.
The Company may participate in certain activities from which it
would be otherwise precluded and maintain its qualification as a REIT.
These activities are conducted in entities that elect to be treated as tax-
able subsidiaries under the Code, subject to certain limitations. As such,
the Company, through its taxable REIT subsidiaries (“TRS”), is engaged in
various real estate related opportunities, primarily related to managing
activities related to certain foreclosed assets, as well as managing various
investments in equity affiliates. As of December 31, 2016, $603.9 million of
the Company’s assets were owned by TRS entities. The Company’s TRS enti-
ties are not consolidated for federal income tax purposes and are taxed as
corporations. For financial reporting purposes, current and deferred taxes
are provided for on the portion of earnings recognized by the Company with
respect to its interest in TRS entities.
The following represents the Company’s TRS income tax benefit
(expense) ($ in thousands):
For the Years Ended December 31,
Current tax benefit (expense)
Deferred tax benefit (expense)
Total income tax (expense) benefit
Explanatory Note:
2016(1)
2014
2015
$ 9,751 $ (7,639) $ (3,912)
–
$ 9,751 $ (7,639) $ (3,912)
–
–
(1) For the year ended December 31, 2016, excludes a REIT income tax benefit of
$0.4 million.
During the year ended December 31, 2016, the Company’s TRS
entities generated a taxable loss of $49.4 million, resulting in a current tax
benefit of $9.8 million, including a benefit for a return to provision adjust-
ment in the amount of $2.8 million. The current benefit was limited to the
amount the Company’s TRS expects to receive after it files an NOL car-
ryback claim. The remaining balance of its NOL will be carried forward
and the Company’s TRS recorded a full valuation allowance against the
related deferred tax asset. During the year ended December 31, 2015, the
Company’s TRS entities generated taxable income of $17.0 million, which was
partially offset by the utilization of NOL carryforwards, resulting in current
tax expense of $7.6 million. During the year ended December 31, 2014, the
Company’s TRS entities generated taxable income of $19.3 million, resulting
in current tax expense of $3.9 million.
Total cash paid for taxes for the years ended December 31, 2016,
2015 and 2014 was $0.2 million, $8.4 million and $1.3 million, respectively.
Deferred income taxes reflect the net tax effects of temporary dif-
ferences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts for income tax purposes, as well as
operating loss and tax credit carryforwards. The Company evaluates the
realizability of its deferred tax assets and recognizes a valuation allowance
if, based on the available evidence, both positive and negative, it is more
likely than not that some portion or all of its deferred tax assets will not be
realized. When evaluating the realizability of its deferred tax assets, the
Company considers, among other matters, estimates of expected future tax-
able income, nature of current and cumulative losses, existing and projected
book/tax differences, tax planning strategies available, and the general
and industry specific economic outlook. This realizability analysis is inher-
ently subjective, as it requires the Company to forecast its business and
general economic environment in future periods. Based on an assessment
of all factors, including historical losses and continued volatility of the activi-
ties within the TRS entities, it was determined that full valuation allowances
were required on the net deferred tax assets as of December 31, 2016 and
2015, respectively. Changes in estimates of deferred tax asset realizability,
if any, are included in “Income tax (expense) benefit” in the consolidated
statements of operations.
53
Deferred tax assets and liabilities of the Company’s TRS entities
were as follows ($ in thousands):
As of December 31,
Deferred tax assets(1)
Valuation allowance
Net deferred tax assets (liabilities)
2016
2015
$ 66,498 $ 53,910
(53,910)
–
(66,498)
$
$
–
54
Explanatory Note:
(1) Deferred tax assets as of December 31, 2016 include timing differences related primar-
ily to asset basis of $29.7 million, deferred expenses and other items of $17.9 million,
NOL carryforwards of $15.6 million and other credits of $3.3 million. Deferred tax assets
as of December 31, 2015 include timing differences related primarily to asset basis of
$40.0 million, deferred expenses and other items of $10.7 million and NOL carryfor-
wards of $3.2 million.
Earnings per share – The Company uses the two-class method in
calculating earnings per share (“EPS”) when it issues securities other than
common stock that contractually entitle the holder to participate in divi-
dends and earnings of the Company when, and if, the Company declares
dividends on its common stock. Vested HPU shares were entitled to divi-
dends of the Company when dividends were declared. Basic earnings per
share (“Basic EPS”) for the Company’s common stock and HPU shares are
computed by dividing net income allocable to common shareholders and
HPU holders by the weighted average number of shares of common stock
and HPU shares outstanding for the period, respectively. Diluted earn-
ings per share (“Diluted EPS”) is calculated similarly, however, it reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock, where such
exercise or conversion would result in a lower earnings per share amount.
Unvested share-based payment awards that contain non-
forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are deemed a “Participating Security” and are included in the
computation of earnings per share pursuant to the two-class method. The
Company’s unvested common stock equivalents and restricted stock awards
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 January 2017, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2017-01, Business Combinations: Clarifying the Definition of a Business
(“ASU 2017-01”) to provide a more robust framework to use in determining
when a set of assets and activities is a business. The amendments provide
more consistency in applying the guidance, reduce the costs of application,
and make the definition of a business more operable. ASU 2017-01 is effec-
tive for interim and annual reporting periods beginning after December 15,
2017. Early application is permitted under certain conditions. Management
is evaluating the impact of the guidance on the Company’s consolidated
financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of
Cash Flows: Restricted Cash (“ASU 2016-18”) which requires that restricted
cash be included with cash and cash equivalents when reconciling begin-
ning and ending cash and cash equivalents on the statement of cash
flows. In addition, ASU 2016-18 requires disclosure of what is included in
restricted cash. ASU 2016-18 is effective for interim and annual reporting
periods beginning after December 15, 2017. Early adoption is permitted.
Management does not believe the guidance will have a material impact
on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash
Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU
2016-15”) which was issued to reduce diversity in practice in how certain
cash receipts and cash payments, including debt prepayment or debt
extinguishment costs, distributions from equity method investees, and other
separately identifiable cash flows, are presented and classified in the state-
ment of cash flows. ASU 2016-15 is effective for interim and annual reporting
periods beginning after December 15, 2017. Early adoption is permitted.
Management does not believe the guidance will have a material impact
on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments –
Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU
2016-13”) which was issued to provide financial statement users with more
decision- useful information about the expected credit losses on finan-
cial instruments held by a reporting entity. This amendment replaces the
incurred loss impairment methodology in current GAAP with a methodol-
ogy that reflects expected credit losses and requires consideration of a
broader range of reasonable and supportable information to inform credit
loss estimates. ASU 2016-13 is effective for interim and annual reporting
periods beginning after December 15, 2019. Early adoption is permitted for
interim and annual reporting periods beginning after December 15, 2018.
Management does not believe the guidance will have a material impact
on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock
Compensation: Improvements to Employee Share-Based Payment
Accounting (“ASU 2016-09”) which was issued to simplify several aspects
of the accounting for share-based payment transactions, including income
tax, classification of awards as either equity or liabilities and classification on
the statement of cash flows. ASU 2016-09 is effective for interim and annual
reporting periods beginning after December 15, 2016. Early adoption is per-
mitted. Management does not believe the guidance will have a material
impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-
02”), which requires the recognition of lease assets and lease liabilities by
lessees for those leases classified as operating leases. For operating leases,
a lessee will be required to do the following: (i) recognize a right-of-use
asset and a lease liability, initially measured at the present value of the
lease payments, in the statement of financial position; (ii) recognize a single
lease cost, calculated so that the cost of the lease is allocated over the lease
term on a generally straight-line basis and (iii) classify all cash payments
within operating activities in the statement of cash flows. For operating lease
arrangements for which the Company is the lessee, primarily the lease of
office space, the Company expects the impact of ASU 2016-02 to be the
recognition of a right-of-use asset and lease liability on its consolidated
balance sheets. The accounting applied by the Company as a lessor will
be largely unchanged from that applied under previous GAAP. However,
in certain instances, a new long-term lease of land subsequent to adoption
could be classified as a sales-type lease, which could result in the Company
derecognizing the underlying asset from its books and recording a profit or
loss on sale and the net investment in the lease. ASU 2016-02 is effective for
interim and annual reporting periods beginning after December 15, 2018.
Early adoption is permitted. Management is evaluating the impact of the
guidance on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments –
Overall: Recognition and Measurement of Financial Assets and Financial
Liabilities (“ASU 2016-01”), which addresses certain aspects of recognition,
measurement, presentation and disclosure of financial instruments. ASU
2016-01 is effective for interim and annual reporting periods beginning
after December 15, 2017. Early adoption is not permitted. Management is
evaluating the impact of the guidance 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 sub-
stantial 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, additional disclosure
is required, including the principal condition or event that raised the sub-
stantial doubt, the Company’s evaluation of the condition 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 substantial doubt. ASU 2014-15 was effec-
tive for interim and annual reporting periods beginning after December 15,
2016. The adoption of ASU 2014-15 did not have a material impact on the
Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers (“ASU 2014-09”) which supersedes existing industry- specific
guidance, including ASC 360-20, Real Estate Sales. The new standard is
principles-based and requires more estimates and judgment than current
guidance. Certain contracts with customers, including lease contracts and
financial instruments and other contractual rights, are not within the scope
of the new guidance. Although most of the Company’s revenue is operating
lease income generated from lease contracts and interest income gener-
ated from financial instruments, certain other of the Company’s revenue
streams will be impacted by the new guidance. In August 2015, the FASB
issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of
the Effective Date, to defer the effective date of ASU 2014-09 by one year.
ASU 2014-09 is now effective for interim and annual reporting periods
beginning after December 15, 2017. Early adoption is permitted beginning
January 1, 2017. 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):
Net Lease(1)
Operating
Properties
Total
As of December 31, 2016
Land, at cost
Buildings and improvements, at cost
Less: accumulated depreciation
Real estate, net
Real estate available and held for sale(2)
Total real estate
As of December 31, 2015
Land, at cost
Buildings and improvements, at cost
Less: accumulated depreciation
Real estate, net
Real estate available and held for sale(2)
Total real estate
$ 272,666 $ 211,054 $ 483,720
311,283 1,422,872
1,111,589
(46,175) (414,840)
(368,665)
476,162 1,491,752
1,015,590
83,764
82,480
1,284
$ 1,016,874 $ 558,642 $ 1,575,516
$ 306,172 $ 133,275 $ 439,447
427,371 1,611,094
1,183,723
(79,142) (456,558)
(377,416)
481,504 1,593,983
1,112,479
137,274 137,274
$ 1,112,479 $ 618,778 $ 1,731,257
–
55
Explanatory Notes:
(1)
In 2014, the Company partnered with a sovereign wealth fund to form a venture to
acquire and develop net lease assets (the “Net Lease Venture”) and gave a right of first
refusal to the Net Lease Venture on all new net lease investments (refer to Note 7 for
more information on the Net Lease Venture). The Company is responsible for sourcing
new opportunities and managing the Net Lease Venture and its assets in exchange for
a promote and management fee.
(2) As of December 31, 2016 and 2015 the Company had $82.5 million and $137.3 mil-
lion, respectively, of residential properties available for sale in its operating
properties portfolio.
Real Estate Available and Held for Sale – During the year ended
December 31, 2016, the Company transferred net lease assets with a car-
rying value of $1.8 million and a commercial operating property with a
carrying value of $16.1 million to held for sale due to executed contracts with
third parties. The Company also acquired two residential condominium
units for $1.8 million that are held for sale and had no operations as of
December 31, 2016.
During the year ended December 31, 2015, the Company transferred
net lease assets with a carrying value of $8.2 million to held for sale due to
executed contracts with third parties and transferred a commercial operat-
ing property with a carrying value of $2.9 million to held for investment due
to a change in business strategy.
During the year ended December 31, 2014, the Company trans-
ferred 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
transferred net lease assets with a carrying value of $4.0 million to held for
sale due to executed contracts with third parties.
Acquisitions – During the year ended December 31, 2016, the
Company acquired one net lease asset for $32.7 million. During the same
period, the Company also acquired land for $3.9 million and simultaneously
entered into a 99 year ground net lease with the seller of the land. The land
acquired is included in our net lease business segment.
56
During the year ended December 31, 2015, the Company acquired,
via deed-in-lieu, title to a residential operating property, which had a total
fair value of $13.4 million and previously served as collateral for loans receiv-
able held by the Company. No gain or loss was recorded in connection with
this transaction.
During the year ended December 31, 2014, the Company acquired,
via deed-in-lieu, title to three commercial operating properties which had
a total fair value of $72.4 million and previously 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 summa-
rizes the Company’s pro forma revenues and net income for the year ended
December 31, 2014 as if the acquisition of the properties acquired during the
year ended December 31, 2014 was completed on January 1, 2013 (unaudited
and $ in thousands):
Pro forma total revenues
Pro forma net income
$466,327
15,351
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 of the acquiree are
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 purport to represent the Company’s results of operations
for future periods.
Dispositions – During the years ended December 31, 2016, 2015
and 2014, the Company sold residential condominiums for total net pro-
ceeds of $97.8 million, $127.9 million and $236.2 million, respectively, and
recorded income from sales of real estate totaling $26.1 million, $40.1 million
and $79.1 million, respectively.
During the years ended December 31, 2016, 2015 and 2014, the
Company sold net lease assets for total net proceeds of $117.2 million,
$100.8 million and $127.2 million, respectively, and recorded income from
sales of real estate of $21.1 million, $40.1 million and $6.2 million, respectively.
