2019
ANNUAL
REPORT
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Letter to
shareholders
2019 was an exceptional year for our company.
net lease and sale-leasebacks and accelerate our
We took bold steps to reshape our business and
ground lease business, becoming the recognized
focus on a new strategy that could deliver higher
expert in the field, and demonstrating to the market
returns to shareholders and better utilize iStar’s
our ability to reach scale and create above-market
unique skills and history of innovation. Our goals
returns. It was critical to capture the attention of
were ambitious, and I am proud to share with you
both customers and investors in 2019, and our results
the significant success our team was able to deliver.
show we were able to do both.
At the beginning of the year we announced that
Safehold’s ground lease portfolio grew almost
we would go “all-in” and put iStar’s full capabilities
$1.8b to $2.7b, far above the targets we set, and
behind our first-of-its-kind ground lease company,
shareholder returns were well over 100%, making
Safehold. As its investment manager and largest
Safehold the best-performing REIT in the industry.
shareholder, we firmly believed the opportunity to
We worked with a wide range of customers,
reinvent this sector held enormous potential, and
from local operating specialists to large-scale
despite the expected skepticism from traditional
global investment funds, while also introducing
quarters, we became convinced its return potential
the Safehold story to an increasing number of
far outweighed the risk-return profile of other
potential shareholders. Providing lower cost capital
available investment opportunities. Along the
to customers and building one of the safest real
way, we also realized the scope of the opportunity
estate portfolios for our shareholders proved to be
required a more concerted effort on our part to
a winning combination, and we see a virtuous circle
knock down the prejudices of the past and share
developing where growth is driving a lower cost of
the very different vision we were pursuing. 2019
capital and a lower cost of capital is driving growth.
needed to be the year we put Safehold on the map
and our ground lease revolution in front of as many
During 2019 we also laid out a strong case for how
people as possible. At the same time, we also knew
best to value the growing portfolio of cash flows
we needed to highlight the embedded value of
our ground leases throw off, and how to think about
iStar’s existing portfolio of assets and make further
the overall value of the Safehold enterprise. We
progress reducing the legacy and non-core assets
have more work to do to help investors understand
that were taking up valuable management time
the full value of what Safehold is building, but
and attention.
the past year has been characterized by very
good progress.
The good news is we were able to make progress on
all of the above. It’s worth reviewing each of these
Highlight Portfolio Value While scaling Safehold
goals and our level of success in achieving them.
was job one, we also wanted to demonstrate
The Next Big Thing Our most important goal this
our existing business lines. To achieve this, we
year was to continue building “the next big thing”
executed our plans to unlock the value in two of
for iStar. We wanted to take our skills in finance,
our largest assets, recognizing almost $400m in
the increased value we had built up in parts of
gains. Our Preferred Freezer portfolio represented
and reduce fixed charges, and ultimately earn an
one of the highest quality master leases in the
upgrade in our credit ratings from S&P. Each of
cold storage space and we knew it had significant
these steps helped create a stronger foundation
value in excess of what the market seemed to give
for the future.
us credit for. A sale to Lineage Logistics enabled
us to monetize this asset and capture the sizable
What Matters Most The result of this considerable
value created during our holding period. Our
Bowlmor master leases also offered an opportunity
progress was the result that matters most, a material
increase in our share price, and shareholder returns
to highlight value that wasn’t readily apparent on
of 64% that placed us among the top performing
our balance sheet. By expanding and extending
REITs in 2019. We know this is the ultimate scorecard,
our relationship with the tenant, we were able to
and we are pleased that the work put in over the
recognize some $180m in built up value and create
past several years is now coming to fruition and
a longer lease term for each of our master leases.
generating increased value for our stakeholders.
These transactions and others helped drive earnings
out of legacy assets into Safehold’s lower risk, faster
to over $3.70 per share in 2019, and together with
growing business and to continue to highlight the
embedded gains in our SAFE investment, increased
value in our Safehold platform. This should in turn
our adjusted book value by over 80%.
increase the value of iStar’s current 31 million share
Our goal in 2020 is to continue redeploying capital
position in Safehold and further demonstrate its
Simplify and Strengthen Lastly, we knew we
significant value to iStar shareholders.
needed to give investors a clearer and simpler
way to see the potential value in our company
We deeply appreciate your support and look
and in our shares. This meant continuing to simplify
forward to continued progress in 2020.
the business by monetizing legacy assets and
providing strong catalysts for the share price to
grow. On the former, asset sales and accelerated
marketing efforts reduced the percentage of legacy,
non-core assets down to just 16% of the portfolio,
Jay Sugarman
with more progress on the horizon. For the latter,
Chairman & Chief Executive Officer
we raised our dividend by 11% and repurchased
9% of outstanding shares of common stock during
the year.
Based on the successes above, we were also able
to make several moves to strengthen the balance
sheet. A growing equity base, strong earnings and
a large pool of unencumbered assets enabled us
to lengthen debt maturities, lower interest costs
1
A ground-
breaking
year At the start of 2019 we
signaled the beginning
of a new era, with a new
mission to revolutionize
commercial real estate
ownership. By reinventing
and modernizing the ground
lease structure, we created
the opportunity for iStar
to once again be the best
in a big, growing market.
2
1
2
3
A 3-part strategy:
Scale a game-changing
ground lease platform
Focus management team and investment
resources around new core mission
Highlight embedded
value in our portfolio
Unlock value in portfolio
Buy back stock
Raise dividend
Simplify iStar’s business
Monetize legacy assets
Enhance capital structure
2019 was defined by progress in each key area of
our strategy, changing the direction of our business,
and accelerating our path to the future.
3
1
Safehold’s ground
lease platform scaled
#1
Performing REIT in
2019 (NYSE: SAFE)
based on TSR
118%
total SAFE
shareholder return
2019 was a transformational year for the modern
ground lease revolution. Commercial real estate
owners across nearly all property types began to
utilize the combination of capital efficiency, cost
efficiency and minimized risk inherent in Safehold’s
value-enhancing structure.
Building owners in over 30 key
U.S. markets are validating
our simple thesis: real estate
investors targeting a 15%+ return
on their equity shouldn’t own the
underlying land at a 5% ROE.
Safehold completed $1.8b
of deals, representing 187%
portfolio growth YOY
iStar’s unique skill sets and
history of innovation have
enabled us to unlock significant
value in a misunderstood asset
class. As Safehold’s founder,
investment manager and largest
shareholder (65.2% ownership
as of YE ’19), we are the biggest
beneficiary of Safehold’s success
and are poised to benefit as
Safehold continues to scale.
Investment in Safehold:
$1256
Market
value¹
+$1.1b
$745
Gross
book
value¹
$156
Gross
book
value¹
$144
Market
value¹
Note: (1) $ in millions. SAFE mark-to-market is based on the December 31, 2019
stock price of $40.30 with 31.2 million shares and December 31, 2018 stock price
of $18.81 with 7.6 million shares.
12/31/18 12/31/19
4
2
Value
highlighted
Highlighted & unlocked
portfolio value
Repurchased stock
Preferred Freezer:
Sold portfolio of seven cold
storage units for $440m,
generating a
$220m gain
Bowlero:
Expanded relationship with
$112m new investment and
extended lease terms to 2047
$180m gain
Safehold:
31.2m SAFE shares held on
the balance sheet for $745m
have a market value of $1.2b¹
$511m
unrealized gain
9%
of diluted shares outstanding
repurchased in 2019
Raised dividend
Annualized:
$0.40
+11%
$0.36
Note: (1) SAFE closed at $40.50 on December 31, 2019.
12/31/18
12/31/19
5
3 Business simplified
and enhanced
Streamlined iStar’s business, monetizing
legacy assets that distract from our
core mission.
Enhanced capital structure, strengthened
credit profile and lowered cost of capital
on a go forward basis.
2019 legacy asset monetization
at the end of 2018 legacy assets were
20%
of the overall portfolio
$250m
Proceeds
from sales of
legacy assets
$33m
Gains from sales
of legacy assets
16%
at the end of 2019
6
S&P
upgrade
30 month
runway
With no unsecured corporate
debt maturities
$1.6b
Shareholder equity gross of depreciation
and market value of SAFE
A good
start
82% 64%
increase in adjusted
common equity per
share in 2019¹
STAR total shareholder
return in 2019
Note: (1) Inclusive of SAFE market value; gross of depreciation, amortization and general reserves. Diluted for Series J Convertible
Preferreds. SAFE mark-to-market is based on the December 31, 2019 stock price of $40.30 with 31.2m shares and December 31, 2018
stock price of $18.81 with 7.6m shares. Based on STAR adj. gross book value per share of $11.05 at YE ’18 and $13.33 at YE ’19.
7
A bright
future
ahead
While 2019 was a major turning point for iStar and
Safehold, it is still only the beginning of what we’re
calling the modern ground lease revolution. With our
human and financial capital highly focused, we will
continue to scale our $2.7b ground lease platform,
targeting a potential $7t addressable market.
For investors, the Safehold platform offers a unique
combination of principal safety, growing income
streams and unrealized capital appreciation. With
a rapidly growing portfolio and the only institutional
platform focused on modernized ground leases, we
firmly believe the revolution has just begun.
8
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
(Mark One)
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-15371
_______________________________________________________________________________
iStar Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
1114 Avenue of the Americas, 39th Floor
New York, NY
(Address of principal executive offices)
95-6881527
(I.R.S. Employer
Identification Number)
10036
(Zip code)
Registrant's telephone number, including area code: (212) 930-9400
_______________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol(s)
Name of Exchange on which registered:
Common Stock, $0.001 par value
8.00% Series D Cumulative Redeemable
Preferred Stock, $0.001 par value
7.65% Series G Cumulative Redeemable
Preferred Stock, $0.001 par value
7.50% Series I Cumulative Redeemable
Preferred Stock, $0.001 par value
STAR
STAR-PD
STAR-PG
STAR-PI
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the registrant was required to file such reports); and (ii) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
As of June 30, 2019 the aggregate market value of iStar Inc. common stock, $0.001 par value per share, held by non-affiliates (1) of the registrant was
approximately $735.2 million, based upon the closing price of $12.42 on the New York Stock Exchange composite tape on such date.
As of February 21, 2020, there were 77,491,574 shares of common stock outstanding.
(1) For purposes of this Annual Report only, includes all outstanding common stock other than common stock held directly by the registrant's directors
and executive officers.
1.
Portions of the registrant's definitive proxy statement for the registrant's 2020 Annual Meeting, to be filed within 120 days after the close of the
registrant's fiscal year, are incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1a.
Risk Factors
Item 1b.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7a.
Item 8.
Item 9.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Equity and Related Share Matters
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplemental Data
Changes and Disagreements with Registered Public Accounting Firm on Accounting and Financial
Disclosure
Item 9a.
Controls and Procedures
Item 9b.
PART III
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance of the Registrant
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships, Related Transactions and Director Independence
Principal Registered Public Accounting Firm Fees and Services
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
Item 16.
SIGNATURES
Form10-K Summary
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PART I
Item 1. Business
Explanatory Note for Purposes of the "Safe Harbor Provisions" of Section 21E of the Securities Exchange Act of 1934, as
amended
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating
to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are
"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Forward-looking statements are included with respect to, among other things, iStar Inc.'s current business
plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified
by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would,"
"will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations
and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from
those contained in the forward-looking statements. Important factors that iStar Inc. believes might cause such differences are
discussed in the section entitled, "Risk Factors" in Part I, Item 1a of this Form 10-K or otherwise accompany the forward-looking
statements contained in this Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged
to read carefully all cautionary statements contained in this Form 10-K.
Overview
iStar Inc. (references to the "Company," "we," "us" or "our" refer to iStar Inc.) finances, invests in and develops real estate
and real estate related projects as part of its fully-integrated investment platform. The Company also manages entities focused on
ground lease ("Ground Lease") and net lease investments. The Company has invested over $40 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 reportable business segments are net lease, real estate finance, operating properties
and land and development.
1
As of December 31, 2019, based on our gross book value, including the carrying value of our equity method investments
exclusive of accumulated depreciation, our total investment portfolio has the following characteristics:
Net Lease: The net lease portfolio includes the Company's traditional net lease investments and its Ground Lease investments
made primarily through Safehold Inc. ("SAFE"), a publicly traded REIT focused exclusively on Ground Leases that we launched
in 2017 and manage pursuant to a management agreement, both of which we believe offer stable long-term cash flows. We own
our traditional net lease properties directly and through ventures that we manage. As of December 31, 2019, we owned
approximately 65.2% of SAFE's outstanding common stock. During the year ended December 31, 2019, the Company's largest
net lease tenant accounted for approximately 11.8% of the Company's revenues.
Real Estate Finance: The real estate finance portfolio is comprised of senior and mezzanine real estate loans that may be
either fixed-rate or variable-rate and are structured to meet the specific financing needs of borrowers. The Company's portfolio
also includes leasehold loans (including leasehold loans to SAFE's tenants), preferred equity investments and senior and
subordinated loans to business entities and may be either secured or unsecured. The Company's loan portfolio includes whole
loans and loan participations.
Operating Properties: The operating properties portfolio is comprised of commercial and residential properties, which
represent a pool of assets across a broad range of geographies and property types. The Company generally seeks to reposition or
redevelop its transitional properties with the objective of maximizing their value through the infusion of capital and/or concentrated
asset management efforts. The commercial properties within this portfolio include retail, hotel and other property types. The
residential properties within this portfolio are generally luxury condominium projects located in major U.S. cities where the
Company's strategy is to sell individual condominium units through retail distribution channels.
Land & Development: The land and development portfolio is primarily comprised of land entitled for master planned
communities and waterfront and urban infill land parcels located throughout the United States. Master planned communities
represent large-scale residential projects that the Company will entitle, plan and/or develop and may sell through retail channels
to homebuilders or in bulk ("MPCs"). The communities also typically have a smaller portion of their land reserved for future
commercial development. Waterfront parcels are generally entitled for residential projects and urban infill parcels are generally
entitled for mixed-use projects. The Company may develop these properties itself, or in partnership with commercial real estate
developers, or may sell the properties.
2
The Company's primary sources of revenues are rent and reimbursements that tenants pay to lease the Company's properties,
interest that borrowers pay on loans, land development revenue from lot and parcel sales, proceeds from asset sales and income
from management fees and equity investments.
Investment Strategy
Throughout our more than 20-year history, we have focused on providing capital to the commercial real estate sector in a
differentiated way that emphasizes custom-tailored solutions over commoditized products. We have adjusted the allocation of our
capital and resources from time to time based on market conditions. Our Ground Lease strategy is the most recent example of our
historical approach. We believe that investment and financing opportunities in the Ground Lease sector currently offer more
attractive risk adjusted returns than other investment opportunities, and should enable us to benefit from the unique insights and
competitive advantages we have gained through the launch of SAFE.
In originating new investments, the Company's strategy is to focus on the following:
• Targeting custom-tailored opportunities where customers require flexible financial solutions and "one-call"
responsiveness, such as a joint offering of a SAFE Ground Lease and an iStar leasehold loan;
• Acquiring a fee simple interest in a commercial property that we intend to bifurcate into a SAFE Ground Lease to be
acquired by SAFE and a leasehold interest which we may sell or hold for investment;
• Avoiding commodity businesses where there is significant direct competition from other providers of capital;
• Developing direct relationships with borrowers and corporate customers in addition to sourcing transactions through
intermediaries;
• Adding value beyond simply providing capital by offering borrowers and corporate customers specific lending and Ground
Lease expertise, flexibility, certainty of closing and continuing relationships beyond the closing of a particular transaction;
• Taking advantage of market anomalies in the real estate capital markets when, in the Company's view, credit is mispriced
by other providers of capital; and
• Evaluating relative risk adjusted returns across multiple investment markets.
We have been actively seeking to reduce the level of our "legacy assets," which refer primarily to properties that we took
back from defaulting borrowers in the financial crisis. As we sell these assets, we expect to use the net proceeds primarily to make
additional investments in our net lease business, including Ground Leases, and for general corporate purposes.
Financing Strategy
We use leverage to enhance our return on assets. Our principal financing sources are our revolving credit facility and term
loan, individual mortgage loans and unsecured bonds issued in capital markets transactions. We took advantage of favorable interest
rate and liquidity conditions in 2019 to refinance and pay down outstanding debt through the issuance of an aggregate of $1.325
billion of unsecured notes. The refinancings reduced our interest costs and improved our debt maturity profile. We have no corporate
debt maturities through September 2022. In addition, substantially all of our Series J preferred stock was converted by the holders
thereof into approximately 16.5 million shares of our common stock, which increased our equity base.
As a result of these and other transactions, the three principal national credit rating agencies have raised the ratings on our
corporate, senior unsecured and senior secured debt one or more times since the third quarter of 2017.
Going forward, the Company will seek to raise capital through a variety of means, which may include unsecured and secured
debt financing, debt refinancings, asset sales, sales of interests in business lines, issuances of equity, joint ventures and other third
party capital arrangements. A more detailed discussion of the Company's current liquidity and capital resources is provided in
Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Underwriting Process
The Company reviews investment opportunities with its investment professionals, as well as representatives from its legal,
credit, risk management and capital markets departments. The Company has developed a process for screening potential investments
called the Six Point Methodologysm. Through this proprietary process, the Company internally evaluates an investment opportunity
by: (1) evaluating the source of the opportunity; (2) evaluating the quality of the collateral, corporate credit or lessee, as well as
the market and industry dynamics; (3) evaluating the borrower equity, corporate sponsorship and/or guarantors; (4) determining
the optimal legal and financial structure for the transaction given its risk profile; (5) performing an alternative investment test;
and (6) evaluating the liquidity of the investment. The Company intends to use a similar screening methodology for leasehold
loans to tenants of SAFE and related party transactions with SAFE. The Company maintains an internal investment committee,
and certain investments, including related party transactions and leasehold loans to tenants of SAFE, are subject to the approval
of the Board of Directors or a committee thereof.
3
Hedging Strategy
The Company finances its business with a combination of fixed-rate and variable-rate debt and its asset base consists of
fixed-rate and variable-rate investments. Its variable-rate assets and liabilities are intended to be matched against changes in variable
interest rates. This means that as interest rates increase, the Company earns more on its variable-rate lending assets and pays more
on its variable-rate debt obligations and, conversely, as interest rates decrease, the Company earns less on its variable-rate lending
assets and pays less on its variable-rate debt obligations. When the Company's variable-rate debt obligations differ from its variable-
rate lending assets, the Company may utilize derivative instruments to limit the impact of changing interest rates on its net income.
The Company also uses derivative instruments to limit its exposure to changes in currency rates in respect of certain investments
denominated in foreign currencies. The derivative instruments the Company uses are typically in the form of interest rate swaps,
interest rate caps and foreign exchange contracts.
Policies with Respect to Other Activities
The Company's investment, financing and corporate governance policies (including conflicts of interests policies) are
managed under the ultimate supervision of the Company's Board of Directors. The Company can amend, revise or eliminate these
policies at any time without a vote of its shareholders. The Company intends to originate and manage investments in a manner
consistent with the requirements of the Internal Revenue Code of 1986, as amended (the "Code") for the Company to qualify as
a REIT.
Investment Restrictions or Limitations
The Company does not have any prescribed allocation among investments or product lines. Instead, the Company focuses
on corporate and real estate credit underwriting to develop an analysis of the risk/reward trade-offs in determining the pricing and
advisability of each particular transaction.
The Company believes that it is not, and intends to conduct its operations so as not to become, regulated as an investment
company under the Investment Company Act. The Company engages primarily in the non-investment company businesses of
investing in, financing and developing real estate and real estate-related projects, generally through subsidiaries and affiliated
companies, including SAFE. Subject to applicable limitations resulting from the Company's intentions to continue to qualify as
a REIT and remain exempt from registration as an investment company, the Company may make additional investments in the
securities of other REITs, other entities engaged in real estate activities or other issuers, including for the purpose of exercising
control over such entities.
Competition
The Company operates in a competitive market. See Item 1a—Risk factors—"We compete with a variety of financing and
leasing sources for our customers," for a discussion of how we may be affected by competition.
Regulation
The operations of the Company are subject, in certain instances, to supervision and regulation by state and federal
governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various
requirements and restrictions, which, among other things: (1) regulate credit granting activities; (2) establish maximum interest
rates, finance charges and other charges; (3) require disclosures to customers; (4) govern secured transactions; (5) set collection,
foreclosure, repossession and claims-handling procedures and other trade practices; (6) govern privacy of customer information;
and (7) regulate anti-terror and anti-money laundering activities. Although most states do not regulate commercial finance, certain
states impose limitations on interest rates and other charges and on certain collection practices and creditor remedies, and require
licensing of lenders and financiers and adequate disclosure of certain contract terms. The Company is also required to comply
with certain provisions of the Equal Credit Opportunity Act that are applicable to commercial loans.
In the judgment of management, existing statutes and regulations have not had a material adverse effect on the business
conducted by the Company. It is not possible at this time to forecast the exact nature of any future legislation, regulations, judicial
decisions, orders or interpretations, nor their impact upon the future business, financial condition or results of operations or prospects
of the Company.
The Company has elected and expects to continue to qualify to be taxed as a REIT under Section 856 through 860 of the
Code. As a REIT, the Company must generally distribute at least 90% of its net taxable income, excluding capital gains, to its
shareholders each year. In addition, the Company must distribute 100% of its net taxable income (including net capital gains) each
year to eliminate U.S. corporate federal income taxes payable by it. REITs are also subject to a number of organizational and
operational requirements in order to elect and maintain REIT qualification. These requirements include specific share ownership
tests and asset and gross income tests. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject
4
to U.S. federal income tax on its net taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as
a REIT, the Company may be subject to state and local taxes and to U.S. federal income tax and excise tax on its undistributed
income.
Code of Conduct
The Company has adopted a code of conduct that sets forth the principles of conduct and ethics to be followed by our
directors, officers and employees (the "Code of Conduct"). The purpose of the Code of Conduct is to promote honest and ethical
conduct, compliance with applicable governmental rules and regulations, full, fair, accurate, timely and understandable disclosure
in periodic reports, prompt internal reporting of violations of the Code of Conduct and a culture of honesty and accountability. A
copy of the Code of Conduct has been provided to each of our directors, officers and employees, who are required to acknowledge
that they have received and will comply with the Code of Conduct. A copy of the Company's Code of Conduct has been previously
filed with the SEC and is incorporated by reference in this Annual Report on Form 10-K as Exhibit 14.0. The Code of Conduct is
also available on the Company's website at www.istar.com. The Company will disclose to shareholders material changes to its
Code of Conduct, or any waivers for directors or executive officers, if any, within four business days of any such event. As of
December 31, 2019, there have been no amendments to the Code of Conduct and the Company has not granted any waivers from
any provision of the Code of Conduct to any directors or executive officers.
Employees
As of February 21, 2020, the Company had 155 employees and believes it has good relationships with its employees. The
Company's employees are not represented by any collective bargaining agreements.
Additional Information
We maintain a website at www.istar.com. The information on our website is not incorporated by reference in this report, and
our web address is included only as an inactive textual reference. In addition to this Annual Report on Form 10-K, the Company
files quarterly and special reports, proxy statements and other information with the SEC. Through the Company's corporate website,
www.istar.com, the Company makes available free of charge its annual proxy statement, annual reports to stockholders, annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically
files such material with, or furnishes it to, the SEC. These documents also may be accessed through the SEC's electronic data
gathering, analysis and retrieval system via electronic means, including on the SEC's homepage, which can be found at www.sec.gov.
Item 1a. Risk Factors
In addition to the other information in this report, you should consider carefully the following risk factors in evaluating an
investment in the Company's securities. Any of these risks or the occurrence of any one or more of the uncertainties described
below could have a material adverse effect on the Company's business, financial condition, results of operations, cash flows and
market price of the Company's common stock. The risks set forth below speak only as of the date of this report and the Company
disclaims any duty to update them except as required by law. For purposes of these risk factors, the terms "our Company," "we,"
"our" and "us" refer to iStar Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
Risks Related to Our Business
Changes in general economic conditions and other factors outside our control may adversely affect our business.
Our success is generally dependent upon economic conditions in the United States, and in particular, the geographic areas
in which our investments are located. Substantially all businesses, including ours, were negatively affected by the previous economic
recession and resulting illiquidity and volatility in the credit and commercial real estate markets. The commercial real estate and
credit markets remain volatile and sensitive to factors outside our control, including changes in interest rates, domestic political
conditions, geopolitical conditions and other factors. It is not possible for us to predict whether these trends will continue in the
future or quantify the impact of these or other trends on our financial results. Deterioration in any of such factors could have a
material adverse effect on our financial performance, liquidity and our ability to meet our debt obligations.
5
Our credit ratings will impact our borrowing costs.
Our borrowing costs and our access to the debt capital markets depend significantly on our credit ratings. Our unsecured
corporate credit ratings from major national credit rating agencies are currently below investment grade. Having below investment
grade credit ratings makes our borrowing costs higher than they would be with an investment grade rating and makes restrictive
covenants in our public debt instruments operative. These restrictive covenants are described below in "Covenants in our
indebtedness could limit our flexibility and adversely affect our financial condition."
Covenants in our indebtedness could limit our flexibility and adversely affect our financial condition.
Our outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of
unencumbered assets to unsecured indebtedness of at least 1.2x and a restriction on debt incurrence based upon the effect of the
debt incurrence on our fixed charge coverage ratio, subject to certain permitted debt baskets. 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. Limitations on our ability to incur new indebtedness
under the fixed charge coverage ratio may limit the amount of new investments we make.
Our revolving credit facility with a maximum capacity of $350.0 million (our "Revolving Credit Facility") and our $650.0
million senior term loan (our "Senior Term Loan") contain certain covenants, including covenants relating to collateral coverage,
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, our Senior Term Loan requires the Company to maintain collateral coverage of at least
1.25x outstanding borrowings on the facility and our Revolving Credit Facility 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. We
may not pay common dividends if the Company is in default under the Senior Term Loan or the Revolving Credit Facility or
would fail to comply with the covenants in such agreements after giving effect to the dividend.
Our Senior Term Loan and Revolving Credit Facility contain cross default provisions that would allow the lenders to declare
an event of default and accelerate our indebtedness to them if we fail to pay amounts due in respect of our other recourse indebtedness
in excess of specified thresholds or if the lenders under such other indebtedness are otherwise permitted to accelerate such
indebtedness for any reason. The indentures governing our unsecured public debt securities permit the bondholders to declare an
event of default and accelerate our indebtedness to them if our other recourse indebtedness in excess of specified thresholds is not
paid at final maturity or if such indebtedness is accelerated. The covenants described above could limit our flexibility and make
it more difficult and/or expensive to refinance our existing indebtedness. A default by us on our indebtedness would have a material
adverse effect on our business, liquidity and the market price of our common stock.
We have made a significant commitment to the Ground Lease business. Our future success will depend in large part on our
ability to execute our Ground Lease strategy, which is subject to risks.
In 2019, we announced that we would focus our business activities primarily on scaling SAFE's portfolio through our position
as SAFE's largest stockholder and investment manager and by offering leasehold financing and equity to Ground Lease customers.
We have made a significant investment in SAFE's common stock and have dedicated a significant majority of our personnel to
working on Ground Lease transactions. There is no assurance that we will be able to achieve our objectives for the Ground Lease
business. Our Ground Lease strategy is subject to a number of risks, including the following:
•
•
•
•
the size of the market for Ground Leases may not meet our estimates. Potential tenants may prefer to own both the land
and the improvements they intend to develop, rehabilitate or own. Negative publicity about the experience of tenants
with non-Safehold Ground Leases may also discourage potential tenants;
as and when interest rates increase, there may be less activity generally in real estate transactions, including leasing,
development and financing, and less financing available for SAFE to refinance its debt obligations or for potential tenants
to finance their leasehold interests;
if SAFE suffers adverse business developments, the market value of our investment in SAFE will likely decline and may
decline materially, the management fees we receive from SAFE may not grow as anticipated and/or SAFE may reduce
its distributions to stockholders, including us, all of which may adversely affect our stock price and our ability to pay
distributions;
there are potential conflicts of interests in our relationship with SAFE, as discussed further below under "There are various
conflicts of interest in our relationship with SAFE, including our executive officers and/or directors who are also officers
and/or directors of SAFE, which could result in decisions that are not in the best interests of our stockholders";
• we have waived or elected not to seek reimbursement in full for certain expenses that we have incurred on SAFE's behalf
•
while it is in its growth stage, and will likely continue to do so while we foster SAFE's growth; and
if we terminate our management agreement with SAFE for convenience, we will be prohibited from competing with
SAFE for one year after such termination.
6
We have significant indebtedness and funding commitments and limitations on our liquidity and ability to raise capital may
adversely affect us.
Sufficient liquidity is critical to our ability to grow and to meet our scheduled debt payments, make additional investments
in SAFE, pay distributions and satisfy funding commitments to borrowers. We have relied on proceeds from the issuance of
unsecured debt, secured borrowings, repayments from our loan assets and proceeds from asset sales to fund our operations and
other activities, and we expect to continue to rely primarily on these sources of liquidity for the foreseeable future. Our ability to
access capital in 2020 and beyond will be subject to a number of factors, many of which are outside of our control, such as general
economic conditions, changes in interest rates and conditions prevailing in the credit and real estate markets. There can be no
assurance that we will have access to liquidity when needed or on terms that are acceptable to us. We may also encounter difficulty
in selling assets or executing capital raising strategies on acceptable terms in a timely manner, which could impact our ability to
make scheduled repayments on our outstanding debt. Failure to repay or refinance our borrowings as they come due would be an
event of default under the relevant debt instruments, which could result in a cross default and acceleration of our other outstanding
debt obligations. Failure to meet funding commitments could cause us to be in default of our financing commitments to borrowers.
Any of the foregoing could have a material adverse effect on our business, liquidity and the market price of our common stock.
We may utilize derivative instruments to hedge risk, which may adversely affect our borrowing cost and expose us to other
risks.
The derivative instruments we may use are typically in the form of interest rate swaps, interest rate caps and foreign exchange
contracts. Interest rate swaps effectively change variable-rate debt obligations to fixed-rate debt obligations or fixed-rate debt
obligations to variable-rate debt obligations. Interest rate caps limit our exposure to rising interest rates. Foreign exchange contracts
limit or offset our exposure to changes in currency rates in respect of certain investments denominated in foreign currencies.
Our use of derivative instruments also involves the risk that a counterparty to a hedging arrangement could default on its
obligation and the risk that we may have to pay certain costs, such as transaction fees or breakage costs, if a hedging arrangement
is terminated by us. As a matter of policy, we enter into hedging arrangements with counterparties that are large, creditworthy
financial institutions typically rated at least "A/A2" by S&P and Moody's, respectively.
Developing an effective strategy for dealing with movements in interest rates and foreign currencies is complex and no
strategy can completely insulate us from risks associated with such fluctuations. There can be no assurance that any hedging
activities will have the desired beneficial impact on our results of operations or financial condition.
Significant increases in interest rates could have an adverse effect on our operating results.
Our operating results 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 interest earning assets and interest bearing liabilities subject to the
impact of interest rate floors and caps, as well as the amounts of floating rate assets and liabilities. Any significant compression
of the spreads between interest earning assets and interest bearing liabilities could have a material adverse effect on us. While
interest rates remain low by historical standards, rates are generally expected to rise in the coming years, although there is no
certainty as to the amount by which they may rise. In the event of a significant rising interest rate environment, rates could exceed
the interest rate floors that exist on certain of our floating rate debt and create a mismatch between our floating rate loans and our
floating rate debt that could have a significant adverse effect on our operating results. An increase in interest rates could also,
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. In addition, rising interest rates may adversely affect the value of our investment in SAFE. Rising interest rates also tend
to negatively impact the residential mortgage market, which in turn may adversely affect the value of and demand for our land
assets, including our residential development projects. Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control.
Changes in the method for determining LIBOR or a replacement of LIBOR may affect the value of the financial obligations
to be held or issued by us that are linked to LIBOR and could affect our results of operations or financial condition.
In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to
submit LIBOR rates after 2021. We are unable to predict the effect of any changes, any establishment of alternative reference rates
or any other reforms to LIBOR or any replacement of LIBOR that may be enacted in the United Kingdom or elsewhere. Such
changes, reforms or replacements relating to LIBOR could have an adverse impact on the market for or value of any LIBOR-
linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall
financial condition or results of operations.
7
We are required to make a number of judgments in applying accounting policies, and different estimates and assumptions
could result in changes to our financial condition and results of operations.
Material estimates that are particularly susceptible to significant change underlie our determination of the reserve for loan
losses, which is based primarily on the estimated fair value of loan collateral, as well as the valuation of real estate assets and
deferred tax assets. While we have identified those accounting policies that are considered critical and have procedures in place
to facilitate the associated judgments, different assumptions in the application of these policies could have a material adverse effect
on our financial performance and results of operations and actual results may differ materially from our estimates.
The carrying values of our assets held for investment are not determined based upon the prices at which they could be sold
currently.
As discussed further in the notes to our consolidated financial statements, we record our real estate and land and development
assets at cost less accumulated depreciation and amortization. If we hold a property for use or investment, we will only review it
for impairment in value if events or changes in circumstances indicate that the carrying amount of the property may not be
recoverable, based on management's determination that the aggregate future cash flows to be generated by the asset (taking into
account the anticipated holding period of the asset) is less than the carrying value. Management's estimates of cash flows considers
factors such as expected future operating income trends, as well as the effects of demand, competition and other economic factors.
The carrying values of our real estate and land and development assets are not indicative of the prices at which we would be able
to sell the properties, if we had to do so before the end of their intended holding period. If we changed our investment intent and
decided to sell a property that was being held for investment, including in distressed circumstances as a means of raising liquidity,
there can be no assurance that we would not realize losses on such sales, which losses could have a material adverse effect on our
business, financial results, liquidity and the market price of our common stock. We intend to accelerate the monetization of assets
in our legacy portfolio. We continue to hold other legacy assets for investment, and there can be no assurance that we will not
recognize impairment on such assets, or non-legacy assets in the future.
Changes in accounting rules will affect our financial reporting.
The Financial Accounting Standards Board ("FASB") has issued new accounting standards that will affect our financial
reporting.
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 financial instruments held by a reporting entity. This amendment replaces the
incurred loss impairment methodology in current GAAP with a methodology 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. On January 1, 2020, upon the adoption of ASU
2016-13, we expect to record an increase to our general reserve of approximately $12.0 million on our loan portfolio and our net
investment in leases, which will be recorded as a decrease to shareholders' equity on January 1, 2020.
Changes in accounting standards could affect the comparability of our reported results with prior periods and our ability to
comply with financial covenants under our debt instruments. We may also need to change our accounting systems and processes
to enable us to comply with the new standards, which may be costly.
For additional information regarding new accounting standards, refer to Note 3 to our consolidated financial statements
under the heading "New accounting pronouncements."
8
Our reserves for loan losses may prove inadequate, which could have a material adverse effect on our financial results.