During the year ended December 31, 2016, the Company sold com-
mercial operating properties for total net proceeds of $229.1 million and
recorded income from sales of real estate totaling $49.3 million.
During the year ended December 31, 2015, the Company sold a
commercial operating property for $68.5 million to a newly formed uncon-
solidated entity in which the Company owns a 50.0% equity interest (refer to
Note 7). The Company recognized a gain on sale of $13.6 million, reflecting
the Company’s share of the interest sold to a third party, which was recorded
as “Income from sales of real estate” in the Company’s consolidated state-
ments of operations.
During the year ended December 31, 2015, the Company, through
a consolidated entity, sold a leasehold interest in a commercial operat-
ing property with a carrying value of $126.3 million for net proceeds of
$93.5 million and simultaneously entered into a ground lease with the buyer
with an initial term of 99 years. The Company sold the leasehold interest
at below fair value to incentivize the buyer to enter into an above market
ground lease. As a result, the Company recorded no gain or loss on the sale
and recorded a lease incentive asset of $32.8 million, which is included in
“Deferred expenses and other assets, net” on the Company’s consolidated
balance sheets. In December 2015, the Company acquired the noncontrol-
ling interest in the entity for $6.4 million.
During the year ended December 31, 2015, the Company also sold
three commercial operating properties for net proceeds of $5.0 million
which approximated carrying value.
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 the Net Lease Venture for net proceeds of $10.1 million that approxi-
mated carrying value (refer to Note 7). During the year ended December 31,
2014, the Company also sold a net lease asset for net proceeds of $93.7 mil-
lion, which approximated carrying value, to the Net Lease Venture (refer to
Note 7).
During the year ended December 31, 2014, the Company sold com-
mercial operating properties for total net proceeds of $34.2 million and
recorded income from sales of real estate of $4.6 million.
Impairments – During the years ended December 31, 2016, 2015
and 2014, the Company recorded impairments on real estate assets total-
ing $10.7 million, $5.9 million and $11.8 million, respectively. The impairments
recorded in 2016 resulted from unfavorable local market conditions on resi-
dential operating properties and impairments upon the execution of sales
contracts on net lease assets. The impairments recorded in 2015 resulted
from a change in business strategy for two commercial operating properties
and unfavorable local market conditions for one residential property. The
impairments recorded in 2014 resulted from changes in business strategy
for a residential property, unfavorable local market conditions for two real
estate properties and from the sale of net lease assets.
Tenant Reimbursements – The Company receives reimbursements
from tenants for certain facility operating expenses including common area
costs, insurance, utilities and real estate taxes. Tenant expense reimburse-
ments were $24.3 million, $26.8 million and $30.0 million for the years ended
December 31, 2016, 2015 and 2014, respectively. These amounts are included
in “Operating lease income” in the Company’s consolidated statements
of operations.
Allowance for Doubtful Accounts – As of December 31, 2016 and
2015, the allowance for doubtful accounts related to real estate tenant
receivables was $1.3 million and $1.9 million, respectively, and the allow-
ance for doubtful accounts related to deferred operating lease income
was $1.3 million and $1.5 million, respectively. These amounts are included
in “Accrued interest and operating lease income receivable, net” and
“Deferred operating lease income receivable, net,” respectively, on the
Company’s consolidated balance sheets.
Future Minimum Operating Lease Payments – Future minimum
operating lease payments to be collected under non- cancelable leases,
excluding customer reimbursements of expenses, in effect as of December 31,
2016, are as follows ($ in thousands):
Year
2017
2018
2019
2020
2021
Net Lease
Assets
$120,055
123,005
123,567
123,059
123,063
Operating
Properties
$36,580
34,535
30,805
28,225
26,794
Note 5 – Land and Development
The Company’s land and development assets were comprised of
the following ($ in thousands):
As of December 31,
Land and land development, at cost
Less: accumulated depreciation
Total land and development, net
2016
$ 952,051
(6,486 )
$ 945,565
2015
$ 1,007,995
(6,032)
$ 1,001,963
Acquisitions – During the year ended December 31, 2016, the
Company acquired an additional 10.7% interest in a consolidated entity for
$10.8 million. The Company owns 95.7% of the entity as of December 31, 2016.
During the year ended December 31, 2016, the Company acquired,
via deed-in-lieu, title to two land assets which had a total fair value of
$40.6 million and previously served as collateral for loans receivable
held by the Company. No gain or loss was recorded in connection with
these transactions.
During the year ended December 31, 2014, the Company acquired,
via deed-in-lieu, title to a land asset that previously served as collateral for
loans receivable. The fair value of the land asset was $5.5 million.
Dispositions – During the years ended December 31, 2016, 2015
and 2014, the Company sold residential lots and parcels and recognized
land development revenue of $88.3 million, $100.2 million and $15.2 mil-
lion, respectively, from its land and development portfolio. During the years
ended December 31, 2016, 2015 and 2014, the Company recognized land
development cost of sales of $62.0 million, $67.4 million and $12.8 million,
respectively, from its land and development portfolio.
During the year ended December 31, 2016, the Company sold a
land and development asset to a newly formed unconsolidated entity in
which the Company owns a 50.0% equity interest (refer to Note 7). The
Company recognized a gain of $8.8 million, reflecting the Company’s share
of the interest sold to a third party, which was recorded as “Income from
sales of real estate” in the Company’s consolidated statement of operations.
In April 2015, the Company transferred a land asset to a purchaser
at a stated price of $16.1 million, as part of an agreement to construct an
amphitheater, for which the Company received immediate payment of
$5.3 million, with the remainder to be received upon completion of the devel-
opment project. Due to the Company’s continuing involvement in the project,
no sale was recognized and the proceeds were recorded as unearned
revenue in “Accounts payable, accrued expenses and other liabilities” on
the Company’s consolidated balance sheets (refer to Note 8).
During the year ended December 31, 2014, the Company contributed
land with a carrying value of $9.5 million to a newly formed unconsolidated
entity (refer to Note 7). During the same period, the Company also sold prop-
erties with a carrying value of $6.8 million for proceeds that approximated
carrying value.
Impairments – During the years ended December 31, 2016, 2015
and 2014, the Company recorded impairments on land and development
assets of $3.8 million, $4.6 million and $22.8 million, respectively.
Redeemable Noncontrolling Interest – The Company has a major-
ity interest in a strategic venture that provides the third party minority partner
an option to redeem its interest at fair value. The Company has reflected
the partner’s noncontrolling interest in this venture as a component of
redeemable noncontrolling interest within its consolidated balance sheets.
Changes in fair value are being accreted over the term from the date of
issuance of the redemption option to the earliest redemption date using
the interest method. As of December 31, 2016 and December 31, 2015, this
interest had a carrying value of $1.3 million and $7.2 million, respectively. As
of December 31, 2016 and 2015, this interest had a redemption value of zero
and $9.2 million, respectively.
Note 6 – Loans Receivable and Other Lending Investments, net
The following is a summary of the Company’s loans receivable and
other lending investments by class ($ in thousands):
As of December 31,
Type of Investment
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
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
2016
2015
$ 940,738 $ 975,915
643,270
28,676
1,647,861
(108,165)
1,539,696
62,289
490,389
24,941
1,456,068
(85,545)
1,370,523
79,916
$ 1,450,439 $ 1,601,985
In June 2015, the Company received a loan with a fair value of
$146.7 million as a non-cash paydown on a $196.6 million loan and reduced
the principal balance by the fair value to $49.9 million. The loan received
has been recorded as a loan receivable and is included in “Loans receiv-
able and other lending investments, net” on the Company’s consolidated
57
balance sheet. In connection with the transaction, the Company recorded
a provision for loan losses of $25.9 million on the original loan resulting
in a remaining balance of $24.0 million. In October 2015, the Company
received full payment of the $24.0 million remaining balance of the original
$196.6 million loan.
During the year ended December 31, 2015, the Company sold a
loan with a carrying value of $5.5 million. No gain or loss was recorded on
the sale. During the year ended December 31, 2014, the Company sold loans
with an aggregate carrying value of $30.8 million and recorded gains of
$19.1 million. Gains on sales of loans are recorded in “Other income” in the
Company’s consolidated statements of operations.
Reserve for Loan Losses – Changes in the Company’s reserve for
loan losses were as follows ($ in thousands):
For the Years Ended December 31,
2016
2015
2014
Reserve for loan losses at beginning of
period
(Recovery of) provision for loan losses(1)
Charge-offs
Reserve for loan losses at end of period
$ 108,165 $ 98,490 $ 377,204
36,567
(1,714)
(26,892) (277,000)
$ 85,545 $ 108,165 $ 98,490
(12,514)
(10,106)
Explanatory Note:
(1) For the years ended December 31, 2016, 2015 and 2014, the provision for loan losses
includes recoveries of previously recorded asset- specific loan loss reserves of $13.7 mil-
lion, $0.6 million and $10.1 million, respectively.
58
The Company’s recorded investment in loans (comprised of a loan’s
carrying value plus accrued interest) and the associated reserve for loan
losses were as follows ($ in thousands):
Individually
Evaluated for
Impairment(1)
Collectively
Evaluated for
Impairment(2)
Total
As of December 31, 2016
Loans
Less: Reserve for loan losses
Total(3)
As of December 31, 2015
Loans
Less: Reserve for loan losses
Total(3)
Explanatory Notes:
$ 253,941 $ 1,209,062 $ 1,463,003
(85,545)
$ 191,696 $ 1,185,762 $ 1,377,458
(62,245)
(23,300)
$ 132,492 $ 1,524,347 $ 1,656,839
(108,165)
$ 60,327 $ 1,488,347 $ 1,548,674
(72,165)
(36,000)
(1) The carrying value of these loans include unamortized discounts, premiums, deferred
fees and costs totaling net discounts of $0.4 million and $0.2 million as of December 31,
2016 and 2015, respectively. The Company’s loans individually evaluated for impair-
ment primarily represent loans on non- accrual status and therefore, the unamortized
amounts associated with these loans are not currently being amortized into income.
During the year ended December 31, 2016, the Company transferred a loan with a
gross carrying value of $157.2 million to non- performing status due to the initiation
of bankruptcy proceedings related to the collateral, which resulted in the release of
$11.6 million of the general reserve. The Company performed a valuation and recorded
a specific reserve of $12.5 million.
(2) The carrying value of these loans include unamortized discounts, premiums, deferred
fees and costs totaling net discounts of $1.9 million and $8.2 million as of December 31,
2016 and 2015, respectively.
(3) The Company’s recorded investment in loans as of December 31, 2016 and 2015
includes accrued interest of $6.9 million and $9.0 million, respectively, which are
included in “Accrued interest and operating lease income receivable, net” on the
Company’s consolidated balance sheets. As of December 31, 2016 and 2015, excludes
$79.9 million and $62.3 million, respectively, of securities that are evaluated for impair-
ment under ASC 320.
Credit Characteristics – As part of the Company’s process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assess-
ment and assigns risk ratings to each of its performing loans. Risk ratings, which range from 1 (lower risk) to 5 (higher risk), are based on judgments which
are inherently uncertain and there can be no assurance that actual performance will be similar to current expectation.
The Company’s recorded investment in performing loans, presented by class and by credit quality, as indicated by risk rating, was as follows
($ in thousands):
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
Total
As of December 31,
2016
2015
Performing Loans
Weighted Average
Risk Ratings
Performing Loans
$ 859,250
335,677
14,135
$ 1,209,062
3.12
3.09
3.00
3.11
Weighted Average
Risk Ratings
2.96
3.37
3.64
3.15
$ 853,595
641,713
29,039
$ 1,524,347
The Company’s recorded investment in loans, aged by payment status and presented by class, were as follows ($ in thousands):
As of December 31, 2016
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
Total
As of December 31, 2015
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
Total
Explanatory Note:
Current
Less Than and
Equal to 90 Days
Greater Than
90 Days(1)
Total Past Due
Total
$ 868,505
335,677
24,998
$ 1,229,180
$ 864,099
647,451
29,039
$ 1,540,589
$ –
–
–
$ –
$ –
–
–
$ –
$ 76,677
157,146
–
$ 76,677
157,146
–
$ 233,823
$ 233,823
$ 116,250
$ 116,250
–
–
–
–
$ 116,250
$ 116,250
$ 945,182
492,823
24,998
$ 1,463,003
$ 980,349
647,451
29,039
$ 1,656,839
(1) As of December 31, 2016, the Company had four loans which were greater than 90 days delinquent and were in various stages of resolution, including legal proceedings, environmental
concerns and foreclosure- related proceedings, and ranged from 1.0 to 8.0 years outstanding. As of December 31, 2015, the Company had four loans which were greater than 90 days delin-
quent and were in various stages of resolution, including legal proceedings, environmental concerns and foreclosure- related proceedings, and ranged from 1.0 to 7.0 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:
Subordinate mortgages
Subtotal
With an allowance recorded:
Senior mortgages
Corporate/Partnership loans
Subtotal
Total:
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
Total
Explanatory Note:
As of December 31, 2016
As of December 31, 2015
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
$ 10,862
$ 10,862
$ 10,846
$ 10,846
$
$
–
–
$
$
–
–
$
$
–
–
$ 85,933
157,146
$ 243,079
$ 85,933
157,146
10,862
$ 253,941
$ 85,780
146,783
$ 232,563
$ 85,780
146,783
10,846
$ 243,409
$ (49,774)
(12,471)
$ (62,245)
$ (49,774)
(12,471)
–
$ 126,754
5,738
$ 132,492
$ 126,754
5,738
–
$ 125,776
5,738
$ 131,514
$ 125,776
5,738
–
$ (62,245)
$ 132,492
$ 131,514
$
$
–
–
$ (69,627)
(2,538)
$ (72,165)
$ (69,627)
(2,538)
–
$ (72,165)
59
(1) All of the Company’s non- accrual loans are considered impaired and included in the table above.