We maintain loan loss reserves to offset potential future losses. Our general loan loss reserve reflects management's then-
current estimation of the probability and severity of losses within our portfolio. In addition, our determination of asset-specific
loan loss reserves relies on material estimates regarding the fair value of loan collateral. Estimation of ultimate loan losses, provision
expenses and loss reserves is a complex and subjective process. As such, there can be no assurance that management's judgment
will prove to be correct and that reserves will be adequate over time to protect against potential future losses. Such losses could
be caused by factors including, but not limited to, unanticipated adverse changes in the economy or events adversely affecting
specific assets, borrowers, industries in which our borrowers operate or markets in which our borrowers or their properties are
located. In particular, during the previous financial crisis, the weak economy and disruption of the credit markets adversely impacted
the ability and willingness of many of our borrowers to service their debt and refinance our loans to them at maturity. If our reserves
for credit losses prove inadequate we may suffer additional losses which would have a material adverse effect on our financial
performance, liquidity and the market price of our common stock.
We have suffered losses when a borrower defaults on a loan and the underlying collateral value is not sufficient, and we may
suffer additional losses in the future.
We have suffered losses arising from borrower defaults on our loan assets and we may suffer additional losses in the future.
In the event of a default by a borrower on a non-recourse loan, we will only have recourse to the real estate-related assets
collateralizing the loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. Conversely, we
sometimes make loans that are unsecured or are secured only by equity interests in the borrowing entities. These loans are subject
to the risk that other lenders may be directly secured by the real estate assets of the borrower. In the event of a default, those
collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying real estate. In cases
described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the borrower
prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or managers of the
assets.
We sometimes obtain individual or corporate guarantees from borrowers or their affiliates. In cases where guarantees are
not fully or partially secured, we typically rely on financial covenants from borrowers and guarantors which are designed to require
the borrower or guarantor to maintain certain levels of creditworthiness. Where we do not have recourse to specific collateral
pledged to satisfy such guarantees or recourse loans, or where the value of the collateral proves insufficient, we will only have
recourse as an unsecured creditor to the general assets of the borrower or guarantor, some or all of which may be pledged to satisfy
other lenders. There can be no assurance that a borrower or guarantor will comply with its financial covenants, or that sufficient
assets will be available to pay amounts owed to us under our loans and guarantees. As a result of these factors, we may suffer
additional losses which could have a material adverse effect on our financial performance, liquidity and the market price of our
common stock.
In the event of a borrower bankruptcy, we may not have full recourse to the assets of the borrower in order to satisfy our
loan. In addition, certain of our loans are subordinate to other debts of the borrower. If a borrower defaults on our loan or on debt
senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt receives payment.
Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents,
assign our loans, accept prepayments, exercise our remedies (through "standstill" periods) and control decisions made in bankruptcy
proceedings relating to borrowers. Bankruptcy and borrower litigation can significantly increase collection costs and losses and
the time necessary to acquire title to the underlying collateral, during which time the collateral may decline in value, causing us
to suffer additional losses.
If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a borrower may
not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or
increasing interest rates may hinder a borrower's ability to refinance our loan because the underlying property cannot satisfy the
debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we
could suffer additional loss which may adversely impact our financial performance.
We may acquire a commercial property with the intent to sell the land to SAFE and to sell or lease the leasehold interest to a
third party. If we are unable to sell or lease the leasehold interest, we will be exposed to the risks of ownership of operating
properties.
We may acquire commercial properties with the intent to separate the property into an ownership interest in land that is sold
to SAFE and an interest in the buildings and improvements thereon that is sold or leased to a third party. There may be instances
where we are unable to find a purchaser or lessee for the improvements, in which case we will be subject to the risks of owning
operating properties.
9
The ownership and operation of commercial properties will expose us to risks, including, without limitation:
•
•
•
•
•
•
•
•
•
•
•
adverse changes in international, regional or local economic and demographic conditions;
tenant vacancies and market pressures to offer tenant incentives to sign or renew leases;
adverse changes in the financial position or liquidity of tenants;
the inability to collect rent from tenants;
tenant bankruptcies;
higher costs resulting from capital expenditures and property operating expenses;
civil disturbances, hurricanes and other natural disasters, or terrorist acts or acts of war, which may result in uninsured
or underinsured losses;
liabilities under environmental laws;
risks of loss from casualty or condemnation;
changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation,
health, safety, environmental, zoning and tax laws; and
the other risks described under "We are subject to additional risks associated with owning and developing property."
Upon taking ownership of a commercial property, we may be required to contribute ownership of the land to a taxable REIT
subsidiary ("TRS"), which would subsequently seek to sell the land to SAFE and lease or sell a leasehold interest in such commercial
property to a third party. Any gain from the sale of land would be subject to corporate income tax.
We are subject to additional risks associated with loan participations.
Some of our loans are participation interests or co-lender arrangements in which we share the rights, obligations and benefits
of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights
with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and
control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but
to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack
of full control.
We are subject to additional risk associated with owning and developing real estate.
We own a number of assets that previously served as collateral on defaulted loans. These assets are predominantly land and
development assets and operating properties. These assets expose us to additional risks, including, without limitation:
• We must incur costs to carry these assets and in some cases make repairs to defects in construction, make improvements
to, or complete the assets, which requires additional liquidity and results in additional expenses that could exceed our
original estimates and impact our operating results.
• Real estate projects are not liquid and, to the extent we need to raise liquidity through asset sales, we may be limited in
our ability to sell these assets in a short-time frame.
• Uncertainty associated with economic conditions, rezoning, obtaining governmental permits and approvals, concerns of
community associations, reliance on third party contractors, increasing commodity costs and threatened or pending
litigation may materially delay our completion of rehabilitation and development activities and materially increase their
cost to us.
• The values of our real estate investments are subject to a number of factors outside of our control, including changes in
the general economic climate, changes in interest rates and the availability of attractive financing, over-building or
decreasing demand in the markets where we own assets, and changes in law and governmental regulations.
The residential market has experienced significant downturns that could recur and adversely affect us.
As of December 31, 2019, we owned land and residential condominiums with a net carrying value of $589.2 million. The
housing market in the United States has previously been affected by weakness in the economy, high unemployment levels and
low consumer confidence. It is possible another downturn could occur again in the near future and adversely impact our portfolio,
and accordingly our financial performance. In addition, rising interest rates tend to negatively impact the residential mortgage
market, which in turn may adversely affect the value of and demand for our land assets including our residential development
projects.
We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their lease obligations.
We own properties leased to tenants of our real estate assets and receive rents from tenants during the contracted term of
such leases. We underwrite the credit of prospective borrowers and tenants and often require them to provide some form of credit
support such as corporate guarantees, letters of credit and/or cash security deposits. Although our loans and real estate assets are
10
geographically diverse and the borrowers and tenants operate in a variety of industries, to the extent we have a significant
concentration of interest or operating lease revenues from any single borrower or customer, the inability of that borrower or tenant
to make its payment could have a material adverse effect on us. For the year ended December 31, 2019, our five largest borrowers
or tenants of net lease assets collectively accounted for approximately 19.8% of our revenues, of which our largest customer
accounted for approximately 11.8%. A tenant's ability to pay rent is determined by its creditworthiness, among other factors. If a
tenant's credit deteriorates, the tenant may default on its obligations under our lease and may also become bankrupt. The bankruptcy
or insolvency of our tenants or other failure to pay is likely to adversely affect the income produced by our real estate assets. If a
tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. If a tenant files for
bankruptcy, we may not be able to evict the tenant solely because of such bankruptcy or failure to pay. A court, however, may
authorize a tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid, future rent would
be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In addition, certain
amounts paid to us within 90 days prior to the tenant's bankruptcy filing could be required to be returned to the tenant's bankruptcy
estate. In any event, it is highly unlikely that a bankrupt or insolvent tenant would pay in full amounts it owes us under a lease
that it intends to reject. In other circumstances, where a tenant's financial condition has become impaired, we may agree to partially
or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is likely less than
the total contractual rental amount. Without regard to the manner in which the lease termination occurs, we are likely to incur
additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant. In
any of the foregoing circumstances, our financial performance could be materially adversely affected.
We are subject to risks relating to our asset concentration.
Our portfolio consists primarily of real estate, commercial real estate loans and our investment in SAFE. Refer to "Item 7.
Management's Discussion and Analysis - Portfolio Overview" for our asset concentrations by property type and geographic location.
In addition, our largest tenant represented 11.8% of our total revenues for the year ended December 31, 2019. Through our
investment in SAFE, we are also exposed to asset concentrations in SAFE's portfolio. For the year ended December 31, 2019,
19.6% of SAFE's total revenues came from hotel properties and two of SAFE's tenants individually represented more than 10%
of its revenues for the year, the tenant of its Ground Lease at 1111 Pennsylvania Avenue in Washington D.C. and the tenant of its
Park Hotels Portfolio. Many property types were adversely affected by the previous economic recession and we may suffer
additional losses on our assets due to these concentrations.
Lease expirations, lease defaults and lease terminations may adversely affect our revenue.
Lease expirations and lease terminations may result in reduced revenues if the lease payments received from replacement
tenants are less than the lease payments received from the expiring or terminating corporate tenants. In addition, lease defaults or
lease terminations by one or more significant tenants or the failure of tenants under expiring leases to elect to renew their leases
could cause us to experience long periods of vacancy with no revenue from a facility and to incur substantial capital expenditures
and/or lease concessions in order to obtain replacement tenants. Leases representing approximately 13.4% of our annualized in-
place operating lease income and interest income from sales-type leases are scheduled to expire during the next five years.
We compete with a variety of financing and leasing sources for our customers.
The financial services industry and commercial real estate markets are highly competitive and have become more competitive
in recent years. Our competitors include finance companies, other REITs, commercial banks and thrift institutions, investment
banks and hedge funds, among others. SAFE's competitors include those same entities, as well as private individuals and pension
funds. These competitors may seek to compete aggressively with us or SAFE on a number of factors including transaction pricing,
terms and structure. We and SAFE may have difficulty competing to the extent we are unwilling to match the competitors' deal
terms in order to maintain our or SAFE's profit margins and/or credit standards. To the extent that we match competitors' pricing,
terms or structure, we or SAFE may experience decreased interest margins and/or increased risk of credit losses, which could have
a material adverse effect on our or SAFE's financial performance, liquidity and the market price of our common stock.
We face significant competition within our net leasing business from other owners, operators and developers of properties,
many of which own properties similar to ours in markets where we operate. Such competition may affect our ability to attract and
retain tenants and reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our
properties, which may result in their owners offering lower rental rates than we would or providing greater tenant improvement
allowances or other leasing concessions. This combination of circumstances could adversely affect our revenues and financial
performance.
11
We are subject to certain risks associated with investing in real estate, including potential liabilities under environmental laws
and risks of loss from weather conditions, man-made or natural disasters, climate change and terrorism.
Under various U.S. federal, state and local environmental laws, ordinances and regulations, a current or previous owner of
real estate (including, in certain circumstances, a secured lender that succeeds to ownership or control of a property) may become
liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property. Those laws
typically impose cleanup responsibility and liability without regard to whether the owner or control party knew of or was responsible
for the release or presence of such hazardous or toxic substances. The costs of investigation, remediation or removal of those
substances may be substantial. The owner or control party of a site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from a site. Certain environmental laws also impose
liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek
recovery from owners of real properties for personal injuries associated with asbestos-containing materials. While a secured lender
is not likely to be subject to these forms of environmental liability, when we foreclose on real property, we become an owner and
are subject to the risks of environmental liability. Additionally, our net lease assets and SAFE's Ground Leases generally require
the tenants to undertake the obligation for environmental compliance and indemnify us and SAFE from liability with respect
thereto. There can be no assurance that the tenants will have sufficient resources to satisfy their obligations to us.
Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts, fires
and other environmental conditions can damage properties we own. As of December 31, 2019, approximately 18.2% of the carrying
value of our assets was located in the western and northwestern United States, geographic areas at higher risk for earthquakes.
Additionally, we own properties located near the coastline and the value of our properties will potentially be subject to the risks
associated with long-term effects of climate change. A significant number of our properties are located in major urban areas which,
in recent years, have been high risk geographical areas for terrorism and threats of terrorism. Certain forms of terrorism including,
but not limited to, nuclear, biological and chemical terrorism, political risks, environmental hazards and/or Acts of God may be
deemed to fall completely outside the general coverage limits of our insurance policies or may be uninsurable or cost prohibitive
to justify insuring against. Furthermore, if the U.S. Terrorism Risk Insurance Program Reauthorization Act is repealed or not
extended or renewed upon its expiration, the cost for terrorism insurance coverage may increase and/or the terms, conditions,
exclusions, retentions, limits and sublimits of such insurance may be materially amended, and may effectively decrease the scope
and availability of such insurance to the point where it is effectively unavailable. Future weather conditions, man-made or natural
disasters, effects of climate change or acts of terrorism could adversely impact the demand for, and value of, our assets and could
also directly impact the value of our assets through damage, destruction or loss, and could thereafter materially impact the availability
or cost of insurance to protect against these events. Although we believe our owned real estate and the properties collateralizing
our loan assets are adequately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain
appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance
to our tenants. The foregoing risks also apply generally to SAFE's properties and the buildings thereon owned by SAFE's tenants.
Any weather conditions, man-made or natural disasters, terrorist attack or effect of climate change, whether or not insured, could
have a material adverse effect on our or SAFE's financial performance, liquidity and the market price of our or SAFE's common
stock. In addition, there is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect
to claims payments due to a deterioration in its financial condition.
Transactions between iStar and SAFE were negotiated between related parties and their terms may not be as favorable to us
as if they had been negotiated with an unaffiliated third party.
Transactions between iStar and SAFE were negotiated between related parties and their terms may not be as favorable to
us as if they had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less
vigorously, our rights under agreements with SAFE because of our desire to maintain our ongoing relationship with SAFE.
There are various potential conflicts of interest in our relationship with SAFE, including our executive officers and/or directors
who are also officers and/or directors of SAFE, which could result in decisions that are not in the best interest of our stockholders.
Conflicts of interest may exist or could arise in the future with SAFE, including our executive officers and/or directors who
are also directors or officers of SAFE. Conflicts may include, without limitation: conflicts arising from the enforcement of
agreements between us and SAFE; conflicts in the amount of time that our officers and employees will spend on our affairs versus
SAFE's affairs; conflicts in determining whether to seek reimbursement from SAFE of certain expenses we incur on its behalf;
and conflicts in future transactions that we may pursue with SAFE. Transactions between iStar and SAFE would be subject to
certain approvals of our independent directors; however, there can be no assurance that such approval will be successful in achieving
terms and conditions as favorable to us as would be available from a third party. Two directors of iStar also serve on SAFE's our
board of directors, including Jay Sugarman, who is the chief executive officer of SAFE and our chief executive officer.
12
Our directors and executive officers have duties to our company under applicable Maryland law, and our executive officers
and our directors who are also directors or officers of SAFE also have duties to SAFE under applicable Maryland law. Those
duties may come in conflict from time to time. We have duties as the manager of SAFE which may come in conflict with our
duties to our stockholders from time to time. In addition, conflicts of interest may exist or could arise in the future with our duties
to Net Lease Venture II and our duties to SAFE as its manager in connection with future investment opportunities.
From time to time we make investments in companies over which we do not have control. Some of these companies operate in
industries that differ from our current operations, with different risks than investing in real estate.
From time to time we make debt or equity investments in other companies that we may not control or over which we may
not have sole control, including SAFE and our Net Lease Venture II. Although these businesses generally have a significant real
estate component, some of them may operate in businesses that are different from our primary or historical business segments.
Consequently, investments in these businesses, among other risks, subject us to the operating and financial risks of new business
lines or industries other than real estate and to the risk that we do not have sole control over the operations of these businesses.
From time to time we may make additional investments in or acquire other entities that may subject us to similar risks.
Investments in entities over which we do not have sole control, including SAFE and our Net Lease Venture II, present additional
risks such as having differing objectives than our partners or the entities in which we invest, or becoming involved in disputes, or
competing with those persons. In addition, we rely on the internal controls and financial reporting controls of these entities and
their failure to maintain effectiveness or comply with applicable standards may adversely affect us.
Declines in the market values of our equity investments that are not publicly traded may adversely affect periodic reported
results.
Certain of our equity investments other than SAFE, are in funds or companies that are not publicly traded and their fair
value may not be readily determinable. We may periodically estimate the fair value of these investments, based upon available
information and management's judgment. Because such valuations are inherently uncertain, they may fluctuate over short periods
of time. In addition, our determinations regarding the fair value of these investments may be materially higher than the values that
we ultimately realize upon their disposal, which could result in losses that have a material adverse effect on our financial
performance, the market price of our common stock and our ability to pay dividends.
Quarterly results may fluctuate and may not be indicative of future quarterly performance.
Our quarterly operating results could fluctuate; therefore, reliance should not be placed on past quarterly results as indicative
of our performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others,
variations in SAFE's performance and the market price of its common stock, variations in loan and real estate portfolio performance,
levels of non-performing assets and related provisions, market values of investments, costs associated with debt, general economic
conditions, the state of the real estate and financial markets and the degree to which we encounter competition in our markets.
Our ability to retain and attract key personnel is critical to our success.
Our success depends on our ability to retain our senior management and the other key members of our management team
and recruit additional qualified personnel. We rely in part on equity compensation to retain and incentivize our personnel. In
addition, if members of our management join competitors or form competing companies, the competition could have a material
adverse effect on our business. Efforts to retain or attract professionals may result in additional compensation expense, which
could affect our financial performance.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our
business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary
business information and that of our customers, and personally identifiable information of our customers and employees, in our
data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our
operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable
to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise
our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure
or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal
information, disrupt our operations and the services we provide to customers, and damage our reputation, which could have a
material adverse effect on our business.
13
We may change certain of our policies without stockholder approval.
Our charter does not set forth specific percentages of the types of investments we may make. We can amend, revise or
eliminate our investment financing and conflict of interest policies at any time at our discretion without a vote of our shareholders.
A change in these policies could have a material adverse effect on our financial performance, liquidity and the market price of our
common stock.
Certain provisions in our charter may inhibit a change in control.
Generally, to maintain our qualification as a REIT under the Code, not more than 50% in value of our outstanding shares
of stock may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of our taxable year. The
Code defines "individuals" for purposes of the requirement described in the preceding sentence to include some types of entities.
Under our charter, no person may own more than 9.8% of our outstanding shares of stock, with some exceptions. The restrictions
on transferability and ownership may delay, deter or prevent a change in control or other transaction that might involve a premium
price or otherwise be in the best interest of the security holders.
We would be subject to adverse consequences if we fail to qualify as a REIT.
We believe that we have been organized and operated in a manner so as to qualify for taxation as a REIT for U.S. federal
income tax purposes commencing with our taxable year ended December 31, 1998. Our qualification as a REIT, however, has
depended and will continue to depend on our ability to meet various requirements concerning, among other things, the ownership
of our outstanding stock, the nature of our assets, the sources of our income and the amount of our distributions to our shareholders.
Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to manage successfully the
composition of our income and assets on an ongoing basis. Our ability to satisfy these asset tests depends upon our analysis of
the characterization of our assets for U.S. federal income tax purposes and fair market values of our assets. The fair market values
of certain of our assets are not susceptible to a precise determination.
If we were to fail to qualify as a REIT for any taxable year, we would not be allowed a deduction for distributions to our
shareholders in computing our net taxable income and would be subject to U.S. federal income tax on our net taxable income at
regular corporate rates and applicable state and local taxes. We would also be disqualified from treatment as a REIT for the four
subsequent taxable years following the year during which our REIT qualification was lost unless we were entitled to relief under
certain Code provisions and obtained a ruling from the IRS. If disqualified and unable to obtain relief, we may need to borrow
money or sell assets to pay taxes. As a result, cash available for distribution would be reduced for each of the years involved.
Furthermore, it is possible that future economic, market, legal, tax or other considerations may cause our REIT qualification to
be revoked. This could have a material adverse effect on our business and the market price of our common stock.
To qualify as a REIT, we may be forced to borrow funds, sell assets or take other actions during unfavorable market conditions.
To qualify as a REIT, we generally must distribute to our shareholders at least 90% of our net taxable income, excluding
net capital gains each year, and we will be subject to U.S. federal income tax, as well as applicable state and local taxes, to the
extent that we distribute less than 100% of our net taxable income each year. In addition, we will be subject to a 4% nondeductible
excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary
income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
In the event that principal, premium or interest payments with respect to a particular debt instrument that we hold are not
made when due, we may nonetheless be required to continue to recognize the unpaid amounts as taxable income. In addition, we
may be allocated taxable income in excess of cash flow received from some of our partnership investments. We are generally
required to take certain amounts into income no later than the time such amounts are reflected on our financial statements. The
application of this rule may require the accrual of income earlier than would be the case under the otherwise applicable tax rules;
however, recently released proposed Treasury Regulations generally would exclude, among other items, original issue discount
(whether or not de minimis) and market discount from the applicability of this rule. Although the proposed Treasury Regulations
generally will not be effective until taxable years beginning after the date on which they are issued in final form, we generally are
permitted to elect to rely on the proposed Treasury Regulations currently. Also, in certain circumstances our ability to deduct
interest expenses for U.S. federal income tax purposes may be limited. From these and other potential timing differences between
income recognition or expense deduction and cash receipts or disbursements, there is a significant risk that we may have substantial
taxable income in excess of cash available for distribution. In order to qualify as a REIT and avoid the payment of income and
excise taxes, we may need to borrow funds or take other actions to meet our REIT distribution requirements for the taxable year
in which the phantom income is recognized.
14
Complying with the REIT requirements may cause us to forego and/or liquidate otherwise attractive investments.
In order to meet the income, asset and distribution tests under the REIT rules, we may be required to take or forego certain
actions. For instance, we may not be able to make certain investments and we may have to liquidate other investments. In addition,
we may be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available
for distribution. These actions could have the effect of reducing our income and amounts available for distribution to our
shareholders.
Certain of our business activities may potentially be subject to the prohibited transaction tax, which could reduce the return
on your investment.
For so long as we qualify as a REIT, our ability to dispose of certain properties may be restricted under the REIT rules,
which generally impose a 100% penalty tax on any gain recognized on "prohibited transactions," which refers to the disposition
of property that is deemed to be inventory or held primarily for sale to customers in the ordinary course of our business, subject
to certain exceptions. Whether property is inventory or otherwise held primarily for sale depends on the particular facts and
circumstances. The Code provides a safe harbor that, if met, allows a REIT to avoid being treated as engaged in a prohibited
transaction. No assurance can be given that any property that we sell will not be treated as property held for sale to customers,
or that we can comply with the safe harbor. The 100% tax does not apply to gains from the sale of foreclosure property or to
property that is held through a taxable REIT subsidiary ("TRS") or other taxable corporation, although such income will be subject
to tax in the hands of the corporation at regular corporate rates. We intend to structure our activities to avoid prohibited transaction
characterization.
Certain of our activities, including our use of TRSs, are subject to taxes that could reduce our cash flows.
Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay some U.S. federal, state, local
and non-U.S. taxes on our income and property, including taxes on any undistributed income, taxes on income from certain activities
conducted as a result of foreclosures, and property and transfer taxes. We would be required to pay taxes on net taxable income
that we fail to distribute to our shareholders. In addition, we may be required to limit certain activities that generate non-qualifying
REIT income, such as land development and sales of condominiums, and/or we may be required to conduct such activities through
TRS. We hold a significant amount of assets in our TRS, including assets that we have acquired through foreclosure, assets that
may be treated as dealer property and other assets that could adversely affect our ability to qualify as a REIT if held at the REIT
level. As a result, we will be required to pay income taxes on the taxable income generated by these assets. Furthermore, we will
be subject to a 100% penalty tax to the extent our economic arrangements with our TRS are not comparable to similar arrangements
among unrelated parties. We will also be subject to a 100% tax to the extent we derive income from the sale of assets to customers
in the ordinary course of business other than through our TRS. To the extent we or our TRS are required to pay U.S. federal, state,
local or non-U.S. taxes, we will have less cash available for distribution to our shareholders.
We have substantial net operating loss carryforwards which we use to offset our tax and distribution requirements. Net
operating losses that have arisen in taxable years beginning after December 31, 2017 and thereafter are only able to offset up to
80% of our net taxable income (after the application of the dividends paid deduction) and may not be carried back. In the event
that we experience an "ownership change" for purposes of Section 382 of the Code, our ability to use these losses will be limited.
An "ownership change" is determined through a set of complex rules which track the changes in ownership that occur in our
common stock for a trailing three year period. We have experienced volatility and significant trading in our common stock in
recent years. The occurrence of an ownership change is generally beyond our control and, if triggered, may increase our tax and
distribution obligations for which we may not have sufficient cash flow.
A failure to comply with the limits on our ownership of and relationship with our TRS would jeopardize our REIT qualification
and may result in the application of a 100% excise tax.
No more than 20% of the value of a REIT's total assets may consist of stock or securities of one or more TRS. This requirement
limits the extent to which we can conduct activities through TRS or expand the activities that we conduct through TRS. The values
of some of our assets, including assets that we hold through TRSs may not be subject to precise determination, and values are
subject to change in the future. In addition, we hold certain mortgage and mezzanine loans within one or more of our TRS that
are secured by real property. We treat these loans as qualifying assets for purposes of the REIT asset tests to the extent that such
mortgage loans are secured by real property and such mezzanine loans are secured by an interest in a limited liability company
that holds real property. We received from the IRS a private letter ruling which holds that we may exclude such loans from the
limitation that securities from TRS must constitute no more than 20% of our total assets. We are entitled to rely upon this private
letter ruling only to the extent that we did not misstate or omit a material fact in the ruling request and that we continue to operate
in accordance with the material facts described in such request, and no assurance can be given that we will always be able to do
so. To the extent that any loan is recharacterized as equity, it would increase the amount of non-real estate securities that we have
15
in our TRS and could adversely affect our ability to meet the limitation described above. If we were not able to exclude such
loans to our TRS from the limitation described above, our ability to meet the REIT asset tests and other REIT requirements could
be adversely affected. Accordingly, there can be no assurance that we have met or will be able to continue to comply with the TRS
limitation.
In addition, we may from time to time need to make distributions from a TRS in order to keep the value of our TRS below
the TRS limitation. TRS dividends, however, generally will not constitute qualifying income for purposes of the 75% REIT gross
income test. While we will monitor our compliance with both this income test and the limitation on the percentage of our total
assets represented by TRS securities, and intend to conduct our affairs so as to comply with both, the two may at times be in
conflict with one another. For example, it is possible that we may wish to distribute a dividend from a TRS in order to reduce the
value of our TRS to comply with limitation, but we may be unable to do so without simultaneously violating the 75% REIT gross
income test.
Although there are other measures we can take in such circumstances to remain in compliance with the requirements for
REIT qualification, there can be no assurance that we will be able to comply with both of these tests in all market conditions.
Legislative or regulatory tax changes related to REITs could materially and adversely affect us.
The U.S. federal income tax laws and regulations governing REITs and their stockholders, as well as the administrative
interpretations of those laws and regulations, are constantly under review and may be changed at any time, possibly with retroactive
effect. No assurance can be given as to whether, when, or in what form, the U.S. federal income tax laws applicable to us and our
stockholders may be enacted. Changes to the U.S. federal income tax laws and interpretations of U.S. federal tax laws could
adversely affect an investment in our common stock.
The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, made significant changes to the U.S. federal
income tax laws applicable to businesses and their owners, including REITs and their stockholders. Certain key provisions of the
Tax Cuts and Jobs Act that could impact us and our stockholders include the following:
• Reduced Tax Rates. The highest individual U.S. federal income tax rate on ordinary income is reduced from 39.6% to
37% (through taxable years ending in 2025), and the maximum corporate income tax rate is reduced from 35% to 21%.
In addition, individuals, trust, and estates that own our stock are permitted to deduct up to 20% of dividends received
from us (other than dividends that are designated as capital gain dividends or qualified dividend income), generally
resulting in an effective maximum U.S. federal income tax rate of 29.6% on such dividends (through taxable years ending
in 2025). Further, the amount that we are required to withhold on distributions to non-U.S. stockholders that are treated
as attributable to gains from our sale or exchange of U.S. real property interests is reduced from 35% to 21%.
• Net Operating Losses. We and our TRSs may not use net operating losses generated beginning in 2018 to offset more
than 80% of our taxable income (determined without regard to the dividends paid deduction). Net operating losses
generated beginning in 2018 can be carried forward indefinitely but can no longer be carried back.
• Limitation on Interest Deductions. The amount of net interest expense that certain taxpayers, including us and our
TRSs, may deduct for a taxable year is limited to the sum of: (i) the taxpayer's business interest income for the taxable
year; and (ii) 30% of the taxpayer's "adjusted taxable income" for the taxable year. For taxable years beginning before
January 1, 2022, adjusted taxable income means earnings before interest, taxes, depreciation, and amortization
("EBITDA"); for taxable years beginning on or after January 1, 2022, adjusted taxable income is limited to earnings
before interest and taxes ("EBIT"). Certain electing businesses, including electing real estate businesses, may elect out
of the foregoing limitation.
• Alternative Minimum Tax. The corporate alternative minimum tax is eliminated.
Income Accrual. We are required to recognize certain items of income for U.S. federal income tax purposes no later than
we would report such items on our financial statements. As discussed in Item 1a-Risk factors-"To qualify as a REIT, we may be
forced to borrow funds, sell assets or take other actions during unfavorable market conditions", earlier recognition of income for
U.S. federal income tax purposes could impact our ability to satisfy the REIT distribution requirements. However, recently released
proposed Treasury Regulations generally would exclude, among other items, original issue discount (whether or not de minimis)
and market discount from the applicability of this rule. Although the proposed Treasury Regulations generally will not be effective
until taxable years beginning after the date on which they are issued in final form, we generally are permitted to elect to rely on
the proposed Treasury Regulations currently.
16
Stockholders are urged to consult with their tax advisors regarding any legislative, regulatory or administrative developments
on an investment in the Company's common stock.
Our Investment Company Act exemption limits our investment discretion and loss of the exemption would adversely affect us.
We believe that we currently are not, and we intend to operate our company so that we will not be, regulated as an investment
company under the Investment Company Act. We believe we are not an investment company under Section 3(a)(1)(A) of the
Investment Company Act because we do not engage primarily, or hold ourselves out as being engaged primarily, in the business
of investing, reinvesting or trading in securities. The Company engages primarily in the non-investment company businesses of
investing in, financing and developing real estate and real estate-related projects, generally through subsidiaries and affiliated
companies, including SAFE. Maintaining our exemption from regulation as an investment company under the Investment Company
Act limits our ability to invest in assets that otherwise would meet our investment strategies.
We will need to monitor our investments and income to ensure that we continue to satisfy our exemption from the Investment
Company Act, but there can be no assurance that we will be able to avoid the need to register as an Investment Company. If it
were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary
penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties,
or that third parties could seek to obtain rescission of transactions and that we would be subject to limitations on corporate leverage
that would have an adverse impact on our investment returns. This would have a material adverse effect on our financial performance
and the market price of our securities.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for some litigation, which
could limit the ability of stockholders to obtain a favorable judicial forum for disputes with our company.
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum
for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of any duty owed by
us or by any director or officer or other employee to us or to our stockholders; (c) any action asserting a claim against us or any
director or officer or other employee arising pursuant to any provision of the Maryland General Corporation Law or our charter
or bylaws; or (d) any action asserting a claim against us or any director or officer or other employee that is governed by the internal
affairs doctrine shall be the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United
States District Court for the District of Maryland, Baltimore Division. This forum selection provision may limit the ability of
stockholders of our company to obtain a judicial forum that they find favorable for disputes with our company or our directors,
officers, employees, if any, or other stockholders.
Item 1b. Unresolved Staff Comments
None.
Item 2. Properties
The Company's principal executive and administrative offices are located at 1114 Avenue of the Americas, New York, NY
10036. Its telephone number and web address are (212) 930-9400 and www.istar.com, respectively. The lease for the Company's
principal executive and administrative offices expires in February 2021. The Company's principal regional offices are located in
the Atlanta, Georgia; Hartford, Connecticut; and Los Angeles, California metropolitan areas.
See Item 1—"Net Lease," and "Operating Properties" for a discussion of properties held by the Company for investment
purposes and Item 8—"Financial Statements and Supplemental Data—Schedule III," for a detailed listing of such properties.
Item 3. Legal Proceedings
The Company and/or one or more of its subsidiaries 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 foreclosure-related proceedings. The Company believes it is not a party to, nor are any of its properties the
subject of, any pending legal proceeding that would have a material adverse effect on the Company’s consolidated financial
statements.
Item 4. Mine Safety Disclosures
Not applicable.
17
PART II
Item 5. Market for Registrant's Equity and Related Share Matters
The Company's common stock trades on the New York Stock Exchange ("NYSE") under the symbol "STAR." The Company
had 1,533 holders of record of common stock as of February 21, 2020. This figure does not represent the actual number of beneficial
owners of our common stock because shares of our common stock are frequently held in “street name” by securities dealers and
others for the benefit of beneficial owners who may vote the shares and who would report dividends paid by us in their taxable
income.
Issuer Purchases of Equity Securities
The following table sets forth the information with respect to purchases made by or on behalf of the Company of its common
stock during the three months ended December 31, 2019.
Total Number of
Shares Purchased(1)
Average Price
Paid per
Share
Total Number of
Shares Purchased as
Part of a Publicly
Announced Plan
Maximum Dollar
Value of Shares that
May Yet be Purchased
Under the Plans(1)
October 1 to October 31, 2019
November 1 to November 30, 2019
— $
— $
—
—
December 1 to December 31, 2019
1,118,131 $
14.18
— $
— $
— $
50,000,000
50,000,000
34,159,707
_______________________________________________________________________________
(1)
We may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans.
Disclosure of Equity Compensation Plan Information
(a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
N/A
2,758,215
Plans Category
Equity compensation plans
approved by security holders-
restricted stock awards(1)(2)
_______________________________________________________________________________
(1)
843,089
Restricted Stock—The amount shown in column (a) includes 598,729 unvested restricted stock units which may vest in the future based on the employees'
continued service to the Company (see Item 8—"Financial Statements and Supplemental Data—Note 15" for a more detailed description of the Company's
restricted stock grants). Substantially all of the restricted stock units included in column (a) are required to be settled on a net, after-tax basis (after deducting
shares for minimum required statutory withholdings); therefore, the actual number of shares issued will be less than the gross amount of the awards. The
amount shown in column (a) also includes 244,360 of common stock equivalents and restricted stock awarded to our non-employee directors in consideration
of their service to the Company as directors. Common stock equivalents represent rights to receive shares of common stock at the date the common stock
equivalents are settled. Common stock equivalents have dividend equivalent rights beginning on the date of grant. The amount in column (c) represents
the aggregate amount of stock options, shares of restricted stock units or other performance awards that could be granted under compensation plans approved
by the Company's security holders after giving effect to previously issued awards of stock options, shares of restricted stock units and other performance
awards (see Item 8—"Financial Statements and Supplemental Data—Note 15" for a more detailed description of the Company's Long-Term Incentive
Plans).
The amount shown in column (a) does not include a currently indeterminable number of shares that may be issued upon the satisfaction of performance
and vesting conditions of awards made under the Company's Performance Incentive Plan ("iPIP") approved by shareholders. In no event may the number
of shares issued exceed the amount available in column (c) unless shareholders authorize additional shares (see Item 8—"Financial Statements and
Supplemental Data—Note 15" for a more detailed description of iPIP.)
(2)
18
Item 6. Selected Financial Data
The following table sets forth selected financial data on a consolidated historical basis for the Company. This information
should be read in conjunction with the discussions set forth in Item 7—"Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OPERATING DATA:
Operating lease income
Interest income
Interest income from sales-type leases(1)
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 from sales of real estate
Income (loss) from operations before earnings from equity method
investments and other items
Loss on early extinguishment of debt, net
Earnings (losses) from equity method investments
Selling profit from sales-type leases(1)
Gain on consolidation of equity method investment(1)
Income (loss) from continuing operations before income taxes
Income tax (expense) benefit
Income (loss) from continuing operations
Income from discontinued operations
Gain from discontinued operations
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(2)
Net income (loss) allocable to common shareholders
Per common share data(3):
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
For the Years Ended December 31,
2019
2018
2017
2016
2015
(In thousands, except per share data and ratios)
$
206,388
$
208,192
$
187,684
$
191,180
$
211,207
97,878
106,548
129,153
134,687
77,654
20,496
55,363
119,595
479,496
183,919
92,426
109,663
58,259
98,609
6,482
13,419
13,120
575,897
236,623
140,222
(27,724)
41,849
180,416
—
334,763
(438)
—
82,342
409,710
798,122
183,751
139,289
350,181
58,699
92,135
16,937
147,108
6,040
994,140
126,004
(70,014)
(10,367)
(5,007)
—
67,877
(17,511)
(815)
334,325
(18,326)
—
—
334,325
(10,283)
324,042
(32,495)
—
—
(18,326)
(13,936)
(32,262)
(32,495)
—
188,091
196,879
679,202
194,686
147,617
180,916
49,033
98,882
—
46,514
88,340
455,187
221,398
137,522
62,007
51,660
84,027
(5,828)
(12,514)
32,379
20,954
718,639
92,049
52,612
(14,724)
13,015
—
—
50,903
948
51,851
4,939
123,418
180,208
(4,526)
175,682
(64,758)
14,484
5,883
564,467
105,296
(3,984)
(1,619)
77,349
—
—
71,746
10,166
81,912
18,270
—
100,182
(4,876)
95,306
—
49,924
100,216
496,034
224,639
146,509
67,382
62,045
81,277
36,567
10,524
6,374
635,317
93,816
(45,467)
(281)
32,153
—
—
(13,595)
(7,639)
(21,234)
15,077
—
(6,157)
3,722
(2,435)
(51,320)
(51,320)
—
—
—
(14)
1,080
$
291,547
$
(64,757) $
110,924
$
43,972
$
(52,675)
$
$
$
$
$
4.51
3.73
4.51
3.73
0.39
$
$
$
$
$
(0.95) $
(0.95) $
(0.25) $
(0.25) $
(0.95) $
(0.95) $
$
0.18
1.56
1.56
$
$
— $
0.35
0.35
$
$
0.60
0.60
$
$
— $
(0.79)
(0.79)
(0.62)
(0.62)
—
_______________________________________________________________________________
(1)
Refer to Note 3 and Note 5 for more information on "Interest income from sales-type leases" and "Selling profit from sales-type leases." Refer to Note
8 for more information on "Gain on consolidation of equity method investment."
All of the Company's outstanding HPUs were repurchased and retired on August 13, 2015. Participating Security holders were non-employee directors
who held unvested common stock equivalents and restricted stock awards granted under the Company's Long Term Incentive Plans that were eligible
to participate in dividends (see Item 8—"Financial Statements and Supplemental Data—Note 15 and 16).
See Item 8—"Financial Statements and Supplemental Data—Note 16."
(2)
(3)
19
2019
2018
2017
2016
2015
For the Years Ended December 31,
(In thousands)
Weighted average common shares outstanding—basic
Weighted average common shares outstanding—
diluted
64,696
80,666
67,958
67,958
71,021
71,021
73,453
73,835
84,987
84,987
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
$
(45,625) $
(24,128) $
101,543
$
29,489
$
(57,827)
(398,096)
(178,629)
778,859
(457,939)
263,071
(41,480)
465,028
(877,655)
191,578
112,185
2019
2018
2017
2016
2015
As of December 31,
(In thousands)
BALANCE SHEET DATA:
Total real estate
Net investment in leases(1)
Land and development, net
Loans receivable and other lending investments, net
Total assets
Debt obligations, net
Total equity(2)
$
1,535,869
$
1,793,570
$
1,350,619
$
1,624,805
$
1,776,890
418,915
580,545
827,861
5,085,109
3,387,080
1,237,960
—
598,218
988,224
5,014,277
3,609,086
1,064,115
—
860,311
1,300,655
4,731,078
3,476,400
914,249
—
945,565
1,450,439
4,825,514
3,389,908
1,059,684
—
1,001,963
1,601,985
5,597,792
4,118,823
1,101,330
_______________________________________________________________________________
(1)
(2)
Refer to Note 5.
Total equity includes $197.5 million and $201.1 million, respectively, of noncontrolling interests as of December 31, 2019 and 2018.
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Please read the following discussion of our consolidated operating results, financial condition and liquidity together with
our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our discussion
of 2017 results is included in Part II, Item 7 of our 2018 Annual Report on Form 10-K. Our historical results may not be indicative
of our future performance. Certain prior year amounts have been reclassified in our consolidated financial statements and the
related notes to conform to the current period presentation.
Executive Overview
Our activities in 2019 primarily focused on improving our credit profile, seeking to simplify our business and scaling our
Ground Lease platform.
•
•
•
Improved Credit Profile: In 2019, we refinanced or repaid an aggregate $1.5 billion of indebtedness, primarily using
net proceeds from issuances of $1.325 billion in aggregate principal amount of new unsecured notes in capital
markets transactions and proceeds from asset sales. In addition, a purchaser of a portfolio of net lease assets assumed
$228.0 million of indebtedness collateralized by those assets (refer to Note 4). Through these transactions we reduced
our interest costs and improved our debt maturity. We have no corporate debt maturities through September 2022.
We also enhanced our equity base with the issuance of approximately 16.5 million shares of common stock upon
conversions of our Series J preferred stock by the holders thereof. Our efforts to improve our credit profile have
resulted in one or more ratings upgrades from each of the three principal national ratings agencies since the third
quarter of 2017.
Simplifying Our Business: During 2019, we further reduced the size of our legacy asset portfolio by 10% based on
gross book value. As of December 31, 2019, the aggregate gross book value of our legacy asset portfolio was $901
million. We intend to continue to reduce the size of the legacy portfolio. We have used the net proceeds from these
sales to make additional investments in our Ground Lease business, to pay down debt and for other working capital
purposes and we expect these trends to continue.
Scaling Our Ground Lease Business: In early 2019, we announced that we would focus our new business activities
on scaling our Ground Lease business. In January 2019, we made an additional $250.0 million equity investment
in SAFE at a price of $20.00 per share, amended and restated our management agreement with SAFE and entered
into certain governance arrangements with SAFE. Since that January 2019 transaction, we participated alongside
public investors in two equity offerings by SAFE in which we invested an aggregate $298.0 million. SAFE invested
the net proceeds of these equity offerings in additional Ground Leases and increased its portfolio from $947 million
as of December 31, 2018 to $2.7 billion as of December 31, 2019. As of December 31, 2019, we owned 65.2% of
SAFE's outstanding common stock and the market value of our shares of SAFE was $1.3 billion. We believe that
our Ground Lease strategy is consistent with our history of innovation in the commercial real estate finance and net
lease sectors.
In addition to the activities described above, we also saw opportunities in the net lease sector. In July 2018, we entered into
Net Lease Venture II with total capital commitments of $526 million and an investment strategy similar to the Net Lease Venture.
We have an equity interest in the new venture of approximately 51.9% and are responsible for managing the venture in exchange
for management and incentive fees. Through December 31, 2019, we have made contributions of $42 million to Net Lease Venture
II, which acquired approximately $122 million of investments.
For the year ended December 31, 2019, we recorded net income allocable to common shareholders of $291.5 million,
compared to a net loss of $64.8 million during the prior year. Adjusted income allocable to common shareholders for the year
ended December 31, 2019 was $291.3 million, compared to $143.1 million during the prior year (see "Adjusted Income" for a
reconciliation of adjusted income to net income).
As of December 31, 2019, we had $307.2 million of cash and $350.0 million of credit facility availability. We have no
corporate debt maturities through September 2022 and expect to use our unrestricted cash balance primarily to fund future investment
activities and for general working capital needs.
21
Portfolio Overview
As of December 31, 2019, based on our gross book value, including the carrying value of our equity method investments
exclusive of accumulated depreciation, our total investment portfolio has the following characteristics:
22
As of December 31, 2019, based on carrying values exclusive of accumulated depreciation and general loan loss
reserves, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in
thousands):
Property/Collateral Types
Office / Industrial
Entertainment / Leisure
Ground Leases
Land and Development
Mixed Use / Mixed Collateral
Hotel
Multifamily
Condominium
Other Property Types
Retail
Strategic Investments
Total
Geographic Region
Northeast
West
Mid-Atlantic
Southwest
Central
Southeast
Various
Strategic Investments
Total
Real Estate Finance
Real Estate
Finance
Net Lease
$
65,037
$ 1,177,949
—
—
932,119
762,301
93,721
209,991
167,137
130,014
79,826
23,896
20,833
—
—
—
—
—
—
57,348
—
—
Operating
Properties
97,941
$
16,068
—
—
39,538
76,749
33,241
8,650
—
40,229
—
Land &
Development
$
Total
% of
Total
— $ 1,340,927
—
—
633,019
—
—
—
—
—
—
—
948,187
762,301
726,740
249,529
243,886
163,255
88,476
81,244
61,062
43,254
28.5%
20.1%
16.2%
15.4%
5.3%
5.2%
3.5%
1.9%
1.7%
1.3%
0.9%
$
790,455
$ 2,929,717
$
312,416
$
633,019
$ 4,708,861
100.0%
Real Estate
Finance
Net Lease
$
305,084
$
813,333
Operating
Properties
93,173
$
Land &
Development
309,268
$
Total
$ 1,520,858
253,215
12,543
14,889
70,733
49,012
84,979
—
476,128
477,829
408,641
418,582
325,758
9,446
—
56,380
—
105,163
44,691
13,009
—
—
73,295
128,417
50,915
31,500
39,624
—
—
859,018
618,789
579,608
565,506
427,403
94,425
43,254
% of
Total
32.4%
18.2%
13.1%
12.3%
12.0%
9.1%
2.0%
0.9%
$
790,455
$ 2,929,717
$
312,416
$
633,019
$ 4,708,861
100.0%
Our real estate finance business targets sophisticated and innovative 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. Our real estate finance portfolio consists of senior mortgage loans
that are secured by commercial and residential real estate assets where we are the first lien holder, subordinated mortgage
loans that are secured by second lien or junior interests in commercial and residential real estate assets, leasehold loans to
Ground Lease tenants, including tenants of SAFE, and corporate/partnership loans, which represent mezzanine or
subordinated loans to entities for which we do not have a lien on the underlying asset, but may have a pledge of underlying
equity ownership of such assets. Our real estate finance portfolio includes loans on stabilized and transitional properties,
Ground Leases and ground-up construction projects. In addition, we have preferred equity investments and debt securities
classified as other lending investments.
23
Our real estate finance portfolio included the following ($ in thousands):
$
Performing loans:
Senior mortgages
Corporate/partnership loans
Subordinate mortgages
Subtotal
Non-performing loans(1):
Senior mortgages
Subtotal
Total carrying value of loans
Other lending investments(2)
Total carrying value
General reserve for loan losses
Total loans receivable and other lending investments, net $
As of December 31,
2019
2018
Total
% of Total
Total
% of Total
534,765
119,818
10,876
665,459
16,119
16,119
681,578
153,216
834,794
(6,933)
827,861
64.1% $
14.4%
1.3%
79.8%
1.9%
1.9%
81.7%
18.3%
100.0%
$
694,025
148,583
10,161
852,769
26,329
26,329
879,098
122,126
1,001,224
(13,000)
988,224
69.4%
14.8%
1.0%
85.2%
2.6%
2.6%
87.8%
12.2%
100.0%
_______________________________________________________________________________
(1)
Non-performing loans are presented net of asset-specific loan loss reserves of $21.7 million and $40.4 million, respectively, as of December 31,
2019 and 2018.
As of December 31, 2019, includes a $44.3 million financing receivable related to the acquisition of bowling centers from one of our lessees
(refer to Note 5).
(2)
Portfolio Activity—During the year ended December 31, 2019, the Company invested $266.9 million (including
capitalized deferred interest and excluding seller financing originations) in its real estate finance portfolio and received
repayments and proceeds from sales of $457.3 million (including the receipt of previously capitalized deferred interest).
We also charged-off $19.2 million from the specific reserve due to the resolution of a non-performing loan and $12.0 million
due to the deterioration of the collateral on a separate non-performing loan.
24
Summary of Interest Rate Characteristics—Our loans receivable and other lending investments had the following
interest rate characteristics ($ in thousands):
As of December 31,
2019
2018
Fixed-rate loans and other lending
investments
Variable-rate loans(1)
Non-performing loans(2)
Total carrying value
Carrying
Value
%
of Total
$ 207,422
611,253
16,119
24.9%
73.2%
1.9%
834,794
100.0%
General reserve for loan losses
(6,933)
Total loans receivable and other lending
investments, net
$ 827,861
Weighted
Average
Accrual
Rate
7.7%
6.2%
N/A
Weighted
Average
Accrual
Rate
Carrying
Value
%
of Total
17.9%
79.5%
2.6%
100.0%
7.2% $ 179,122
6.2%
N/A
795,772
26,330
1,001,224
(13,000)
$ 988,224
__________________________________________________________________________
(1)
As of December 31, 2019 and 2018, includes $400.4 million and $461.3 million, respectively, of loans with a weighted average LIBOR floor
of 1.3% and 1.1%, respectively.
Non-performing loans are presented net of asset-specific loan loss reserves of $21.7 million and $40.4 million, respectively, as of December 31,
2019 and 2018.
(2)
Summary of Maturities—As of December 31, 2019, our loans receivable and other lending investments had the
following maturities ($ in thousands):
Year of Maturity(1)
2020
2021
2022
2023
2024
2025 and thereafter
Total performing loans and other securities
Other lending investments
Non-performing loans(2)
Total carrying value
General reserve for loan losses
Total loans receivable and other lending investments, net
Number of
Loans
Maturing
Carrying
Value
%
of Total
9
11
—
1
1
2
24
2
1
27
$
$
$
$
322,194
327,673
—
84,981
4,715
34,773
774,336
44,339
16,119
834,794
(6,933)
827,861
38.6%
39.2%
—%
10.2%
0.6%
4.2%
92.8%
5.3%
1.9%
100.0%
_______________________________________________________________________________
(1)
Year of maturity represents the initial maturity and does not include any extension options. As of December 31, 2019, our real estate finance
portfolio had a weighted average remaining term, exclusive of any borrower extension options, of 2.3 years.
Non-performing loans are presented net of asset-specific loan loss reserves of $21.7 million.
(2)
25
The tables below summarize our loan portfolio, excluding securities and other lending investments, and the reserves
for loan losses associated with our loan portfolio ($ in thousands):
December 31, 2019
Gross
Carrying
Value
Reserve
for Loan
Losses
Number
Carrying
Value
% of
Total
Performing loans
22
$
665,460
$
(6,933) $
658,527
97.6%
Non-performing loans
1
37,820
(21,701)
16,119
2.4%
Total
23
$
703,280
$ (28,634) $
674,646
100.0%
December 31, 2018
Gross
Carrying
Value
Reserve
for Loan
Losses
Number
Carrying
Value
% of
Total
Performing loans
35
$
852,768
$ (13,000) $
839,768
97.0%
Non-performing loans
3
66,725
(40,395)
26,330
3.0%
Total
38
$
919,493
$ (53,395) $
866,098
100.0%
Reserve for Loan
Losses as a % of
Gross Carrying
Value
1.0%
57.4%
4.1%
Reserve for Loan
Losses as a % of
Gross Carrying
Value
1.5%
60.5%
5.8%
Performing Loans—The table below summarizes our performing loans gross of reserves ($ in thousands):
December 31, 2019
December 31, 2018
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
Total
$
$
Weighted average LTV
Yield
534,765
$
119,818
10,877
665,460
$
61%
8.8%
694,025
148,583
10,160
852,768
63%
9.2%
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. As of December 31, 2019, we had one non-performing
loan with a carrying value of $16.1 million compared to non-performing loans with an aggregate carrying value of $26.3
million as of December 31, 2018. 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 $28.6 million as of December 31, 2019, or 4.1% of total
loans, compared to $53.4 million or 5.8% as of December 31, 2018. For the year ended December 31, 2019, the provision
for loan losses included a $12.5 million provision resulting primarily from the deterioration of the collateral for one of our
loans, partially offset by a $6.0 million decrease in the general reserve. We expect that our level of reserve for loan losses
will fluctuate from period to period. Due to the volatility of the commercial real estate market, the process of estimating
collateral values and reserves requires the use of significant judgment. We currently believe there is adequate collateral 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 collateral less costs to sell is lower
than the carrying value of the loan. As of December 31, 2019, asset-specific reserves decreased to $21.7 million compared
to $40.4 million as of December 31, 2018.
The formula-based general reserve is derived from estimated principal default probabilities and loss severities applied
to groups of performing loans based upon risk ratings assigned to loans with 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 and future expectations about their credit quality
26
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 geographical
location as well as national and regional economic factors. This methodology results in loans being segmented by risk
classification into risk rating categories that are associated with estimated probabilities of default and principal loss. 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 $6.9 million or 1.0% of performing loans as of December 31, 2019, compared to
$13.0 million or 1.5% of performing loans as of December 31, 2018. The decrease was primarily attributable to a decrease
in the size of our loan portfolio and an overall improvement in the risk ratings of our loan portfolio.
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. Leases typically
provide for expenses at the facility to be paid by the tenant on a triple net lease basis. Under a typical net lease agreement,
the tenant agrees to pay a base monthly operating lease payment and most or all of the facility operating expenses (including
taxes, utilities, maintenance and insurance). We generally intend to hold net lease assets for long-term investment. However,
we may dispose of assets if we deem the disposition to be in our best interests.
The net lease segment includes our Ground Lease investments, made primarily through SAFE, and our traditional
net lease investments.
SAFE—SAFE is a publicly-traded company that originates and acquires Ground Leases in order to generate attractive
long-term risk-adjusted returns. We believe its business has characteristics comparable to a high-grade fixed income
investment business, but with certain unique advantages. Relative to alternative fixed income investments generally, SAFE's
Ground Leases typically benefit from built-in growth derived from contractual rent increases, and the opportunity to realize
value from residual rights to acquire the buildings and other improvements on its land at no additional cost. We believe that
these features offer us the opportunity through our ownership in SAFE to realize superior risk-adjusted total returns when
compared to certain alternative highly-rated investments. As of December 31, 2019, we owned approximately 65.2% of
SAFE's common stock outstanding.
We account for our investment in SAFE as an equity method investment (refer to Note 8). We act as SAFE's external
manager pursuant to a management agreement. The management agreement generally provides for a base management fee
that ranges from a minimum of 1.0% to a maximum of 1.5% as SAFE's Total Equity (as defined in the agreement) increases.
The management fee is payable in cash or at SAFE's election (as determined by SAFE's independent directors), SAFE
common stock. The initial term of the management agreement ends on June 30, 2023 during which the agreement is non-
terminable, except for certain cause events. After the initial term, the agreement will be automatically renewed for additional
one year terms, subject to certain rights of SAFE's independent directors to terminate the agreement based on the manager's
materially detrimental long-term performance or, beginning with the seventh annual renewal term after the initial term,
unfair management fees that the manager declines to renegotiate. SAFE will be obligated to pay the manager a termination
fee equal to three times the annual management fee paid in respect of the last completed fiscal year prior to the termination.
We are party to an exclusivity agreement with SAFE pursuant to which we agreed, subject to certain exceptions, that
we will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a Ground Lease unless we
have first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity. We are
also party to a stockholders agreement with SAFE that:
•
•
•
•
•
limits our discretionary voting power to 41.9% of the outstanding voting power of SAFE's Common Stock
until our aggregate ownership of SAFE common stock is less than 41.9%;
requires us to cast all of our voting power in favor of three director nominees to SAFE's board who are
independent of each of us and SAFE for three years;
subjects us to certain standstill provisions for two years;
restricts our ability to transfer shares of SAFE common stock issued in exchange for Investor Units, or
"Exchange Shares," for one year after their issuance;
prohibits us from transferring shares of SAFE common stock representing more than 20% of the outstanding
SAFE common stock in one transaction or a series of related transactions to any person or group, other than
27
pursuant to a widely distributed public offering, unless SAFE's other stockholders have participation rights
in the transaction; and
provides us certain preemptive rights.
•
Net Lease Venture—In February 2014, the Company partnered with a sovereign wealth fund to form a venture to
acquire and develop net lease assets and gave a right of first refusal to the venture on all new net lease investments that met
specified investment criteria (refer to Note 8 in our consolidated financial statements for more information on our Net Lease
Venture). The Net Lease Venture's investment period expired on June 30, 2018 and the remaining term of the venture extends
through February 13, 2022, subject to two, one-year extension options at the discretion of us and our partner. We obtained
control over the Net Lease Venture when the investment period expired on June 30, 2018 and consolidated the assets and
liabilities of the venture, which had previously been accounted for as an equity method investment.
Net Lease Venture II—In July 2018, we entered into Net Lease Venture II with similar investment strategies as the
Net Lease Venture (refer to Note 8). The Net Lease Venture II has a right of first offer on all new net lease investments
(excluding Ground Leases) originated by us. We have an equity interest in the new venture of approximately 51.9%, which
is accounted for as an equity method investment, and are responsible for managing the venture in exchange for a management
fee and incentive fee.
As of December 31, 2019, our consolidated net lease portfolio totaled $2.2 billion. Our net lease portfolio, including
the carrying value of our equity method investments in SAFE and Net Lease Venture II, exclusive of accumulated
depreciation, totaled $2.9 billion. The table below provides certain statistics for our net lease portfolio.
Ownership %
Gross book value (millions)(2)
Consolidated
Real Estate(1)
100.0%
Net Lease
Venture II
SAFE
51.9%
65.2%
$
2,153
$
139
$
2,634
% Leased
99.2%
100.0%
100.0%
Square feet (thousands)
Weighted average lease term (years)(3)
Weighted average yield(4)
_______________________________________________________________________________
(1) We own 51.9% of the Net Lease Venture which is consolidated in our GAAP financial statements (refer to Note 8).
(2) Gross book value represents the acquisition cost of real estate and any additional capital invested into the property by us. For SAFE, includes
15,917
10.5%
1,998
7.9%
4.4%
89.7
17.6
N/A
6.7
its 54.8% pro rata share of its unconsolidated equity method investment.
(3) Weighted average lease term is calculated using GAAP rent and the initial maturity and does not include extension options. For SAFE, includes
its 54.8% pro rata share of its unconsolidated equity method investment.
(4) Yield for SAFE is calculated over the trailing twelve months and excludes management fees earned by us.
Portfolio Activity—During the year ended December 31, 2019, we invested approximately $583.1 million in SAFE
common stock through a series of private placements and open market transactions.
Also during the year ended December 31, 2019, we acquired three net lease assets for an aggregate $220.3 million,
inclusive of closing costs, and made contributions of $25.6 million to Net Lease Venture II.
During the year ended December 31, 2019, we sold a portfolio of net lease assets with an aggregate carrying value of
$220.4 million and recognized gains of $219.7 million in "Income from sales of real estate" in our consolidated statements
of operations. In connection with the sale of this portfolio of assets the buyer assumed a $228.0 million non-recourse
mortgage.
28
Summary of Lease Expirations—As of December 31, 2019, future lease expirations on our net lease assets, excluding
our equity method investments in SAFE and Net Lease Venture II, are as follows ($ in thousands):
Year of Lease Expiration
Annualized In-Place
Operating
Lease Income and
Interest Income
from
Sales-type Leases
% of Annualized
In-Place
Operating
Lease Income and
Interest Income from
Sales-type Leases
Number of
Leases
Expiring
% of Total
Revenue(1)
Square Feet of
Leases Expiring
(in thousands)
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030 and thereafter
Total
$
1
2
1
2
2
1
5
1
3
1
18
37
$
2,228
4,087
7,204
3,953
5,746
7,383
10,129
622
1,948
5,768
131,912
180,980
1.2%
2.3%
4.0%
2.2%
3.2%
4.1%
5.6%
0.3%
1.1%
3.2%
72.8%
100.0%
0.4%
0.8%
1.4%
0.8%
1.1%
1.4%
2.0%
0.1%
0.4%
1.1%
25.6%
35.1%
153
133
484
29
235
410
640
153
189
396
13,095
15,917
Weighted average remaining
lease term (in years)(2)
_______________________________________________________________________________
(1)
17.6
Reflects the percentage of annualized operating lease income and interest income from sales-type leases for leases in-place as a percentage
of annualized total revenue.
Represents the initial maturity and does not include extension options.
(2)
Operating Properties
Our operating properties portfolio is comprised of commercial and residential properties, which represent a pool of
assets across a broad range of geographies and collateral types including retail, hotel and other properties. The operating
properties are primarily part of our legacy portfolio, and generally represent properties that we acquired in foreclosures of
loans on which the borrowers defaulted during the financial crisis. The Company generally seeks to reposition or redevelop
transitional properties with the objective of maximizing their value through the infusion of capital and/or intensive asset
management efforts. Upon stabilization, the Company will generally look to monetize these assets if favorable conditions
exist for maximizing value, or if the Company determines that the future prospects of the property indicate that the Company
would be better served by disposing of the asset and investing the cash in new assets, paying down debt or otherwise using
the cash.
The Company's operating properties portfolio, including equity method investments, included the following ($ in
thousands):
Real estate, at cost
Less: accumulated depreciation
Real estate, net
Real estate available and held for sale
Other investments
Total portfolio assets
As of December 31,
2018
2019
214,048
(13,911)
200,137
$
$
8,650
61,686
252,323
(17,798)
234,525
21,496
65,643
270,473
$
321,664
$
$
$
As of December 31, 2019, our operating property portfolio, including the carrying value of our equity method
investments, exclusive of accumulated depreciation, totaled $312.4 million.
29
Portfolio Activity—We have been aggressively monetizing our operating properties and during the year ended
December 31, 2019, we sold commercial and residential operating properties with an aggregate carrying value of $73.1
million and recognized gains of $11.9 million in "Income from sales of real estate" in our consolidated statements of
operations. We also invested $5.6 million in our operating properties and made contributions of $11.3 million to our operating
property equity method investments.
As of December 31, 2019, future lease expirations on commercial properties within the operating properties portfolio,
excluding hotels and other investments, were as follows ($ in thousands):
Year of Lease Expiration
2020(2)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030 and thereafter
Total
Number of
Leases
Expiring
Annualized In-
Place
Operating
Lease Income
% of In-Place
Operating
Lease Income
% of Total
Revenue(1)
Square Feet of
Leases Expiring
(in thousands)
$
48
11
18
7
1
9
3
37
1
2
1
950
375
491
177
118
1,213
427
3,851
87
888
63
11.0%
4.3%
5.7%
2.0%
1.4%
14.0%
4.9%
44.6%
1.0%
10.4%
0.7%
138
$
8,640
100.0%
0.2%
0.1%
0.1%
—%
—%
0.2%
0.1%
0.7%
0.1%
0.2%
—%
1.7%
11
9
9
4
1
39
10
33
2
17
2
137
Weighted average remaining
lease term (in years)
5.9
_______________________________________________________________________________
(1)
(2)
Reflects the percentage of annualized operating lease income for leases in-place as a percentage of annualized total revenue.
Includes office leases expiring in commercial properties as well as month-to-month and short term license agreements within our retail properties.
Land and Development
As of December 31, 2019, the Company's land and development portfolio, including equity method investments,
includes master planned communities, infill land parcels and waterfront land parcels located throughout the United States.
The Company's land and development portfolio included the following ($ in thousands):
Land and development, net
Other investments
Total
As of December 31,
2019
2018
$
$
580,545
42,866
623,411
$
$
598,218
65,312
663,530
Portfolio Activity—During the year ended December 31, 2019, we sold land parcels and residential lots and units and
recognized $119.6 million in "Land development revenue" and $109.7 million in "Land development cost of sales" in our
consolidated statement of operations.
30
The following table presents a land and development portfolio rollforward for the year ended December 31, 2019 and
certain land and development statistics.
Land and Development Portfolio Rollforward
(in millions)
Asbury Ocean
Club and
Asbury Park
Waterfront
Magnolia
Green
All
Others
Total
Segment
$
$
$
240.1
(45.2)
Beginning balance(1)
Asset sales(2)
Capital expenditures
Other(3)
Ending balance(1)
_______________________________________________________________________
(1)
(2)
(3)
109.5
(16.7)
22.3
(2.2)
112.9
(29.3)
234.6
69.0
$
$
$
$
248.6
(43.3)
7.7
20.0
233.0
$
598.2
(105.2)
99.0
(11.5)
580.5
As of December 31, 2019 and 2018, Total Segment excludes $42.9 million and $65.3 million, respectively, of equity method investments.
Represents gross book value of the assets sold, rather than proceeds received.
For Asbury Ocean Club and Asbury Park Waterfront, other represents assets transferred to the operating properties segment. For All Others,
includes the acquisition of a land and development asset from an unconsolidated entity in which we owned a noncontrolling 50% equity interest
(refer to Note 6).
Following is a description of some of our major land and development projects that we are holding for further
development. There can be no assurance that we will not change our current strategy for any of the projects described below:
Asbury Ocean Club and Asbury Park Waterfront
iStar owns 35 acres of oceanfront property in the Asbury Park waterfront redevelopment area in Asbury Park, N.J.
iStar serves as the master developer and its land holdings represent approximately 70% of the undeveloped land along the
waterfront. Over the past several years, iStar has strategically developed a limited number of residential and commercial
projects to re-establish the local housing market and drive momentum for future growth. The existing redeveloper agreement
with the city permits up to approximately 2,500 additional units, comprised of for-sale residential homes, hotel keys and
multi-family apartments. Future projects are positioned to be developed by iStar or in conjunction with joint venture partners.
These individual land parcels could also be sold to third party developers.
Asbury Ocean Club is a 16-story mixed-use project comprised of 130 residential condominium units, a 54-unit boutique
hotel, 24,000 square feet of retail space, a 15,000 square foot spa, 26,000 square feet of outdoor amenity space and 410
structured parking spaces, located at 1101 Ocean Avenue in Asbury Park, New Jersey. The project was completed in the
summer of 2019.
Magnolia Green
Magnolia Green is a 3,500 unit multi-generational master planned community just outside of Richmond, Virginia
with distinct phases designed for people in different life stages, from first home buyers to empty nesters. Built on nearly
1,900 acres, Magnolia Green is a community with home designs from the area's top builders. The community’s amenity
package features an 18-hole Jack Nicklaus designed golf course and a full-service golf clubhouse, aquatic center and a new
tennis facility completed in 2019.
31
Results of Operations for the Year Ended December 31, 2019 compared to the Year Ended December 31, 2018
For the Years Ended
December 31,
2019
2018
$ Change
Operating lease income
Interest income
Interest income from sales-type leases
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 loan losses
Impairment of assets
Other expense
Total costs and expenses
Income from sales of real estate
Loss on early extinguishment of debt, net
Earnings (losses) from equity method investments
Selling profit from sales-type leases
Gain from consolidation of equity method investment
Income tax benefit (expense)
Net income (loss)
$
(in thousands)
$
206,388
$
208,192
$
77,654
20,496
55,363
119,595
479,496
183,919
92,426
109,663
58,259
98,609
6,482
13,419
13,120
575,897
236,623
(27,724)
41,849
180,416
—
(438)
334,325
97,878
—
82,342
409,710
798,122
183,751
139,289
350,181
58,699
92,135
16,937
147,108
6,040
994,140
126,004
(10,367)
(5,007)
—
67,877
(815)
(18,326) $
$
(1,804)
(20,224)
20,496
(26,979)
(290,115)
(318,626)
168
(46,863)
(240,518)
(440)
6,474
(10,455)
(133,689)
7,080
(418,243)
110,619
(17,357)
46,856
180,416
(67,877)
377
352,651
Revenue—Operating lease income, which primarily includes income from net lease assets and commercial operating
properties, decreased to $206.4 million in 2019 from $208.2 million in 2018. The following tables summarizes our operating lease
income by segment ($ in millions).
2018
Change
Net Lease(1)
Operating Properties(2)
Land and Development
2019
$ 177.7
28.4
0.3
$
152.0
$
55.7
0.5
Total
$ 206.4
$
208.2
$
25.7
(27.3)
(0.2)
(1.8)
______________________________________________________________
(1) Change primarily due to a $42.6 million increase from the consolidation of the Net Lease Venture on June 30, 2018, an increase of $17.0 million from
acquiring new assets in 2019, partially offset by a decrease of $15.8 million from the reclassification of certain operating leases as sales-type leases in
May 2019 (refer to Note 5) and $18.1 million from asset sales and lease amendments.
(2) Change primarily due to asset sales in 2019 and 2018.
32
The following table shows certain same store statistics for our Net Lease segment. Same store assets are defined as assets
we owned on or prior to January 1, 2018 and were in service through December 31, 2019 (Operating lease income in millions).
Operating lease income
$
85.1
$
2019
2018
Rent per square foot
Occupancy(1)
______________________________________________________________
(1) Occupancy as of December 31, 2019 and 2018.
98.8%
8.78
$
$
84.7
8.63
99.5%
Interest income decreased to $77.7 million in 2019 from $97.9 million in 2018. The decrease in interest income was due
primarily to a decrease in the average balance of our performing loans and other lending investments, which decreased to $856.6
million for the year ended December 31, 2019 from $1.07 billion in 2018. The weighted average yield on our performing loans
and other lending investments was 8.8% and 9.2% for the years ended December 31, 2019 and 2018, respectively.
On January 1, 2019, we adopted new accounting standards (refer to Note 3) and classified certain of our leases in 2019 as
sales-type leases. Under sales-type leases, we accrue interest income from sales-type leases under the effective interest method as
opposed to recognition of operating lease income under the straight-line rent method for our leases that do not qualify as sales-
type leases. Interest income from sales-type leases was $20.5 million for the year ended December 31, 2019.
Other income decreased to $55.4 million in 2019 from $82.3 million in 2018. Other income in 2019 consisted primarily of
income from our hotel properties, management fees, lease termination fees, other ancillary income from our operating properties,
land and development projects and loan portfolio and interest income on our cash. Other income in 2018 consisted primarily of
income from our hotel properties, income recognized from the termination of a lease, management fees, other ancillary income
from our operating properties and interest income earned on our cash balances. The decrease in 2019 was due primarily to the sale
of one of our hotel properties in the fourth quarter 2018, partially offset by an increase in management fees.