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
Subordinate mortgages
Subtotal
With an allowance recorded:
Senior mortgages
Corporate/Partnership loans
Subtotal
Total:
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
Total
For the Years Ended December 31,
2016
Average
Recorded
Investment
Interest Income
Recognized
2015
Average
Recorded
Investment
Interest Income
Recognized
2014
Average
Recorded
Investment
Interest Income
Recognized
$ 3,661
6,799
10,460
118,921
66,101
185,022
122,582
66,101
6,799
$ 195,482
$ 226
–
226
$
–
–
–
–
–
–
226
–
–
$ 226
129,135
24,252
153,387
129,135
24,252
–
$ 153,387
$ –
–
–
38
12
50
38
12
–
$ 50
$ 35,659
–
35,659
334,351
52,963
387,314
370,010
52,963
–
$ 422,973
$ 1,922
–
1,922
158
181
339
2,080
181
–
$ 2,261
There was no interest income related to the resolution of non- performing loans recorded during the years ended December 31, 2016, 2015 and 2014.
Troubled Debt Restructurings – During the year ended
December 31, 2015, the Company modified two senior loans that were
determined to be troubled debt restructurings. The Company restruc-
tured one non- performing loan with a recorded investment of $5.8 million
to grant a maturity extension of one year. The Company also modified
one non- performing loan with a recorded investment of $11.6 million to
grant a discounted payoff option and a maturity extension of one year.
The Company’s recorded investment in these loans was not impacted by
the modifications.
During the year ended December 31, 2014, the Company restruc-
tured one non- performing senior loan that was determined to be a troubled
debt restructuring with a recorded investment of $7.0 million to grant a
maturity extension of one year and included conditional extension options.
The Company’s recorded investment in this loan was not impacted by
the modification.
Generally when granting concessions, the Company will seek to
protect its position by requiring incremental pay downs, additional collat-
eral or guarantees and in some cases lookback features or equity kickers to
offset concessions granted should conditions impacting the loan improve.
The Company’s determination of credit losses is impacted by troubled debt
restructurings whereby loans that have gone through troubled debt restruc-
turings are considered impaired, assessed for specific reserves, and are
not included in the Company’s assessment of general loan loss reserves.
Loans previously restructured under troubled debt restructurings that sub-
sequently default are reassessed to incorporate the Company’s current
assumptions on expected cash flows and additional provision expense is
recorded to the extent necessary. As of December 31, 2016, there were no
unfunded commitments associated with modified loans considered troubled
debt restructurings.
Securities – Other lending investments – securities includes the following ($ in thousands):
60
As of December 31, 2016
Available-for-Sale Securities
Municipal debt securities
Held-to- Maturity Securities
Debt securities
Total
As of December 31, 2015
Available-for-Sale Securities
Municipal debt securities
Held-to- Maturity Securities
Debt securities
Total
Face Value
Amortized Cost
Basis
Net Unrealized
Gain (Loss)
Estimated Fair
Value
Net Carrying
Value
$ 21,240
$ 21,240
$ 426
$ 21,666
$ 21,666
58,454
$ 79,694
58,250
$ 79,490
2,753
$ 3,179
61,003
$ 82,669
58,250
$ 79,916
$ 1,010
$ 1,010
$ 151
$ 1,161
$ 1,161
54,549
$ 55,559
61,128
$ 62,138
71
$ 222
61,199
$ 62,360
61,128
$ 62,289
As of December 31, 2016, the contractual maturities of the Company’s securities were as follows ($ in thousands):
Held-to- Maturity Securities
Available-for-Sale Securities
Amortized Cost
Basis
Estimated Fair
Value
Amortized Cost
Basis
Estimated Fair
Value
Maturities
Within one year
After one year through 5 years
After 5 years through 10 years
After 10 years
Total
$
–
58,250
$
–
61,003
$
–
–
–
–
$ 58,250
$ 61,003
–
–
–
21,240
$ 21,240
$
–
–
–
21,666
$ 21,666
Note 7 – Other Investments
The Company’s other investments and its proportionate share of earnings (losses) from equity method investments were as follows ($ in thousands):
Real estate equity investments
iStar Net Lease I LLC (“Net Lease Venture”)
Marina Palms, LLC (“Marina Palms”)
Other real estate equity investments (1)
Subtotal
Other strategic investments (2)(3)
Total
Explanatory Notes:
Carrying Value
As of December 31,
Equity in Earnings (Losses)
For the Years Ended December 31,
2016
2015
2016
2015
2014
$ 92,669
35,185
53,202
181,056
33,350
$ 214,406
$ 69,096
30,099
81,452
180,647
73,525
$ 254,172
$ 3,567
22,053
41,822
67,442
9,907
$ 77,349
$ 5,221
23,626
(5,280)
23,567
8,586
$ 32,153
$ 1,915
14,671
36,842
53,428
41,477
$ 94,905
(1) During the year ended December 31, 2016, a majority-owned consolidated subsidiary of the Company sold its interest in a real estate equity method investment for net proceeds of
$39.8 million and recognized equity in earnings of $31.5 million, of which $10.1 million was attributable to the noncontrolling interest. In addition, the Company received a distribution
from one of its real estate equity method investments and recognized equity in earnings during the year ended December 31, 2016 of $11.6 million. During the year ended December 31,
2014, the Company recognized $32.9 million of earnings from equity method investments resulting from asset sales by one of its equity method investees.
(2) 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
of its equity method investees.
(3) In conjunction with the sale of the Company’s interests in Oak Hill Advisors, L.P. in 2011, the Company retained a share of the carried interest related to various funds. During the years
ended December 31, 2016, 2015 and 2014, the Company recognized $4.3 million, $2.2 million and $9.0 million, respectively, of carried interest income.
Net Lease Venture – In February 2014, the Company partnered
with a sovereign wealth fund to form a new unconsolidated entity in which
the Company has an equity interest of approximately 51.9%. This entity is
not a VIE and the Company does not have controlling interest due to the
substantive participating rights of its partner. The partners plan to contribute
up to an aggregate $500 million of equity to acquire and develop net lease
assets over time. The Company is responsible for sourcing new opportunities
and managing the venture and its assets in exchange for a promote and
management fee. Several of the Company’s senior executives whose time is
substantially devoted to the Net Lease Venture own a total of 0.6% equity
ownership in the venture via co- investment. These senior 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, 2016,
the Net Lease Venture acquired two office properties and the Company
made contributions to the Net Lease Venture of $37.7 million. 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
Net Lease Venture. The Company also sold its 72% interest in a previously
consolidated entity, which owns a net lease asset subject to a mortgage
of $26.0 million, to the Net Lease Venture for net proceeds of $10.1 million,
which approximated carrying value. During the same period, the Net Lease
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, 2016 and 2015, the
venture’s carrying value of total assets was $511.3 million and $400.2 million,
respectively. During the years ended December 31, 2016, 2015 and 2014, the
Company recorded $1.6 million, $1.5 million and $1.3 million, respectively,
of management fees from the Net Lease Venture. The management fees
are included in “Other income” in the Company’s consolidated statements
of operations. In November 2016, the Net Lease Venture placed five year
non- recourse financing of $29.0 million on one of its net lease assets. Net
proceeds from the financing were distributed to the members of which the
Company received $13.2 million. In June 2015, the Net Lease Venture placed
ten year non- recourse financing of $120.0 million on one of its net lease
assets. Net proceeds from the financing were distributed to its members of
which the Company received approximately $61.2 million.
Marina Palms – As of December 31, 2016, the Company owned a
47.5% equity interest in Marina Palms, a 468 unit, two tower residential con-
dominium development in North Miami Beach, Florida. The 234 unit north
tower has one unit remaining for sale as of December 31, 2016. The 234 unit
south tower is 83% pre-sold (based on unit count) as of December 31, 2016.
This entity is not a VIE and the Company does not have controlling interest
due to shared control of the entity with its partner. As of December 31, 2016
and 2015, the venture’s carrying value of total assets was $201.8 million and
$278.5 million, respectively.
Other real estate equity investments – As of December 31, 2016,
the Company’s other real estate equity investments included equity interests
in real estate ventures ranging from 20% to 85%, comprised of investments
of $3.6 million in operating properties and $49.6 million in land assets. As
of December 31, 2015, the Company’s other real estate equity investments
included $11.1 million in operating properties and $70.4 million in land assets.
In December 2016, the Company sold a land and development
asset for $36.0 million to a newly formed unconsolidated entity in which
the Company owns a 50.0% equity interest (refer to Note 5). The Company
recognized a gain of $8.8 million, reflecting the Company’s share of the
interest sold to a third party, which was recorded as “Income from sales of
real estate” in the Company’s consolidated statements of operations. The
Company and its partner both made $7.0 million contributions to the venture
and the Company provided financing to the entity in the form of a $27.0 mil-
lion senior loan, of which $23.0 million was funded as of December 31, 2016.
The Company received $17.6 million of net proceeds from the sale of the
asset. This entity is a VIE and the Company does not have a controlling
interest due to shared control of the entity with its partner.
61
Other strategic investments – As of December 31, 2016, the
Company also had smaller investments in real estate related funds and
other strategic investments in several other entities that were accounted for
under the equity method or cost method. As of December 31, 2016 and 2015,
the carrying value of the Company’s cost method investments was $1.4 mil-
lion and $1.5 million, respectively. During the year ended December 31, 2015,
the Company sold available-for-sale securities for proceeds of $7.4 mil-
lion for gains of $2.6 million, which are included in “Other income” in the
Company’s consolidated statements of operations. The amount reclassified
out of accumulated other comprehensive income into earnings was deter-
mined based on the specific identification method.
Summarized investee financial information – The following tables
present the investee level summarized financial information of the Company’s
equity method investments ($ in thousands):
As of December 31,
Balance Sheets
Total assets
Total liabilities
Noncontrolling interests
Total equity
2016
2015
$ 2,803,411 $ 3,597,587
768,622
19,208
2,809,757
683,079
23,544
2,096,788
For the Years Ended December 31,
2016
2015
2014
Income Statements
Revenues
Expenses
Net income attributable to
parent entities
$ 272,281
(227,720)
$ 481,224
(245,968)
$ 626,039
(185,603)
42,209
234,529
440,210
During the year ended December 31, 2015, the Company sold a
commercial operating property for $68.5 million to a newly formed uncon-
solidated entity in which the Company owns a 50.0% equity interest (refer to
Note 4). The Company recognized a gain on sale of $13.6 million, reflecting
the Company’s share of the interest sold to a third party, which was recorded
as “Income from sales of real estate” in the Company’s consolidated state-
ments of operations. The venture placed financing on the property and
proceeds from the financing were distributed to its members. Net pro-
ceeds received by the Company were $55.4 million, which was net of the
Company’s $13.6 million non-cash equity contribution to the venture and
inclusive of a $21.0 million distribution from the financing proceeds. This
entity is not a VIE and the Company does not have a controlling interest due
to shared control of the entity with its partner.
During the year ended December 31, 2014, the Company contrib-
uted land to a newly formed unconsolidated entity in which the Company
received an initial equity interest of 85.7%. As of December 31, 2016, this
entity is not a VIE and the Company does not have a controlling inter-
est due to shared control of the entity with the partner. Additionally, the
Company committed to provide $45.7 million of mezzanine financing to
the entity. As of December 31, 2015, the loan balance was $33.7 million and
is included in “Loans receivable and other lending investments, net” on
the Company’s consolidated balance sheets. In September 2016, the entity
secured non- recourse financing from a third-party lender, paid off in full
the mezzanine loan from the Company and distributed the excess proceeds
from the financing to the partners. The Company received a distribution in
excess of its carrying value and recorded equity in earnings of $11.6 million.
The Company has no further obligation nor intention to fund the venture
in the future. Subsequent to the distribution of the financing proceeds,
the operating agreement of the entity was amended and the Company
retained a 50% interest in the entity. During the years ended December 31,
2016, 2015 and 2014, the Company recorded $3.6 million, $3.9 million and
$0.6 million of interest income, respectively. As of December 31, 2016 and
2015, the Company had a recorded equity interest of zero and $6.3 mil-
lion, respectively.
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 are based on its ownership percentage in the entity. During the
year ended December 31, 2014, as a result of the transaction, the Company
recorded an additional provision of $2.8 million in “Provision for (recovery
of) loan losses” in its consolidated statements of operations. In 2016, the
Company purchased the units of another member in the entity for $1.9 million
that increased its equity interest to 20.1%. Also during 2016, the Company
recorded a $3.6 million impairment in equity in earnings due to a reduction
in the estimated fair value of the underlying property. As of December 31,
2016 and 2015, the Company had a recorded equity interest of $26.4 million
and $24.0 million, respectively.
62
Note 8 – Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following
items ($ in thousands):
As of December 31,
Intangible assets, net(1)
Other receivables(2)
Other assets
Restricted cash
Leasing costs, net(3)
Corporate furniture, fixtures and equipment, net(4)
Deferred expenses and other assets, net
2016
$ 63,098
52,820
39,591
25,883
12,566
5,691
$ 199,649
2015
$ 71,446
22,557
36,999
26,657
19,393
4,405
$ 181,457
Intangible assets – The estimated expense from the amortization
of lease incentives and in-place leases for each of the five succeeding fiscal
years is as follows ($ in thousands):
2017
2018
2019
2020
2021
$2,484
2,135
2,097
2,068
2,022
Note 9 – Loan Participations Payable, net
Explanatory Notes:
The Company’s loan participations payable, net were as follows
($ in thousands):
Loan participations payable(1)
Debt discounts and deferred financing costs, net
Total loan participations payable, net
Carrying Value as of
December 31,
2016
$ 160,251
(930)
$ 159,321
December 31,
2015
$ 153,000
(914)
$ 152,086
Explanatory Note:
(1) As of December 31, 2016, the Company had three loan participations payable with a
weighted average interest rate of 4.8%. As of December 31, 2015, the Company had
two loan participations payable with a weighted average interest rate of 4.6%.
Loan participations represent transfers of financial assets that
did not meet the sales criteria established under ASC Topic 860 and are
accounted for as loan participations payable, net as of December 31, 2016
and 2015. As of December 31, 2016 and 2015, the corresponding loan receiv-
able balances were $159.1 million and $153.0 million, respectively, and are
included in “Loans receivable and other lending investments, net” on the
Company’s consolidated balance sheets. The principal and interest due
on these loan participations payable are paid from cash flows of the cor-
responding loans receivable, which serve as collateral for the participations.
63
(1)
Intangible assets, net includes above market and in-place lease assets related to the
acquisition of real estate assets. This balance also includes a lease incentive asset
of $32.8 million (refer to Note 4). Accumulated amortization on intangible assets, net
was $32.6 million and $37.3 million as of December 31, 2016 and 2015, respectively. The
amortization of above market leases and lease incentive assets decreased operating
lease income in the Company’s consolidated statements of operations by $4.1 mil-
lion, $6.7 million and $8.6 million for the years ended December 31, 2016, 2015, and
2014, respectively. These intangible lease assets are amortized over the term of the
lease. The amortization expense for in-place leases was $1.9 million, $3.6 million and
$6.7 million for the years ended December 31, 2016, 2015, and 2014, respectively. These
amounts are included in “Depreciation and amortization” in the Company’s consoli-
dated statements of operations.
(2) As of December 31, 2016 and 2015, includes $26.0 million and $11.3 million, respectively,
of receivables related to the construction and development of an amphitheater (refer
to Note 5).
(3) Accumulated amortization of leasing costs was $6.7 million and $9.8 million as of
December 31, 2016 and 2015, respectively.
(4) Accumulated depreciation on corporate furniture, fixtures and equipment was
$9.0 million and $8.1 million as of December 31, 2016 and 2015, respectively.
Accounts payable, accrued expenses and other liabilities consist of
the following items ($ in thousands):
As of December 31,
Other liabilities(1)
Accrued expenses(2)
Accrued interest payable
Intangible liabilities, net(3)
Accounts payable, accrued expenses and
other liabilities
2016
$ 75,993
72,693
54,033
8,851
2015
$ 80,332
68,937
55,081
10,485
$ 211,570
$ 214,835
Explanatory Notes:
(1) As of December 31, 2016 and 2015, “Other liabilities” includes $24.0 million and
$14.5 million, respectively, related to profit sharing arrangements with developers for
certain properties sold. As of December 31, 2016 and 2015, includes $1.2 million and
$4.4 million, respectively, associated with “Real estate available and held for sale” on
the Company’s consolidated balance sheets. As of December 31, 2016 and 2015, “Other
liabilities” also includes $8.5 million and $6.6 million, respectively related to tax incre-
ment financing bonds which were issued by government entities to fund development
within two of the Company’s land projects. The amount represents tax assessments
associated with each project, which will decrease as the Company sells units.
(2) As of December 31, 2016 and 2015, accrued expenses includes $1.7 million and $5.3 mil-
lion, respectively, associated with “Real estate available and held for sale” on the
Company’s consolidated balance sheets.
(3) Intangible liabilities, net includes below market lease liabilities related to the acqui-
sition of real estate assets. Accumulated amortization on below market leases was
$6.4 million and $6.6 million as of December 31, 2016 and 2015, respectively. The amor-
tization of below market leases increased operating lease income in the Company’s
consolidated statements of operations by $1.1 million, $1.5 million and $2.5 million for
the years ended December 31, 2016, 2015 and 2014, respectively.
Note 10 – Debt Obligations, net
As of December 31, 2016 and 2015, the Company’s debt obligations were as follows ($ in thousands):
Carrying Value as of December 31,
2016
2015
Stated Interest Rates
Scheduled Maturity Date
Secured credit facilities and mortgages:
2015 $250 Million Secured Revolving Credit Facility
2016 Senior Secured Credit Facility
Mortgages collateralized by net lease assets
2012 Tranche A-2 Facility
Total secured credit facilities and mortgages
Unsecured notes:
5.875% senior notes
3.875% senior notes
3.00% senior convertible notes(5)
1.50% senior convertible notes(6)
5.85% senior notes
9.00% senior notes
4.00% senior notes(7)
7.125% senior notes
4.875% senior notes(8)
5.00% senior notes(9)
6.50% senior notes(10)
Total unsecured notes
Other debt obligations:
Trust preferred securities
64
Total debt obligations
Debt discounts and deferred financing costs, net
Total debt obligations, net(11)
Explanatory Notes:
$
–
498,648
249,987
–
748,635
–
–
–
–
99,722
275,000
550,000
300,000
300,000
770,000
275,000
2,569,722
100,000
3,418,357
(28,449)
$ 3,389,908
$ 250,000
–
239,547
339,717
829,264
261,403
265,000
200,000
200,000
99,722
275,000
550,000
300,000
300,000
770,000
–
3,221,125
100,000
4,150,389
(31,566)
$ 4,118,823
LIBOR + 2.75%(1)
LIBOR + 4.50%(2)
3.875%–7.26%(3)
LIBOR + 5.75%(4)
March 2018
July 2020
Various through 2032
–
5.875%
3.875%
3.00%
1.50%
5.85%
9.00%
4.00%
7.125%
4.875%
5.00%
6.50%
–
–
–
–
March 2017
June 2017
November 2017
February 2018
July 2018
July 2019
July 2021
LIBOR + 1.50%
October 2035
(1) The loan bears interest at the Company’s election of either (i) a base rate, which is the greater of (a) prime, (b) federal funds plus 0.5% or (c) LIBOR plus 1.0% and subject to a margin
ranging from 1.25% to 1.75%, or (ii) LIBOR subject to a margin ranging from 2.25% to 2.75%. At maturity, the Company may convert outstanding borrowings to a one year term loan
which matures in quarterly installments through March 2019.
(2) The loan bears interest at the Company’s election of either (i) a base rate, which is the greater of (a) prime, (b) federal funds plus 0.5% or (c) LIBOR plus 1.0% and subject to a margin of
3.5% or (ii) LIBOR subject to a margin of 4.5% with a minimum LIBOR rate of 1.0%.
(3) As of December 31, 2016 and 2015, includes a loan with a floating rate of LIBOR plus 2.00%. As of December 31, 2016, the weighted average interest rate of these loans is 5.1%.
(4) The loan had a LIBOR floor of 1.25%.
(5) The Company’s 3.00% senior convertible fixed rate notes due November 2016 (“3.00% Convertible Notes”) were convertible at the option of the holders, into 85.0 shares per $1,000
principal amount of 3.00% Convertible Notes, at $11.77 per share at any time prior to the close of business on November 14, 2016. $9.6 million principal amount of the 3.00% Convertible
Notes were converted into 0.8 million shares of common stock.
(6) The Company’s 1.50% senior convertible fixed rate notes due November 2016 (“1.50% Convertible Notes”) were convertible at the option of the holders, into 57.8 shares per $1,000
principal amount of 1.50% Convertible Notes, at $17.29 per share at any time prior to the close of business on November 14, 2016. None of the 1.50% Convertible Notes were converted
into shares of common stock.
(7) The Company can prepay these senior notes without penalty beginning August 1, 2017.
(8) The Company can prepay these senior notes without penalty beginning January 1, 2018.
(9) The Company can prepay these senior notes without penalty beginning July 1, 2018.
(10) The Company can prepay these senior notes without penalty beginning July 1, 2020.
(11) The Company capitalized interest relating to development activities of $5.8 million, $5.3 million and $4.9 million for the years ended December 31, 2016 2015 and 2014, respectively.
Future Scheduled Maturities – As of December 31, 2016, future
scheduled maturities of outstanding debt obligations are as follows ($
in thousands):
2017(1)
2018
2019
2020
2021
Thereafter
Total principal maturities
Unamortized discounts and deferred
financing costs, net
Total debt obligations, net
Unsecured
Debt
$ 924,722 $
600,000
770,000
–
275,000
100,000
2,669,722
Secured
Debt
–
Total
$ 924,722
11,196 611,196
29,191 799,191
498,648 498,648
119,860 394,860
89,740 189,740
748,635 3,418,357
(18,426)
(28,449)
$ 2,651,296 $ 738,612 $ 3,389,908
(10,023)
Explanatory Note:
(1) The Company has $924.7 million of debt obligations maturing in three separate
tranches during 2017, and $311.2 million of other debt obligations maturing before the
end of February 2018, as listed in the debt obligations table above. The Company’s
plans to satisfy these obligations primarily consist of accessing the debt and/or equity
markets to obtain capital to satisfy the maturing obligations. In addition, management
intends to execute on its business strategy of disposing of assets and selling interests in
business lines as well as collecting loan repayments from borrowers to further gener-
ate available liquidity. Should these sources of capital not be sufficiently available,
the Company will slow its pace of making new investments and will need to identify
alternative sources of capital. As of February 23, 2017, the Company had approximately
$710.7 million of cash and available capacity under existing borrowing arrangements.
2016 Senior Secured Credit Facility – In June 2016, the Company
entered into a senior secured credit facility of $450.0 million (the “2016 Senior
Secured Credit Facility”). In August 2016, the Company upsized the facility
to $500.0 million. The initial $450.0 million of the 2016 Senior Secured Credit
Facility was issued at 99% of par and the upsize was issued at par. The
2016 Senior Secured Credit Facility bears interest at a floating rate of LIBOR
plus 4.50% with a 1.00% LIBOR floor. Subsequent to December 31, 2016, the
Company repriced the 2016 Senior Secured Credit Facility to LIBOR plus
3.75% with a 1.00% LIBOR floor. The 2016 Senior Secured Credit Facility is
collateralized 1.25x by a first lien on a fixed pool of assets. Proceeds from
principal repayments and sales of collateral are applied to amortize the
2016 Senior Secured Credit Facility. Proceeds received for interest, rent, lease
payments and fee income are retained by the Company. The Company
may also make optional prepayments, subject to prepayment fees, and is
required to repay 0.25% of the principal amount outstanding on the first
business day of each quarter beginning on October 3, 2016. Proceeds from
the 2016 Senior Secured Credit Facility, together with cash on hand, were
primarily used to repay in full the remaining $323.2 million 2012 Secured
Tranche A-2 Facility and repay the $245.0 million balance outstanding on
the 2015 Secured Revolving Credit Facility (as defined below).
In connection with the 2016 Senior Secured Credit Facility, the
Company incurred $4.5 million of lender fees, substantially all of which
was capitalized in “Debt obligations, net” on the Company’s consolidated
balance sheets. The Company also incurred $6.2 million in third party
fees, of which $4.3 million was capitalized in “Debt obligations, net” on the
Company’s consolidated balance sheets, as it related to new lenders, and
$1.9 million was recognized in “Other expense” in the Company’s consoli-
dated statements of operations as it related primarily to those lenders from
the original facility that modified their debt under the new facility.
2016 Secured Term Loan – In December 2016, the Company
arranged a $170.0 million delayed draw secured term loan (the “2016
Secured Term Loan”). The 2016 Secured Term Loan bears interest at a rate
of LIBOR + 1.50%. As of December 31, 2016, the Company had not yet drawn
on the 2016 Secured Term Loan.
2015 Secured Revolving Credit Facility – In March 2015, the
Company entered into a secured revolving credit facility with a maximum
capacity of $250.0 million (the “2015 Secured Revolving Credit Facility”).
Borrowings under this credit facility bear interest at a floating rate indexed
to one of several base rates plus a margin which adjusts upward or down-
ward based upon the Company’s corporate credit rating. An undrawn credit
facility commitment fee ranges from 0.375% to 0.5%, based on average
utilization each quarter. During the year ended December 31, 2016, the
weighted average cost of the credit facility was 3.19%. Commitments under
the revolving facility mature in March 2018. At maturity, the Company may
convert outstanding borrowings to a one year term loan which matures in
quarterly installments through March 2019. As of December 31, 2016, the
Company had $250.0 million of borrowing capacity available under the
2015 Secured Revolving Credit Facility.
2012 Secured Credit Facilities – In March 2012, the Company
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 accrued interest at a rate of LIBOR + 4.00% (the “2012 Secured
Tranche A-1 Facility”), and a $470.0 million 2012 A-2 tranche due March
2017, which accrued interest at a rate of LIBOR + 5.75% (the “2012 Secured
Tranche A-2 Facility,” together the “2012 Secured Credit Facilities”). The 2012
A-1 and A-2 tranches were issued at 98.0% of par and 98.5% of par, respec-
tively, and both tranches included a LIBOR floor of 1.25%.