Land development revenue and cost of sales—In 2019, we sold land parcels and residential lots and units and recognized
land development revenue of $119.6 million which had associated cost of sales of $109.7 million. In 2018, we sold land parcels
and residential lots and units and recognized land development revenue of $409.7 million which had associated cost of sales of
$350.2 million. The decrease in 2019 was primarily the result of two bulk land parcel sales in 2018 that generated $253.3 million
in land development revenue.
Costs and expenses—Interest expense was $183.9 million in 2019 and $183.8 million in 2018. The balance of our average
outstanding debt, inclusive of loan participations and lease liabilities associated with finance-type leases, was $3.50 billion for
2019 and $3.52 billion for 2018. Our weighted average cost of debt was 5.4% for 2019 and 5.5% for 2018. In addition, we
consolidated the Net Lease Venture on June 30, 2018 and during the years ended December 31, 2019 and 2018, we recorded $23.0
million and $10.7 million, respectively, in interest expense as a result of the consolidation of the Net Lease Venture. We own a
51.9% equity interest in the Net Lease Venture.
Real estate expenses decreased to $92.4 million in 2019 from $139.3 million in 2018. The following table summarizes our
real estate expenses by segment ($ in millions).
2019
2018
Change
Operating Properties(1)
Land and Development(2)
Net Lease(3)
Total
$
$
35.3
$
80.6
$
32.3
24.8
92.4
41.7
17.0
$
139.3
$
(45.3)
(9.4)
7.8
(46.9)
______________________________________________________________
(1) Change primarily due to a sale of assets, partially offset by new assets beginning operations in 2019.
(2) Change primarily due to asset sales, a decrease in legal costs at certain properties and other properties being moved to operating properties after beginning
operations, partially offset by new land and development assets and an increase in marketing costs at certain of our properties.
(3) Change primarily due to acquiring new assets in 2019 and the consolidation of the Net Lease Venture on June 30, 2018, partially offset by asset sales.
Depreciation and amortization was $58.3 million in 2019 and $58.7 million in 2018. The decrease in 2019 was primarily the
result of a $19.8 million decrease from asset sales and the reclassification of certain operating leases to sales-type leases, which
was partially offset by an increase in depreciation and amortization of $14.0 million due to the consolidation of the Net Lease
Venture on June 30, 2018 and $6.2 million from new acquisitions.
33
General and administrative expenses increased to $98.6 million in 2019 from $92.1 million in 2018. Excluding performance
based compensation, general and administrative expenses decreased to $52.9 million in 2019 from $61.3 million in 2018, which
does not include $7.5 million and $1.8 million, respectively, in management fees earned from SAFE that we record in other income.
General and administrative expenses net of performance based compensation and SAFE management fees was $45.4 million in
2019 and $59.5 million in 2018. The following table summarizes our general and administrative expenses for the years ended
December 31, 2019 and 2018 (in millions):
Payroll and related costs
Performance based compensation(1)
Severance costs(2)
Occupancy costs
Public company costs
Other
Total
Year Ended
December 31,
2019
2018
Change
$
32.6
$
34.9
$
45.7
—
4.4
5.6
10.3
98.6
$
30.8
5.3
5.2
5.0
10.9
92.1
$
$
(2.3)
14.9
(5.3)
(0.8)
0.6
(0.6)
6.5
____________________________________________________
(1) For the years ended December 31, 2019 and 2018, includes performance based compensation related to our Performance Incentive Plans and Annual
Incentive Plan. Please refer to Note 15 - Stock-Based Compensation Plans and Employee Benefits for a description of the Performance Incentive Plans.
(2) Represents costs associated with terminated employees.
The provision for loan losses was $6.5 million in 2019 as compared to a provision for loan losses of $16.9 million in 2018.
The provision for loan losses in 2019 included a $12.5 million specific reserve provision resulting primarily from the deterioration
of the collateral for one of our loans, partially offset by a $6.0 million decrease in the general reserve due to a decrease in the size
of our loan portfolio. The provision for loan losses in 2018 was due to a specific reserve of $21.4 million resulting from the
resolution of a non-performing loan, partially offset by a $4.5 million decrease in the general reserve due to a decrease in the size
of our loan portfolio.
In 2019, we recorded an aggregate impairment of $5.7 million in connection with the sale of net lease properties and a
commercial operating property, an aggregate impairment of $5.3 million on two land and development assets based on expected
sales proceeds, a $1.1 million impairment on a land and development asset due to a change in business strategy, $0.6 million of
impairments in connection with the sale of residential condominium units and an impairment of $0.6 million on an equity investment.
In 2018, we recorded $147.1 million of impairments, which resulted primarily from our decision to accelerate the monetization
of certain legacy assets, including several larger assets.
Other expense increased to $13.1 million in 2019 from $6.0 million in 2018. The increase in 2019 was due primarily to losses
associated with derivative contracts that were terminated.
Income from sales of real estate—Income from sales of real estate increased to $236.6 million in 2019 from $126.0 million
in 2018. The following table presents our income from sales of real estate by segment ($ in millions).
Net Lease(1)
Operating Properties
Total income from sales of real estate
2019
2018
Change
$
$
224.7
11.9
236.6
$
$
45.0
81.0
126.0
$
$
179.7
(69.1)
110.6
_______________________________________________________________________________
(1)
During the year ended December 31, 2019, we sold a portfolio of net lease assets with an aggregate carrying value of $220.4 million and recognized
gains of $219.7 million in "Income from sales of real estate" in our consolidated statements of operations.
Loss on early extinguishment of debt, net—In 2019 and 2018, we incurred losses on early extinguishment of debt of $27.7
million and $10.4 million, respectively. In 2019, we incurred losses on early extinguishment of debt primarily from the repayment
of senior notes prior to maturity. In 2018, we incurred losses on early extinguishment of debt resulting from the opportunistic
refinancing of a net lease asset which generated $115.5 million of excess proceeds to us, repayments of our Senior Term Loan
prior to its modification, the modification and upsize of our Senior Term Loan and repayment of senior notes prior to maturity.
Earnings (losses) from equity method investments—Earnings (losses) from equity method investments increased to $41.8
million in 2019 from $(5.0) million in 2018. In 2019, we recognized $29.8 million of income from our equity method investment
34
in SAFE, which includes a dilution gain of $7.6 million resulting from SAFE equity offerings during 2019, $19.3 million resulting
primarily from the sale of assets in operating property ventures and $7.3 million of aggregate losses from our remaining equity
method investments. In 2018, we recognized $4.1 million of income related to operations at our Net Lease Venture (which we
consolidate as of June 30, 2018), $4.7 million of income from our equity method investment in SAFE and $13.8 million was
aggregate losses from our remaining equity method investments, inclusive of a $10.0 million impairment on a non-U.S. equity
method investment due to local market conditions and a $6.1 million impairment on a land and development equity method
investment due to a change in business strategy.
Selling profit from sales-type leases—During the year ended December 31, 2019, we entered into a transaction with an
operator of bowling entertainment venues, consisting of the purchase of nine bowling centers for $56.7 million and a commitment
to invest up to $55.0 million in additional bowling centers over the next several years. The new centers were added to our existing
master leases with the tenant. In connection with this transaction, the maturities of the leases were extended by 15 years to 2047.
As a result of the modifications to the leases, we classified the leases as sales-type leases and recognized $180.4 million in "Selling
profit from sales-type leases" as a result of the transaction.
Gain on consolidation of equity method investment—On June 30, 2018, we gained control of the Net Lease Venture when
its investment period expired. As a result, on that date we consolidated the assets and liabilities of the venture which had previously
been accounted for as an equity method investment. We recorded a gain of $67.9 million as a result of the consolidation.
Income tax (expense) benefit—Income taxes are primarily generated by assets held in our TRS. An income tax expense of
$0.4 million was recorded in 2019 and a $0.8 million income tax expense was recorded in 2018. The income tax expense for 2019
consists of federal taxes, including those related to our TRS's, state margins taxes and other minimum state franchise taxes. The
income tax expense for 2018 includes federal taxes related to one of our TRS's, state margins taxes and other minimum state
franchise taxes.
Adjusted Income
In addition to net income (loss) prepared in conformity with generally accepted accounting principles in the United States
of America ("GAAP"), we use adjusted income, a non-GAAP financial measure, to measure 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 operating activities in the period in which they occur. Adjusted income
is 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, the liquidation preference recorded as a
premium above book value on the redemption of preferred stock, the imputed non-cash interest expense recognized for the
conversion feature of our senior convertible notes, the non-cash portion of gain (loss) on early extinguishment of debt and is
adjusted for the effect of gains or losses on charge-offs and dispositions on carrying value gross of loan loss reserves and impairments
("Adjusted Income").
35
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 operating 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 performance 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,
2019
2018
2017
Adjusted Income
Net income (loss) allocable to common shareholders
Add: Depreciation and amortization(1)
Add/Less: Provision for (recovery of) loan losses
Add: Impairment of assets(2)
Add: Stock-based compensation expense
Add: Loss on early extinguishment of debt, net
Add: Non-cash interest expense on senior convertible notes
Add: Premium on redemption of preferred stock
Add: Deferred gain on sale(3)
Less: Losses on charge-offs and dispositions(4)
Adjusted income allocable to common shareholders(3)
_______________________________________________________________________________
(1)
$
$
$
291,547
58,925
(64,757) $
68,056
6,482
13,419
30,436
7,118
4,984
—
16,937
163,765
17,563
4,318
4,733
—
—
(121,576)
291,335
—
(67,506)
143,109
$
$
110,924
60,828
(5,828)
32,379
18,812
3,065
1,255
16,314
55,500
(23,130)
270,119
(2)
(3)
(4)
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.
Impairment of assets also includes impairments on equity method investments recorded in "Earnings from equity method investments" in our consolidated
statements of operations.
Adjusted Income for the year ended December 31, 2018, as previously reported, included a $75.9 million add-back attributable to aggregate deferred
gains on our retained interests in entities to which we sold or contributed properties prior to 2018 and a $3.3 million add-back for depreciation related
to such properties. We recognized those gains in our GAAP retained earnings as of January 1, 2018 when we adopted a new accounting standard that
mandated such recognition. We retrospectively modified our presentation of Adjusted Income for 2018 and 2017, as shown in the table above, to reflect
the effects of the dispositions in the periods in which they occurred. Adjusted Income for the year ended December 31, 2017 shown in the table above
includes $55.5 million of the aggregate deferred gain, which resulted from the sale of our Ground Lease business to SAFE in the second quarter of
2017. The remaining $23.7 million of the aggregate deferred gains are not shown in the table above because the disposition transactions occurred prior
to 2017. Adjusted Income as previously reported (i.e., prior to the retrospective modification) for the years ended December 31, 2018 and 2017 was
$222.3 million and $214.6 million, respectively.
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.
36
Liquidity and Capital Resources
During the year ended December 31, 2019, we invested $1.4 billion in new investments, prior financing commitments and
ongoing development. This amount includes $266.9 million in lending and other investments, $128.9 million to develop our land
and development assets, $18.7 million of capital to reposition or redevelop our operating properties, $919.5 million to invest in
net lease assets (including $583.1 million to acquire additional common stock of SAFE) and $38.8 million in other investments.
Also during the year ended December 31, 2019, we generated $1.2 billion from loan repayments and asset sales within our portfolio,
comprised of $457.3 million from real estate finance, $113.7 million from operating properties, $482.4 million from net lease
assets, $149.9 million from land and development assets and $2.4 million from other investments. These amounts are inclusive
of fundings and proceeds from both consolidated investments and our pro rata share from equity method investments.
The following table outlines our capital expenditures on operating properties, net lease and land and development assets as
reflected in our consolidated statements of cash flows for the years ended December 31, 2019 and 2018, by segment ($ in thousands):
Operating Properties
Net Lease
Total capital expenditures on real estate assets
Land and Development
Total capital expenditures on land and development assets
For the Years Ended December 31,
2019
2018
6,397
33,549
39,946
117,514
117,514
$
$
$
$
26,016
34,479
60,495
128,543
128,543
$
$
$
$
As of December 31, 2019, we had unrestricted cash of $307.2 million and $350.0 million of borrowing capacity available
under the Revolving Credit Facility. Our primary cash uses over the next 12 months are expected to be 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 $25 million to $75 million of capital expenditures within our portfolio. The majority of these amounts relate to
our land and development projects and operating properties, and include multifamily and residential development activities which
are expected to include approximately $15 million in vertical construction. The amount actually invested 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, 2019, we also had approximately $443.9 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 performance hurdles and all other conditions to fundings (see "Unfunded Commitments" below). We also have $322.2 million
carrying amount of scheduled real estate finance maturities over the next 12 months, exclusive of any extension options that can
be exercised by our borrowers. Our capital sources to meet cash uses through the next 12 months and beyond are expected to
include cash on hand, income from our portfolio, loan repayments from borrowers and proceeds from asset sales.
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 financial results. Furthermore, as more fully described in Item 1a. Risk
Factors, our ability to incur more debt to create cash liquidity is dependent on our compliance with debt covenants in our unsecured
notes and corporate debt facilities.
37
Contractual Obligations—The following table outlines the contractual obligations related to our long-term debt obligations,
loan participations payable and lease obligations as of December 31, 2019.
Amounts Due By Period
Total
Less Than 1
Year
1 - 3
Years
3 - 5
Years
5 - 10
Years
After 10
Years
(in thousands)
Long-Term Debt Obligations:
Unsecured notes(1)
Secured credit facilities
Mortgages
Trust preferred securities
Total principal maturities
Interest Payable(2)
Loan Participations Payable(3)
Lease Obligations(4)
Total
$ 2,123,045
491,875
721,118
100,000
3,436,038
719,926
35,656
1,611,714
$ 5,803,334
$
— $ 798,045
—
—
223,414
13,633
—
—
1,021,459
13,633
291,952
144,931
—
35,656
13,998
9,553
$ 1,327,409
$ 203,773
$
775,000
491,875
22,649
—
1,289,524
177,819
—
12,889
$ 1,480,232
$ 550,000
—
451,878
—
1,001,878
84,027
—
32,393
$ 1,118,298
$
—
—
9,544
100,000
109,544
21,197
—
1,542,881
$ 1,673,622
_______________________________________________________________________________
(1)
(2)
(3)
(4)
We repaid the remaining $110.5 million aggregate principal amount of the 6.00% senior unsecured notes due 2022 in January 2020 (refer to 11).
Variable-rate debt assumes one-month LIBOR of 1.76% and three-month LIBOR of 1.91% that were in effect as of December 31, 2019.
Refer to Note 10 to the consolidated financial statements.
We are obligated to pay ground rent under certain operating leases; however, our tenants at the properties pay this expense directly under the terms of
various subleases and these amounts are excluded from lease obligations.
Senior Term Loan—In June 2018, we amended our senior secured term loan (the "Senior Term Loan") to increase the
amount of the loan to $650.0 million, reduce the interest rate to LIBOR plus 2.75% and extend its maturity to June 2023. The
Senior Term Loan is secured by pledges of equity of certain subsidiaries that own a defined pool of assets. The Senior Term Loan
permits substitution of collateral, subject to overall collateral pool coverage and concentration limits, over the life of the facility.
We may make optional prepayments, subject to prepayment fees, and are required to repay 0.25% of the principal amount of the
Senior Term Loan each quarter.
Revolving Credit Facility—In September 2019, we amended and restated our secured revolving credit facility (the
"Revolving Credit Facility") to increase the maximum available principal amount to $350.0 million, extend the maturity date to
September 2022 and make certain other changes. Outstanding borrowings under the Revolving Credit Facility are secured by
pledges of the equity interests in our subsidiaries that own a defined pool of assets. 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 downward based upon our
corporate credit rating, ranging from 1.0% to 1.5% in the case of base rate loans and from 2.0% to 2.5% in the case of LIBOR
loans. In addition, there is an undrawn credit facility commitment fee ranging from 0.25% to 0.45% based on corporate credit
ratings. At maturity, we may convert outstanding borrowings to a one year term loan which matures in quarterly installments
through September 2023. As of December 31, 2019, based on our borrowing base of assets, we had $350.0 million of borrowing
capacity available under the Revolving Credit Facility.
Unsecured Notes—In March 2019, the Company repaid in full the 5.00% senior unsecured notes due July 2019. In September
2019, we issued $675.0 million principal amount of 4.75% senior unsecured notes due October 2024. Proceeds from the offering,
together with cash on hand, were used in October 2019 to repay in full the $400.0 million principal amount outstanding of the
4.625% senior unsecured notes due September 2020 and the $275.0 million principal amount outstanding of the 6.50% senior
unsecured notes due July 2021. In November 2019, we issued an additional $100.0 million principal amount of 4.75% senior
unsecured notes due October 2024. Proceeds from the offering will be used for general corporate purposes. In December 2019,
we issued $550.0 million principal amount of 4.25% senior unsecured notes due August 2025. Proceeds from the offering were
used to redeem the $375.0 million principal amount outstanding ($110.5 million was redeemed in January 2020) of the 6.00%
senior unsecured notes due April 2022, repay a portion of the borrowings outstanding under the Senior Term Loan and pay related
premiums and expenses in connection with the transaction.
38
Collateral Assets—The carrying value of our assets that are directly pledged or are held by subsidiaries whose equity is
pledged as collateral to secure our obligations under our secured debt facilities are as follows, by asset type ($ in thousands):
Real estate, net
Real estate available and held for sale
Net investment in leases
Land and development, net
Loans receivable and other lending investments, net(2)(3)
Other investments
Cash and other assets
Total
As of December 31,
2019
2018
Collateral
Assets(1)
1,409,585
—
418,915
—
233,104
—
—
2,061,604
$
$
Non-Collateral
Assets
$
$
117,634
8,650
—
580,545
566,050
907,875
814,044
2,994,798
Collateral
Assets(1)
1,620,008
1,055
—
12,300
498,524
—
—
2,131,887
$
$
Non-Collateral
Assets
$
$
151,011
21,496
—
585,918
480,154
304,275
1,329,990
2,872,844
___________________________________________________________
(1)
The Senior Term Loan and the Revolving Credit Facility are secured only by pledges of equity of certain of our subsidiaries and not by pledges of the
assets held by such subsidiaries. Such subsidiaries are subject to contractual restrictions under the terms of such credit facilities, including restrictions
on incurring new debt (subject to certain exceptions). As of December 31, 2019, Collateral Assets includes $438.7 million carrying value of assets held
by entities whose equity interests are pledged as collateral for the Revolving Credit Facility that is undrawn as of December 31, 2019.
As of December 31, 2019 and 2018, the amounts presented exclude general reserves for loan losses of $6.9 million and $13.0 million, respectively.
As of December 31, 2019 and 2018, the amounts presented exclude loan participations of $35.6 million and $22.5 million, respectively.
(2)
(3)
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, as such terms are defined in the indentures governing the debt securities, 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 indebtedness for the
purpose of refinancing existing indebtedness and for other permitted purposes under the indentures.
The Senior Term Loan and the Revolving Credit Facility contain certain covenants, including covenants relating to collateral
coverage, 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 Senior Term Loan requires us to maintain collateral coverage of at
least 1.25x outstanding borrowings on the facility. The 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 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, we have the option to pay down outstanding borrowings or substitute assets in the borrowing
base. Under both the Senior Term Loan and the Revolving Credit Facility we are permitted to pay dividends provided that no
material default (as defined in the relevant agreement) has occurred and is continuing or would result therefrom and we remain in
compliance with our financial covenants after giving effect to the dividend.
Derivatives—Our use of derivative financial instruments is primarily limited to the utilization of interest rate swaps, interest
rate caps or other instruments to manage interest rate risk exposure and foreign exchange contracts to manage our risk to changes
in foreign currencies. See Item 8—"Financial Statements and Supplemental Data—Note 13" for further details.
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 Item 8—"Financial Statements and Supplemental
Data—Note 8" 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 real estate
assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. We
refer to these arrangements as Performance-Based Commitments. In addition, we have committed to invest capital in several real
estate funds and other ventures. These arrangements are referred to as Strategic Investments.
39
As of December 31, 2019, the maximum amount of fundings we may be obligated to make under each category, assuming
all performance hurdles and milestones are met under the Performance-Based Commitments and assuming 100% of our capital
committed to Strategic Investments is drawn down, are as follows (in thousands):
Performance-Based Commitments
Strategic Investments
Total
Loans and
Other Lending
Investments(1)
225,600
$
Real Estate(2)
70,047
$
—
—
$
225,600
$
70,047
Other
Investments
$
$
131,380
16,851
148,231
$
$
Total
427,027
16,851
443,878
_______________________________________________________________________________
(1)
(2)
Excludes $14.3 million of commitments on loan participations sold that are not our obligation.
Includes a commitment to invest up to $55.0 million in additional bowling centers over the next several years (refer to Note 5).
Stock Repurchase Program—We may repurchase shares in negotiated transactions or open market transactions, including
through one or more trading plans. During the year ended December 31, 2019, we repurchased 7.3 million shares of our outstanding
common stock for $74.6 million, representing an average cost of $10.16 per share. During the year ended December 31, 2018, we
repurchased 0.8 million shares of our outstanding common stock for $8.3 million, representing an average cost of $10.22 per share.
Preferred Equity—In December 2019, we issued 16.5 million shares of our common stock upon conversions of our Series
J preferred stock by the holders thereof. We redeemed a de minimis amount of the Series J preferred stock for cash at the liquidation
preference plus accrued dividends to the redemption date (refer to Note 14).
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments
in certain circumstances 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 consistently from period to period. We base our estimates on historical corporate and
industry experience and various other assumptions that we believe to be appropriate under the circumstances. For all of these
estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment.
During 2019, management reviewed and evaluated these critical accounting estimates and believes they are appropriate.
Our significant accounting policies are described in Item 8—"Financial Statements and Supplemental Data—Note 3." The
following is a summary of accounting policies that require more significant management estimates and judgments:
Reserve for loan losses—The reserve for loan losses reflects management's estimate of loan losses inherent in the loan
portfolio, including financing receivables (refer to Note 5), 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 quality based on all known and relevant
internal and external factors that may affect collectability. We consider, among other things, payment status, lien position, borrower
financial resources and investment in collateral, collateral type, project economics and geographical location as well as national
and regional economic factors. This methodology results in loans being segmented by risk classification into risk rating categories
40
that are associated with estimated probabilities of default and principal loss. Ratings range from "1" to "5" with "1" representing
the lowest risk of loss and "5" representing the highest risk of loss. We estimate loss rates based on historical realized losses
experienced within our portfolio and take into account current economic conditions affecting the commercial real estate market
when establishing appropriate time frames to evaluate loss experience.
The asset-specific reserve component relates to reserves for losses on impaired loans. We consider a loan to be impaired
when, based upon current information and events, we believe that it is probable that we will be unable to collect all amounts due
under the contractual terms of the loan agreement. This assessment is made on a loan-by-loan basis each quarter based on such
factors as payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics
and geographical location as well as national and regional economic factors. A reserve is established for an impaired loan when
the present value of payments expected to be received, 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.
Our one impaired loan is 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 some 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 concession to a debtor that is experiencing financial difficulties. Impairments on TDR loans are generally measured
based on the present value of expected future cash flows discounted at the effective interest rate of the original loan.
The provision for (recovery of) loan losses for the years ended December 31, 2019, 2018 and 2017 were $6.5 million, $16.9
million and $(5.8) million, respectively. The total reserve for loan losses as of December 31, 2019 and 2018, included asset specific
reserves of $21.7 million and $40.4 million, respectively, and general reserves of $6.9 million and $13.0 million, respectively.
Reserve for losses on net investment in leases— We evaluate our net investment in leases for impairment under ASC
310. As part of our process for monitoring the credit quality of our net investment in leases, we perform a quarterly assessment
for each of our net investment leases. We consider a net investment in lease 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 lease.
As of December 31, 2019, all of our net investment in leases were performing in accordance with the terms of the respective leases.
Any potential reserve for losses on net investment in leases will reflect management's estimate of losses inherent in the
portfolio as of the balance sheet date. If we determine that the cash flows we expect to receive from the underlying collateral over
the lease term is less than the carrying value of the net investment in lease, we will record a reserve. The reserve, if applicable,
will be increased (decreased) through "Reserve for losses on net investment in leases" in our consolidated statements of operations.
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 classified 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 year ended December 31, 2018, we received title to a property in satisfaction of a mortgage loan with a fair value
of $4.6 million for which the property had served as collateral. We did not take title to any properties during the years ended
December 31, 2019 and 2017.
Net Investment in Leases—Net investment in leases are recognized when our leases qualify as sales-type leases. The net
investment in leases is initially measured at the present value of the fixed and determinable lease payments, including any guaranteed
or unguaranteed residual value of the asset at the end of the lease, discounted at the rate implicit in the lease. If a lease qualifies
as a sales-type lease, it is further evaluated to determine whether the transaction is considered a sale leaseback transaction. If the
sales-type lease does not qualify as a sale leaseback transaction, the lease is considered a financing receivable and is recognized
in accordance with ASC 310 and recorded in "Loans receivable and other lending investments, net" on our consolidated balance
sheets.
41
Impairment or disposal of long-lived assets—Real estate assets to be disposed of are reported at the lower of their carrying
amount or estimated fair value less costs to sell and are included in "Real estate available and held for sale" on our consolidated
balance sheets. The difference between the estimated fair value less costs to sell and the 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
operations. Once the asset is classified as held for sale, depreciation expense is no longer recorded.
We periodically review real estate to be held for use 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 anticipated holding period of the asset) is less than the carrying value. Such estimate
of cash flows considers factors such as expected future operating income, trends and prospects, as well as the effects of demand,
competition and other economic factors. To the extent impairment has occurred, the loss will be measured as the excess of the
carrying amount of the property over the fair value of the asset and reflected as an adjustment to the basis of the asset. Impairments
of real estate and land and development assets are recorded in "Impairment of assets" in our consolidated statements of operations.
During the year ended December 31, 2019, we recorded aggregate impairments on real estate and land and development
assets of $13.4 million. During the year ended December 31, 2018, we recorded impairments of $147.1 million on land and
development and real estate assets resulting primarily from our decision to accelerate the monetization of certain legacy assets,
including several larger assets. During the year ended December 31, 2017, we recorded impairments on real estate and land and
development assets totaling $32.4 million. The impairments recorded in 2017 were primarily the result of impairments on land
and development assets of $20.5 million resulting from a decrease in expected cash flows on one asset and a change in exit strategy
on another asset, and impairments of $11.9 million on real estate assets due to shifting demand in the local condominium markets
and changes in our exit strategy on other real estate 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, 2019, 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 carryforwards. We evaluate our ability to realize 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 our ability to realize our deferred tax assets, we consider, among other
matters, estimates of expected future taxable income, nature of current and cumulative losses, existing and projected book/tax
differences, tax planning strategies available, and the general and industry specific economic outlook. This analysis is inherently
subjective, as it requires us to forecast our business and general economic environment in future periods. Changes in estimate of
our ability to realize our deferred tax asset, if any, are included in "Income tax (expense) benefit" in the consolidated statements
of operations.
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 $79.6 million and $78.1 million as of December 31,
2019 and 2018, respectively.
Variable interest entities—We evaluate our investments and other contractual arrangements to determine if our interests
constitute variable interests in a variable interest entity ("VIE") and if we are the primary beneficiary. There is a significant amount
of judgment required to determine if an entity is considered a VIE and if we are the primary beneficiary. We first perform a
qualitative analysis, which requires certain subjective decisions regarding our assessment, including, but not limited to, which
interests create or absorb variability, the contractual terms, the key decision making powers, impact on the VIE's economic
performance and related party relationships. An iterative quantitative analysis is required if our qualitative analysis proves
inconclusive as to whether the entity is a VIE or we are the primary beneficiary and consolidation is required.
Fair value of assets and liabilities—The degree of management judgment involved in determining the fair value of assets
and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial and
nonfinancial assets and 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,
42
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 Item 8—"Financial Statements and Supplemental Data—Note 17" 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.
43
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Market Risks
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity
prices and equity prices. In pursuing our business plan, the primary market risk to which we are exposed is interest rate risk. Our
operating results will depend in part on the difference between the interest and related income earned on our assets and the interest
expense incurred in connection with our interest-bearing liabilities. Changes in the general level of interest rates prevailing in the
financial markets will affect the spread between our floating rate assets and liabilities subject to the net amount of floating rate
assets/liabilities and the impact of interest rate floors and caps. Any significant compression of the spreads between interest-earning
assets and interest-bearing liabilities could have a material adverse effect on us.
In the event of a significant rising interest rate environment or economic downturn, defaults could increase and cause us to
incur additional credit losses which would adversely affect our liquidity and operating results. Such delinquencies or defaults
would likely have 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 governmental monetary and tax policies, domestic and
international economic and political conditions, and other factors beyond our control. We monitor the spreads between our interest-
earning assets and 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, assuming no change in our interest earning assets
or interest bearing liabilities, should interest rates increase or decrease by 10, 50 or 100 basis points, assuming no change in the
shape of the yield curve (i.e., relative interest rates). The base interest rate scenario assumes the one-month LIBOR rate of 1.76%
as of December 31, 2019. Actual results could differ significantly from those estimated in the table.
Estimated Change In Net Income
($ in thousands)
Change in Interest Rates
-100 Basis Points
-50 Basis Points
-10 Basis Points
Base Interest Rate
+10 Basis Points
+50 Basis Points
+100 Basis Points
$
Net Income(1)
(1,394)
(734)
(157)
—
157
1,156
2,805
______________________________________________________________________________
(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, 2019, $400.4 million of our floating rate loans have a cumulative weighted average LIBOR floor of 1.3% and $35.7 million
of our floating rate debt has a cumulative weighted average interest rate floor of 0.4%.
44
Item 8. Financial Statements and Supplemental Data
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and
2017
Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedule II—Valuation and Qualifying Accounts and Reserves as of December 31, 2018 with reconciliations
for the years ended December 31, 2019, 2018 and 2017
Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2019 with reconciliations for
the years ended December 31, 2019, 2018 and 2017
Schedule IV—Mortgage Loans on Real Estate as of December 31, 2019 with reconciliations for the years
ended December 31, 2019, 2018 and 2017
Page
46
51
52
53
54
56
58
105
106
114
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements
or notes thereto.
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of iStar Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of iStar Inc. and subsidiaries (the "Company") as of December 31, 2019 and
2018, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows, for the years ended
December 31, 2019 and 2018, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for the years ended December 31, 2019 and 2018, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24,
2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3 to the financial statements, effective January 1, 2019, the company adopted FASB Accounting Standards Updates
2016-02 and 2018-11, Leases, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Real Estate-Impairment-Refer to Notes 3 and 4 to the financial statements
Critical Audit Matter Description
The Company reviews real estate to be held for use 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 value of a real estate asset held for use and land
and development assets are impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest
charges) to be generated by the asset (taking into account the anticipated holding period of the asset) is less than the carrying value. Such
estimate of cash flows considers factors, such as expected future operating income trends, as well as the effects of demand, competition and
other economic factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property
over the estimated fair value of the asset and reflected as an adjustment to the basis of the asset.
Given the subjectivity in identifying the events or changes in circumstances that would lead to an impairment, as well as in estimating the
aggregate future cash flows and the fair value of the impaired asset, performing audit procedures to evaluate impairment of the real estate
assets required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
46
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to identifying events that would lead to an impairment as well as related to the aggregate future cash flows and
the fair value of the impaired asset included the following, among others:
• We tested the effectiveness of controls over management’s identification of events or changes in circumstances that would lead to an
impairment, estimate of future cashflows used to determine fair value, including controls over management selection of the hold period,
discount rates, growth rates, and capitalization rates.
• We evaluated management’s assessment of events or changes in circumstances that would lead to an impairment, such as identifying
when an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life by:
– Discussing with management and Company personnel responsible for real estate investment strategy to determine if management’s
intent regarding the hold period had changed;
– Read meeting minutes to identify any evidence that may contradict management’s estimate of the hold period for indicators that it is
likely a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life; and
– Compared the recorded value for those long-lived assets which are being marketed for sale to any current purchase offers and
identified those properties where potential sale proceeds may be less than the recorded value.
• We evaluated management’s ability to forecast future cashflows by comparing actual results to management’s historical forecasts.
• We evaluated the reasonableness of management’s future cashflows by comparing the forecasts to:
– Historical revenues, expenses, and capital expenditures;
–
– Recently executed agreements, market rent comparables, and expense growth expectations in the industry.
Internal communications to management and the Board of Directors; and
• With the assistance of our fair value specialists, we evaluated the reasonableness of the fair value of the impaired asset and consistency
with external data from other sources.
Loans Receivable and Other Lending Investments, Net-Reserve for Loan Losses-Refer to Notes 3 and 6 to the financial statements
Critical Audit Matter Description
The reserve for loan losses reflects management’s estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The
reserve for loan losses includes an asset-specific component.
The asset-specific reserve component relates to reserves for losses on impaired loans. A reserve is established for an impaired loan when the
present value of payments expected to be received 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 the loan.
Given the judgment necessary to identify events or changes in circumstances that indicate the carrying amounts of loans receivable may not
be recoverable, performing audit procedures to evaluate the reserve for loan losses and estimated asset-specific reserve for loan losses
required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the allowance for loan losses and the collectability of the loan portfolio, loss rates, present value of payments
to be received, and fair value of collateral included the following, among others:
• We tested the effectiveness of controls over the asset-specific reserves for loan losses, including management’s controls over the
identification of impairment indicators, determination of risk ratings, present value of payments to be received, and the fair value of
collateral.
• With the assistance of our fair value specialists, we evaluated loans for potential impairment by:
– Evaluating the accuracy and determining the relevance of the factors utilized during the Company’s evaluation;
– Analyzing period over period changes on items, such as net operating income, debt service coverage ratio, occupancy, cash flow
volatility, leasing and tenant profile, loan structure, exit plan, and project sponsorship, to determine impact on loan performance;
– Evaluating the financial performance of the collateral associated with each loan; and
– Evaluating the impact of macroeconomic and microeconomic events on the borrower, sponsor, or asset type.
• We reviewed remittance for loans in the Company’s portfolio to corroborate that the borrowers had the ability to pay their obligations in
accordance with the loan agreements.
• With the assistance of our fair value specialists, we evaluated the reasonableness and financial performance of the collateral values and
consistency with external data from other sources.
Net Investment in Leases-Refer to Notes 3 and 5 to the financial statements
Critical Audit Matter Description
In May 2019, the Company entered into a transaction with an operator of bowling entertainment venues, consisting of the purchase of nine
bowling centers for $56.7 million, of which seven were acquired from the lessee for $44.1 million, and a commitment to purchase up to
$55.0 million in additional bowling centers over the next several years. The new centers were added to the Company’s existing master leases
with the tenant. In connection with this transaction, the maturities of the master leases were extended by 15 years to 2047.
As a result of the modifications to the leases, the Company classified the leases as sales-type leases and recorded $424.1 million in “Net
investment in leases” and derecognized $193.4 million from “Real estate, net” and “Real estate available and held for sale,” $25.4 million
47
from “Deferred operating lease income receivable, net,” $13.4 million from “Deferred expenses and other assets, net,” and $1.9 million from
“Accounts payable, accrued expenses and other liabilities” on its consolidated balance sheet. The Company recognized $180.4 million in
“Selling profit from sales-type leases” in its consolidated statements of operations as a result of the transaction. The Company determined that
the seven bowling centers acquired from the lessee did not qualify as a sale leaseback transaction and, as a result, recorded $44.1 million
financing receivable in “Loans receivable and other lending investments, net” on its consolidated balance sheet.
We identified the recognition of net investment in leases due to the lease modification as a critical audit matter because of the significant
estimates and assumptions management makes to determine the appropriate lease classification, identification of separate lease components,
and the valuation methodology for estimating the fair value of assets and liabilities. This required a high degree of auditor judgment and an
increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the
reasonableness of management’s discounted cash flow analysis, valuation methodology, and cost to replace certain assets.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the recognition of net investment in leases due to the lease modification included the following, among others:
• We tested the effectiveness of controls over the net investment in leases, including management’s controls over the modification of
leases, the identification of separate lease components, and the valuation methodology for estimating the fair value of assets and
liabilities.
• We assessed the reasonableness of the lease modification and management’s classification analysis by comparing the extension term,
remaining economic life, present value of the lease payments, and projected cash flows associated with the modified lease to in-place
lease agreements.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) current market
data, (3) cost to replace certain assets, and (4) assumptions used in the discounted cash flows, including testing the mathematical
accuracy of the calculation, and developing a range of independent estimates and comparing our estimates to those used by management.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 24, 2020
We have served as the Company's auditor since 2018.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of iStar Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of iStar Inc. and subsidiaries (the “Company”) as of December 31, 2019, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 24, 2020,
expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s change in the
manner in which it accounts for leases due to the adoption of FASB Accounting Standards Updates 2016-02 and 2018-11, Leases, using the
modified retrospective approach.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) 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 controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 24, 2020
We have served as the Company's auditor since 2018.
49
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of iStar Inc.
Opinion on the Financial Statements
We have audited the consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows of
iStar Inc. and its subsidiaries (the “Company”) for the year ended December 31, 2017, including the related notes and
schedules of valuation and qualifying accounts and reserves, real estate and accumulated depreciation, and mortgage loans on
real estate for the year ended December 31, 2017 listed in the accompanying index (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of
operations and cash flows of the Company for the year ended December 31, 2017 in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on
a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
New York, New York
February 26, 2018, except for the change in the manner in which the Company classifies certain cash receipts and cash
payments and the change in manner in which it presents restricted cash on the consolidated statements of cash flows discussed
in Note 3 (not presented herein) to the consolidated financial statements appearing under Item 8 of the Company’s 2018 annual
report on Form 10-K, as to which the date is February 25, 2019
We served as the Company's auditor from at least 1997 to 2018. We have not been able to determine the specific year we began
serving as auditor of the Company.
50
iStar Inc.
Consolidated Balance Sheets
(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
Net investment in leases
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
Liabilities associated with properties held for sale
Loan participations payable, net
Debt obligations, net
Total liabilities
Commitments and contingencies (refer to Note 12)
Equity:
iStar Inc. shareholders' equity:
Preferred Stock Series D, G and I, liquidation preference $25.00 per share (refer to Note 14)
Convertible Preferred Stock Series J, liquidation preference $50.00 per share (refer to Note
14)
Common Stock, $0.001 par value, 200,000 shares authorized, 77,810 and 68,085 shares
issued and outstanding as of December 31, 2019 and 2018, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss (refer to Note 14)
Total iStar Inc. shareholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
_______________________________________________________________________________
Note - Refer to Note 2 for details on the Company's consolidated variable interest entities ("VIEs").
As of December 31,
2018
2019
$
$
$
1,761,079
(233,860)
1,527,219
8,650
1,535,869
418,915
580,545
827,861
907,875
307,172
10,162
54,222
442,488
5,085,109
424,374
57
35,638
3,387,080
3,847,149
2,076,333
(305,314)
1,771,019
22,551
1,793,570
—
598,218
988,224
304,275
931,751
10,669
98,302
289,268
5,014,277
316,251
2,341
22,484
3,609,086
3,950,162
12
—
12
4
78
3,284,877
(2,205,838)
(38,707)
1,040,422
197,538
1,237,960
5,085,109
$
68
3,352,225
(2,472,061)
(17,270)
862,978
201,137
1,064,115
5,014,277
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
51
iStar Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
For the Years Ended December 31,
2018
2017
2019
Revenues:
Operating lease income
Interest income
Interest income from sales-type leases
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
Provision for (recovery of) loan losses
Impairment of assets
Other expense
Total costs and expenses
Income from sales of real estate
Income (loss) from operations before earnings from equity method investments and other
items
Loss on early extinguishment of debt, net
Earnings (losses) from equity method investments
Selling profit from sales-type leases
Gain on consolidation of equity method investment
Income (loss) from continuing operations before income taxes
Income tax benefit (expense)
Income (loss) from continuing operations
Income from discontinued operations
Gain from discontinued operations
Net income (loss)
Net income attributable to noncontrolling interests
Net income (loss) attributable to iStar Inc.
Preferred dividends
Net income (loss) allocable to common shareholders
Per common share data:
Income (loss) attributable to iStar Inc. from continuing operations:
Basic
Diluted
Net income (loss) attributable to iStar Inc.:
Basic
Diluted
Weighted average number of common shares:
Basic
Diluted
$
206,388
$
208,192
$
77,654
20,496
55,363
119,595
479,496
183,919
92,426
109,663
58,259
98,609
6,482
13,419
13,120
575,897
236,623
140,222
(27,724)
41,849
180,416
—
334,763
(438)
334,325
—
—
334,325
(10,283)
324,042
(32,495)
97,878
—
82,342
409,710
798,122
183,751
139,289
350,181
58,699
92,135
16,937
147,108
6,040
994,140
126,004
(70,014)
(10,367)
(5,007)
—
67,877
(17,511)
(815)
(18,326)
—
—
(18,326)
(13,936)
(32,262)
(32,495)
$
$
$
$
$
291,547
$
(64,757) $
4.51
3.73
4.51
3.73
$
$
$
$
(0.95) $
(0.95) $
(0.95) $
(0.95) $
64,696
80,666
67,958
67,958
187,684
106,548
—
188,091
196,879
679,202
194,686
147,617
180,916
49,033
98,882
(5,828)
32,379
20,954
718,639
92,049
52,612
(14,724)
13,015
—
—
50,903
948
51,851
4,939
123,418
180,208
(4,526)
175,682
(64,758)
110,924
(0.25)
(0.25)
1.56
1.56
71,021
71,021
The accompanying notes are an integral part of the consolidated financial statements.
52
iStar Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net income (loss)
Other comprehensive income (loss):
Impact from adoption of new accounting standards
Reclassification of losses on cumulative translation adjustment into
earnings upon realization(1)
Reclassification of (gains) losses on cash flow hedges into earnings upon
realization(2)
Unrealized gains (losses) on available-for-sale securities
Unrealized gains (losses) on cash flow hedges
Unrealized losses on cumulative translation adjustment
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive income attributable to noncontrolling interests
Comprehensive income (loss) attributable to iStar Inc.
$
For the Years Ended December 31,
2018
2017
2019
$
334,325
$
(18,326) $
180,208
—
—
14,524
2,280
(42,582)
—
(25,778)
308,547
(5,942)
302,605
$
276
721
(1,508)
(1,135)
(14,699)
(364)
(16,709)
(35,035)
(12,015)
(47,050) $
—
—
(168)
1,186
847
(129)
1,736
181,944
(4,526)
177,418
_______________________________________________________________________________
(1)
(2)
Amounts were reclassified to "Earnings (losses) from equity method investments" in the Company's consolidated statements of operations.
Reclassified to "Interest expense" in the Company's consolidated statements of operations are $1,861, $388 and $64 for the years ended December 31,
2019, 2018 and 2017, respectively. Amount reclassified to "Gain on consolidation of equity method investment" in the Company's consolidated
statements of operations is $1,876 for the year ended December 31, 2018. Reclassified to "Earnings (losses) from equity method investments" in the
Company's consolidated statements of operations are $184, $(20) and $304, respectively, for the years ended December 31, 2019, 2018 and 2017.
Amount reclassified to "Other expense" in the Company's consolidated statements of operations is $11,673 for the year ended December 31, 2019
resulting from hedged forecasted transactions becoming not probable to occur. Amount reclassified to "Income from sales of real estate" in the
Company's consolidated statements of operations is $806 for the year ended December 31, 2019.
The accompanying notes are an integral part of the consolidated financial statements.
53
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iStar Inc.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
Provision for (recovery of) loan losses
Impairment of assets
Depreciation and amortization
Non-cash interest income from sales-type leases
Stock-based compensation expense
Amortization of discounts/premiums and deferred financing costs on debt obligations, net
Amortization of discounts/premiums and deferred interest on loans, net
Deferred interest on loans received
Gain from consolidation of equity method investment
Gain from discontinued operations
Selling profit from sales-type leases
Losses (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
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, net investments in leases and land 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
Cash, cash equivalents and restricted cash acquired upon consolidation of equity method investment
Distributions from other investments
Contributions to and acquisition of interest in other investments
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
Purchase of marketable securities in connection with the defeasance of mortgage notes payable
Preferred dividends paid
Common dividends paid
Repurchase of stock
Redemption of Series E and F preferred stock
Payments for deferred financing costs
Payments for withholding taxes upon vesting of stock-based compensation
Contributions from noncontrolling interests
Distributions to and redemption of noncontrolling interests
Payments for debt prepayment or extinguishment costs
Other financing activities, net
Cash flows used in financing activities
Effect of exchange rate changes on cash
Changes in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of amount capitalized
For the Years Ended December 31,
2018
2017
2019
$
334,325
$
(18,326)
$
180,208
6,482
13,419
58,259
(3,781)
30,436
13,847
(42,342)
10,397
—
—
(180,416)
(41,849)
30,058
(16,185)
(236,623)
(9,932)
27,724
13,642
417
(5,848)
(47,655)
(45,625)
(255,804)
(39,946)
(117,514)
(240,487)
419,800
5,898
329,971
114,885
—
62,911
(656,720)
(21,090)
(398,096)
1,486,980
(1,482,558)
—
(32,495)
(25,059)
(68,289)
—
(19,928)
(4,475)
2,812
(14,998)
(20,606)
(13)
(178,629)
12
(622,338)
974,544
352,206
181,520
$
$
$
$
16,937
147,108
58,699
—
17,563
15,422
(41,168)
40,463
(67,877)
—
—
5,007
18,133
(14,989)
(126,004)
(59,529)
10,367
3,377
949
(1,925)
(28,335)
(24,128)
(482,143)
(60,495)
(128,543)
(19,454)
832,982
—
411,786
223,416
13,608
40,804
(94,578)
41,476
778,859
704,360
(944,800)
(110,939)
(32,496)
(12,227)
(8,304)
—
(5,471)
(4,807)
13,927
(60,743)
(4,132)
7,693
(457,939)
19
296,811
677,733
974,544
$
(5,828)
32,379
49,934
—
18,812
13,857
(55,985)
52,795
—
(123,418)
—
(13,015)
42,059
(6,830)
(92,557)
(15,963)
14,724
16,878
1,424
(15,230)
7,299
101,543
(522,269)
(37,067)
(121,400)
(6,600)
615,620
—
314,013
194,090
—
49,672
(224,219)
1,231
263,071
2,288,654
(1,921,699)
—
(48,444)
—
(45,928)
(240,000)
(32,419)
(724)
12
(26,213)
(14,108)
(611)
(41,480)
(28)
323,106
354,627
677,733
171,590
179,208
56
Supplemental disclosure of non-cash investing and financing activity:
Fundings and repayments of loan receivables and loan participations, net
Sales-type lease origination
Acquisitions of real estate and land and development 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
Marketable securities transferred in connection with the defeasance of mortgage notes payable
Accounts payable for capital expenditures on real estate assets
Acquisition of land and development asset through joint venture consolidation
Conversion of Series J convertible preferred stock
Defeasance of mortgage notes payable
Receivable from sales of real estate and land parcels
Accrued finance costs
Accrued stock repurchases
Assumption of mortgage by third party
Financing provided on sales of land and development assets, net
Increase in net lease assets upon consolidation of equity method investment
Increase in debt obligations upon consolidation of equity method investment
Increase in noncontrolling interests upon consolidation of equity method investment
$
For the Years Ended December 31,
2019
2018
2017
$
13,014
411,523
—
4,073
—
—
—
27,000
193,510
—
—
2,362
6,358
228,000
—
—
—
—
$
(80,095)
—
4,600
—
16,052
110,939
—
—
—
(105,785)
—
—
—
—
142,639
844,550
464,706
200,093
(57,514)
—
—
—
3,775
—
2,709
—
—
—
4,853
—
—
—
—
—
—
—
The accompanying notes are an integral part of the consolidated financial statements.
57
iStar Inc.
Notes to Consolidated Financial Statements
Note 1—Business and Organization
Business—iStar Inc. (the "Company") finances, invests in and develops real estate and real estate related projects as part of
its fully-integrated investment platform. The Company also manages entities focused on ground lease and net lease investments
(refer to Note 8). The Company has invested over $40 billion of capital 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 reportable business segments are real estate finance, net lease, operating properties and land and development (refer to
Note 18).
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 and 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.
Principles of Consolidation—The consolidated financial statements include the financial statements of the Company, its
wholly owned subsidiaries, controlled partnerships and VIEs for which the Company is the primary beneficiary. All intercompany
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 provided no financial support to those VIEs that it was not previously contractually required to provide.
58
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Consolidated VIEs—The Company consolidates VIEs for which it is considered the primary beneficiary. 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, 2019. The following table presents the assets
and liabilities of the Company's consolidated VIEs as of December 31, 2019 and 2018 ($ in thousands):
ASSETS
Real estate
Real estate, at cost
Less: accumulated depreciation
Real estate, net
Land and development, 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
Accounts payable, accrued expenses and other liabilities
LIABILITIES
Debt obligations, net
Total liabilities
As of
December 31,
2019
December 31,
2018
$
$
$
$
891,000
(37,542)
853,458
273,617
45
19,112
1,208
19,547
134,117
1,301,104
107,455
482,918
590,373
$
$
848,052
(15,365)
832,687
279,031
72
25,219
1,302
8,972
167,324
1,314,607
106,907
485,000
591,907
Unconsolidated VIEs—The Company has investments in VIEs where it is not the primary beneficiary, and accordingly, the
VIEs have not been consolidated in the Company's consolidated financial statements. As of December 31, 2019, the Company's
maximum exposure to loss from these investments does not exceed the sum of the $115.2 million carrying value of the investments,
which are classified in "Other investments" on the Company's consolidated balance sheets, and $14.8 million of related unfunded
commitments.
Note 3—Summary of Significant Accounting Policies
The following paragraphs describe the impact on the Company's consolidated financial statements from the adoption of
Accounting Standards Updates ("ASUs") on January 1, 2019.
ASU 2016-02 and ASU 2018-11—Accounting Standards Update ("ASU") 2016-02, Leases ("ASU 2016-02") required
the recognition of right-of-use lease assets and lease liabilities by the Company as lessee for those leases classified as operating
or finance leases, both measured at the present value of the lease payments, on its consolidated balance sheets. For operating lease
arrangements as of December 31, 2018 for which the Company was the lessee, primarily under leases of office space and certain
ground leases, the Company recorded operating lease right-of-use assets of $31.6 million in "Deferred expenses and other assets,
net" and operating lease liabilities of $31.6 million in "Accounts payable, accrued expenses and other liabilities" on its consolidated
balance sheets. In addition, the Company entered into finance leases in 2019, and as of December 31, 2019, recorded finance lease
right-of-use assets of $145.2 million in "Deferred expenses and other assets, net" and finance lease liabilities of $147.7 million in
"Accounts payable, accrued expenses and other liabilities" on its consolidated balance sheets (refer to Significant Accounting
Policies below).
The Company, as lessor, classifies certain of its leases on net lease properties as sales-type leases and records the leases
as "Net investment in leases" on the Company's consolidated balance sheets (refer to Note 5). For the Company's leases which
qualify as sales-type leases, the Company records "Interest income from sales-type leases" in the Company's consolidated statements
of operations. The amount recorded as interest income from sales-type leases in any given period will likely be different than the
straight-line lease income that would have been recorded under the superseded guidance.
59
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Management elected the practical expedient package that allowed the Company: (a) to not reassess whether any expired
or existing contracts entered into prior to January 1, 2019 are or contain leases; (b) to not reassess the lease classification for any
expired or existing leases entered into prior to January 1, 2019; and (c) to not reassess initial direct costs for any expired or existing
leases entered into prior to January 1, 2019. In addition, the Company elected to not record on its consolidated balance sheets
leases whose term is less than 12 months at lease inception.
ASU 2018-11, Leases amended ASU 2016-02 so that: (i) entities could elect to not recast the comparative periods presented
when transitioning to ASC 842 by allowing entities to change their initial application to the beginning of the period of adoption;
and (ii) provided lessors with a practical expedient to not separate non-lease components from the associated lease component of
the contractual payments if certain conditions are met. Management elected both of these provisions.
ASU 2018-16—ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate
("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes was issued in October
2018 and expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting by adding the OIS
rate based on SOFR as an eligible benchmark interest rate. The adoption of ASU 2018-16 did not have a material impact on the
Company's consolidated financial statements.
Significant Accounting Policies
Real estate and land and development—Real estate and land and development assets are recorded at cost less accumulated
depreciation and amortization, as follows:
Capitalization and depreciation—Certain improvements and replacements are capitalized when they extend the useful life
of the asset. For real estate projects, the Company begins to capitalize qualified development and construction costs, including
interest, real estate taxes, compensation and certain other carrying costs incurred which are specifically 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 relative 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 borrowings 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 facility 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 measures identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree
based on their relative fair values. For business combinations, the Company recognizes and measures goodwill or gain from a
bargain purchase, if applicable, and expenses acquisition-related costs in the periods in which the costs are incurred and the services
are received. For acquisitions of assets, acquisition-related costs are capitalized and recorded in "Real estate, net" on the Company's
consolidated balance sheets.
The Company accounts for its acquisition of properties by recording the purchase price of tangible and intangible assets and
liabilities acquired based on their estimated fair values. The value of the tangible assets, consisting of land, buildings, building
improvements and tenant improvements is determined as if these assets are vacant. Intangible assets may include the value of 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 liabilities” 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
60
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
are considered to be below-market. The Company may also engage in sale/leaseback transactions and execute leases with the
occupant simultaneously with the purchase of the asset. These transactions are accounted for as asset acquisitions.
Impairments—The Company reviews real estate assets to be held for use 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 value of a long-lived asset held for use and land and development assets are impaired only if management's estimate of the
aggregate future cash flows (undiscounted and without interest charges) to be generated by the asset (taking into account the
anticipated holding period of the asset) is less than the carrying value. Such estimate of cash flows considers factors such as
expected future operating income trends, as well as the effects of demand, competition and other economic factors. To the extent
impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the estimated fair
value of the asset and reflected as an adjustment to the basis of the asset. Impairments of real estate assets 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 operations. Once a real estate asset is classified as held for
sale, depreciation expense is no longer recorded.
The Company classifies its real estate assets as held for sale in the period in which all of the following conditions are met:
(i) the Company commits to a plan and has the authority to sell the asset; (ii) the asset is available for sale in its current condition;
(iii) the Company has initiated an active marketing plan to locate a buyer for the asset; (iv) the sale of the asset is both probable
and expected to qualify for full sales recognition within a period of 12 months; (v) the asset is being actively marketed for sale at
a price that is reflective of its current fair value; and (vi) the Company does not anticipate changes to its plan to sell the asset.
If circumstances arise that were previously considered unlikely and, as a result the Company decides not to sell a property
previously classified as held for sale, the property is reclassified as held and used and included in "Real estate, net" on the Company's
consolidated balance sheets. The Company measures and records a property that is reclassified as held and used at the lower of:
(i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have
been recognized had the property been continuously classified as held and used; or (ii) the estimated fair value at the date of the
subsequent decision not to sell.
Dispositions—Gains or losses on the sale of real estate assets, including residential property, are recognized in accordance
with Accounting Standards Codification ("ASC") 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets. 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.
Net Investment in Leases—Net investment in leases are recognized when the Company's leases qualify as sales-type leases.
The net investment in leases is initially measured at the present value of the fixed and determinable lease payments, including any
guaranteed or unguaranteed residual value of the asset at the end of the lease, discounted at the rate implicit in the lease. Acquisition-
related costs are capitalized and recorded in "Net Investment in Leases" on the Company's consolidated balance sheets. If a lease
qualifies as a sales-type lease, it is further evaluated to determine whether the transaction is considered a sale leaseback transaction.
If the sales-type lease does not qualify as a sale leaseback transaction, the lease is considered a financing receivable and is recognized
in accordance with ASC 310 (refer to Note 5) and recorded in "Loans receivable and other lending investments, net" on the
Company's consolidated balance sheets.
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 securities classified as held-to-maturity are reported at their
outstanding unpaid principal balance, and include unamortized acquisition premiums or discounts and unamortized deferred loan
costs or fees. These loans and debt securities also include accrued and paid-in-kind interest and accrued exit fees that the Company
61
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
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 historical 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 statements of operations, and the remainder will be recorded in "Accumulated other comprehensive
income (loss)" on the Company's consolidated balance sheets.
The Company acquires properties through foreclosure or by deed-in-lieu of foreclosure in full or partial satisfaction of non-
performing loans. Based on the Company's strategic plan to realize the maximum value from the collateral received, property is
classified as "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 method investments—Equity interests are accounted for pursuant to the equity method of accounting if the Company
can significantly influence the operating and financial policies of an investee. This is generally presumed to exist when ownership
interest is between 20% and 50% of a corporation, or greater than 5% of a limited partnership or certain limited liability companies.
The Company's periodic share of earnings and losses in equity method investees is included in "Earnings from equity method
investments" in the consolidated statements of operations. Equity method investments are included in "Other investments" on the
Company's consolidated balance sheets. The Company also has equity interests that are not accounted for pursuant to the equity
method of accounting. These equity interests are carried at cost, plus or minus any changes in value identified through observable
comparable price changes in transactions in identical or similar investments of the same entity. The changes in fair value for these
investments are included in "Other income" in the consolidated statements of operations.
To the extent that the Company contributes assets to an unconsolidated subsidiary, the Company’s investment in the subsidiary
is recorded at the Company’s cost basis in the assets that were contributed to the unconsolidated 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 subsidiary,
as appropriate. The Company recognizes gains on the contribution of real estate to unconsolidated subsidiaries, relating solely to
the outside partner’s interest, to the extent the economic substance of the transaction is a sale. The Company recognizes a loss
when it contributes property to an unconsolidated subsidiary and receives a disproportionately smaller interest in the subsidiary
based on a comparison of the carrying amount of the property with the cash and other consideration contributed by the other
investors.
The Company periodically reviews equity method investments for impairment in value whenever events or changes in
circumstances indicate that the carrying amount of such investments may not be 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.
62
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
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. The following table provides a reconciliation of the cash and
cash equivalents and restricted cash reported in the Company's consolidated balance sheets that total to the same amount as reported
in the consolidated statements of cash flows (in thousands):
December 31,
2019
December 31,
2018
December 31,
2017
December 31,
2016
Cash and cash equivalents
Restricted cash included in deferred expenses and
other assets, net
Total cash, cash equivalents and restricted cash
reported in the consolidated statements of cash flows
$
$
307,172
$
931,751
$
657,688
$
328,744
45,034
42,793
20,045
25,883
352,206
$
974,544
$
677,733
$
354,627
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 assessment includes a review of, among other
factors, which interests create or absorb variability, contractual terms, the key decision making powers, their impact on the VIE's
economic performance, and related party relationships. Where qualitative 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 / Accounts payable, accrued expenses and other liabilities—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 participations payable, net" on the Company's consolidated balance sheets. Lease incentives and leasing
costs that include brokerage, legal and other costs 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.
Effective January 1, 2019 with the adoption of ASU 2016-02, the Company, as lessee, records right-of-use lease assets in
"Deferred expenses and other assets" and lease liabilities in "Accounts payable, accrued expenses and other liabilities" on its
consolidated balance sheets for operating and finance leases, both measured at the present value of the fixed and determinable
lease payments. Some of the Company's lease agreements include extension options, which are not included in the lease payments
unless the extensions are reasonably certain to be exercised. For operating leases, the Company recognizes a single lease cost for
office leases in "General and administrative" and a single lease cost for ground leases in "Real estate expense" in the consolidated
statements of operations, calculated so that the cost of the lease is allocated generally on a straight-line basis over the term of the
lease, and classifies all cash payments within operating activities in the consolidated statements of cash flows. For finance leases,
the Company recognizes amortization of the right-of-use assets on a straight-line basis over the term of the lease in "Depreciation
and amortization" and interest expense on the lease liability using the effective interest method in "Interest expense" in the
consolidated statements of operations. Repayments of the principal portion of the finance lease liability are classified within
financing activities in the consolidated statements of cash flows and payments of interest on a finance lease liability are classified
within operating activities in the consolidated statement of cash flows.
Identified intangible assets and liabilities—Upon the acquisition of a business or an asset, 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, 2019, all such intangible assets and liabilities acquired by the Company have finite lives.
Intangible assets are included in "Deferred expenses and other assets, net" and intangible liabilities are included in "Accounts
payable, accrued expenses and other liabilities" on the Company's consolidated balance sheets. The Company amortizes finite
lived intangible assets and liabilities based on the period over which the assets are expected to contribute directly or indirectly to
the future cash flows of the business acquired. The Company reviews finite lived intangible assets for impairment whenever events
or changes in circumstances indicate that their carrying amount may not be recoverable. If the Company determines the carrying
63
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
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 maintain 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: For the Company's leases classified as operating leases, 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 respective 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 certain tenant leases that is contingent upon tenant sales exceeding defined thresholds.
These rents are recognized only after the defined threshold has been met for the period.
Management estimates losses within its operating lease income receivable and deferred operating lease income receivable
balances as of the balance sheet date and incorporates a reserve based on management's evaluation of the credit risks associated
with these receivables. As of December 31, 2019 and 2018, the allowance for doubtful accounts related to real estate tenant
receivables was $1.0 million and $1.5 million, respectively, and the allowance for doubtful accounts related to deferred operating
lease income was $1.0 million and $1.8 million, respectively.
Interest Income: Interest income on loans receivable and financing receivables (refer to Note 5) is recognized on an accrual
basis using the interest method.
On occasion, the Company may acquire loans at premiums or discounts. These discounts and premiums in addition to any
deferred costs or fees, are typically amortized over the contractual term of the loan using the interest method. Exit fees are also
recognized over the lives of the related loans as a yield adjustment, if management believes it is probable that such amounts will
be received. If loans with premiums, discounts, loan origination or exit fees are prepaid, the Company immediately recognizes the
unamortized 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 management believes all amounts contractually
owed will be received.
Certain of the Company's loans contractually provide for accrual of interest at specified rates that differ from current payment
terms. Interest is recognized on such loans at the accrual rate subject to management's determination that accrued interest and
outstanding principal are ultimately collectible, based on the underlying collateral and operations of the borrower.
64
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Certain of the Company's loan investments provide for additional interest based on the borrower's operating cash flow or
appreciation of the underlying collateral. Such amounts are considered contingent interest and are reflected as interest income only
upon receipt of cash.
Interest Income from Sales-Type Leases—Interest income from sales-type leases is recognized in "Interest income from sales-
type leases" in the Company's consolidated statements of operations under the effective interest method. The effective interest
method produces a constant yield on the net investment in the lease over the term of the lease. Rent payments that are not fixed
and determinable at lease inception, such as percentage rent and CPI adjustments, are not included in the effective interest method
calculation and are recognized in "Interest income from sales-type leases" in the Company's consolidated statements of operations
in the period earned.
Other income: Other income includes revenues from hotel operations, 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 maintenance payments, lease
termination fees, management fees and other ancillary income. During the year ended December 31, 2017, the Company recorded
$123.4 million of interest income and real estate tax reimbursements resulting from the settlement of litigation involving a dispute
over the purchase and sale of land (refer to Note 6).
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 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.
Reserve for loan losses—The reserve for loan losses reflects management's estimate of loan losses inherent in the loan
portfolio, including financing receivables (refer to Note 5), 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 consolidated
statements of operations and is decreased by charge-offs. During delinquency and the foreclosure process, there are typically
numerous points of negotiation with the borrower as the Company works toward a settlement or other alternative resolution, which
can impact the potential for loan repayment or receipt of 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. 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 underlying collateral in full satisfaction of the loan upon foreclosure or deed-in-lieu, or when the Company has otherwise
ceased significant collection efforts. The Company considers circumstances such as the foregoing to be 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. 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 judgments about their credit quality based
on all known and relevant internal and external factors that may affect collectability. The Company considers, among other things,
payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and
geographical location as well as national and regional economic factors. This methodology results in loans being segmented by
risk classification into risk rating categories that are associated with estimated probabilities of default and principal loss. Ratings
range from "1" to "5" with "1" representing the lowest risk of loss and "5" representing the highest risk of loss. The Company
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 probable that the Company will be unable to collect
all amounts due under the contractual terms of the loan agreement. This assessment is made on a loan-by-loan basis each quarter
65
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
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.
The Company's one impaired loan is collateral dependent and impairment is measured using the estimated fair value of the
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 some 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.
Reserve for losses on net investment in leases— The Company evaluates its net investment in leases for impairment under
ASC 310. As part of its process for monitoring the credit quality of its net investment in leases, the Company performs a quarterly
assessment for each of its net investment leases. The Company considers a net investment in lease to be impaired when, based
upon current information and events, it believes that it is probable that it will be unable to collect all amounts due under the
contractual terms of the lease. As of December 31, 2019, all of the Company's net investment in leases were performing in accordance
with the terms of the respective leases.
Any potential reserve for losses on net investment in leases will reflect management's estimate of losses inherent in the
portfolio as of the balance sheet date. If the Company determines that the cash flows it expects to receive from the underlying
collateral over the lease term is less than the carrying value of the net investment in lease, it will record a reserve. The reserve, if
applicable, will be increased (decreased) through "Reserve for losses on net investment in leases" in the Company's consolidated
statements of operations.
Loss on debt extinguishments—The Company recognizes the difference between the reacquisition price of debt and the
net carrying amount of extinguished debt currently in earnings. Such amounts may include prepayment penalties or the write-off
of unamortized debt 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, including derivative
financial instruments at some of its equity method investments, is primarily limited to the utilization of interest rate swaps, interest
rate caps or other instruments to manage interest rate risk exposure. The Company does not enter into derivatives for trading
purposes.
The Company recognizes its derivatives as either assets or liabilities on the Company's consolidated balance sheets at fair
value. If certain conditions are met, a derivative may be 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 and qualifying as cash flow hedges, changes in the fair value of the derivatives, including the
Company's pro rata share of derivatives at equity method investments, are reported as a component of accumulated other
comprehensive income (loss) and subsequently reclassified into interest expense or earnings from equity method investments in
the same periods during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive
income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt.
For the Company's derivatives not designated as hedges, the changes in the fair value of the derivatives are reported in "Other
expense" in the Company's consolidated statements of operations.
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
66
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
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 and subjects net income, if any, from these assets to corporate
level tax. The carrying value of assets with foreclosure elections as of December 31, 2019 is $39.6 million. Beginning in 2018,
the Tax Cuts and Jobs Act reduced the corporate tax rate to 21% from 35% and net income from foreclosure property, if any, is
subject to a 21% tax rate.
As of December 31, 2018, the Company had $567.7 million of REIT net operating loss ("NOL") 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 2031 and through 2036 if unused. The amount of NOL carryforwards as of December 31,
2019 will be subject to finalization of the Company's 2019 tax return. The Tax Cuts and Jobs Act reduced the deduction for net
operating losses to 80% of the Company’s taxable income for losses incurred after December 31, 2017. The Company's NOL
carryforward for losses incurred in taxable years prior to 2018 remain fully deductible. The Company's tax years from 2015 through
2018 remain subject to examination by major tax jurisdictions. During the year ended December 31, 2019, the Company is expected
to have REIT taxable income before the deduction for dividends paid and 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 taxable 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, 2019, $752.0 million of the Company's assets were owned by TRS entities. The Company's
TRS entities are not consolidated with the REIT for federal income tax purposes and are taxed as corporations. For financial
reporting purposes, current and deferred taxes are provided for on the portion of earnings recognized by the Company with respect
to its interest in TRS entities.
The following represents the Company's TRS income tax benefit (expense) ($ in thousands):
Current tax benefit (expense)(1)(2)
Total income tax (expense) benefit
For the Years Ended December 31,
2017
2018
2019
$
$
(35) $
(35) $
(447) $
(447) $
531
531
_______________________________________________________________________________
(1)
For the year ended December 31, 2017, the Company recognized a tax benefit for alternative minimum tax credits generated from a carryback of NOLs to
2014 and 2015. For the year ended December 31, 2019, excludes a REIT tax expense of $0.4 million, for the year ended December 31, 2018, excludes a
REIT tax expense of $0.5 million and for the year ended December 31, 2017, excludes a REIT income tax benefit of $0.4 million.
(2) Under the Tax Cuts and Jobs Act, the alternative minimum tax credit carryforward is a refundable tax credit over a four year period beginning in 2018 and
ending in 2021 upon which the full amount of the credit will be allowed.
During the year ended December 31, 2019, the Company’s TRS entities generated a taxable loss of $31.6 million for which
the Company recognized no current tax benefit. The Company’s TRS 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, 2018, the Company's
TRS entities generated a taxable loss of $25.9 million for which the Company recognized no current tax benefit. The Company’s
TRS NOL will be carried forward and the Company’s TRS recorded a full valuation allowance against the related deferred tax
67
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
asset. During the year ended December 31, 2017, the Company's TRS entities generated a taxable loss of $33.1 million for which
the Company recognized no current tax benefit.
Total cash paid for taxes for the years ended December 31, 2019, 2018 and 2017 was $0.4 million, $2.0 million and $6.0
million, respectively. The taxes paid in 2017 were primarily alternative minimum taxes at the REIT which the Company expects
to be refunded over the next two years.
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 for income tax purposes, as well as operating loss and tax credit carryforwards.
The Company applied the corporate tax rate enacted December 22, 2017 under the Tax Cuts and Jobs Act effective for years
beginning after 2017 to value its deferred tax assets and liabilities. The Company evaluates whether its deferred tax assets are
realizable 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 whether its deferred tax assets are
realizable, the Company considers, among other matters, estimates of expected future taxable 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 analysis is inherently subjective, as it requires the Company to forecast its business and general
economic environment in future periods. Based on an assessment of all factors, including historical losses and continued volatility
of the activities within the TRS entities, it was determined that full valuation allowances were required on the net deferred tax
assets as of December 31, 2019 and 2018, respectively. Changes in estimates of our valuation allowance, if any, are included in
"Income tax (expense) benefit" in the consolidated statements of operations. The valuation allowance was reduced to reflect the
change in value of our net deferred tax assets that reflects a reduced rate of tax under the Tax Cuts and Jobs Act.