The 2012 Secured Tranche A-1 Facility was fully repaid in August
2013. In June 2016, proceeds from the 2016 Senior Secured Credit Facility were
used to repay in full the remaining 2012 Secured Tranche A-2 Facility. During
the years ended December 31, 2016, 2015 and 2014, repayments of the 2012
Secured Tranche A-2 Facility prior to maturity resulted in losses on early
extinguishment of debt of $1.2 million, $0.3 million and $1.5 million, respec-
tively, related to the accelerated amortization of discounts and unamortized
deferred financing fees on the portion of the facility that was repaid. These
amounts are included in “Loss on early extinguishment of debt, net” in the
Company’s consolidated statements of operations.
Unsecured Notes – In March 2016, the Company repaid its
$261.4 million principal amount of 5.875% senior unsecured notes at maturity
using available cash. In addition, the Company issued $275.0 million prin-
cipal amount of 6.50% senior unsecured notes due July 2021. Proceeds from
the offering were primarily used to repay in full the $265.0 million principal
amount of senior unsecured notes due July 2016 and repay $5.0 million of the
2015 Secured Revolving Credit Facility. In addition, the Company retired its
$200.0 million principal amount of 3.0% senior unsecured convertible notes
due November 2016 with available cash after the conversion of $9.6 million
principal amount into 0.8 million shares of the Company’s common stock. The
Company also repurchased and retired its $200.0 million principal amount
of 1.50% senior unsecured convertible notes due November 2016 using
available cash. During the year ended December 31, 2016, repayments of
unsecured notes prior to maturity resulted in losses on early extinguishment
of debt of $0.4 million. This amount is included in “Loss on early extinguish-
ment of debt, net” in the Company’s consolidated statements of operations.
65
Encumbered/Unencumbered Assets – As of December 31, 2016 and 2015, the carrying value of the Company’s encumbered and unencumbered
assets by asset type are as follows ($ in thousands):
As of December 31,
2016
2015
Real estate, net
Real estate available and held for sale
Land and development, net
Loans receivable and other lending investments, net(1)(2)
Other investments
Cash and other assets
Total
Encumbered Assets
$ 881,212
–
35,165
172,581
–
–
$ 1,088,958
Unencumbered
Assets
$ 610,540
83,764
910,400
1,142,050
214,406
639,588
$ 3,600,748
Encumbered Assets
$ 816,721
10,593
17,714
170,162
22,352
–
$ 1,037,542
Unencumbered
Assets
$ 777,262
126,681
984,249
1,314,823
231,820
1,008,415
$ 4,443,250
66
Explanatory Notes:
(1) As of December 31, 2016 and 2015, the amounts presented exclude general reserves for loan losses of $23.3 million and $36.0 million, respectively.
(2) As of December 31, 2016 and 2015, the amounts presented exclude loan participations of $159.1 million and $153.0 million, respectively.
Debt Covenants
The Company’s outstanding unsecured debt securities contain
corporate level covenants that include a covenant to maintain a ratio of
unencumbered assets to unsecured indebtedness of at least 1.2x and a
covenant not to incur additional indebtedness (except for incurrences of
permitted debt), if on a pro forma basis, the Company’s consolidated fixed
charge coverage ratio, determined in accordance with the indentures gov-
erning the Company’s debt securities, is 1.5x or lower. If any of the Company’s
covenants are breached and not cured within applicable cure periods, the
breach could result in acceleration of its debt securities unless a waiver or
modification is agreed upon with the requisite percentage of the bond-
holders. If the Company’s ability to incur additional indebtedness under the
fixed charge coverage ratio is limited, the Company is permitted to incur
indebtedness for the purpose of refinancing existing indebtedness and for
other permitted purposes under the indentures.
The Company’s 2016 Senior Secured Credit Facility and the 2015
Secured Revolving Credit Facility contain certain covenants, including cov-
enants 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 2016 Senior Secured Credit Facility requires the Company
to maintain collateral coverage of at least 1.25x outstanding borrowings
on the facility. The 2015 Secured Revolving Credit Facility is secured by a
borrowing base of assets and requires the Company to maintain both col-
lateral coverage of at least 1.5x outstanding borrowings on the facility and
a consolidated ratio of cash flow to fixed charges of at least 1.5x. The 2015
Secured Revolving Credit Facility does not require that proceeds from the
borrowing base be used to pay down outstanding borrowings provided
the collateral coverage remains at least 1.5x outstanding borrowings on the
facility. To satisfy this covenant, the Company has the option to pay down
outstanding borrowings or substitute assets in the borrowing base. In addi-
tion, for so long as the Company maintains its qualification as a REIT, the
2016 Senior Secured Credit Facility and the 2015 Secured Revolving Credit
Facility permit the Company to distribute 100% of its REIT taxable income on
an annual basis (prior to deducting certain cumulative net operating loss
(“NOL”) carryforwards). The Company may not pay common dividends if it
ceases to qualify as a REIT.
The Company’s 2016 Senior Secured Credit Facility and the 2015
Secured Revolving Credit Facility contain cross default provisions that
would allow the lenders to declare an event of default and accelerate the
Company’s indebtedness to them if the Company fails to pay amounts due
in respect of its other recourse indebtedness in excess of specified thresholds
or if the lenders under such other indebtedness are otherwise permitted to
accelerate such indebtedness for any reason. The indentures governing
the Company’s unsecured public debt securities permit the bondholders to
declare an event of default and accelerate the Company’s indebtedness to
them if the Company’s other recourse indebtedness in excess of specified
thresholds is not paid at final maturity or if such indebtedness is accelerated.
Note 11 – Commitments and Contingencies
Unfunded Commitments – The Company generally funds construc-
tion and development loans and build-outs of space in real estate assets
over a period of time if and when the borrowers and tenants meet estab-
lished 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 fund-
ing 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 arrangements as Discretionary
Fundings. Finally, the Company has committed to invest capital in several
real estate funds and other ventures. These arrangements are referred to
as Strategic Investments.
As of December 31, 2016, the maximum amount of fundings 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(1)
Real
Estate
Other
Investments
Total
$ 366,287
–
$ 366,287
$ 14,616
–
$ 14,616
$ 25,574
45,540
$ 71,114
$ 406,477
45,540
$ 452,017
Performance-Based
Commitments
Strategic Investments
Total(2)
Explanatory Notes:
(1) Excludes $158.7 million of commitments on loan participations sold that are not the
obligation of the Company.
(2) The Company did not have any Discretionary Fundings as of December 31, 2016.
Other Commitments – Total operating lease expense for the years
ended December 31, 2016, 2015 and 2014 was $5.9 million, $6.0 million and
$5.8 million, respectively. Future minimum lease obligations under non-
cancelable operating leases are as follows ($ in thousands):
2017
2018
2019
2020
2021
Thereafter
$5,463
4,552
3,692
3,696
1,439
3,752
Legal Proceedings – The Company and/or one or more of its sub-
sidiaries is party to various pending litigation matters that are considered
ordinary routine litigation incidental to the Company’s business as a finance
and investment company focused on the commercial real estate industry,
including loan foreclosure and foreclosure-related proceedings. In addition
to such matters, the Company is a party to the following legal proceedings:
Shareholder Action
On March 7, 2014, a shareholder action purporting to assert deriva-
tive, class and individual claims was filed in the Circuit Court for Baltimore
City, Maryland naming the Company, a number of our current and former
senior executives (including our chief executive officer) and current and
former directors as defendants. The complaint sought unspecified dam-
ages and other relief and alleged breach of fiduciary duty, breach of
contract and other causes of action arising out of shares of our common
stock issued by the Company to our senior executives pursuant to restricted
stock unit awards granted in December 2008 and modified in July 2011. On
October 30, 2014, the Circuit Court granted the Company’s motion to dismiss
all of plaintiffs’ claims in this action. Plaintiffs appealed the dismissal of their
claims and, on January 28, 2016, the Maryland Court of Special Appeals
affirmed the order of the Circuit Court. Plaintiffs filed a petition for certiorari
with the Maryland Court of Appeals, which agreed to hear the appeal. On
January 20, 2017, the Maryland Court of Appeals (Maryland’s highest court)
issued its opinion affirming the dismissal of all of plaintiffs’ claims against
the Company and the other defendants.
U.S. Home Corporation (“Lennar”) v. Settlers Crossing, LLC, et al. (Civil
Action No. DKC 08-1863)
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 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 is entitled to specific performance and
awarded damages 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; plus (iv) actual and rea-
sonable attorneys’ fees and costs incurred by the Company in connection
with the litigation. Lennar appealed the Court’s judgment and has posted
an appeal bond. The Court granted Lennar’s motion to stay the judgment
pending appeal and also clarified the judgment that the unpaid amount
will accrue simple interest at a rate of 12% annually, including while the
appeal is pending. In the pending appeal before the United States Court
of Appeals for the Fourth Circuit, oral argument is scheduled to be held on
March 23, 2017. There can be no assurance as to the timing or actual receipt
by the Company of amounts awarded by the Court or the outcome of the
appeal. A third party purchased a participation interest in the Company’s
original loan and as of December 31, 2016 holds a 4.3% participation inter-
est in all proceeds.
On a quarterly basis, the Company evaluates developments in
legal proceedings that could require a liability to be accrued and/or dis-
closed. 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 proper-
ties the subject of, any pending legal proceeding that would have a material
adverse effect on the Company’s consolidated financial statements.
67
Note 12 – 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 components of
economic risk: interest rate risk, credit risk and market risk. The Company
is subject to interest rate risk to the degree that its interest-bearing liabili-
ties 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 invest-
ments due to changes in interest rates or other market factors, including the
rate of prepayments of principal and the value of the collateral underlying
loans, the valuation of 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 geographic
region, or have similar economic features that would cause their ability to
meet contractual obligations, including those to the Company, to be similarly
affected by changes in economic conditions.
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, 2016, the only states with a concentration greater than 10.0%
were New York with 19.0% and California with 13.0%. As of December 31,
2016, the Company’s portfolio contains concentrations in the following asset
types: land 22.4%, office/industrial 22.9%, hotel 12.5%, entertainment/leisure
10.6%, condominium 10.0% and mixed use/mixed collateral 10.0%.
The Company underwrites the credit of prospective borrowers 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 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 a material adverse
effect on the Company. As of December 31, 2016, the Company’s five largest
borrowers or tenants collectively accounted for approximately 18.4% of the
Company’s 2016 revenues, of which no single customer accounts for more
than 5.9%.
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 operat-
ing 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 bal-
ance sheets as of December 31, 2016 and 2015 ($ in thousands):
Derivative Assets as of December 31,
Derivative Liabilities as of December 31,
2016
2015
2016
2015
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
68
Derivatives Designated in Hedging
Relationships
Foreign exchange contracts
Other Assets
$
–
Other Assets
$
39
Interest rate swaps
Total
Derivatives not Designated in Hedging
Relationships
Foreign exchange contracts
Interest rate cap
Total
N/A
Other Assets
Other Assets
–
–
$
$ 702
25
$ 727
Other
Liabilities
Other
Liabilities
N/A
–
39
$
Other Assets
Other Assets
$ 378
1,105
$ 1,483
N/A
N/A
$ 8
39
$ 47
$ –
–
$ –
N/A
$ –
Other
Liabilities
N/A
N/A
131
$ 131
$ –
–
$ –
The tables below present the effect of the Company’s derivative financial instruments in the consolidated statements of operations and the con-
solidated statements of comprehensive income (loss) for the years ended December 31, 2016, 2015 and 2014 ($ in thousands):
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)
Derivatives Designated in
Hedging Relationships
Location of Gain (Loss)
Recognized in Income
For the Year Ended December 31, 2016
Interest rate cap
Interest rate cap
Interest rate swaps
Interest rate swaps
Foreign exchange contracts
For the Year Ended December 31, 2015
Interest rate cap
Interest rate cap
Interest rate swaps
Interest rate swap
Interest Expense
Earnings from equity investments
Interest Expense
Earnings from equity investments
Earnings from equity investments
Interest Expense
Earnings from equity investments
Interest Expense
Earnings from equity method
investments
Foreign exchange contracts
Earnings from equity method
For the Year Ended December 31, 2014
Interest rate cap
Interest rate cap
Interest rate cap
Interest rate swaps
Interest rate swap
investments
Interest Expense
Other Expense
Earnings from equity method
investments
Interest Expense
Earnings from equity method
investments
Foreign exchange contracts
Earnings from equity method
investments
$
–
(4)
(175)
94
(167)
–
(13)
(537)
(528)
(124)
–
(2,984)
(9)
(970)
(753)
(471)
$ (185)
(3)
(32)
(378)
–
(626)
(1)
170
(464)
–
(56)
–
–
(6)
(420)
–
Derivatives not Designated in
Hedging Relationships
Interest rate cap
Foreign exchange contracts
Location of Gain or (Loss)
Recognized in Income
Other Expense
Other Expense
Amount of Gain or (Loss) Recognized in Income
For the Years Ended December 31,
2016
$ (1,080)
1,115
2015
$ (3,671)
2,403
Foreign Exchange Contracts – The Company is exposed to fluctua-
tions 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 investments. Foreign exchange con-
tracts 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 trans-
lation adjustment. The ineffective portion of the change in fair value of the
derivatives is recognized directly in earnings. Amounts are reclassified out of
Accumulated Other Comprehensive Income into earnings when the hedged
foreign entity is either sold or substantially liquidated. As of December 31,
2016, the Company had the following outstanding foreign currency deriva-
tives that were used to hedge its net investments in foreign operations that
were designated (Rs and $ in thousands):
Derivative Type
Sells Indian rupee
(“INR”)/Buys USD
Forward
Notional
Amount
Notional
(USD Equivalent)
Maturity
Rs 350,000
$5,089
April 2017
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(3,634)
N/A
N/A
N/A
N/A
2014
$ (1,347)
7,257
69
For derivatives not designated as net investment hedges, the changes in the fair value of the derivatives are reported in the Company’s consoli-
dated statements of operations within “Other Expense.” As of December 31, 2016, the Company had the following outstanding foreign currency derivatives
that were used to hedge its net investments in foreign operations that were not designated ($, €, and £ in thousands):
Derivative Type
Sells euro (“EUR”)/Buys USD Forward
Sells pound sterling (“GBP”)/Buys USD Forward
Notional Amount
€6,300
£3,400
Notional
(USD Equivalent)
$7,095
$4,427
Maturity
January 2017
January 2017
The Company marks its foreign investments each quarter based on current exchange rates and records the gain or loss through “Other expense” in
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, $(0.1) million and $0.1 million
during the years ended December 31, 2016, 2015 and 2014, respectively, in its consolidated statements of operations.