Deferred tax assets and liabilities of the Company's TRS entities were as follows ($ in thousands):
Deferred tax assets(1)(2)
Valuation allowance
Net deferred tax assets (liabilities)
As of December 31,
2019
2018
$
$
$
79,645
(79,645)
— $
78,107
(78,107)
—
_______________________________________________________________________________
(1) Deferred tax assets as of December 31, 2019 include temporary differences related primarily to asset basis of $32.9 million, deferred expenses and other
items of $11.9 million, NOL carryforwards of $32.5 million and other credits of $2.3 million. Deferred tax assets as of December 31, 2018 include temporary
differences related primarily to asset basis of $35.3 million, deferred expenses and other items of $17.2 million and NOL carryforwards of $25.6 million.
The Company has determined that the change in tax law associated with the Tax Cuts and Jobs Act will not have a material effect on whether its deferred
tax assets are realizable.
(2) Gross deferred tax assets as of December 31, 2017 were valued at the enacted corporate tax rate during the period in which such deferred tax assets are
expected to be realized. The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% from 35% for taxable years beginning after December 31,
2017. The Company’s TRS’s applied its reduced effective tax rate to compute its gross deferred tax assets before valuation allowance.
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 dividends and earnings of the Company
when, and if, the Company declares dividends on its common stock. Basic earnings per share ("Basic EPS") for the Company's
common stock are computed by dividing net income allocable to common shareholders by the weighted average number of shares
of common stock outstanding for the period, respectively. Diluted earnings 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.
New accounting pronouncements—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 financial instruments held by a reporting entity. This
amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit
losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates.
ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. On January 1, 2020, upon
the adoption of ASU 2016-13, the Company expects to record an increase to its general reserve of approximately $12.0 million
on its loan portfolio and its net investment in leases, which will be recorded as a decrease to shareholders' equity on January 1,
2020.
68
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
In May 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ("ASU 2019-04") to clarify certain accounting
topics from previously issued ASUs, including ASU 2016-13. ASU 2019-04 addresses certain aspects of ASU 2016-13, including
but not limited to, accrued interest receivable, loan recoveries, interest rate projections for variable-rate financial instruments and
expected prepayments. ASU 2019-04 provides alternatives that allow entities to measure credit losses on accrued interest separate
from credit losses on the principal portion of a loan, clarifies that entities should include expected recoveries in the measurement
of credit losses, allows entities to consider future interest rates when measuring credit losses and can elect to adjust effective interest
rates used to discount expected cash flows for expected loan prepayments. ASU 2019-04 is effective upon the adoption of ASU
2016-13. Management does not expect the adoption of ASU 2019-04 to have a material impact on the Company’s consolidated
financial statements.
Note 4—Real Estate
The Company's real estate assets were comprised of the following ($ in thousands):
As of December 31, 2019
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, 2018
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
Net Lease(1)
Operating
Properties
Total
$
199,710
$
106,187
$
305,897
$
$
1,347,321
(219,949)
1,327,082
—
1,327,082
336,740
1,487,270
(287,516)
1,536,494
1,055
$
$
107,861
(13,911)
200,137
8,650
208,787
133,599
118,724
(17,798)
234,525
21,496
$
$
1,455,182
(233,860)
1,527,219
8,650
1,535,869
470,339
1,605,994
(305,314)
1,771,019
22,551
$
1,537,549
$
256,021
$
1,793,570
_______________________________________________________________________________
(1)
In May 2019, the Company modified certain of its leases. As a result of these modifications, the Company classified the leases as sales-type leases and
recorded $424.1 million in "Net investment in leases" and derecognized $193.4 million from "Real estate, net" and "Real estate available and held for sale"
on its consolidated balance sheet (refer to Note 5).
(2) As of December 31, 2019 and 2018, the Company had $8.6 million and $20.6 million, respectively, of residential condominiums available for sale in its
operating properties portfolio.
Real Estate Available and Held for Sale—The following table presents the carrying value of properties transferred to held
for sale, by segment ($ in millions)(1):
Property Type
Operating Properties
Net Lease
Total
Year Ended December 31,
2019
2018
2017
$
$
14.5
185.9
200.4
$
$
23.2
8.1
31.3
$
$
20.1
0.9
21.0
_______________________________________________________________________________
(1)
Properties were transferred to held for sale due to executed contracts with third parties or changes in business strategy. All of these properties were ultimately
sold.
Acquisitions—During the year ended December 31, 2019, the Company acquired a net lease asset for $11.5 million. In
addition, the Company acquired the leasehold interest in an office property for $98.2 million, inclusive of closing costs, and
69
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
simultaneously entered into a new 98-year ground lease with SAFE (refer to Note 8) and also acquired the leasehold interest in a
net lease asset for $110.6 million and simultaneously entered into a new 99-year Ground Lease with SAFE (refer to Note 8). During
the year ended December 31, 2018, the Company acquired two net lease assets for an aggregate $14.8 million.
Disposition of Ground Lease Business—In April 2017, institutional investors acquired a controlling interest in the
Company's ground lease business through the merger of a Company subsidiary and related transactions (the "Acquisition
Transactions"). Ground leases generally represent ownership of the land underlying commercial real estate projects that is triple
net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon ("Ground Lease"). The
Company's Ground Lease business was a component of the Company's net lease segment and consisted of 12 properties subject
to long term net leases including seven Ground Leases and one master lease (covering five properties). The acquiring entity was
a newly formed unconsolidated entity named Safety, Income & Growth Inc., which was subsequently renamed Safehold Inc.
("SAFE"). The carrying value of the Company's Ground Lease assets was approximately $161.1 million. Shortly before the
Acquisition Transactions, the Company completed a $227.0 million financing on its Ground Lease assets. The Company received
all of the proceeds of the financing. The Company received an additional $113.0 million of proceeds in the Acquisition Transactions,
including $55.5 million that the Company contributed to SAFE in its initial capitalization. As a result of the Acquisition Transactions,
the Company deconsolidated the 12 properties and the associated financing. The Company accounts for its investment in SAFE
as an equity method investment (refer to Note 8). The Company accounted for this transaction as an in substance sale of real estate
and recognized a gain of $123.4 million, reflecting the aggregate gain less the fair value of the Company's retained interest in
SAFE. The gain was recorded in "Gain from discontinued operations" in the Company's consolidated statements of operations.
As a result of the adoption of ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, on
January 1, 2018, the Company recorded an increase to retained earnings of $55.5 million, bringing the Company's aggregate gain
on the sale of its Ground Lease business to approximately $178.9 million.
Discontinued Operations—The transactions described above involving the Company's Ground Lease business qualified
for discontinued operations and the following table summarizes income from discontinued operations for the year ended December
31, 2017 ($ in thousands)(1):
Revenues
Expenses
$
Income from sales of real estate
Income from discontinued operations
$
5,922
(1,491)
508
4,939
_______________________________________________________________________________
(1)
The transactions closed on April 14, 2017. Revenues primarily consisted of operating lease income and expenses primarily consisted of depreciation and
amortization and real estate expense.
The following table presents cash flows provided by operating activities and cash flows used in investing activities from
discontinued operations for the year ended December 31, 2017 ($ in thousands).
Cash flows provided by operating activities
$
Cash flows used in investing activities
5,702
(534)
70
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Other Dispositions—The following table presents the proceeds and income recognized for properties sold, by property type
($ in millions):
Operating Properties(1)
Proceeds
Income from sales of real estate
Years Ended December 31,
2019
2018
2017
$
86.1
11.9
$
327.9
$
81.0
41.3
4.5
Net Lease(2)
Proceeds
$
469.4
$
Income from sales of real estate
224.7
$
79.7
45.0
175.4
87.5
Total
Proceeds
$
555.5
$
407.6
$
Income from sales of real estate
236.6
126.0
216.7
92.0
_______________________________________________________________________________
(1) During the year ended December 31, 2019, the Company sold commercial and residential operating properties with an aggregate carrying value of $73.1
million and recognized $11.9 million of gains in "Income from sales of real estate" in the Company's consolidated statements of operations. During the
year ended December 31, 2018, the Company sold 10 commercial operating properties and residential condominium units from other properties and
recognized $81.0 million of gains in "Income from sales of real estate" in the Company's consolidated statements of operations, of which $9.8 million was
attributable to a noncontrolling interest at one of the properties.
(2) During the year ended December 31, 2019, the Company sold a portfolio of net lease assets with an aggregate carrying value of $220.4 million and recognized
$219.7 million of gains in "Income from sales of real estate" in the Company's consolidated statements of operations. In connection with the sale of this
portfolio of assets the buyer assumed a $228.0 million non-recourse mortgage. During the year ended December 31, 2018, the Company sold five net lease
assets and recognized $45.0 million of gains in "Income from sales of real estate" in the Company's consolidated statements of operations. During the year
ended December 31, 2017, the Company sold one net lease property and recognized a gain on sale of $62.5 million. Prior to the sale, the Company acquired
the noncontrolling interest with a carrying value of $3.5 million for $12.0 million.
Impairments—During the years ended December 31, 2019, 2018 and 2017, the Company recorded aggregate impairments
on real estate assets totaling $5.4 million, $90.4 million and $11.9 million, respectively. During the year ended December 31, 2019,
the Company recorded an aggregate impairment of $5.4 million in connection with the sale of net lease and operating properties
and residential condominium units. The impairments recorded in 2018 were primarily from the Company's decision to accelerate
the monetization of certain legacy assets, including several larger assets. The impairments recorded in 2017 were primarily the
result of shifting demand in the local condominium markets, changes in the Company's exit strategy on other real estate assets and
an impairment recorded in connection with the sale of an outparcel located at a commercial operating property.
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 reimbursements were $21.2 million, $22.4
million and $21.9 million for the years ended December 31, 2019, 2018 and 2017, 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, 2019 and 2018, the allowance for doubtful accounts related to
real estate tenant receivables was $1.0 million and $1.5 million, respectively, and the allowance for doubtful accounts related to
deferred operating lease income was $1.0 million and $1.8 million, respectively. These amounts are included in "Accrued interest
and operating lease income receivable, net" and "Deferred operating lease income receivable, net," respectively, on the Company's
consolidated balance sheets.
71
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Future Minimum Operating Lease Payments—Future minimum operating lease payments to be collected under non-
cancelable leases, excluding customer reimbursements of expenses, in effect as of December 31, 2019, are as follows ($ in
thousands):
Year
2020
2021
2022
2023
2024
Net Lease
Assets
Operating
Properties
$
$
141,993
141,763
140,165
131,998
126,453
16,625
16,293
8,112
7,822
7,801
Note 5—Net Investment in Leases
In May 2019, the Company entered into a transaction with an operator of bowling entertainment venues, consisting of the
purchase of nine bowling centers for $56.7 million, of which seven were acquired from the lessee for $44.1 million, and a
commitment to invest up to $55.0 million in additional bowling centers over the next several years. The new centers were added
to the Company's existing master leases with the tenant. In connection with this transaction, the maturities of the master leases
were extended by 15 years to 2047.
As a result of the modifications to the leases, the Company classified the leases as sales-type leases and recorded $424.1
million in "Net investment in leases" and derecognized $193.4 million from "Real estate, net" and "Real estate available and held
for sale," $25.4 million from "Deferred operating lease income receivable, net," $13.4 million from "Deferred expenses and other
assets, net" and $1.9 million from "Accounts payable, accrued expenses and other liabilities" on its consolidated balance sheet.
The Company recognized $180.4 million in "Selling profit from sales-type leases" in its consolidated statements of operations for
the year ended December 31, 2019 as a result of the transaction. The Company determined that the seven bowling centers acquired
from the lessee did not qualify as a sale leaseback transaction and, as a result, recorded a $44.1 million financing receivable in
"Loans receivable and other lending investments, net" on its consolidated balance sheet (refer to Note 7). For the year ended
December 31, 2019, the Company recognized $20.5 million of "Interest income from sales-type leases" in the Company's
consolidated statements of operations.
Future Minimum Lease Payments under Sales-type Leases—Future minimum lease payments to be collected under sales-
type leases, excluding lease payments that are not fixed and determinable, in effect as of December 31, 2019, are as follows by
year ($ in thousands):
2020
2021
2022
2023
2024
Thereafter
$
Total undiscounted cash flows
Unguaranteed estimated residual value
Present value discount
Net investment in leases as of December 31, 2019
$
Amount
27,565
28,062
30,549
30,549
30,549
894,745
1,042,019
340,620
(963,724)
418,915
Impairments—During the year ended December 31, 2019, the Company recorded an impairment of $0.9 million in connection
with the sale of a net lease property.
72
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Note 6—Land and Development
The Company's land and development assets were comprised of the following ($ in thousands):
Land and land development, at cost
Less: accumulated depreciation
Total land and development, net
As of December 31,
2018
2019
$
$
590,153
(9,608)
580,545
$
$
606,849
(8,631)
598,218
Acquisitions—During the year ended December 31, 2019, the Company acquired a land and development asset from an
unconsolidated entity in which the Company owned a noncontrolling 50% equity interest for $34.3 million, which consisted of a
$7.3 million cash payment and the assumption of a $27.0 million loan (refer to Note 8).
During the year ended December 31, 2018, the Company acquired, via foreclosure, title to a land asset which had a total
fair value of $4.6 million and had previously served as collateral for loans receivable held by the Company. No gain or loss was
recorded in connection with this transaction.
Dispositions—During the years ended December 31, 2019, 2018 and 2017, the Company sold land parcels and residential
lots and units and recognized land development revenue of $119.6 million, $409.7 million and $196.9 million, respectively. In
connection with the sale of two land parcels totaling 93 acres during the year ended December 31, 2018, the Company provided
an aggregate $145.0 million of financing to the buyers, of which $94.2 million was outstanding as of December 31, 2019. During
the years ended December 31, 2019, 2018 and 2017, the Company recognized land development cost of sales of $109.7 million,
$350.2 million and $180.9 million, respectively, from its land and development portfolio.
In connection with the resolution of litigation involving a dispute over the purchase and sale of approximately 1,250 acres
of land in Prince George’s County, Maryland, during the year ended December 31, 2017, the Company recognized $114.0 million
of land development revenue and $106.3 million of land development cost of sales.
Impairments—During the year ended December 31, 2019, the Company recorded an aggregate impairment of $5.3 million
on two land and development assets based on expected sales proceeds and an impairment of $1.1 million on a land and development
asset due to a change in business strategy. During the year ended December 31, 2018, the Company recorded an aggregate impairment
of $56.7 million on five land and development assets, primarily from the Company's decision to accelerate the monetization of
legacy assets, including several larger assets. During the year ended December 31, 2017, the Company recorded impairments on
land and development assets of $20.5 million resulting from a decrease in expected cash flows on one asset and a change in exit
strategy on another asset.
73
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Note 7—Loans Receivable and Other Lending Investments, net
The following is a summary of the Company's loans receivable and other lending investments by class ($ in thousands):
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(1)
Total loans receivable and other lending investments, net
As of December 31,
2019
2018
$
572,584
$
119,818
10,877
703,279
(28,634)
674,645
153,216
$
827,861
$
760,749
148,583
10,161
919,493
(53,395)
866,098
122,126
988,224
_______________________________________________________________________________
(1)
As of December 31, 2019, includes a $44.3 million financing receivable related to the acquisition of bowling centers from one of the Company's lessees (refer
to Note 5).
Reserve for Loan Losses—Changes in the Company's reserve for loan losses were as follows ($ in thousands):
Reserve for loan losses at beginning of period
Provision for (recovery of) loan losses
Charge-offs
Reserve for loan losses at end of period
For the Years Ended December 31,
2019
2018
2017
$
$
53,395
$
78,489
$
6,482
(31,243)
28,634
$
16,937
(42,031)
53,395
$
85,545
(5,828)
(1,228)
78,489
_______________________________________________________________________________
(1)
During the year ended December 31, 2019, the Company charged-off $19.2 million from the specific reserve due to the resolution of a non-performing loan
and $12.0 million due to the deterioration of the collateral on a separate non-performing loan.
74
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
The Company's recorded investment in loans (comprised of a loan's carrying value plus accrued interest) and the associated
reserve for loan losses were as follows ($ in thousands):
As of December 31, 2019
Loans
Less: Reserve for loan losses
Total(3)
As of December 31, 2018
Loans
Less: Reserve for loan losses
Total(3)
Individually
Evaluated for
Impairment(1)
Collectively
Evaluated for
Impairment(2)
Total
$
$
$
$
37,820
(21,701)
16,119
66,725
(40,395)
26,330
$
$
$
$
668,769
(6,933)
661,836
857,662
(13,000)
844,662
$
$
$
$
706,589
(28,634)
677,955
924,387
(53,395)
870,992
_______________________________________________________________________________
(1)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs totaling net discounts of $0.1 million and $0.5 million as of
December 31, 2019 and 2018, respectively. The Company's loans individually evaluated for impairment primarily represent loans on non-accrual status; therefore,
the unamortized amounts associated with these loans are not currently being amortized into income.
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs totaling net discounts of $0.7 million and $3.1 million as of
December 31, 2019 and 2018, respectively.
The Company's recorded investment in loans as of December 31, 2019 and 2018 includes accrued interest of $3.3 million and $4.9 million, respectively, which
is included in "Accrued interest and operating lease income receivable, net" on the Company's consolidated balance sheets. As of December 31, 2019, excludes
a $44.3 million financing receivable (refer to Note 5). As of December 31, 2019 and 2018, the total amounts exclude $108.9 million and $122.1 million,
respectively, of securities that are evaluated for impairment under ASC 320.
(2)
(3)
Credit Characteristics—As part of the Company's process for monitoring the credit quality of its loans, it performs a quarterly
loan portfolio assessment and assigns risk ratings to each of its performing loans. Risk ratings, which range from 1 (lower risk) to 5
(higher risk), are based on judgments which are inherently uncertain and there can be no assurance that actual performance will be
similar to current expectation.
75
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
The Company's recorded investment in performing loans, presented by class and by credit quality, as indicated by risk rating,
was as follows ($ in thousands):
As of December 31,
2019
2018
Performing
Loans
Weighted
Average
Risk Ratings
Performing
Loans
Weighted
Average
Risk Ratings
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
Total
$
$
537,201
120,658
10,910
668,769
2.71
2.83
3.00
2.73
$
$
697,807
149,663
10,192
857,662
2.76
2.84
3.00
2.77
The Company's recorded investment in loans, aged by payment status and presented by class, was as follows ($ in thousands):
As of December 31, 2019
Current
Less Than
and Equal
to 90 Days
Greater
Than
90 Days(1)
Total
Past Due
Total
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
Total
As of December 31, 2018
Senior mortgages
Corporate/Partnership loans
Subordinate mortgages
Total
$
$
$
$
537,201
$
— $
37,820
$
37,820
$
120,658
10,910
668,769
703,807
149,663
10,192
$
$
—
—
—
—
— $
37,820
— $
60,725
—
—
—
—
$
$
—
—
37,820
60,725
$
$
—
—
575,021
120,658
10,910
706,589
764,532
149,663
10,192
863,662
$
— $
60,725
$
60,725
$
924,387
_______________________________________________________________________________
(1) As of December 31, 2019, the Company had one loan which was greater than 90 days delinquent and was in various stages of resolution, including legal and
environmental matters, and was 10.5 years outstanding. As of December 31, 2018, the Company had two loans which were greater than 90 days delinquent and
were in various stages of resolution, including legal and foreclosure-related proceedings and environmental matters, and ranged from 4.0 to 9.0 years outstanding.
Impaired Loans—In the second quarter 2018, the Company resolved a non-performing loan with a carrying value of $145.8
million. The Company received a $45.8 million cash payment and a preferred equity investment with a face value of $100.0 million
that is mandatorily redeemable in five years. The Company recorded the preferred equity at its fair value of $77.0 million and are
accruing interest over the expected duration of the investment. In addition, the Company recorded a $21.4 million loan loss provision
and simultaneously charged-off of the remaining unpaid balance.
The Company's recorded investment in impaired loans, presented by class, was as follows ($ in thousands)(1):
As of December 31, 2019
As of December 31, 2018
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With an allowance recorded:
Senior mortgages
Total
$
$
37,820
37,820
$
$
37,923
37,923
$
$
(21,701) $
(21,701) $
66,725
66,725
$
$
66,777
66,777
$
$
(40,395)
(40,395)
_______________________________________________________________________________
(1) All of the Company's non-accrual loans are considered impaired and included in the table above.
76
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
The Company's average recorded investment in impaired loans and interest income recognized, presented by class, was as follows
($ in thousands):
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
For the Years Ended December 31,
2019
2018
2017
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
— $
— $
—
38,556
—
38,556
38,556
—
—
—
—
—
—
—
—
—
— $
—
67,041
39,169
106,210
67,041
39,169
—
$
38,556
$
— $ 106,210
$
301
301
—
—
—
—
—
301
301
$
6,582
$
6,582
1,127
1,127
82,749
156,756
239,505
82,749
156,756
6,582
$ 246,087
$
—
—
—
—
—
1,127
1,127
There was no interest income related to the resolution of non-performing loans recorded during the years ended December 31,
2019, 2018 and 2017.
Other lending investments—Other lending investments includes the following securities ($ in thousands):
Face Value
Amortized
Cost Basis
Net Unrealized
Gain
Estimated Fair
Value
Net Carrying
Value
As of December 31, 2019
Available-for-Sale Securities
Municipal debt securities
Held-to-Maturity Securities
Debt securities
Total
As of December 31, 2018
Available-for-Sale Securities
Municipal debt securities
Held-to-Maturity Securities
Debt securities
Total
$
21,140
$
21,140
$
2,756
$
23,896
$
23,896
100,000
84,981
—
84,981
84,981
$
121,140
$
106,121
$
2,756
$
108,877
$
108,877
$
21,185
$
21,185
$
476
$
21,661
$
21,661
120,866
100,465
7
100,472
100,465
$
142,051
$
121,650
$
483
$
122,133
$
122,126
77
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
As of December 31, 2019, 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
84,981
84,981
—
—
—
—
$
84,981
$
84,981
$
21,140
$
— $
—
—
21,140
—
—
—
23,896
23,896
After 5 years through 10 years
After 10 years
Total
Note 8—Other Investments
The Company's other investments and its proportionate share of earnings (losses) from equity method investments were as
follows ($ in thousands):
Carrying Value
Equity in Earnings (Losses)
As of December 31,
For the Years Ended December 31,
2019
2018
2019
2018
2017
Real estate equity investments
Safehold Inc. ("SAFE")(1)
iStar Net Lease II LLC ("Net Lease Venture II")
iStar Net Lease I LLC ("Net Lease Venture")(2)
Other real estate equity investments(3)
Subtotal
Other strategic investments(4)
Total
$
729,357
$
149,589
$
30,712
—
104,553
864,622
43,253
16,215
—
130,955
296,759
7,516
$
907,875
$
304,275
$
29,764
(529)
—
12,620
41,855
(6)
41,849
$
$
$
4,711
(333)
4,100
(4,112)
4,366
(9,373)
(5,007) $
551
—
4,534
6,520
11,605
1,410
13,015
_______________________________________________________________________________
(1) As of December 31, 2019, the Company owned 31.2 million shares of SAFE common stock which, based on the closing price of $40.30 on December 31,
2019, had a market value of $1.3 billion. For the year ended December 31, 2019, equity in earnings includes a dilution gain of $7.6 million resulting from
SAFE equity offerings during 2019.
The Company consolidated the assets and liabilities of the Net Lease Venture on June 30, 2018 (refer to Net Lease Venture below).
(2)
(3) During the year ended December 31, 2019, equity in earnings (losses) includes $19.3 million of income resulting primarily from the sale of properties at
two of the Company's equity method investments. During the year ended December 31, 2018, the Company recorded a $6.1 million impairment on a land
and development equity method investment due to a change in business strategy.
For the year ended December 31, 2018, equity in earnings (losses) includes a $10.0 million impairment on a foreign equity method investment due to local
market conditions.
(4)
Safehold Inc.—SAFE is a publicly-traded company formed by the Company primarily to acquire, own, manage, finance
and capitalize ground leases. Ground leases generally represent ownership of the land underlying commercial real estate projects
that is net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon ("Ground Leases").
On January 2, 2019, the Company purchased 12.5 million newly designated limited partnership units (the "Investor Units")
in SAFE's operating partnership ("SAFE OP"), at a purchase price of $20.00 per unit, for a total purchase price of $250.0 million.
The purpose of the investment was to allow SAFE to fund additional Ground Lease acquisitions and originations. Each Investor
Unit received distributions equivalent to distributions declared and paid on one share of SAFE's common stock. The Investor Units
had no voting rights. They had limited protective consent rights over certain matters such as amendments to the terms of the
Investor Units that would adversely affect the Investor Units. In May 2019, after the approval of SAFE's stockholders, the Investor
Units were exchanged for shares of SAFE's common stock on a one-for-one basis. Following the exchange, the Investor Units
were retired.
78
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
In connection with the Company's purchase of the Investor Units, it entered into a Stockholder's Agreement with SAFE on
January 2, 2019. The Stockholder's Agreement:
• limits the Company's discretionary voting power to 41.9% of the outstanding voting power of SAFE's common stock
until its aggregate ownership of SAFE common stock is less than 41.9%;
• requires the Company to cast all of its voting power in favor of three director nominees to SAFE's board who are independent
of each of the Company and SAFE for three years;
• subjects the Company to certain standstill provisions for two years;
• restricts the Company's ability to transfer shares of SAFE common stock issued in exchange for Investor Units, or
"Exchange Shares," for one year after their issuance;
• prohibits the Company from transferring shares of SAFE common stock representing more than 20% of the outstanding
SAFE common stock in one transaction or a series of related transactions to any person or group, other than pursuant to
a widely distributed public offering, unless SAFE's other stockholders have participation rights in the transaction; and
• provides the Company certain preemptive rights.
A wholly-owned subsidiary of the Company is the external manager of SAFE and is entitled to a management fee. In addition,
the Company is also the external manager of a venture in which SAFE is a member. Following are the key terms of the management
agreement with SAFE:
• The Company received no management fee through June 30, 2018, which covered the first year of the management
agreement;
• The Company receives a fee equal to 1.0% of total SAFE equity (as defined in the management agreement) up to $1.5
billion; 1.25% of total SAFE equity (for incremental equity of $1.5 billion - $3.0 billion); 1.375% of total SAFE equity (for
incremental equity of $3.0 billion - $5.0 billion); and 1.5% of total SAFE equity (for incremental equity over $5.0 billion);
• Fee to be paid in cash or in shares of SAFE common stock, at the discretion of SAFE's independent directors;
• The stock is locked up for two years, subject to certain restrictions;
• There is no additional performance or incentive fee;
• The management agreement is non-terminable by SAFE through June 30, 2023 except for cause; and
• Automatic annual renewals thereafter, subject to non-renewal upon certain findings by SAFE's independent directors and
payment of termination fee equal to three times the prior year's management fee.
In August 2019, the Company acquired 6.0 million shares of SAFE's common stock in a private placement for $168.0 million.
In November 2019, the Company acquired 3.8 million shares of SAFE's common stock in a private placement for $130.0 million.
As of December 31, 2019, the Company owned approximately 65.2% of SAFE's common stock outstanding.
During the year ended December 31, 2019, the Company recorded $7.5 million of management fees and during the six
months ended December 31, 2018, the Company recorded $1.8 million of management fees pursuant to its management agreement
with SAFE. During the six months ended June 30, 2018, the Company waived $1.8 million of management fees and during the
year ended December 31, 2017, the Company waived $2.0 million management fees pursuant to its management agreement with
SAFE.
The Company is also entitled to receive certain expense reimbursements, including for the allocable costs of its personnel
that perform certain legal, accounting, due diligence tasks and other services that third-party professionals or outside consultants
otherwise would perform. The Company has waived or elected not to charge in full certain of the expense reimbursements while
SAFE is growing its portfolio. For the year ended December 31, 2019, the Company was reimbursed $2.1 million of expense
reimbursements and for the six months ended December 31, 2018, the Company was reimbursed $0.7 million of expense
reimbursements. Pursuant to the terms of the management agreement with SAFE, the Company waived all expense reimbursements
for the first year after the closing of SAFE's initial public offering, through June 30, 2018. The Company has an exclusivity
agreement with SAFE pursuant to which it agreed, subject to certain exceptions, that it will not acquire, originate, invest in, or
provide financing for a third party’s acquisition of, a Ground Lease unless it has first offered that opportunity to SAFE and a
majority of its independent directors has declined the opportunity.
79
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Following is a list of investments that the Company has transacted with SAFE, all of which were approved by the Company's
and SAFE's independent directors, for the periods presented:
In August 2017, the Company committed to provide a $24.0 million loan to the ground lessee of a Ground Lease originated
at SAFE. The loan was for the renovation of a medical office building in Atlanta, GA. The Company funded $18.4 million of the
loan, which was fully repaid in August 2019. During the years ended December 31, 2019, 2018 and 2017, the Company recorded
$1.2 million, $1.4 million and $0.2 million, respectively, of interest income on the loan.
In October 2017, the Company closed on a 99-year Ground Lease and a $80.5 million construction financing commitment
to support the ground-up development of a to-be-built luxury multi-family project in San Jose, CA. The transaction includes a
combination of: (i) a newly created Ground Lease and a $7.2 million leasehold improvement allowance, which was fully funded
as of December 31, 2019; and (ii) a $80.5 million leasehold first mortgage. As of December 31, 2019, $38.9 million of the leasehold
first mortgage was funded. During the years ended December 31, 2019 and 2018, the Company recorded $1.2 million and $0.2
million, respectively, of interest income on the loan. The Company entered into a forward purchase contract with SAFE under
which SAFE would acquire the Ground Lease in November 2020 for approximately $34.0 million.
In May 2018, the Company provided a $19.9 million leasehold mortgage loan to the ground lessee of a Ground Lease
originated at SAFE. The loan was for the acquisition of two multi-tenant office buildings in Atlanta, GA. The loan was repaid in
full in November 2019 and during the years ended December 31, 2019 and 2018, the Company recorded $1.9 million and $1.4
million, respectively, of interest income on the loan.
In June 2018, the Company sold two industrial facilities located in Miami, FL to a third-party and simultaneously structured
and entered into two Ground Leases. The Company then sold the two Ground Leases to SAFE. Net proceeds from the transactions
totaled $36.1 million and the Company recognized a $24.5 million gain on sale.
In January 2019, the Company committed to provide a $13.3 million loan to the ground lessee of a Ground Lease originated
at SAFE. The loan is for the conversion of an office building into a multi-family property in Washington, DC. As of December 31,
2019, $12.6 million of the loan was funded. During the year ended December 31, 2019, the Company recorded $1.0 million of
interest income on the loan.
In February 2019, the Company acquired the leasehold interest in an office property and simultaneously entered into a new
98-year Ground Lease with SAFE (refer to Note 4).
In August 2019, the Company acquired the leasehold interest in a net lease asset and simultaneously entered into a new 99-
year Ground Lease with SAFE (refer to Note 4).
In October 2019, SAFE acquired land and SAFE's Ground Lease tenant acquired the leasehold from a venture in which the
Company has a 50% ownership interest. In addition, the Company provided a $22.0 million loan to SAFE's Ground Lease tenant
for the acquisition of the leasehold. The Company sold the loan at par to a third-party in November 2019.
Net Lease Venture—In February 2014, the Company partnered with a sovereign wealth fund to form the Net Lease Venture
to acquire and develop net lease assets and gave a right of first offer to the venture on all new net lease investments. The Company
and its partner had joint decision making rights pertaining to the acquisition of new investments. Upon the expiration of the
investment period on June 30, 2018, the Company obtained control of the venture through its unilateral rights of management and
disposition of the assets. As a result, the expiration of the investment period resulted in a reconsideration event under GAAP and
the Company determined that the Net Lease Venture is a VIE for which the Company is the primary beneficiary. Effective June
30, 2018, the Company consolidated the Net Lease Venture as an asset acquisition under ASC 810. The Company recorded a gain
of $67.9 million in "Gain on consolidation of equity method investment" in the Company's consolidated statement of operations
as a result of the consolidation. The Net Lease Venture had previously been accounted for as an equity method investment. The
Company has an equity interest in the Net Lease Venture of approximately 51.9% and recorded a $188.3 million increase to
"Noncontrolling interests" and $11.8 million increase to "Redeemable noncontrolling interest" on the Company's consolidated
balance sheet as a result of the consolidation. The Company acquired the redeemable noncontrolling interest in the fourth quarter
2018. The Company is responsible for sourcing new opportunities and managing the venture and its assets in exchange for a
management fee and incentive 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 incentive fee received based on the 47.5% partner's interest.
80
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
During the years ended December 31, 2018 and 2017, the Company recorded $1.3 million and $2.1 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 addition, beginning after the Company's consolidation of the Net Lease Venture on June 30, 2018 and
after the effect of eliminations, during the year ended December 31, 2019 and the six months ended December 31, 2018, the
Company earned $1.5 million and $0.7 million, respectively, of management fees with respect to services provided to other investors
in the Net Lease Venture, which was recorded as a reduction to "Net income attributable to noncontrolling interests" in the Company's
consolidated statements of operations.
Net Lease Venture II—In July 2018, the Company entered into a new venture ("Net Lease Venture II") with an investment
strategy similar to the Net Lease Venture. The Net Lease Venture II has a right of first offer on all new net lease investments
(excluding Ground Leases) originated by the Company. Net Lease Venture II's investment period ends in June 2021. Net Lease
Venture II is a voting interest entity and the Company has an equity interest in the venture of approximately 51.9%. The Company
does not have a controlling interest in Net Lease Venture II due to the substantive participating rights of its partner. The Company
accounts for its investment in Net Lease Venture II as an equity method investment and is responsible for managing the venture
in exchange for a management fee and incentive fee. During the years ended December 31, 2019 and 2018, the Company recorded
$1.5 million and $0.4 million, respectively, of management fees from Net Lease Venture II.
In December 2019, Net Lease Venture II closed on a commitment to provide up to $150.0 million in net lease financing for
the construction of three industrial centers and entered into a 25 year master lease with the tenant. As of December 31, 2019, Net
Lease Venture II had funded $18.7 million of its commitment.
In December 2019, Net Lease Venture II closed on the acquisition of two grocery distribution centers for $81.8 million,
inclusive of assumed debt. The properties are 100% leased with two separate coterminous leveraged leases with 6.2 years remaining
on the lease terms.
In December 2018, Net Lease Venture II acquired four buildings comprising 168,636 square feet (the "Properties") located
in Livermore, CA. Net Lease Venture II acquired the Properties for $31.2 million which are 100% leased with four separate leases
that expire in December 2028.
Other real estate equity investments—As of December 31, 2019, the Company's other real estate equity investments
include equity interests in real estate ventures ranging from 16% to 95%, comprised of investments of $61.7 million in operating
properties and $42.9 million in land assets. As of December 31, 2018, the Company's other real estate equity investments included
$65.6 million in operating properties and $65.3 million in land assets. In December 2019, the Company sold a partial interest in
one of its other real estate equity investments to a related party for $0.5 million and recorded no gain or loss on the transaction.
In August 2018, the Company provided a mezzanine loan with a principal balance of $33.0 million and $30.5 million as of
December 31, 2019 and 2018, respectively, to an unconsolidated entity in which the Company owns a 50% equity interest. The
loan is included in "Loans receivable and other lending investments, net" on the Company's consolidated balance sheet. During
the years ended December 31, 2019 and 2018, the Company recorded $2.8 million and $1.1 million, respectively, of interest income
on the mezzanine loan.
In December 2016, the Company sold a land and development asset to a newly formed unconsolidated entity in which the
Company owned a 50.0% equity interest. The Company provided financing to the entity in the form of a $27.0 million senior loan,
all of which was funded as of December 31, 2018 and was included in "Loans receivable and other lending investments, net" on
the Company's consolidated balance sheet. In April 2019, the Company acquired the land and development asset from the entity
for $34.3 million, which consisted of a $7.3 million cash payment and the assumption of the $27.0 million senior loan. During the
years ended December 31, 2019, 2018 and 2017, the Company recorded $0.6 million, $2.1 million and $1.9 million, respectively,
of interest income on the senior loan.
Other strategic investments—As of December 31, 2019 and 2018, the Company also had investments in real estate related
funds and other strategic investments in real estate entities.
81
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Summarized investee financial information—The following table presents the investee level summarized financial
information of the Company's equity method investments ($ in thousands):
Balance Sheets
Total assets
Total liabilities
As of December 31,
2018
2019
$ 3,653,763
1,918,034
$ 2,118,045
1,016,502
Noncontrolling interests
1,486
2,007
Total equity attributable
to parent entities
1,734,243
1,099,536
Note 9—Other Assets and Other Liabilities
For the Years Ended December 31,
2018
2019
2017
Income Statements
Revenues
Expenses
Net income attributable
to parent entities
$ 214,123
(181,456)
$ 262,970
(187,257)
$
261,867
(167,999)
32,474
75,056
91,633
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
Intangible assets, net(1)
Finance lease right-of-use assets(2)
Operating lease right-of-use assets(2)
Other receivables(3)
Restricted cash
Other assets(4)
Leasing costs, net(5)
Corporate furniture, fixtures and equipment, net(6)
Deferred financing fees, net
As of December 31,
2019
2018
$
174,973
$
156,281
145,209
34,063
16,846
45,034
17,534
3,793
2,736
2,300
—
—
46,887
42,793
32,333
6,224
3,850
900
Deferred expenses and other assets, net
$
442,488
$
289,268
(2)
_______________________________________________________________________________
(1)
Intangible assets, net includes above market and in-place lease assets and lease incentives related to the acquisition of real estate assets. Accumulated
amortization on intangible assets, net was $33.4 million and $27.0 million as of December 31, 2019 and 2018, respectively. The amortization of above
market leases and lease incentive assets decreased operating lease income in the Company's consolidated statements of operations by $1.7 million, $2.2
million and $2.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. These intangible lease assets are amortized over the term of
the lease. The amortization expense for in-place leases was $9.6 million, $7.2 million and $1.9 million for the years ended December 31, 2019, 2018 and
2017, respectively. These amounts are included in "Depreciation and amortization" in the Company's consolidated statements of operations. As of
December 31, 2019, the weighted average amortization period for the Company's intangible assets was approximately 20.7 years.
Right-of-use lease assets relate primarily to the Company's leases of office space and certain of its ground leases. Right-of use lease assets initially equal
the lease liability. The lease liability (see table below) equals the present value of the minimum rental payments due under the lease discounted at the rate
implicit in the lease or the Company's incremental secured borrowing rate for similar collateral. For operating leases, lease liabilities were discounted at
the Company's weighted average incremental secured borrowing rate for similar collateral estimated to be 5.3% and the weighted average lease term is 7.8
years. For finance leases, lease liabilities were discounted at a weighted average rate implicit in the lease of 5.5% and the weighted average lease term is
98.0 years. Right-of-use assets for finance leases are amortized on a straight-line basis over the term of the lease and are recorded in "Depreciation and
amortization" in the Company's consolidated statements of operations. During the year ended December 31, 2019, the Company recognized $5.1 million
in "Interest expense" and $0.9 million in "Depreciation and amortization" in its consolidated statement of operations relating to finance leases. For operating
leases, rent expense is recognized on a straight-line basis over the term of the lease and is recorded in "General and administrative" and "Real estate expense"
in the Company's consolidated statements of operations (refer to Note 3). During the year ended December 31, 2019, the Company recognized $3.6 million
in "General and administrative" and $3.3 million in "Real estate expense" in its consolidated statement of operations relating to operating leases.
(3) As of December 31, 2018, includes $26.0 million of reimbursements receivable related to the construction and development of an operating property that
was received in 2019.
(4) Other assets primarily includes derivative assets, prepaid expenses and deposits for certain real estate assets.
(5) Accumulated amortization of leasing costs was $3.3 million and $4.4 million as of December 31, 2019 and 2018, respectively.
(6) Accumulated depreciation on corporate furniture, fixtures and equipment was $13.1 million and $11.9 million as of December 31, 2019 and 2018, respectively.
82
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
Other liabilities(1)
Finance lease liabilities (see table above)
Operating lease liabilities (see table above)
Accrued expenses
Accrued interest payable
Intangible liabilities, net(2)
Accounts payable, accrued expenses and other liabilities
As of December 31,
2019
2018
$
81,709
$
143,325
147,749
34,182
83,778
25,733
51,223
—
—
95,149
42,669
35,108
$
424,374
$
316,251
_______________________________________________________________________________
(1) As of December 31, 2019 and 2018, "Other liabilities" includes $27.5 million and $42.6 million, respectively, of deferred income. As of December 31,
2019 and 2018, "Other liabilities" includes $0.1 million and $18.5 million, respectively, related to profit sharing arrangements with developers for certain
properties sold. As of December 31, 2019 and 2018, "Other liabilities" also includes $6.2 million and $9.4 million, respectively, related to tax increment
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 or pays down the bonds.
Intangible liabilities, net includes below market lease liabilities related to the acquisition of real estate assets. Accumulated amortization on below market
lease liabilities was $5.0 million and $2.8 million as of December 31, 2019 and 2018, respectively. The amortization of below market lease liabilities
increased operating lease income in the Company's consolidated statements of operations by $2.3 million, $3.9 million and $1.3 million for the years ended
December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, the weighted average amortization period for the Company's intangible liabilities
was approximately 18.3 years.
(2)
Intangible assets—The estimated expense from the amortization of intangible assets for each of the five succeeding fiscal
years is as follows ($ in thousands):
2020
2021
2022
2023
2024
$
11,826
11,796
11,795
11,641
11,524
Note 10—Loan Participations Payable, net
The Company's loan participations payable, net were as follows ($ in thousands):
Carrying Value as of
December 31,
2019
December 31,
2018
Loan participations payable(1)
Debt discounts and deferred financing costs, net
Total loan participations payable, net
$
$
35,656
(18)
35,638
$
$
22,642
(158)
22,484
_______________________________________________________________________________
(1)
As of December 31, 2019 and 2018, the Company had one loan participation payable with an interest rate of 6.3% and 7.0%, respectively.
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, 2019 and 2018. As of December 31, 2019 and
2018, the corresponding loan receivable balances were $35.6 million and $22.5 million, respectively, and are included in "Loans
receivable and other lending investments, net" on the Company's consolidated balance sheets. The principal and interest due on
these loan participations payable are paid from cash flows of the corresponding loans receivable, which serve as collateral for the
participations.
83
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Note 11—Debt Obligations, net
The Company's debt obligations were as follows ($ in thousands):
Carrying Value as of December 31,
2019
2018
Stated
Interest Rates
Scheduled
Maturity Date
Secured credit facilities and mortgages:
2015 $350 Million Revolving Credit Facility
$
— $
Senior Term Loan
Mortgages collateralized by net lease assets(3)
491,875
721,118
— LIBOR + 2.25% (1)
LIBOR + 2.75% (2)
(3)
3.31% - 7.26%
646,750
802,367
Total secured credit facilities and mortgages
1,212,993
1,449,117
September 2022
June 2023
—
—
—
April 2022
September 2022
September 2022
October 2024
August 2025
—
—
—
110,545
400,000
287,500
775,000
550,000
375,000
400,000
275,000
375,000
400,000
287,500
—
—
5.00%
4.625%
6.50%
6.00%
5.25%
3.125%
4.75%
4.25%
2,123,045
2,112,500
Unsecured notes:
5.00% senior notes(4)
4.625% senior notes(5)
6.50% senior notes(6)
6.00% senior notes(7)
5.25% senior notes(8)
3.125% senior convertible notes(9)
4.75% senior notes(10)
4.25% senior notes(11)
Total unsecured notes
Other debt obligations:
Trust preferred securities
Total debt obligations
100,000
3,436,038
100,000
LIBOR + 1.50%
October 2035
3,661,617
Debt discounts and deferred financing costs, net
Total debt obligations, net (12)
_______________________________________________________________________________
(1)
3,387,080
(48,958)
$
$
(52,531)
3,609,086
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
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 0.50% or (c) LIBOR plus
1.00% and subject to a margin ranging from 1.00% to 1.50%; or (ii) LIBOR subject to a margin ranging from 2.00% to 2.50%. At maturity, the Company
may convert outstanding borrowings to a one year term loan which matures in quarterly installments through September 2023.
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 0.50% or (c) LIBOR plus
1.00% and subject to a margin of 1.75%; or (ii) LIBOR subject to a margin of 2.75%.
In June 2019, the buyer of a portfolio of net lease assets assumed a $228.0 million non-recourse mortgage (refer to Note 4). As of December 31, 2019, the
weighted average interest rate of these loans is 4.37% inclusive of the effect of interest rate swaps.
The Company prepaid these senior notes in March 2019 without penalty.
The Company prepaid these senior notes in October 2019 with a $6.0 million prepayment penalty.
The Company prepaid these senior notes in October 2019 with a $4.5 million prepayment penalty.
The Company partially prepaid these senior notes in December 2019 with a $10.1 million prepayment premium. The Company repaid the remaining senior
notes in January 2020.
The Company can prepay these senior notes without penalty beginning September 15, 2021.
The Company's 3.125% senior convertible fixed rate notes due September 2022 ("3.125% Convertible Notes") are convertible at the option of the holders
at any time prior to the close of business on the business day immediately preceding September 15, 2022. The conversion rate as of December 31, 2019
was 67.92 shares per $1,000 principal amount of 3.125% Convertible Notes, which equals a conversion price of $14.72 per share. Upon conversion, the
Company will pay or deliver, as the case may be, a combination of cash and shares of its common stock. As such, at issuance in September 2017, the
Company valued the liability component at $221.8 million, net of fees, and the equity component of the conversion feature at $22.5 million, net of fees,
and recorded the equity component in "Additional paid-in capital" on the Company's consolidated balance sheet. In October 2017, the initial purchasers of
the 3.125% Convertible Notes exercised their option to purchase an additional $37.5 million aggregate principal amount of the 3.125% Convertible Notes.
At issuance, the Company valued the liability component at $34.0 million, net of fees, and the equity component of the conversion feature at $3.4 million,
net of fees, and recorded the equity component in "Additional paid-in capital" on the Company's consolidated balance sheet. As of December 31, 2019, the
carrying value of the 3.125% Convertible Notes was $268.7 million, net of fees, and the unamortized discount of the 3.125% Convertible Notes was $15.5
million, net of fees. As of December 31, 2018, the carrying value of the 3.125% Convertible Notes was $262.6 million, net of fees, and the unamortized
discount of the 3.125% Convertible Notes was $20.5 million, net of fees. During the years ended December 31, 2019, 2018 and 2017, the Company
recognized $9.0 million, $9.0 million and $2.5 million, respectively, of contractual interest and $5.0 million, $4.7 million and $1.3 million, respectively,
of discount amortization on the 3.125% Convertible Notes. The effective interest rate for 2019, 2018 and 2017 was 5.2%.
(10) The Company can prepay these senior notes without penalty beginning July 1, 2024.
(11) The Company can prepay these senior notes without penalty beginning May 1, 2025.
(12) The Company capitalized interest relating to development activities of $7.5 million, $11.3 million and $8.5 million for the years ended December 31, 2019,
2018 and 2017, respectively.
84
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Future Scheduled Maturities—As of December 31, 2019, future scheduled maturities of outstanding debt obligations are
as follows ($ in thousands):
2020
2021
2022
2023
2024
Thereafter
Total principal maturities
Unamortized discounts and deferred financing costs, net
Total debt obligations, net
Unsecured Debt
Secured Debt
Total
$
$
— $
—
798,045
—
775,000
650,000
2,223,045
(41,228)
2,181,817
$
— $
159,083
47,901
491,875
—
514,134
1,212,993
(7,730)
1,205,263
$
—
159,083
845,946
491,875
775,000
1,164,134
3,436,038
(48,958)
3,387,080
Senior Term Loan—In June 2018, the Company amended its senior secured term loan (the "Senior Term Loan") to increase
the amount of the loan to $650.0 million, reduce the interest rate to LIBOR plus 2.75% and extend its maturity to June 2023. The
Senior Term Loan is secured by pledges of equity of certain subsidiaries that own a defined pool of assets. The Senior Term Loan
permits substitution of collateral, subject to overall collateral pool coverage and concentration limits, over the life of the facility.
The Company may make optional prepayments, subject to prepayment fees, and is required to repay 0.25% of the principal amount
of the Senior Term Loan each quarter.
During the years ended December 31, 2018 and 2017, repayments of the Senior Term Loan prior to modifications and
expenses incurred for the modifications resulted in losses on early extinguishment of debt of $2.5 million and $0.8 million,
respectively.
Revolving Credit Facility—In September 2019, the Company amended its secured revolving credit facility (the "Revolving
Credit Facility") to increase the maximum capacity to $350.0 million, extend the maturity date to September 2022 and make certain
other changes. Outstanding borrowings under the Revolving Credit Facility are secured by pledges of the equity interests in the
Company's subsidiaries that own a defined pool of assets. 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 downward based upon the Company's corporate credit
rating, ranging from 1.0% to 1.5% in the case of base rate loans and from 2.0% to 2.5% in the case of LIBOR loans. In addition,
there is an undrawn credit facility commitment fee that ranges from 0.25% to 0.45%, based on corporate credit ratings. At maturity,
the Company may convert outstanding borrowings to a one year term loan which matures in quarterly installments through
September 2023. As of December 31, 2019, based on the Company's borrowing base of assets, the Company had $350.0 million
of borrowing capacity available under the Revolving Credit Facility.
Unsecured Notes—In September 2019, the Company issued $675.0 million principal amount of 4.75% senior unsecured
notes due October 2024. Proceeds from the offering, together with cash on hand, were used to repay in full the $400.0 million
principal amount outstanding of the 4.625% senior unsecured notes due September 2020 and the $275.0 million principal amount
outstanding of the 6.50% senior unsecured notes due July 2021. In November 2019, the Company issued an additional $100.0
million principal amount of 4.75% senior unsecured notes due October 2024 at 102% of par, representing a yield to maturity of
4.29%.
In December 2019, the Company issued $550.0 million principal amount of 4.25% senior unsecured notes due August 2025.
Proceeds from the offering were used to redeem the $375.0 million principal amount outstanding ($110.5 million was redeemed
in January 2020) of the 6.00% senior unsecured notes due April 2022, repay a portion of the borrowings outstanding under the
Senior Term Loan and pay related premiums and expenses in connection with the transaction.
During the years ended December 31, 2019, 2018 and 2017, repayments of senior unsecured notes prior to maturity resulted
in losses on early extinguishment of debt of $26.6 million, $1.2 million and $13.6 million, respectively. These amounts are included
in "Loss on early extinguishment of debt, net" in the Company's consolidated statements of operations.
85
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Collateral Assets—The carrying value of the Company's assets that are directly pledged or are held by subsidiaries whose
equity is pledged as collateral to secure the Company's obligations under its secured debt facilities are as follows, by asset type ($
in thousands):
Real estate, net
Real estate available and held for sale
Net investment in leases
Land and development, net
Loans receivable and other lending investments, net(2)(3)
Other investments
Cash and other assets
Total
As of December 31,
2019
2018
Collateral
Assets(1)
1,409,585
—
418,915
—
233,104
—
—
2,061,604
$
$
Non-Collateral
Assets
$
$
117,634
8,650
—
580,545
566,050
907,875
814,044
2,994,798
Collateral
Assets(1)
1,620,008
1,055
—
12,300
498,524
—
—
2,131,887
$
$
Non-Collateral
Assets
$
$
151,011
21,496
—
585,918
480,154
304,275
1,329,990
2,872,844
_______________________________________________________________________________
(1)
The Senior Term Loan and the Revolving Credit Facility are secured only by pledges of equity of certain of the Company's subsidiaries and not by pledges
of the assets held by such subsidiaries. Such subsidiaries are subject to contractual restrictions under the terms of such credit facilities, including restrictions
on incurring new debt (subject to certain exceptions). As of December 31, 2019, Collateral Assets includes $438.7 million carrying value of assets held by
entities whose equity interests are pledged as collateral for the Revolving Credit Facility that is undrawn as of December 31, 2019.
(2) As of December 31, 2019 and 2018, the amounts presented exclude general reserves for loan losses of $6.9 million and $13.0 million, respectively.
(3) As of December 31, 2019 and 2018, the amounts presented exclude loan participations of $35.6 million and $22.5 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, as such terms are defined in the indentures governing the debt securities,
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 governing 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 bondholders. 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 Senior Term Loan and the Revolving Credit Facility contain certain covenants, including covenants relating
to collateral coverage, 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 Senior Term Loan requires the Company to maintain
collateral coverage of at least 1.25x outstanding borrowings on the facility. The Revolving Credit Facility is secured by a borrowing
base of assets and requires the Company to maintain both borrowing base asset value 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 Revolving Credit Facility does not require
that proceeds from the borrowing base be used to pay down outstanding borrowings provided the borrowing base asset value
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. The Company may not pay common dividends if it ceases to
qualify as a REIT. In June 2018, the Company amended the terms of the Senior Term Loan and the Revolving Credit Facility to
include the ability to pay common dividends with no restrictions so long as the Company is not in default on any of its debt
obligations.
The Company's Senior Term Loan and the 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
86
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Company's other recourse indebtedness in excess of specified thresholds is not paid at final maturity or if such indebtedness is
accelerated.
Note 12—Commitments and Contingencies
Unfunded Commitments—The Company generally funds construction 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 established milestones and other performance
criteria. The Company refers to these arrangements as Performance-Based Commitments. In addition, 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, 2019, 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 and that 100% of its capital
committed to Strategic Investments is drawn down, are as follows ($ in thousands):
Performance-Based Commitments
Strategic Investments
Total
Loans and Other
Lending
Investments(1)
$
$
225,600
—
225,600
$
$
Real Estate(2)
70,047
—
70,047
$
$
Other
Investments
131,380
16,851
148,231
$
$
Total
427,027
16,851
443,878
_______________________________________________________________________________
(1)
(2)
Excludes $14.3 million of commitments on loan participations sold that are not the obligation of the Company.
Includes a commitment to invest up to $55.0 million in additional bowling centers over the next several years (refer to Note 5).
Other Commitments—Total operating lease expense for the years ended December 31, 2019, 2018 and 2017 was $4.4
million, $5.0 million and $5.2 million, respectively. Future minimum lease obligations under non-cancelable operating and finance
leases as of December 31, 2019 are as follows ($ in thousands):
2020
2021
2022
2023
2024
Thereafter
Total undiscounted cash flows
Present value discount(1)
Other adjustments(2)
Lease liabilities
Operating(1)(2)
Finance(1)
4,167
1,803
1,098
728
617
1,447
9,860
(1,057)
25,379
34,182
$
$
5,386
5,494
5,604
5,716
5,830
1,573,824
1,601,854
(1,454,105)
—
147,749
$
$
_______________________________________________________________________________
(1)
During the year ended December 31, 2019, the Company made payments of $4.1 million related to its operating leases and $3.3 million related to its
finance leases (refer to Note 4). The weighted average lease term for the Company's operating leases, excluding operating leases for which the Company's
tenants pay rent on its behalf, was 4.2 years and the weighted average discount rate was 5.6%. The weighted average lease term for the Company's finance
leases was 93 years and the weighted average discount rate was 5.4%.
The Company is obligated to pay ground rent under certain operating leases; however, the Company's tenants at the properties pay this expense directly
under the terms of various subleases and these amounts are excluded from lease obligations. The amount shown above is the net present value of the
payments to be made by the Company's tenants on its behalf.
(2)
87
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Future minimum lease obligations under operating leases as of December 31, 2018 were as follows ($ in thousands):
2019
2020
2021
2022
2023
Thereafter
$
Operating(1)
4,340
4,016
1,589
991
849
2,469
_______________________________________________________________________________
(1)
The Company is obligated to pay ground rent under certain operating leases; however, the Company's tenants at the properties pay this expense directly
under the terms of various subleases and these amounts are excluded from lease obligations.
Legal Proceedings—The Company and/or one or more of its subsidiaries 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 foreclosure-related proceedings. The Company believes it is not a party to, nor are
any of its properties the subject of, any pending legal proceeding that would have a material adverse effect on the Company’s
consolidated financial statements.
Note 13—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 liabilities mature or reprice at different points in time and potentially at different bases, than its
interest-earning assets. Credit risk is the risk of default on the Company's lending investments or leases that result from a borrower's
or tenant's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of loans
and other lending investments due to changes in interest rates or other market factors, including the rate of prepayments of principal
and the value of the collateral underlying loans, the 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, 2019, the only states with a concentration greater than 10.0% were New York with 16.7%, New Jersey
with 14.2% and California with 12.5%. As of December 31, 2019, the Company's portfolio contains concentrations in the following
asset types: office/industrial 28.5%, land 15.4%, entertainment/leisure 20.1%, hotel 5.2% and mixed use/mixed collateral 5.3%.
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, 2019, the
Company's five largest borrowers or tenants collectively accounted for approximately 19.8% of the Company's 2019 revenues, of
which the largest customer, from the Company's net lease segment, accounted for 11.8%.
Derivatives
The Company's use of derivative financial instruments has historically been limited to the utilization of interest rate swaps,
interest rate caps and foreign exchange contracts. The principal objective of such financial instruments is to minimize the risks
and/or costs associated with the Company's operating and financial structure and to manage its exposure to interest rates and
foreign exchange rates. The Company may have derivatives that are not designated as hedges because they do not meet the strict
hedge accounting requirements. Although not designated as hedges, such derivatives are entered into to manage the Company's
88
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
exposure to interest rate movements and other identified risks.
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on
the consolidated balance sheets as of December 31, 2019 and 2018 ($ in thousands)(1):
As of December 31, 2019
Derivative Assets
Derivative Liabilities
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivatives Designated in Hedging Relationships
Interest rate swaps
Total
Deferred expenses and
other assets, net
As of December 31, 2018
Derivatives Designated in Hedging Relationships
Interest rate swaps
Total
Deferred expenses and
other assets, net
$
$
$
$
114
114
3,669
3,669
Accounts payable,
accrued expenses and
other liabilities
Accounts payable,
accrued expenses and
other liabilities
$
$
$
$
8,680
8,680
10,244
10,244
____________________________________________________________________________
(1)
Over the next 12 months, the Company expects that $5.1 million related to cash flow hedges will be reclassified from "Accumulated other comprehensive
income (loss)" as an increase to interest expense.
The tables below present the effect of the Company's derivative financial instruments, including the Company's share of
derivative financial instruments at certain of its equity method investments, in the consolidated statements of operations and the
consolidated statements of comprehensive income (loss) ($ in thousands):
Derivatives Designated in Hedging
Relationships
For the Year Ended December 31, 2019
Interest rate swaps(1)
Interest rate swaps
For the Year Ended December 31, 2018
Interest rate swaps
Interest rate swaps
For the Year Ended December 31, 2017
Interest rate cap
Interest rate swaps
Interest rate swap
Foreign exchange contracts
Location of Gain (Loss)
When Recognized in
Income
Interest expense
Earnings from equity
method investments
Interest expense
Earnings from equity
method investments
Earnings from equity
method investments
Interest expense
Earnings from equity
method investments
Earnings from equity
method investments
Amount of Gain
(Loss) Recognized in
Accumulated Other
Comprehensive
Income
Amount of Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income into Earnings
$
(21,165) $
(1,861)
(21,417)
(12,963)
(1,736)
(16)
495
368
(352)
(184)
(388)
20
(16)
339
(285)
—
______________________________________________________________
(1)
For the year ended December 31, 2019, $4.3 million of the loss recognized in accumulated other comprehensive income was attributable to a noncontrolling
interest.
89
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Derivatives not Designated in Hedging Relationships(1)
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 Year
Ended December 31, 2017
6
(970)
____________________________________________________________________________
(1)
The Company did not have any derivatives not designated in hedging relationships during the years ended December 31, 2019 and 2018.
Interest Rate Hedges—For derivatives designated and qualifying as cash flow hedges, the changes in the fair value of the
derivatives are reported in Accumulated Other Comprehensive Income (Loss). 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."
Credit Risk-Related Contingent Features—The Company has agreements with each of its derivative counterparties that
contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then
the Company could also be declared in default on its derivative obligations.
The Company reports derivative instruments on a gross basis in its consolidated financial statements. In connection with its
derivatives which were in a liability position as of December 31, 2018, the Company posted collateral of $6.4 million 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, 2018.
90
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Note 14—Equity
Preferred Stock—In December 2019, the Company issued an aggregate 16.5 million shares of its common stock upon
conversion its outstanding Series J Preferred Stock at a conversion rate of 4.125 shares of common stock per each share of Series
J Preferred Stock. The total carrying value of the Series J Preferred Stock prior to redemption was $193.5 million, net of discounts
and fees, and was recorded in "Additional paid-in-capital" and "Convertible Preferred Stock Series J, liquidation preference $50.00
per share" on the Company's consolidated balance sheet as of December 31, 2018.
The Company had the following series of Cumulative Redeemable and Convertible Perpetual Preferred Stock outstanding
as of December 31, 2019 and 2018:
Cumulative Preferential Cash
Dividends(1)(2)
Carrying Value
(in thousands)
Series
D
G
I
J (convertible)(4)
Total
Shares Issued
and
Outstanding
(in thousands)
4,000
3,200
5,000
4,000
16,200
Par
Value
$ 0.001
0.001
0.001
0.001
Liquidation
Preference(3)(4)
25.00
$
25.00
25.00
50.00
Rate per
Annum
Annual
Dividend
Rate
(per share)
2.00
1.91
1.88
2.25
8.00% $
7.65%
7.50%
4.50%
December 31,
2019
December 31,
2018
$
$
89,041
72,664
120,785
—
282,490
$
$
89,041
72,664
120,785
193,510
476,000
(2)
_______________________________________________________________________________
(1) Holders of shares of the Series D, G and I 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.
The Company declared and paid dividends of $8.0 million, $6.1 million and $9.4 million on its Series D, G and I Cumulative Redeemable Preferred Stock
during the years ended December 31, 2019 and 2018, respectively. The Company declared and paid dividends of $9.0 million and $9.0 million on its Series
J Convertible Perpetual Preferred Stock during the years ended December 31, 2019 and 2018, respectively. The character of the 2019 dividends was 100%
capital gain distribution, of which 34.01% represented unrecaptured section 1250 gain. The character of the 2018 dividends was 100% capital gain distribution,
of which 26.02% represented unrecaptured section 1250 gain and 73.98% long term capital gain. There are no dividend arrearages on any of the preferred
shares currently outstanding.
The Company may, at its option, redeem the Series 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.
The Company redeemed all of its Series J Preferred Stock in December 2019.
(3)
(4)
Dividends—To maintain its qualification as a REIT, the Company must annually distribute, at a minimum, an amount equal
to 90% of its taxable income, excluding net capital gains, and must distribute 100% of its taxable income (including net capital
gains) to 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 qualification. As of December 31, 2018, the Company had $567.7
million of NOL 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 begin to expire in 2031 and will fully expire in 2036 if unused.
The amount of NOL carryforwards as of December 31, 2019 will be determined upon finalization of the Company's 2019 tax
return. Because taxable income differs from cash flow from operations due to non-cash revenues and expenses (such as depreciation
and certain asset impairments), in certain circumstances, the Company may generate operating cash flow in excess of its dividends,
or alternatively, may need to make dividend payments in excess of operating cash flows. The Senior Term Loan and the Revolving
Credit Facility permit the Company to pay common dividends with no restrictions so long as the Company is not in default on any
of its debt obligations. The Company declared and paid common stock dividends of $25.3 million, or $0.39 per share, for the year
ended December 31, 2019 and $12.3 million, or $0.18 per share, for the year ended December 31, 2018. The character of the 2019
dividends was 100% capital gain distribution, of which 34.01% represented unrecaptured section 1250 gain. The character of the
2018 dividends was 100% capital gain distribution, of which 26.02% represented unrecaptured section 1250 gain and 73.98% long
term capital gain.
91
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Stock Repurchase Program—The Company may repurchase shares in negotiated transactions or open market transactions,
including through one or more trading plans. During the year ended December 31, 2019, the Company repurchased 7.3 million
shares of its outstanding common stock for $74.6 million, for an average cost of $10.16 per share. During the three months ended
March 31, 2018, the Company repurchased 0.8 million shares of its outstanding common stock for $8.3 million, for an average
cost of $10.22 per share. The Company did not repurchase any shares of its common stock during the nine months ended
December 31, 2018 or the year ended December 31, 2017 under stock repurchase programs. As of December 31, 2019, the Company
had authorization to repurchase up to $34.2 million of common stock.
Accumulated Other Comprehensive Income (Loss)—"Accumulated other comprehensive income (loss)" reflected in the
Company's shareholders' equity is comprised of the following ($ in thousands):
Unrealized gains on available-for-sale securities
Unrealized losses on cash flow hedges
Unrealized losses on cumulative translation adjustment
Accumulated other comprehensive loss
As of December 31,
2019
2018
$
$
$
2,756
(37,264)
(4,199)
(38,707) $
475
(13,546)
(4,199)
(17,270)
Note 15—Stock-Based Compensation Plans and Employee Benefits
Stock-Based Compensation—The Company recorded stock-based compensation expense, including the expense related
to performance incentive plans (see below), of $30.4 million, $17.6 million and $18.8 million, respectively, during the years ended
December 31, 2019, 2018 and 2017 in "General and administrative" in the Company's consolidated statements of operations. As
of December 31, 2019, there was $2.7 million of total unrecognized compensation cost related to all unvested restricted stock units
that is expected to be recognized over a weighted average remaining vesting/service period of 1.35 years.
Performance Incentive Plans—The Company's Performance Incentive Plans ("iPIP") are 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 plans. Awards vest over six years, with 40% being vested
at the end of the second year and 15% each year thereafter.
2019-2020 iPIP Plan—The Company's 2019-2020 iPIP plan is an equity-classified award which is measured at the grant
date fair value and recognized as compensation cost in "General and administrative" in the Company's consolidated statements of
operations and "Noncontrolling interests" in the Company's consolidated statements of changes in equity over the requisite service
period. Investments in the 2019-2020 iPIP plan will be held by a consolidated subsidiary of the Company that has two ownership
classes, class A units and class B units. The Company owns 100% of the class A units and the class B units were issued to employees
as long-term compensation. Except for certain clawback provisions, participants can retain vested class B units upon their
termination of employment with the Company. The class B units are entitled to distributions from the net cash realized from the
investments in the plan after the Company, through its ownership of the class A units, has received a specified return on its invested
capital and a return of its invested capital. Distributions on the class B units are also subject to reductions under a total shareholder
return ("TSR") adjustment. The fair value of the class B units was determined using a model that forecasts the underlying cash
flows from the investments within the entity to which the class B units have ownership rights. During the year ended December 31,
2019, the Company recorded $2.9 million of expense related to the 2019-2020 iPIP plan. Distributions on the class B units will
be 50% in cash and 50% in shares of the Company's common stock or in shares of SAFE's common stock owned by the Company.
2013-2018 iPIP Plans—The remainder of the Company's iPIP plans, as shown in the table below, are liability-classified
awards and are remeasured each reporting period at fair value until the awards are settled. Certain employees will be granted
awards that entitle employees to receive the residual cash flows from the investments in the plans after the Company has received
a specified return on its invested capital and a return of its invested capital. Awards are also subject to reductions under a TSR
adjustment. The fair value of awards is determined using a model that forecasts the Company's projected investment performance.
Settlement of the awards will be 50% in cash and 50% in shares of the Company's common stock or in shares of SAFE's common
stock owned by the Company.
92
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
The following is a summary of the status of the Company’s liability-classified iPIP plans and changes during the year ended
December 31, 2019.
Points at beginning of period
Granted
Forfeited
Points at end of period
iPIP Investment Pool
2015-2016
79.41
2013-2014
85.77
2017-2018
82.43
—
(4.60)
81.17
—
(6.13)
73.28
—
(5.16)
77.27
During the year ended December 31, 2019, the Company made distributions to participants in the 2015-2016 investment
pool. The iPIP participants received total distributions in the amount of $9.4 million as compensation, comprised of cash and
356,065 shares of the Company's common stock with a fair value of $13.11 per share, which are fully-vested and issued under the
2009 LTIP (see below). After deducting statutory minimum tax withholdings, a total of 192,829 shares of the Company's common
stock were issued.
During the year ended December 31, 2019, the Company made distributions to participants in the 2013-2014 investment
pool. The iPIP participants received total distributions in the amount of $7.4 million as compensation, comprised of cash and
389,545 shares of the Company's common stock with a fair value of $9.21 per share, which are fully-vested and issued under the
2009 LTIP (see below). After deducting statutory minimum tax withholdings, a total of 209,118 shares of the Company's common
stock were issued.
As of December 31, 2019 and 2018, the Company had accrued compensation costs relating to iPIP of $41.9 million and
$37.5 million, respectively, 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 2009 Long-Term Incentive Plan (the "2009 LTIP") is designed to provide
incentive compensation for officers, key employees, directors and advisors of the Company. The 2009 LTIP provides for awards
of stock options, shares of restricted stock, phantom shares, restricted stock units, dividend equivalent rights and other share-based
performance awards. 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. The Company's shareholders approved the 2009 LTIP in 2009 and approved the performance-based
provisions of the 2009 LTIP, as amended, in 2014. In May 2019, the Company's shareholders approved an increase in the number
of shares available for issuance under the 2009 LTIP from a maximum of 8.0 million to 8.9 million and extended the expiration
date of the 2009 LTIP from May 2019 to May 2029.
As of December 31, 2019, an aggregate of 2.8 million shares remain available for issuance pursuant to future awards under
the Company's 2009 LTIP.