Interest Rate Hedges – For derivatives designated as cash flow 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
the Company’s consolidated statements of operations. The Company entered into an interest rate swap to convert its variable rate debt to fixed rate on a
$28.0 million secured term loan maturing in 2019. As of December 31, 2016, the Company had the following outstanding interest rate swap that was used
to hedge its variable rate debt that was designated as a cash flow hedge ($ in thousands):
Derivative Type
Interest rate swap
Notional Amount
$26,396
Variable Rate
LIBOR + 2.00%
Fixed Rate
3.47%
Effective Date
October 2012
Maturity
November 2019
70
For derivatives not designated as cash flow 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 2014, in connection with the full repayment and
termination of one of the Company’s credit facilities, 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 $3.6 million recorded
as a component of “Other expense” in the Company’s consolidated statements of operations for the year ended December 31, 2014. As of December 31,
2016, the Company had the following outstanding interest rate cap that was used to hedge its variable rate debt that was not designated as a cash flow
hedge ($ 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 $0.5 million
relating to other cash flow hedges will be reclassified from “Accumulated
other comprehensive income (loss)” into earnings.
Credit Risk-Related Contingent Features – The Company has
agreements with each of its derivative counterparties that contain a provi-
sion 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.
The Company reports derivative instruments on a gross basis in the
consolidated financial statements. In connection with its foreign currency
derivatives which were in a liability position as of December 31, 2016 and
2015, the Company has posted collateral of $0.4 million and $1.0 million,
respectively, and is included in “Deferred expenses and other assets, net” on
the Company’s consolidated balance sheets. The Company’s net exposure
under these contracts was zero as of December 31, 2016.
Note 13 – Equity
Preferred Stock – The Company had the following series of Cumulative Redeemable and Convertible Perpetual Preferred Stock outstanding as
of December 31, 2016 and 2015:
Shares Issued and
Outstanding
(in thousands)
4,000
5,600
4,000
3,200
5,000
4,000
25,800
Par Value
$0.001
0.001
0.001
0.001
0.001
0.001
Cumulative Preferential Cash Dividends(1)(2)
Liquidation
Preference(3)(4)
$25.00
25.00
25.00
25.00
25.00
50.00
Rate per Annum
8.00%
7.875%
7.80%
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
Series
D
E
F
G
I
J (convertible)
Explanatory Notes:
(1) Holders of shares of the Series D, E, F, G, I and J preferred stock are entitled to receive dividends, when and as declared by the Company’s 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 applicable dividend payment date falls or on another date designated by the Company’s Board of Directors 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, 2016 and 2015. The Company declared and paid dividends of $9.0 million on its Series J Convertible Perpetual Preferred Stock during the years
ended December 31, 2016 and 2015, respectively. The character of the 2016 dividends are as follows: 47.30% is a capital gain distribution, of which 76.15% represents unrecaptured
section 1250 gain and 23.85% long term capital gain, and 52.70% is ordinary income. All 2015 dividends qualified as a return of capital for tax reporting purposes. There are no divi-
dend arrearages on any of the preferred shares currently outstanding.
(3) The Company may, at its option, redeem the Series D, E, F, G, and I Preferred Stock, in whole or in part, at any time and from time to time, for cash at a redemption price equal to 100%
of the liquidation preference of $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.
(4) Each share of the Series J Preferred Stock is convertible at the holder’s option at any time, initially into 3.9087 shares of the Company’s common stock (equal to an initial conversion price
of approximately $12.79 per share), subject to specified adjustments. The Company may not redeem the Series J Preferred Stock prior to March 15, 2018. On or after March 15, 2018, the
Company may, at its option, redeem the Series J Preferred Stock, in whole or in part, at any time and from time to time, for cash at a redemption price equal to 100% of the liquidation
preference of $50.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.
71
High Performance Unit Program
In May 2002, the Company’s shareholders approved the iStar HPU
Program. The program entitled 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 performance
thresholds and were 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
were paid on the Company’s common stock. Each of these three plans had
5,000 shares of High Performance common stock associated with it, which
was recorded as a separate class of stock within shareholders’ equity on the
Company’s consolidated balance sheets. High Performance common stock
carried 0.25 votes per share. Net income allocable to common shareholders
is reduced by the HPU holders’ share of earnings.
In August 2015, the Company repurchased and retired all of its
outstanding 14,888 HPUs, representing approximately 2.8 million common
stock equivalents. The Company repurchased these HPUs at fair value from
current and former employees through an arms-length exchange offer. HPU
holders could have elected to receive $9.30 in cash or 0.7 shares of iStar
common stock, or a combination thereof, per common stock equivalent
underlying the HPUs. Approximately 37% of the outstanding HPUs were
exchanged for $9.8 million in cash and approximately 63% of the outstand-
ing HPUs were exchanged for 1.2 million shares of iStar common stock with
a fair value of $15.2 million, representing the number of shares issued at
the closing price of the Company’s common stock on August 13, 2015. The
transaction value in excess of the HPUs carrying value of $9.8 million was
recorded as a reduction to retained earnings (deficit) in the Company’s
consolidated statements of changes in equity.
Dividends – To maintain its qualification as a REIT, the Company
must annually distribute, at a minimum, an amount equal to 90% of its tax-
able income, excluding net capital gains, and must distribute 100% of its
taxable income (including net capital gains) to eliminate corporate federal
income taxes payable by the REIT. The Company has recorded NOLs and
may record NOLs 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 qualifica-
tion. As of December 31, 2015, the Company had $902.9 million of NOL
72
carryforwards at the corporate REIT level that can generally be used to offset
both ordinary taxable income and capital gain net income in future years.
The NOL carryforwards will expire beginning in 2029 and through 2035 if
unused. The amount of NOL carryforwards as of December 31, 2016 will
be determined upon finalization of the Company’s 2016 tax return. Because
taxable income differs from cash flow from operations due to non-cash
revenues and expenses (such as depreciation and certain asset impair-
ments), in certain circumstances, the Company may generate operating
cash flow in excess of its dividends, or alternatively, may need to make divi-
dend payments in excess of operating cash flows. The 2016 Senior Secured
Credit Facility and the 2015 Secured Revolving Credit Facility permit the
Company to distribute 100% of its REIT taxable income on an annual basis
(prior to deducting certain cumulative NOL carryforwards), as long as the
Company maintains its REIT qualification. The 2016 Senior Secured Credit
Facility and the 2015 Secured Revolving Credit Facility restrict the Company
from paying any common dividends if it ceases to qualify as a REIT. The
Company did not declare or pay any common stock dividends for the years
ended December 31, 2016 and 2015.
Stock Repurchase Program – In February 2016, after having
substantially utilized the remaining availability previously authorized, the
Company’s Board of Directors authorized a new $50.0 million stock repur-
chase program. After having substantially utilized the availability authorized
in February 2016, the Company’s Board of Directors authorized an increase
to the stock repurchase program to $50.0 million, effective August 4, 2016.
The program authorizes the repurchase of common stock from time to time
in open market and privately negotiated purchases, including pursuant to
one or more trading plans. During the year ended December 31, 2016, the
Company repurchased 10.2 million shares of its outstanding common stock
for $98.4 million, at an average cost of $9.67 per share. During the year
ended December 31, 2015, the Company repurchased 5.7 million shares of its
outstanding common stock for $70.4 million, at an average cost of $12.25 per
share. As of December 31, 2016, the Company had remaining authorization
to repurchase up to $50.0 million of common stock available to repurchase
under its stock repurchase program.
Accumulated Other Comprehensive Income (Loss) – “Accumulated
other comprehensive income (loss)” reflected in the Company’s shareholders’
equity is comprised of the following ($ in thousands):
As of December 31,
Unrealized gains (losses) on available-for-sale
securities
Unrealized gains (losses) on cash flow hedges
Unrealized losses on cumulative translation
adjustment
Accumulated other comprehensive income (loss)
2016
2015
$ 149
27
$ (125)
(690)
(4,394)
$ (4,218)
(4,036)
$ (4,851)
Note 14 – Stock-Based Compensation Plans and Employee Benefits
Stock-Based Compensation – The Company recorded stock-based
compensation expense, including the effect of performance incentive plans
(see below), of $10.9 million, $12.0 million and $13.3 million, respectively, for
the years ended December 31, 2016, 2015 and 2014 in “General and admin-
istrative” in the Company’s consolidated statements of operations. As of
December 31, 2016, there was $1.9 million of total unrecognized compensa-
tion cost related to all unvested restricted stock units that is expected to be
recognized over a weighted average remaining vesting/service period of
2.07 years.
Performance Incentive Plans – The Company’s Performance
Incentive Plan (“iPIP”) 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. The following is a summary of
granted iPIP points.
– In May 2014, the Company granted 73 iPIP points for the initial
2013–2014 investment pool.
– In January 2015, the Company granted an additional 10 points
for the 2013–2014 investment pool and 34 iPIP points for the
2015–2016 investment pool.
– In January 2016, the Company granted an additional 10 iPIP
points in the 2013–2014 investment pool and an additional 40
iPIP points in the 2015–2016 investment pool.
– In June 2016, the Company granted an additional 2.5 points in
the 2015–2016 investment pool.
All decisions regarding the granting of points under iPIP are made
at the discretion of the Company’s Board of Directors or a committee of the
Board of Directors. The fair value of points is 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 (“TSR”) as compared to the average
TSR of the NAREIT All REIT Index and the Russell 2000 Index during the rel-
evant 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 per-
formance of such index. Point holders will not receive a distribution until the
Company has received a full return of its capital plus a preferred return dis-
tribution, which is based on a preferred return hurdle rate of 9% per annum.
Subject to certain vesting and employment 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” in the Company’s consolidated statements of
operations. As of December 31, 2016 and 2015, the Company had accrued
compensation costs relating to iPIP of $22.4 million and $16.6 million, respec-
tively, which are included in “Accounts payable, accrued expenses and other
liabilities” on the Company’s consolidated balance sheets.
Long-Term Incentive Plan – The Company’s shareholders approved
the Company’s 2009 Long-Term Incentive Plan (the “2009 LTIP”) which is
designed to provide incentive compensation for officers, key employees,
directors and advisors of the Company. Shareholders approved amend-
ments to the 2009 LTIP and the performance-based provisions of the 2009
LTIP in 2014. The 2009 LTIP provides for awards of stock options, shares of
restricted stock, phantom shares, restricted stock units, dividend equiva-
lent rights and other share-based performance awards. A maximum of
8,000,000 shares of common stock may be awarded under the 2009 LTIP.
All awards under the 2009 LTIP are made at the discretion of the Company’s
Board of Directors or a committee of the Board of Directors.
As of December 31, 2016, an aggregate of 3.6 million shares remain
available for issuance pursuant to future awards under the Company’s 2009
Long-Term Incentive Plans.
Restricted Share Issuances – During the year ended December 31,
2016, the Company granted 92,057 shares of common stock to certain
employees under the 2009 LTIP 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 share awards was $8.46 and the total fair
value was $0.7 million. The shares are fully-vested and 58,667 shares were
issued net of statutory minimum required tax withholdings. The employees
are restricted from selling these shares for up to 18 months from the date
of grant.
Restricted Stock Units
Changes in non-vested restricted stock units (“Units”) during the
year ended December 31, 2016 were as follows (number of shares and $ in
thousands, except per share amounts):
Non-vested as of December 31, 2015
Granted
Vested
Forfeited
Non-vested as of December 31, 2016
Number of
Shares
426
223
(277)
(82)
290
Weighted
Average
Grant
Date Fair
Value Per
Share
$ 12.90
$ 10.11
$ 10.91
$ 17.49
$ 11.33
Aggregate
Intrinsic
Value
$ 4,991
$ 3,578
The total fair value of Units vested during the years ended
December 31, 2016, 2015 and 2014 was $2.9 million, $0.1 million and $39.2 mil-
lion, respectively. The weighted-average grant date fair value per share of
Units granted during the years ended December 31, 2016, 2015 and 2014 was
$10.11, $13.65 and $15.31, respectively.
As of December 31, 2016, 38,070 market-based Units did not meet
the criteria to vest. The market-condition was based on the Company’s
TSR measured over a performance period ending on the vesting date of
December 31, 2016. 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 beginning 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 were
below the minimum threshold payout level, resulting in no payout of awards.
2016 Restricted Stock Unit Activity – During the year ended
December 31, 2016, the Company granted new stock-based compensation
awards to certain employees in the form of long-term incentive awards,
comprised of the following:
– 20,000 fully-vested shares of the Company’s common stock
granted on June 15, 2016. Under this award, 12,030 shares were
issued as of that date, after deducting shares for minimum
required statutory withholdings. In addition, 80,000 service-
based Units were granted on June 15, 2016, 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 vest in equal annual installments over four years on each
anniversary of the grant date, if the employee remains employed
by the Company on the vesting date, subject to certain acceler-
ated vesting rights. Upon vesting of these Units, the holder will
receive shares of the Company’s common stock in the amount
of the vested Units, net of statutory minimum required tax with-
holdings. 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, 2016, 80,000 of such service-based Units
were outstanding.
– 122,817 service-based Units granted on January 29, 2016, repre-
senting 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 installment on December 31, 2018, 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, 2016, 109,417
of such service-based Units were outstanding.
73
Directors’ Awards – Non-employee directors are awarded CSEs
or restricted share awards at the time of the annual shareholders’ meet-
ing in consideration for their services on the Company’s Board of Directors.
During the year ended December 31, 2016, the Company awarded to non-
employee Directors 12,953 CSEs and 72,537 restricted shares of common
stock at a fair value per share of $9.65 at the time of grant. These CSEs and
restricted shares have a vesting term of 7.5 months and one year, respec-
tively. 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 CSEs and restricted shares of common stock vest and are settled. As of
December 31, 2016, a combined total of 333,384 CSEs and restricted shares
of common stock granted to members of the Company’s Board of Directors
remained outstanding under the Company’s Non-Employee Directors
Deferral Plan, with an aggregate intrinsic value of $4.1 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 completion of three
months of continuous service with the Company. Each participant may con-
tribute on a pretax basis up to the maximum percentage of compensation
and dollar amount permissible under Section 402(g) of the Internal Revenue
Code not to exceed the limits of Code Sections 401(k), 404 and 415. At the
discretion of the Company’s 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 compensation. The Company made gross
contributions of $1.0 million, $1.0 million and $0.9 million, respectively, for the
years ended December 31, 2016, 2015 and 2014.
Note 15 – Earnings Per Share
Earnings per share (“EPS”) is calculated using the two-class method,
which allocates earnings among common stock and participating securities
to calculate EPS when an entity’s capital structure includes either two or more
classes of common stock or common stock and participating securities. HPU
holders were current and former Company employees who purchased high
performance common stock units under the Company’s High Performance
Unit Program. These HPU units were treated as a separate class of common
stock. All of the Company’s outstanding HPUs were repurchased and retired
on August 13, 2015 (refer to Note 13).
74
As of December 31, 2016, the Company had the following additional
stock-based compensation awards outstanding:
– 39,071 target amount of market-based Units granted on
January 30, 2015, representing the right to receive an equiva-
lent number of shares of the Company’s common stock (after
deducting shares for minimum required statutory withholdings)
if and when the Units vest. The performance is based on the
Company’s TSR, measured over a performance period ending
on December 31, 2017, which is the date the awards cliff vest.
Vesting will range from 0% to 200% of the target amount of
the awards, depending on the Company’s TSR performance
relative to the NAREIT All REITs Index (one-half of the target
amount of the award) and the Russell 2000 Index (one-half of
the target amount of the award) 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 calculation of the performance of such index.
To the extent Units vest based on the Company’s TSR perfor-
mance, holders will receive an equivalent number of shares of
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 market-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 market-based awards
were 0.75% for risk-free interest rate and 28.14% for expected
stock price volatility.
– 56,020 service-based Units granted on January 30, 2015, repre-
senting 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 installment on December 31, 2017, 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.
– 4,751 service-based Units granted on various dates, represent-
ing 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 have an original vesting term of three years. Upon vest-
ing 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.
The following table presents a reconciliation of income (loss) from operations used in the basic and diluted EPS calculations ($ in thousands, except
for per share data):
For the Years Ended December 31,
Income (loss) from operations
Income from sales of real estate
Net (income) loss attributable to noncontrolling interests
Preferred dividends
Income (loss) from operations attributable to iStar Inc. and allocable to common shareholders, HPU holders
and Participating Security Holders for basic earnings per common share(1)
Add: Effect of joint venture shares
Add: Effect of 1.50% senior convertible unsecured notes
Add: Effect of 3.00% senior convertible unsecured notes
2016
$ (5,114)
105,296
(4,876)
(51,320)
$ 43,986
7
3,907
6,239
2015
$ (99,973)
93,816
3,722
(51,320)
$ (53,755)
–
–
–
2014
$ (74,178)
89,943
704
(51,320)
$ (34,851)
–
–
–
Income (loss) from operations attributable to iStar Inc. and allocable to common shareholders, HPU holders
and Participating Security Holders for diluted earnings per common share(1)
$ 54,139
$ (53,755)
$ (34,851)
Explanatory Note:
(1) For the year ended December 31, 2016, includes income from operations allocable to Participating Security Holders of $14 and $13 on a basic and dilutive basis.
For the Years Ended December 31,
Earnings allocable to common shares:
Numerator for basic earnings per share:
2016
2015
2014
Income (loss) from operations attributable to iStar Inc. and allocable to common shareholders
Net income (loss) attributable to iStar Inc. and allocable to common shareholders
$ 43,972
$ 43,972
$ (52,675)
$ (52,675)
$ (33,722)
$ (33,722)
Numerator for diluted earnings per share:
Income (loss) from operations attributable to iStar Inc. and allocable to common shareholders
Net income (loss) attributable to iStar Inc. and allocable to common shareholders
$ 54,126
$ 54,126
$ (52,675)
$ (52,675)
$ (33,722)
$ (33,722)
Denominator for basic and diluted earnings per share:
Weighted average common shares outstanding for basic earnings per common share
Add: Effect of assumed shares issued under treasury stock method or restricted stock units
Add: Effect of joint venture shares
Add: Effect of 1.50% senior convertible unsecured notes
Add: Effect of 3.00% senior convertible unsecured notes
Weighted average common shares outstanding for diluted earnings per common share
Basic earnings per common share:
Income (loss) from operations attributable to iStar Inc. and allocable to common shareholders
Net income (loss) attributable to iStar Inc. and allocable to common shareholders
Diluted earnings per common share:
Income (loss) from operations attributable to iStar Inc. and allocable to common shareholders
Net income (loss) attributable to iStar Inc. and allocable to common shareholders
For the Years Ended December 31,
Earnings allocable to HPUs(1):
Numerator for basic and diluted earnings per HPU share:
Net income (loss) attributable to iStar Inc. and allocable to HPU holders
Denominator for basic and diluted earnings per HPU share:
Weighted average HPUs outstanding for basic and diluted earnings per share
Basic and diluted earnings per HPU share:
Net income (loss) attributable to iStar Inc. and allocable to HPU holders
Explanatory Note:
(1) All of the Company’s outstanding HPUs were repurchased and retired on August 13, 2015 (refer to Note 13).
73,453
84
298
9,868
14,764
98,467
$ 0.60
$ 0.60
$ 0.55
$ 0.55
84,987
–
–
–
–
84,987
$
$
$
$
(0.62)
(0.62)
(0.62)
(0.62)
85,031
–
–
–
–
85,031
$
$
$
$
(0.40)
(0.40)
(0.40)
(0.40)
2016
2015
2014
$ –
–
$ –
$ (1,080)
$ (1,129)
9
15
$ (120.00)
$ (75.27)
75
For the years ended December 31, 2016, 2015 and 2014, 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 Notes:
2016(1)
–
–
15,635
–
2015(1)
298
16,992
15,635
11,567
2014(1)
298
16,992
15,635
11,567
(1) For the years ended December 31, 2015 and 2014, the effect of the Company’s unvested Units, market-based Units and CSEs were anti-dilutive.
(2) For the year ended December 31, 2016, the effect of 16 and 125 unvested time and market-based Units, respectively, were anti-dilutive.
Note 16 – Fair Values
Fair value represents the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The 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 acces-
sible 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., sup-
ported 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 spe-
cific 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.
76
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):
As of December 31, 2016
Recurring basis:
Derivative assets(1)
Derivative liabilities(1)
Available-for-sale securities(1)
Non-recurring basis:
Impaired loans(2)
Impaired real estate(3)
As of December 31, 2015
Recurring basis:
Derivative assets(1)
Derivative liabilities(1)
Available-for-sale securities(1)
Non-recurring basis:
Impaired loans(4)
Explanatory Notes:
Quoted market
prices in active
markets (Level 1)
Total
Fair Value Using
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs (Level 3)
$
727
47
21,666
7,200
3,063
$ 1,522
131
1,161
3,200
$ –
–
–
–
–
$ –
–
–
–
$ 727
47
–
–
–
$ 1,522
131
–
$
–
–
21,666
7,200
3,063
$
–
–
1,161
–
3,200
(1) The fair value of the Company’s derivatives are based upon widely accepted valuation techniques utilized by a third-party specialist using observable inputs such as interest rates
and contractual cash flow and are classified as Level 2. The fair value of the Company’s available-for-sale securities are based upon unadjusted third-party broker quotes and are
classified as Level 3.
(2) The Company recorded a provision for loan losses on one loan with a fair value of $5.2 million using an appraisal based on market comparable sales. In addition, the Company
recorded a recovery of loan losses on one loan with a fair value of $2.0 million based on proceeds to be received.
(3) The Company recorded an impairment on one real estate asset with a fair value of $3.1 million based on a discount rate of 11% using discounted cash flows over a two year sellout period.
(4) The Company recorded a provision for loan losses on one loan with a fair value of $3.2 million based on a discounted cash flow analysis using a discount rate of 14%.
The following table summarizes changes in Level 3 available-for-
sale securities reported at fair value on the Company’s consolidated balance
sheets for the years ended December 31, 2016 and 2015 ($ in thousands):
Beginning balance
Purchases
Repayments
Unrealized gains recorded in other comprehensive
income
Ending balance
2016
$ 1,161
20,240
(10)
2015
$ 1,167
–
(10)
275
$ 21,666
4
$ 1,161
Fair values of financial instruments – The Company’s estimated fair
values of its loans receivable and other lending investments and outstand-
ing debt was $1.5 billion and $3.6 billion, respectively, as of December 31,
2016 and $1.6 billion and $4.3 billion, respectively, as of December 31, 2015.
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 finan-
cial 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, there-
fore, 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 table
above are described more fully below for each type of asset and liability.
Derivatives – The Company uses interest rate swaps, interest rate
caps and foreign exchange contracts to manage its interest rate and for-
eign currency risk. The valuation of these instruments is determined using
discounted cash flow analysis on the expected cash flows of each deriva-
tive. This analysis reflects the contractual terms of the derivatives, including
the period to maturity, and uses observable market-based inputs, includ-
ing interest rate curves, foreign exchange rates, and implied volatilities.
The Company incorporates credit valuation adjustments to appropriately
reflect both its own non-performance risk and the respective counterparty’s
non-performance risk in the fair value measurements. In adjusting the fair
value of its derivative contracts for the effect of non-performance risk, the
Company has considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts and
guarantees. 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 underlying 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 methodology 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 proper-
ties, 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, costs of completion and the inventory sell out pricing and
timing. 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 gener-
ally 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 unob-
servable inputs, which may include discount rates, capitalization rates and
the timing and amounts of estimated future cash flows. For income produc-
ing 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 market rate growth,
operating costs, costs of completion and the inventory sell out pricing and
timing. 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 significant
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 3 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 determines best reflect current
market interest rates that would be offered for loans with similar charac-
teristics 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.
77
Debt obligations, net – For debt obligations traded in secondary
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 hier-
archy. For debt obligations not traded in secondary markets, the Company
determines fair value using a discounted cash flow methodology, whereby
contractual cash flows are discounted at rates that management deter-
mines best reflect current market interest rates that would be charged for
debt with similar characteristics and credit quality. The Company has deter-
mined 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 17 – Segment Reporting
The Company has determined that it has four reportable segments based on how management reviews and manages its business. These report-
able segments include: Real Estate Finance, Net Lease, Operating Properties and Land and Development. 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 segment includes the
Company’s activities and operations related to the ownership of properties generally leased to single corporate tenants. The Operating Properties segment
includes the Company’s activities and operations related to its commercial and residential properties. The Land and Development segment includes the
Company’s activities related to its developable land portfolio.