Restricted Stock Units—Changes in non-vested restricted stock units ("Units") during the year ended December 31, 2019
were as follows (number of shares and $ in thousands, except per share amounts):
Non-vested as of December 31, 2018
Granted
Vested
Forfeited
Non-vested as of December 31, 2019
Number
of Shares
Weighted Average
Grant Date
Fair Value
Per Share
$
357
485
$
(153) $
(91) $
$
598
10.68
8.84
11.12
9.99
9.18
$
$
Aggregate
Intrinsic
Value
3,277
8,688
The total fair value of Units vested during the years ended December 31, 2019, 2018 and 2017 was $1.8 million, $1.4 million
and $0.9 million, respectively. The weighted-average grant date fair value per share of Units granted during the years ended
December 31, 2019, 2018 and 2017 was $8.84, $10.16 and $12.09, respectively.
Directors' Awards—Non-employee directors are awarded CSEs or restricted share awards at the time of the annual
shareholders' meeting in consideration for their services on the Company's Board of Directors. During the year ended December 31,
2019, the Company awarded to non-employee Directors 65,936 restricted shares of common stock at a fair value per share of $8.74
93
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
at the time of grant. These restricted shares have a vesting term of one year. The Company also issued a total of 6,254 CSEs at a
fair value of $10.90 in respect of dividend equivalents on outstanding CSEs during the year ended December 31, 2019. 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, 2019, a combined total of 244,360
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 $3.5 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 contribute 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 participant's contributions, up to a maximum of 10% of the participants' compensation. The Company made gross
contributions of $0.9 million, $1.1 million and $1.1 million, respectively, for the years ended December 31, 2019, 2018 and 2017.
Note 16—Earnings Per Share
Earnings per share ("EPS") is calculated using the two-class method, which allocates earnings among common stock and
participating securities, if applicable, to calculate EPS when an entity's capital structure includes either two or more classes of
common stock or common stock and participating securities.
94
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
The following table presents a reconciliation of income (loss) from continuing operations used in the basic and diluted EPS
calculations ($ in thousands, except for per share data):
Income (loss) from continuing operations
Net income attributable to noncontrolling interests
Preferred dividends
Premium above book value on redemption of preferred stock
Income (loss) from continuing operations attributable to iStar Inc. and
allocable to common shareholders for basic earnings per common share
Add: Effect of Series J convertible perpetual preferred stock
Income (loss) from continuing operations attributable to iStar Inc. and
allocable to common shareholders for diluted earnings per common share
For the Years Ended December 31,
2017
2018
2019
$
334,325
(10,283)
(18,326) $
(13,936)
(32,495)
—
(32,495)
—
291,547
$
9,000
(64,757) $
—
51,851
(4,526)
(48,444)
(16,314)
(17,433)
—
300,547
$
(64,757) $
(17,433)
$
$
$
95
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
For the Years Ended December 31,
2017
2018
2019
Earnings allocable to common shares:
Numerator for basic earnings per share:
Income (loss) from continuing operations attributable to iStar Inc. and
allocable to common shareholders
$
291,547
$
Income from discontinued operations
Gain from discontinued operations
—
—
(64,757) $
—
—
(17,433)
4,939
123,418
Net income (loss) attributable to iStar Inc. and allocable to common
shareholders
$
291,547
$
(64,757) $
110,924
Numerator for diluted earnings per share:
Income (loss) from continuing operations attributable to iStar Inc. and
allocable to common shareholders
$
300,547
$
—
—
(64,757) $
—
—
(17,433)
4,939
123,418
$
300,547
$
(64,757) $
110,924
Income from discontinued operations
Gain from discontinued operations
Net income (loss) attributable to iStar Inc. and allocable to common
shareholders
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 for
restricted stock units
Add: Effect of series J convertible perpetual preferred stock
Weighted average common shares outstanding for diluted earnings per
common share
Basic earnings per common share:
Income (loss) from continuing operations attributable to iStar Inc. and
allocable to common shareholders
Income from discontinued operations
Gain from discontinued operations
Net income (loss) attributable to iStar Inc. and allocable to common
shareholders
Diluted earnings per common share:
Income (loss) from continuing operations attributable to iStar Inc. and
allocable to common shareholders
Income from discontinued operations
Gain from discontinued operations
Net income (loss) attributable to iStar Inc. and allocable to common
shareholders
$
$
$
$
96
64,696
67,958
71,021
146
15,824
—
—
—
—
80,666
67,958
71,021
4.51
$
—
—
(0.95) $
—
—
(0.25)
0.07
1.74
4.51
$
(0.95) $
1.56
3.73
$
—
—
(0.95) $
—
—
(0.25)
0.07
1.74
3.73
$
(0.95) $
1.56
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
For the years ended December 31, 2019, 2018 and 2017, the following shares were not included in the diluted EPS calculation
because they were anti-dilutive (in thousands)(1)(2)(3):
Joint venture shares
Series J convertible perpetual preferred stock
For the Years Ended December 31,
2017
2018
2019
—
—
—
15,704
255
15,635
(2)
(3)
_______________________________________________________________________________
(1)
For the year ended December 31, 2017, the effect of 6 and 17 unvested time and market-based Units, respectively, were anti-dilutive due to the Company
having a net loss for the period.
For the year ended December 31, 2018, the effect of the Company's unvested Units, CSEs and restricted stock awards were anti-dilutive due to the Company
having a net loss for the period.
The Company will settle conversions of the 3.125% Convertible Notes by paying the conversion value in cash up to the original principal amount of the
notes being converted and shares of common stock to the extent of any conversion premium. The amount of cash and shares of common stock, if any, due
upon conversion will be based on a daily conversion value calculated for each trading day in a 40 consecutive day observation period. Based upon the
conversion price of the 3.125% Convertible Notes, no shares of common stock would have been issuable upon conversion of the 3.125% Convertible Notes
for the years ended December 31, 2019, 2018, and 2017, and therefore the 3.125% Convertible Notes had no effect on diluted EPS for such periods.
Note 17—Fair Values
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs to be used in valuation
techniques to measure fair value:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for
substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and
unobservable (i.e., supported by little or no market activity).
Certain of the Company's assets and liabilities are recorded at fair value either on a recurring or non-recurring basis. Assets
required to be marked-to-market and reported at fair value every reporting period are classified as being valued on a recurring
basis. Assets not required to be recorded at fair value every period may be recorded at fair value if a specific provision or other
impairment is recorded within the period to mark the carrying value of the asset to market as of the reporting date. Such assets are
classified as being valued on a non-recurring basis.
97
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
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, 2019
Recurring basis:
Derivative assets(1)
Derivative liabilities(1)
Available-for-sale securities(1)
Non-recurring basis:
Impaired land and development(2)
As of December 31, 2018
Recurring basis:
Derivative assets(1)
Derivative liabilities(1)
Available-for-sale securities(1)
Non-recurring basis:
Impaired real estate(3)
Impaired real estate available and held for sale(4)
Impaired land and development(5)
Quoted market
prices in
active markets
(Level 1)
Fair Value Using
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
114
$
— $
8,680
23,896
40,000
$
$
3,669
$
10,244
21,661
$
29,400
19,300
78,400
—
—
—
— $
—
— $
—
—
—
114
$
8,680
—
—
—
—
23,896
40,000
3,669
$
10,244
—
—
— $
21,661
—
—
—
29,400
19,300
78,400
_______________________________________________________________________________
(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.
The Company recorded aggregate impairments of $5.3 million on two land and development assets with an estimated aggregate fair value of $40.0 million.
The estimated fair values are based on expected sales proceeds.
The Company recorded aggregate impairments of $76.3 million on three real estate assets with an estimated aggregate fair value of $29.4 million. The
impairments were as follows:
(2)
(3)
i.
ii.
iii.
A $23.2 million impairment on a commercial operating property based on a decline in expected operating performance. The fair value is based
on the Company's estimate of the recoverability of its investment in the project.
A $6.0 million impairment on a property based on a strategic decision to sell the asset. The fair value is based on purchase offers received from
third parties, which is consistent with the Company's estimate of fair value.
A $47.1 million impairment on a commercial operating property based on a strategic decision to sell the asset. The fair value is based on purchase
offers received from third parties, which is consistent with the Company's estimate of fair value.
(4)
(5)
The Company recorded aggregate impairments of $3.7 million on two real estate assets held for sale. The fair values are based on market comparable sales.
The Company recorded aggregate impairments of $55.4 million on four land and development assets with an estimated aggregate fair value of $78.4 million.
The impairments were as follows:
i.
ii.
iii.
iv.
A $25.0 million impairment on a waterfront land and development asset based on a strategic decision to sell the asset. The fair value is based
on purchase offers received from third parties, which is consistent with the Company's estimate of fair value.
A $21.6 million impairment on a master planned community based on a strategic decision to sell the asset. The fair value is based on purchase
offers received from third parties, which is consistent with the Company's estimate of fair value.
A $6.9 million impairment on an infill land and development asset based on the deterioration of the asset. The fair value is based on purchase
offers received from third parties, which is consistent with the Company's estimate of fair value.
A $1.9 million impairment on a waterfront land and development asset based on the sale of the asset in 2019.
98
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
The following table summarizes changes in Level 3 available-for-sale securities reported at fair value on the Company's
consolidated balance sheets for the years ended December 31, 2019 and 2018 ($ in thousands):
Beginning balance
Repayments
Unrealized gains (losses) recorded in other comprehensive income
Ending balance
2019
2018
$
21,661
(45)
2,280
23,896
$
22,842
(46)
(1,135)
21,661
$
$
Fair values of financial instruments—The Company's estimated fair values of its loans receivable and other lending
investments and outstanding debt was $0.9 billion and $3.6 billion, respectively, as of December 31, 2019 and $1.0 billion and
$3.5 billion, respectively, as of December 31, 2018. 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, net investment in leases, accrued interest
receivable and accounts payable, approximate the fair values of the instruments. Cash and cash equivalents and restricted cash
values are considered Level 1 on the fair value hierarchy. The fair value of other financial instruments, including derivative assets
and liabilities, are included in the fair value hierarchy table above.
Given the nature of certain assets and liabilities, clearly determinable market based valuation inputs are often not available,
therefore, these assets and liabilities are valued using internal valuation techniques. Subjectivity exists with respect to these internal
valuation techniques, therefore, the fair values disclosed may not ultimately be realized by the Company if the assets were sold
or the liabilities were settled with third parties. The methods the Company used to estimate the fair values presented in the 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 foreign currency risk. The valuation of these instruments is determined using discounted cash flow analysis on the expected
cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and
uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company
incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective
counterparty's non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the
effect of non-performance risk, the Company has considered the impact of netting and any applicable credit enhancements, such
as 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 properties, cash flows
generally include property revenues, operating costs and capital expenditures that are based on current observable market rates
and estimates for market rate growth and occupancy levels. For other real estate, cash flows may include lot and unit sales that
are based on current observable market rates and estimates for annual 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 some cases, the
Company obtains external "as is" appraisals for loan collateral, generally when third party participations exist, and appraised values
may be discounted when real estate markets rapidly deteriorate. The Company has determined that significant inputs used in its
internal valuation models and appraisals fall within Level 3 of the fair value hierarchy.
Impaired real estate—If the Company determines a real estate asset available and held for sale is impaired, it records an
impairment charge to adjust the asset to its estimated fair market value less costs to sell. Due to the nature of individual real estate
properties, the Company generally uses a discounted cash flow methodology through internally developed valuation models to
estimate the fair value of the assets. This approach requires the Company to make judgments with respect to significant unobservable
inputs, which may include discount rates, capitalization rates and the timing and amounts of estimated future cash flows. For
income producing properties, cash flows generally include property revenues, operating costs and capital expenditures that are
based on current observable market rates and estimates for market rate growth and occupancy levels. For other real estate, cash
99
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
flows may include lot and unit sales that are based on current 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 some 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 and net investment in leases—The Company estimates the fair value
of its performing loans and other lending investments and net investment in leases using a discounted cash flow methodology.
This method discounts estimated future cash flows using rates management determines best reflect current market interest rates
or rental rates that would be offered for loans or tenants with similar characteristics and credit quality. The Company determined
that the significant inputs used to value its loans and other lending investments and net investment in leases fall within Level 3 of
the fair value hierarchy. For certain lending investments, the Company uses market quotes, to the extent they are available, that
fall within Level 2 of the fair value hierarchy or broker quotes that fall within Level 3 of the fair value hierarchy.
Debt obligations, net—For debt obligations traded in 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 hierarchy. 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 determines best reflect current market interest rates that would be charged for debt
with similar characteristics and credit quality. The Company has determined that the inputs used to value its debt obligations under
the discounted cash flow methodology fall within Level 3 of the fair value hierarchy.
Note 18—Segment Reporting
The Company has determined that it has four reportable segments based on how management reviews and manages its
business. These reportable 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 and its investment in SAFE (refer to Note 8). 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.
100
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
The Company evaluates performance based on the following financial measures for each segment. The Company's segment
information is as follows ($ in thousands):
Year Ended December 31, 2019
Operating lease income
Interest income
Interest income from sales-type leases
Other income
Land development revenue
Earnings (losses) from equity method
investments
Selling profit from sales-type leases
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 items:
Provision for loan losses
Impairment of assets
Depreciation and amortization
Capitalized expenditures
Year Ended December 31, 2018
Real Estate
Finance
Net Lease
Operating
Properties
Land and
Development
Corporate/
Other(1)
Company
Total
$
— $
177,679
$
28,423
$
286
$
— $
206,388
75,636
—
4,946
—
—
—
—
80,582
—
—
(462)
(29,587)
(8,254)
42,279
6,482
—
—
—
$
$
$
$
2,018
20,496
16,718
—
29,235
180,416
224,654
651,216
—
—
17,384
—
8,298
—
11,969
66,074
(24,786)
(35,322)
—
—
—
—
(95,154)
(25,990)
(10,249)
(2,887)
—
—
7,838
119,595
4,322
—
—
132,041
(32,318)
(109,663)
—
(20,706)
(11,957)
—
—
8,477
—
(6)
—
—
8,471
—
—
(12,658)
(28,223)
(19,085)
77,654
20,496
55,363
119,595
41,849
180,416
236,623
938,384
(92,426)
(109,663)
(13,120)
(183,919)
(68,173)
505,286
$
17,616
$
(42,603) $
(51,495) $
471,083
— $
— $
— $
— $
2,471
51,091
31,445
3,853
4,977
5,617
6,427
977
99,031
668
1,214
—
6,482
13,419
58,259
136,093
Operating lease income
$
— $
151,958
$
55,677
$
557
$
— $
208,192
Interest income
Other income
Land development revenue
Earnings (losses) from equity method
investments
Gain from consolidation of equity method
investment
Income from sales of real estate
97,878
4,556
—
—
—
—
Total revenue and other earnings
102,434
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
—
—
(1,578)
(40,653)
(12,997)
47,206
16,937
—
—
—
$
$
$
$
—
4,286
—
8,479
67,877
45,038
277,638
(17,033)
—
—
—
54,361
—
—
7,320
409,710
—
11,819
—
97,878
82,342
409,710
(1,003)
(3,110)
(9,373)
(5,007)
—
80,966
190,001
(80,570)
—
—
—
—
414,477
(41,686)
(350,181)
—
(21,897)
(14,313)
—
—
2,446
—
—
(4,462)
(38,877)
(19,975)
67,877
126,004
986,996
(139,289)
(350,181)
(6,040)
(183,751)
(74,572)
(63,706)
(20,713)
(18,618)
(6,574)
176,186
$
84,239
$
(13,600) $
(60,868) $
233,163
— $
— $
— $
— $
16,937
79,991
17,417
19,912
56,726
1,353
144,595
—
1,341
—
147,108
58,699
204,722
10,391
38,588
40,215
101
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Real Estate
Finance
Net Lease
Operating
Properties
Land and
Development
Corporate/
Other(1)
Company
Total
Year Ended December 31, 2017
Operating lease income
$
— $
123,685
$
63,159
$
840
$
— $
187,684
Interest income
Other income
Land development revenue
Earnings (losses) from equity method
investments
Income from discontinued operations
Gain from discontinued operations
Income from sales of real estate
106,548
2,633
—
—
—
—
—
Total revenue and other earnings
109,181
—
—
(1,413)
(40,359)
(15,223)
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
$
$
—
2,603
—
5,086
4,939
123,418
87,512
347,243
(16,742)
—
—
—
49,641
—
—
126,259
196,879
(772)
7,292
—
—
4,537
116,565
(89,725)
—
—
—
—
—
331,270
(41,150)
(180,916)
—
(28,033)
(16,483)
—
6,955
—
1,409
—
—
—
8,364
—
—
(19,541)
(52,413)
(20,726)
106,548
188,091
196,879
13,015
4,939
123,418
92,049
912,623
(147,617)
(180,916)
(20,954)
(194,686)
(80,070)
(53,710)
(19,563)
(20,171)
(8,075)
52,186
$
257,228
$
(1,406) $
64,688
$
(84,316) $
288,380
(5,828) $
— $
— $
— $
— $
(5,828)
—
—
—
5,486
28,132
4,838
6,358
17,684
35,754
20,535
1,896
125,744
—
1,321
—
32,379
49,033
166,336
102
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
As of December 31, 2019
Real estate
Real estate, net
Real estate available and held for sale
Total real estate
Net investment in leases
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, 2018
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
Real Estate
Finance
Net Lease
Operating
Properties
Land and
Development
Corporate/
Other(1)
Company
Total
$
— $ 1,327,082
$
200,137
$
— $
— $ 1,527,219
—
—
—
—
—
1,327,082
418,915
—
783,522
—
44,339
760,068
8,650
208,787
—
—
—
61,686
—
—
—
580,545
—
42,866
$
783,522
$ 2,550,404
$
270,473
$
623,411
$
—
—
—
—
—
43,255
43,255
8,650
1,535,869
418,915
580,545
827,861
907,875
4,271,065
814,044
$ 5,085,109
$
— $ 1,536,494
$
234,525
$
— $
— $ 1,771,019
—
—
—
988,224
1,055
1,537,549
21,496
256,021
—
—
—
—
—
165,804
65,643
—
—
598,218
—
65,312
$
988,224
$ 1,703,353
$
321,664
$
663,530
$
—
—
—
—
7,516
7,516
22,551
1,793,570
598,218
988,224
304,275
3,684,287
1,329,990
$ 5,014,277
_______________________________________________________________________________
(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 $30.4 million, $17.6 million and $18.8 million for the years ended December 31,
2019, 2018 and 2017, respectively.
The following is a reconciliation of segment profit to net income (loss) ($ in thousands):
(3)
Segment profit
Add/Less: (Provision for) recovery of loan losses
Less: Impairment of assets
Less: Depreciation and amortization
Less: Stock-based compensation expense
Less: Income tax (expense) benefit
Less: Loss on early extinguishment of debt, net
Net income (loss)
For the Years Ended December 31,
2019
2018
2017
$
471,083
$
233,163
$
(6,482)
(13,419)
(58,259)
(30,436)
(438)
(27,724)
(16,937)
(147,108)
(58,699)
(17,563)
(815)
(10,367)
$
334,325
$
(18,326) $
288,380
5,828
(32,379)
(49,033)
(18,812)
948
(14,724)
180,208
103
Notes to Consolidated Financial Statements (Continued)
iStar Inc.
Note 19—Quarterly Financial Information (Unaudited)
The following table sets forth the selected quarterly financial data for the Company ($ in thousands, except per share amounts).
2019:
Revenue
Net income (loss)
Net income (loss) attributable to iStar Inc.
Earnings per common share data(1):
Net income (loss) attributable to common shareholders
Basic
Diluted
Earnings per share
Basic
Diluted
Weighted average number of common shares
Basic
Diluted
2018:
Revenue
Net income (loss)
Net income (loss) attributable to iStar Inc.
Earnings per common share data(1):
Net income (loss) attributable to common shareholders
Basic
Diluted
Earnings per share
Basic
Diluted
Weighted average number of common shares
Basic
Diluted
December 31,
September 30,
June 30,
March 31,
For the Quarters Ended
$
$
$
$
$
$
$
$
$
$
$
$
$
$
128,888
$
145,338
(36,022) $
(38,137) $
3,626
781
$
$
$
98,468
373,691
370,839
(46,260) $
(46,260) $
(7,343) $
(7,343) $
362,715
364,965
(0.71) $
(0.71) $
(0.12) $
(0.12) $
64,910
64,910
62,168
62,168
5.67
4.55
64,019
80,259
140,165
$
(105,028) $
122,141
$
(8,832) $
(107,332) $
(10,860) $
171,571
60,506
50,997
(115,455) $
(115,455) $
(18,984) $
(18,984) $
42,873
45,123
(1.70) $
(1.70) $
(0.28) $
(0.28) $
68,012
68,012
67,975
67,975
0.63
0.54
67,932
83,694
$
$
$
$
$
$
$
$
$
$
$
$
$
$
106,802
(6,970)
(9,441)
(17,565)
(17,565)
(0.26)
(0.26)
67,747
67,747
364,245
35,028
34,933
26,809
29,059
0.39
0.35
67,913
83,670
_______________________________________________________________________________
(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.
104
iStar Inc.
Schedule II—Valuation and Qualifying Accounts and Reserves
($ in thousands)
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Adjustments
to Valuation
Accounts
Deductions
Balance at
End
of Period
For the Year Ended December 31, 2017
Reserve for loan losses(1)(2)
Allowance for doubtful accounts(2)
Allowance for deferred tax assets(2)
For the Year Ended December 31, 2018
Reserve for loan losses(1)(2)
Allowance for doubtful accounts(2)
Allowance for deferred tax assets(2)
For the Year Ended December 31, 2019
Reserve for loan losses(1)(2)
Allowance for doubtful accounts(2)
Allowance for deferred tax assets(2)
$
$
$
$
$
85,545
$
2,588
66,498
154,631
78,489
2,610
63,258
144,357
53,395
3,271
78,107
$
$
$
$
(5,828) $
473
$
$
$
$
7,108
1,753
16,937
1,300
14,849
33,086
6,482
(696)
1,538
— $
—
(9,318)
(9,318) $
(1,228) $
(451)
(1,030)
(2,709) $
— $
—
—
— $
— $
—
—
(42,031) $
(639)
—
(42,670) $
(31,243) $
(633)
—
(31,876) $
78,489
2,610
63,258
144,357
53,395
3,271
78,107
134,773
28,634
1,942
79,645
110,221
_____________________________________________________________
(1)
(2)
Refer to Note 7 to the Company's consolidated financial statements.
Refer to Note 3 to the Company's consolidated financial statements.
$
134,773
$
7,324
$
— $
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Item 9. Changes and Disagreements with Registered Public Accounting Firm on Accounting and Financial Disclosure
None.
Item 9a. Controls and Procedures
Evaluation of Disclosure Controls and Procedures—The Company has established and maintains disclosure controls and
procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Accounting
Officer, who is currently performing the functions of the Company's principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company has formed a disclosure committee that is responsible for considering the
materiality of information and determining the disclosure obligations of the Company on a timely basis. Both the Chief Executive
Officer and the principal financial officer (whose functions are currently being performed by the Company's Chief Accounting
Officer) are members of the disclosure committee.
Based upon their evaluation as of December 31, 2019, the Chief Executive Officer and the principal financial officer (whose
functions are currently being performed by the Company's Chief Accounting Officer) concluded that the Company's disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities and Exchange Act of 1934, as amended
(the "Exchange Act")) are effective.
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 Accounting Officer, who is currently performing the functions of the Company's principal 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, 2019.
The Company's internal control over financial reporting as of December 31, 2019 has been audited by Deloitte & Touche
LLP, an independent registered public accounting firm.
Changes in Internal Controls Over Financial Reporting—There have been no changes during the last fiscal quarter in
the Company's internal controls identified in connection with the evaluation required by paragraph (d) of Exchange Act
Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
Item 9b. Other Information
None.
116
PART III
Item 10. Directors, Executive Officers and Corporate Governance of the Registrant
Portions of the Company's definitive proxy statement for the 2020 annual meeting of shareholders to be filed within 120 days
after the close of the Company's fiscal year are incorporated herein by reference.
Item 11. Executive Compensation
Portions of the Company's definitive proxy statement for the 2020 annual meeting of shareholders to be filed within 120 days
after the close of the Company's fiscal year are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Portions of the Company's definitive proxy statement for the 2020 annual meeting of shareholders to be filed within 120 days
after the close of the Company's fiscal year are incorporated herein by reference.
Item 13. Certain Relationships, Related Transactions and Director Independence
Portions of the Company's definitive proxy statement for the 2020 annual meeting of shareholders to be filed within 120 days
after the close of the Company's fiscal year are incorporated herein by reference.
Item 14. Principal Registered Public Accounting Firm Fees and Services
Portions of the Company's definitive proxy statement for the 2020 annual meeting of shareholders to be filed within
120 days after the close of the Company's fiscal year are incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
PART IV
(a) and (c) Financial statements and schedules—see Index to Financial Statements and Schedules included in Item 8.
(b) Exhibits—see index on following page.
117
INDEX TO EXHIBITS
Document Description
Restated Charter of the Company (including the Articles Supplementary for each Series of the Company's Preferred Stock).(1)
Amended and Restated Bylaws of the Company.(2)
Articles Supplementary relating to Series D Preferred Stock.(3)
Articles Supplementary relating to Series G Preferred Stock.(4)
Articles Supplementary relating to Series I Preferred Stock.(5)
Form of 8.00% Series D Cumulative Redeemable Preferred Stock Certificate.(3)
Form of 7.65% Series G Cumulative Redeemable Preferred Stock Certificate.(4)
Form of 7.50% Series I Cumulative Redeemable Preferred Stock Certificate.(5)
Form of Stock Certificate for the Company's Common Stock.(6)
Base Indenture, dated as of February 5, 2001, between the Company and State Street Bank and Trust Company.(7)
Twenty-Ninth Supplemental Indenture, dated as of March 13, 2017, governing the 6.00% Senior Notes Due 2022.(8)
Form of Global Note, No. 1, evidencing 6.00% Senior Notes due 2022.(8)
Thirty-First Supplemental Indenture, dated as of September 20, 2017, governing the 5.25% Senior Notes due 2022.(9)
Form of Global Note, No. 1, evidencing 5.25% Senior Notes due 2022.(9)
Thirty-Second Supplemental Indenture, dated as of September 20, 2017, governing the 3.125% Senior Notes due 2022.(9)
Form of Global Note, No. 1, evidencing 3.125% Senior Notes due 2022.(9)
Thirty-Third Supplemental Indenture, dated as of September 16, 2019, governing the 4.75% Senior Notes due 2024.(10)
Thirty-Fourth Supplemental Indenture, dated as of December 16, 2019, governing the 4.25% Senior Notes due 2025.(11)
Exhibit
Number
3.1
3.2
3.6
3.8
3.9
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14*
Description of Common and Preferred Stock
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
14.0
21.1*
23.1*
23.2*
31.0*
32.0*
100*
iStar Inc. 2009 Long Term Incentive Compensation Plan.(12)
iStar Inc. 2013 Performance Incentive Plan.(12)
Form of Restricted Stock Unit Award Agreement.(13)
Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting).(14)
Form of Award Agreement For Investment Pool.(6)
Amended and Restated Credit Agreement, dated as of June 23, 2016, by the Company, the banks set forth therein and J.P.
Morgan Chase Bank, N.A., as administrative agent, and J.P. Morgan Chase Bank, N.A., Bank Of America, N.A. and Barclays
Bank PLC as joint lead arrangers.(15)
Security Agreement, dated as of June 23, 2016, made by the Company, and the other parties thereto in favor of J.P. Morgan
Chase Bank, N.A., as administrative agent.(15)
Third Amendment, dated as of June 28, 2018, to the Amended and Restated Credit Agreement referenced at Exhibit 10.8 (16)
Amended and Restated Credit Agreement dated as of September 27, 2019, among the Company, the other parties named therein
and JPMorgan Chase Bank, N.A. as administrative agent.(17)
Stockholder Agreement, dated as of January 2, 2019, between iStar Inc., and Safehold Inc.(18)
Amended and Restated Management Agreement, dated as of January 2, 2019, among Safehold Inc., SFTY Manager LLC and
iStar Inc.(18)
First Amendment to Stockholder Agreement, dated as of January 14, 2020, between iStar Inc. and Safehold Inc. (19)
First Amendment to Amended and Restated Management Agreement, dated as of January 14, 2020, among Safehold Inc., SFTY
Manager LLC and iStar Inc.(19)
iStar Inc. Code of Conduct.(20)
Subsidiaries of the Company.
Consent of Deloitte & Touche LLP.
Consent of PricewaterhouseCoopers LLP.
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act.
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act.
Inline XBRL-related documents
101
Interactive data file
________________________________________________________________________
118
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
Incorporated by reference from the Company's Current Report on Form 8-K filed on December 15, 2016.
Incorporated by reference from the Company's Current Report on Form 8-K filed on October 25, 2013.
Incorporated by reference from the Company's Current Report on Form 8-A filed on July 8, 2003.
Incorporated by reference from the Company's Current Report on Form 8-A filed on December 10, 2003.
Incorporated by reference from the Company's Current Report on Form 8-A filed on February 27, 2004.
Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2014 filed on March 2, 2015.
Incorporated by reference from the Company's Current Report on Form S-3 Registration Statement filed on February 12, 2001.
Incorporated by reference from the Company's Current Report on Form 8-K filed on March 13, 2017.
Incorporated by reference from the Company's Current Report on Form 8-K filed on September 20, 2017.
Incorporated by reference from the Company's Current Report on Form 8-K filed on September 16, 2019.
Incorporated by reference from the Company's Current Report on Form 8-K filed on December 16, 2019.
Incorporated by reference from the Company's Definitive Proxy Statement filed on April 11, 2014.
Incorporated by reference from the Company's Current Report on Form 8-K filed on January 25, 2007.
Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 filed on May 9, 2008.
Incorporated by reference from the Company's Current Report on Form 8-K filed on June 29, 2016
Incorporated by reference from the Company's Current Report on Form 8-K filed on July 5, 2018.
Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 filed on October 31, 2019.
Incorporated by reference from the Company's Current Report on Form 8-K filed on January 3, 2019.
Incorporated by reference from the Company's Current Report on Form 8-K filed on January 15, 2020.
Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 16, 2005.
* Filed herewith.
**In accordance with Rule 406T of Regulation S-T, the Inline XBRL related information in Exhibit 101 is deemed not filed or part of a registration statement or
prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934 and otherwise
is not subject to liability under these sections.
119
Item 16. Form 10-K Summary
None.
120
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 24, 2020
Date: February 24, 2020
iStar Inc.
Registrant
/s/ JAY SUGARMAN
Jay Sugarman
Chairman of the Board of Directors and Chief
Executive Officer (principal executive officer)
iStar Inc.
Registrant
/s/ GARETT ROSENBLUM
Garett Rosenblum
Chief Accounting Officer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 24, 2020
Date: February 24, 2020
Date: February 24, 2020
Date: February 24, 2020
Date: February 24, 2020
/s/ JAY SUGARMAN
Jay Sugarman
Chairman of the Board of Directors
Chief Executive Officer
/s/ CLIFFORD DE SOUZA
Clifford De Souza
Director
/s/ ROBIN JOSEPHS
Robin Josephs
Director
/s/ RICHARD LIEB
Richard Lieb
Director
/s/ BARRY W. RIDINGS
Barry W. Ridings
Director
121
Exhibit 31.0
I, Jay Sugarman, certify that:
1. I have reviewed this annual report on Form 10-K of iStar Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 24, 2020
By:
/s/ JAY SUGARMAN
Name:
Title:
Jay Sugarman
Chief Executive Officer
I, Garett Rosenblum, certify that:
1. I have reviewed this annual report on Form 10-K of iStar Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 24, 2020
By:
/s/ GARETT ROSENBLUM
Name: Garett Rosenblum
Title:
Chief Accounting Officer (principal
financial officer)
Certification of Chief Executive Officer
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
Exhibit 32.0
The undersigned, the Chief Executive Officer of iStar Inc. (the "Company"), hereby certifies on the date hereof, pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K
for the year ended December 31, 2019 (the "Form 10-K"), filed concurrently herewith by the Company, fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained
in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 24, 2020
By:
/s/ JAY SUGARMAN
Name:
Title:
Jay Sugarman
Chief Executive Officer
Certification of Chief Financial Officer
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
The undersigned, the principal financial officer of iStar Inc. (the "Company"), hereby certifies on the date hereof, pursuant
to 18 U.S.C. 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-
K for the year ended December 31, 2019 (the "Form 10-K"), filed concurrently herewith by the Company, fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained
in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 24, 2020
By:
/s/ GARETT ROSENBLUM
Name: Garett Rosenblum
Title:
Chief Accounting Officer (principal
financial officer)
Performance Graph
The following graph compares the total cumulative shareholder returns on our Common Stock from
December 31, 2014 to December 31, 2019 to that of: (1) the Standard & Poor’s 500 Index (the ‘‘S&P 500 Index’’);
and (2) the Standard & Poor’s 500 Financials Index (‘‘the S&P 500 Financials’’).
Total Shareholder Return
101
98
86
121
114
91
148
138
83
132
128
68
174
170
112
200
180
160
140
120
100
80
60
40
20
0
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
STAR
S&P 500
S&P 500 Financials
1APR202017500212
Directors and Officers
Directors
Executive Officers
Executive Vice Presidents
Jay Sugarman
Chairman & Chief Executive
Officer
Jay Sugarman
Chairman &
Chief Executive Officer
Marcos Alvarado
President &
Chief Investment Officer
Jeremy Fox-Geen
Chief Financial Officer
Douglas Heitner
Chief Legal Officer
Robin Josephs (1) (2) (3)
Lead Director
Nominating and Governance
Committee Chair
Clifford De Souza (1) (3) (4)
Audit Committee Chair
Richard Lieb (2) (3)
Investment Committee Chair
Barry W. Ridings (1) (2)
Compensation Committee Chair
Anita Sands
Director
Brett Asnas
Head of Capital Markets
Elisha J. Blechner
Co-Head of Investments
Head of Portfolio Management
Timothy Doherty
Co-Head of Investments
Barclay G. Jones III
Net Lease Investments
(1) Audit Committee
(2) Compensation Committee
(3) Investment Committee
(4) Nominating and Governance Committee
Corporate Information
Headquarters
Employees
As of March 23, 2020,
the Company had
158 employees
Registrar &
Transfer Agent
Computershare Trust
Company, NA
PO Box 505000
Louisville, KY 40233
Tel: 800.317.4445
www.computershare.com
New York
1114 Avenue of the
Americas
New York, NY 10036
Tel: 212.930.9400
Fax: 212.930.9494
Regional Offices
Los Angeles
10960 Wilshire Boulevard
Suite 1260
Los Angeles, CA 90024
Tel: 310.315.7019
Fax: 310.315.7017
Atlanta
3480 Preston Ridge Road
Suite 575
Alpharetta, GA 30005
Tel: 678.297.0100
Fax: 678.297.0101
Hartford
180 Glastonbury Boulevard
Suite 201
Glastonbury, CT 06033
Tel: 860.815.5900
Fax: 860.815.5901
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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
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
Senior Vice President,
Investor Relations &
Marketing
1114 Avenue of the Americas
New York, NY 10036
Tel: 212.930.9400
Email:
investors@istar.com
Website:
www.istar.com
2019
ANNUAL
REPORT
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