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 and
Development
Corporate/
Other(1)
Company
Total
78
Year Ended December 31, 2016
Operating lease income
Interest income
Other income
Land development revenue
Earnings (loss) from equity method investments
Income from sales of real estate
Total revenue and other earnings
Real estate expense
Land development cost of sales
Other expense
Allocated interest expense
Allocated general and administrative(2)
Segment profit (loss)(3)
Other significant non-cash items:
Recovery of loan losses
Impairment of assets
Depreciation and amortization
Capitalized expenditures
Year Ended December 31, 2015
Operating lease income
Interest income
Other income
Land development revenue
Earnings (loss) from equity method investments
Income from sales of real estate
Total revenue and other earnings
Real estate expense
Land development cost of sales
Other expense
Allocated interest expense
Allocated general and administrative(2)
Segment profit (loss)(3)
Other significant non-cash items:
Provision for loan losses
Impairment of assets
Depreciation and amortization
Capitalized expenditures
$
–
$ 148,002
$ 64,593
129,153
4,658
–
–
–
133,811
–
–
(2,719)
(57,787)
(15,311)
57,994
$
$
(12,514)
–
–
–
–
$
134,687
9,737
–
–
–
144,424
–
–
(2,291)
(57,109)
(13,128)
71,896
$
$
36,567
–
–
–
–
1,633
–
3,567
21,138
174,340
(19,058)
–
–
–
33,216
–
33,863
75,357
207,029
(82,401)
–
–
$
423
–
3,170
88,340
30,012
8,801
130,746
(36,963)
(62,007)
–
$
$
(65,880)
(17,585)
71,817
(23,156)
(6,574)
$ 94,898
(34,888)
(13,693)
(16,805)
$
–
4,829
34,049
3,667
$
–
5,855
17,887
56,784
$
–
3,800
1,296
109,548
$ 151,481
$ 77,454
–
357
–
5,221
40,082
197,141
(21,855)
–
–
–
34,637
–
1,663
53,734
167,488
(95,888)
–
–
$
$
(66,504)
(15,569)
93,213
(28,014)
(6,988)
$ 36,598
–
–
38,138
4,195
$
–
5,935
24,548
84,103
$
785
–
1,219
100,216
16,683
–
118,903
(29,007)
(67,382)
$
$
–
(32,087)
(11,488)
(21,061)
–
4,589
1,422
94,971
$
–
–
3,838
–
9,907
–
13,745
–
–
(3,164)
(39,687)
(19,975)
$ (49,081)
$
–
–
1,097
–
–
–
$
3,981
–
8,586
–
12,567
–
–
(4,083)
(40,925)
(22,091)
$ (54,532)
$
–
–
1,139
–
$ 213,018
129,153
46,515
88,340
77,349
105,296
659,671
(138,422)
(62,007)
(5,883)
(221,398)
(73,138)
$ 158,823
$
(12,514)
14,484
54,329
169,999
$ 229,720
134,687
49,931
100,216
32,153
93,816
640,523
(146,750)
(67,382)
(6,374)
(224,639)
(69,264)
$ 126,114
$
36,567
10,524
65,247
183,269
Year Ended December 31, 2014
Operating lease income
Interest income
Other income
Land development revenue
Earnings (loss) from equity method investments
Income from sales of real estate
122,704
21,217
–
–
–
Total revenue and other earnings
143,921
Real estate expense
Land development cost of sales
Other expense
Allocated interest expense(5)
Allocated general and administrative(2)
Segment profit (loss)(3)
Other significant non-cash items:
Recovery of loan losses
Impairment of assets(5)
Depreciation and amortization(5)
Capitalized expenditures
As of December 31, 2016
Real estate
Real estate, net
Real estate available and held for sale
Total real estate
Land and development, net
Loans receivable and other lending investments, net
Other investments
Total portfolio assets
Cash and other assets
Total assets
As of December 31, 2015
Real estate
–
–
(243)
(58,043)
(13,211)
72,424
(1,714)
–
–
–
–
–
–
–
$
$
$
1,450,439
–
$ 1,450,439
Real estate, net
Real estate available and held for sale
$
Total real estate
Land and development, net
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
Land and
Development
Corporate/
Other(1)
Company
Total
$
–
$ 151,934
$ 90,331
$
–
4,437
–
3,260
6,206
165,837
(22,967)
–
–
(72,089)
(16,603)
54,178
–
3,689
38,841
3,933
$
$
$ 1,015,590
1,284
1,016,874
–
–
92,669
$ 1,109,543
–
42,000
–
1,669
83,737
217,737
(113,504)
–
–
(39,535)
(9,608)
$ 55,090
$
–
8,131
32,142
61,186
$ 476,162
82,480
558,642
–
–
3,583
$ 562,225
835
–
3,327
15,191
14,966
–
34,319
(26,918)
(12,840)
–
(29,432)
(13,062)
(47,933)
$
–
–
10,052
–
75,010
–
85,062
–
–
(6,097)
(25,384)
(22,489)
$ 31,092
–
$
22,814
1,440
80,119
1,148
$
–
–
–
945,565
–
84,804
$ 1,030,369
33,350
$ 33,350
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
1,601,985
–
$ 1,601,985
$ 1,112,479
–
1,112,479
$ 481,504
137,274
618,778
$
–
–
–
$
–
–
–
–
1,001,963
–
–
–
–
–
–
69,096
$ 1,181,575
11,124
$ 629,902
100,419
$ 1,102,382
73,533
$ 73,533
$ 243,100
122,704
81,033
15,191
94,905
89,943
646,876
(163,389)
(12,840)
(6,340)
(224,483)
(74,973)
$ 164,851
$
(1,714)
34,634
73,571
145,238
$ 1,491,752
83,764
1,575,516
945,565
1,450,439
214,406
4,185,926
639,588
$ 4,825,514
$ 1,593,983
137,274
1,731,257
1,001,963
1,601,985
254,172
4,589,377
1,008,415
$ 5,597,792
79
(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 $10.9 million, $12.0 million and $13.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.
(3) The following is a reconciliation of segment profit to net income (loss) ($ in thousands):
For the Years Ended December 31,
Segment profit
Less: Recovery of (provision for) loan losses
Less: Impairment of assets
Less: Depreciation and amortization
Less: Stock-based compensation expense
Less: Income tax benefit (expense)
Less: Loss on early extinguishment of debt, net
Net income (loss)
2016
$ 158,823
12,514
(14,484)
(54,329)
(10,889)
10,166
(1,619)
$ 100,182
2015
$ 126,114
(36,567)
(10,524)
(65,247)
(12,013)
(7,639)
(281)
$ (6,157)
2014
$ 164,851
1,714
(34,634)
(73,571)
(13,314)
(3,912)
(25,369)
$ 15,765
Note 18 – 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
2016:
Revenue
Net income (loss)
Earnings per common share data(1):
Net income (loss) attributable to iStar Inc.
Basic(2)
Diluted(2)
Earnings per share
Basic
Diluted
Weighted average number of common shares
Basic
Diluted
2015:
Revenue
Net income (loss)
Earnings per common share data(1):
Net income (loss) attributable to iStar Inc.
Basic(3)
Diluted(3)
Earnings per share
Basic
Diluted
Weighted average number of common shares
Basic
Diluted
Earnings per HPU share data(1)(4):
Net income (loss) attributable to iStar Inc.
Basic and diluted
Earnings per share
Basic and diluted
Weighted average number of HPU shares – basic and diluted
80
December 31,
September 30,
June 30,
March 31,
$ 106,811
$ (8,461)
$ 128,668
$ 58,155
$ 126,903
$ 59,787
$ 114,644
$ (9,299)
$ (19,252)
$ (19,252)
$ 46,292
$ 51,453
$ 38,112
$ 43,293
$ (21,187)
$ (21,187)
$
$
(0.27)
(0.27)
$
$
0.65
0.44
$
$
0.52
0.37
$
$
(0.27)
(0.27)
71,603
71,603
71,210
115,666
73,984
118,510
77,060
77,060
$ 172,025
$ 19,974
$ 120,487
$ 5,958
$ 109,185
$ (19,776)
$ 112,857
$ (12,313)
$ 7,685
$ 7,684
$ (6,072)
$ (6,072)
$ (30,950)
$ (30,950)
$ (22,553)
$ (22,553)
$
$
0.09
0.09
$
$
(0.07)
(0.07)
$
$
(0.36)
(0.36)
$
$
(0.26)
(0.26)
83,162
83,581
85,766
85,766
85,541
85,541
85,497
85,497
$
$
–
–
–
$
(94)
$ (1,027)
$
(749)
$ (13.41)
7
$ (68.47)
15
$ (49.93)
15
Explanatory Notes:
(1) Basic and diluted EPS are computed independently based on the weighted-average shares of common stock and stock equivalents outstanding for each period. Accordingly, the sum
of the quarterly EPS amounts may not agree to the total for the year.
(2) For the quarter ended June 30, 2016 includes net income attributable to iStar Inc. and allocable to Participating Security Holders of $20 and $14 on a basic and dilutive basis,
respectively.
(3) For the quarter ended December 31, 2015 includes net income attributable to iStar Inc. and allocable to Participating Security Holders of $5 and $5 on a basic and dilutive basis,
respectively.
(4) All of the Company’s outstanding HPUs were repurchased and retired on August 13, 2015 (refer to Note 13).
Performance Graph
Dividends
The following graph compares the total cumulative shareholder
returns on our Common Stock from December 31, 2011 to December 31, 2016
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”).
$269.75
$154.06
$174.56
$100.0
$153.53
$115.98
$128.74
$258.03
$201.05
$174.54
$221.74
$197.91
$176.94
$242.93
$233.84
$198.09
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
iStar
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 periods indicated.
Quarter Ended
December 31
September 30
June 30
March 31
2016
High
$ 12.83
$ 11.21
$ 10.68
$ 11.64
2015
Low
$ 10.45
$ 9.10
$ 8.74
$ 7.59
High
$ 13.34
$ 13.85
$ 14.77
$ 14.17
Low
$ 11.55
$ 11.54
$ 12.89
$ 12.40
On February 16, 2017, the closing sale price of the common stock as
reported by the NYSE was $11.75. The Company had 1,842 holders of record
of common stock as of February 16, 2017.
The Company’s Board of Directors has not established any mini-
mum 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 nec-
essarily equal net income as calculated in accordance with accounting
principles generally accepted in the United States (“GAAP”)), determined
without regard to the deduction for dividends paid and excluding any net
capital gains. The Company has recorded net operating losses (“NOLs”)
and may record NOLs 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
S&P 500 Financials
Holders of common stock, certain unvested restricted stock awards
and common share equivalents will be entitled to receive distributions if, as
and when the Company’s Board of Directors authorizes and declares distri-
butions. However, rights to distributions may be subordinated to the rights
of holders of preferred stock, when preferred stock is issued and outstand-
ing. In addition, the 2016 Senior Secured Credit Facility and 2015 Secured
Revolving Credit Facility (see “Financial Statements and Supplemental
Data – Note 10”) permit the Company to distribute 100% of its REIT taxable
income on an annual basis for so long as the Company maintains its quali-
fication as a REIT. The 2016 Senior Secured Credit Facility and 2015 Secured
Revolving Credit Facility generally restrict the Company from paying any
common dividends if it ceases to qualify as a REIT. In any liquidation, dis-
solution or winding up of the Company, each outstanding share of common
stock 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, 2016 and 2015. The Company declared
and paid dividends of $8.0 million, $11.0 million, $7.8 million, $6.1 million,
$9.4 million, and $9.0 million on its Series D, E, F, G, I, and J preferred stock,
respectively, during each of the years ended December 31, 2016 and 2015.
The character of the 2016 dividends are as follows: 47.30% is a capital gain
distribution, of which 76.15% represents unrecaptured section 1250 gain and
23.85% long term capital gain, and 52.70% is ordinary income. All 2015 divi-
dends qualified as return of capital for tax reporting purposes. There are no
dividend arrearages on any of the preferred shares currently outstanding.
Distributions to shareholders will generally be taxable as ordinary
income, although all or a portion of such distributions may be designated by
the Company as capital gain or may constitute a tax-free return of capital.
The Company annually furnishes to each of its shareholders a statement
setting forth the distributions paid during the preceding year and their char-
acterization as ordinary income, capital gain or return of capital.
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 NOL 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.
81
directors and officers
Directors
Executive Officers
Executive Vice Presidents
82
Jay Sugarman
Chairman & Chief Executive Officer,
iStar Inc.
Clifford De Souza (1) (3)
Director, iStar Inc.
Robert W. Holman, Jr. (2) (3)
Chairman & Chief Executive Officer,
National Warehouse Investment
Company
Robin Josephs (2) (3)
Lead Director, iStar Inc.
Dale Anne Reiss (1) (3)
Global & Americas
Director of Real Estate,
Ernst & Young, LLP (Retired)
Barry W. Ridings (1) (2)
Senior Advisor
Lazard Freres & Co. LLC
(1) Audit Committee
(2) Compensation Committee
(3) Nominating & Governance Committee
Jay Sugarman
Chairman & Chief Executive Officer
Elisha J. Blechner
Head of Portfolio Management
Nina B. Matis
Chief Investment Officer &
Chief Legal Officer
Geoffrey G. Jervis
Chief Operating Officer &
Chief Financial Officer
Chase S. Curtis, Jr.
Credit
Timothy Doherty
Investments
Karl Frey
Land & Development
Barclay G. Jones III
Investments
Michelle M. MacKay
Investments
Steven Magee
Land & Development
David M. Sotolov
Investments / Head of West Coast
Originations
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
83
1777 Ala Moana Boulevard
Honolulu, HI 96815
Tel: 808.800.4320
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
As of March 8, 2017, the
Company had 194 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 16, 2017, 9:00 a.m. ET
Harvard Club of New York City
35 West 44th Street
New York, NY 10036
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
Investor Information Services
iStar Inc. 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
Email:
investors@istar.com
iStar Website:
www.istar.com
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Annual Report 2016