Item 1 - "Net Leasing" and "Real Estate Investment," 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 facilities.
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 its business as a finance and investment company focused on the commercial real estate industry, including loan foreclosure and foreclosure-related proceedings. In addition to such matters, the Company or its subsidiaries is a party to, or any of their property is the subject of, the following pending legal proceedings.
Citiline Holdings, Inc., et al. v. iStar Financial, Inc., et al.
In April 2008, two putative class action complaints were filed in the United States District Court for the Southern District of New York naming the Company and certain of its current and former executive officers as defendants and alleging violations of federal securities laws. Both suits were purportedly filed on behalf of the same putative class of investors who purchased Common Stock in the Company's December 13, 2007 public offering (the "Company's Offering"). The two complaints were consolidated in a single proceeding (the "Citiline Action") on April 30, 2008.
On November 17, 2008, Plumbers Union Local No. 12 Pension Fund and Citiline Holdings, Inc. were appointed Lead Plaintiffs to pursue the Citiline Action. Plaintiffs filed a Consolidated Amended Complaint on February 2, 2009, purportedly on behalf of a putative class of investors who purchased the Company's Common Stock between December 6, 2007 and March 6, 2008 (the "Complaint"). The Complaint named as defendants the Company, certain of its current and former executive officers, and certain investment banks who served as underwriters in the Company's Offering. The Complaint reasserted claims for alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act, and added claims for alleged violations of Sections 10(b) and 20(a) of the Exchange Act. Plaintiffs allege the defendants made certain material misstatements and omissions relating to the Company's continuing operations, including the value of the Company's loan portfolio and certain debt securities held by the Company. The Complaint seeks certification as a class action, unspecified compensatory damages plus interest and attorneys fees, and rescission of the public offering. No class has been certified. The Company and its current and former officers filed a motion to dismiss the Complaint on April 27, 2009 and, on March 26, 2010, the Court issued its order granting, in part, the dismissal of certain Securities Act claims against certain of the Company's current and former officers, but denying the motion as to all claims asserted against the Company. Accordingly, the discovery process has commenced. The Company believes the Citiline Action has no merit and intends to continue defending itself vigorously against it.
Shareholder Derivative Actions
In April and May 2010, three separate shareholder derivative complaints were filed, purportedly on the Company's behalf against the Company's Board of Directors and certain current and former executive officers. These actions arise out of the same facts and circumstances alleged in the Citiline Action (described above) and all claim that the individual defendants breached their fiduciary duties to the Company and are liable to the Company for unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets. Two of these complaints were filed in the United States District Court for the Southern District of New York and the third was filed in Supreme Court of New York, County of New York. In June 2010, the New York state court action was voluntarily dismissed by the plaintiff. Plaintiffs in the remaining two derivative actions seek monetary damages, reimbursement for professional fees, improvements in governance and controls and disgorgement of profits. The Company, as a nominal defendant on whose behalf the plaintiffs claim they are acting, has filed motions to dismiss these claims on the basis that neither shareholder has established the right to usurp the Board of Directors' power to decide whether and when a suit should be filed. Briefing on the motions to dismiss was completed in November 2010. Both motions are pending decision and no date has been set for oral argument. The individual defendants, who are separately represented by counsel, believe these claims have no merit and intend to defend themselves vigorously against these actions.
Shareholder Letters
On two occasions in 2009, the Company received letters from persons claiming to own Company shares and demanding that the Company address certain compensation, disclosure and other issues. In response to these demands, the Company appointed a special committee of independent directors. The committee, with the assistance of independent counsel, investigated the claims and concluded that the claimants either had not demonstrated they had standing to raise claims or had not sustained damages. One of these individuals, who repeatedly refused to provide any satisfactory evidence that she owned stock in the Company, has since filed suit against the Company (one of the pending derivative actions described in the preceding paragraph), alleging that certain current and former officers and directors breached their fiduciary duties to the Company, and that the special committee improperly refused her demand to initiate suit against these officers and directors on behalf of the Company. The Company has received letters from two other individuals claiming to own Company shares and demanding that the Company take action against current and former officers and directors named in the letter to recover damages arising from alleged breaches of fiduciary duties. The allegations in these two letters are materially the same as those made in the pending shareholder derivative actions described in the preceding paragraph. The shareholders on whose behalf these letters were written have complied with the special committee's request to furnish evidence of their continuous ownership of iStar shares. The special committee of independent directors is currently reviewing the claims made in these letters.
Item 4. (Removed and Reserved)
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 "SFI."
The high and low closing prices per share of Common Stock are set forth below for the periods indicated.
On March 11, 2011, the closing sale price of the Common Stock as reported by the NYSE was $9.83. The Company had 2,772 holders of record of Common Stock as of March 11, 2011.
At December 31, 2010, the Company had five series of preferred stock outstanding: 8.000% Series D Preferred Stock, 7.875% Series E Preferred Stock, 7.8% Series F Preferred Stock, 7.65% Series G Preferred Stock and 7.50% Series I Preferred Stock. Each of the Series D, E, F, G and I preferred stock is publicly traded.
Dividends
The Board of Directors has not established any minimum distribution level. In order to maintain its qualification as a REIT, the Company intends to pay dividends to its shareholders that, on an annual basis, will represent at least 90% of its taxable income (which may not necessarily equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gains. The Company has recorded net operating losses and may record net operating losses in the future, which may reduce its taxable income in future periods and lower or eliminate entirely the Company's obligation to pay dividends for such periods in order to maintain its REIT qualification.
Holders of Common Stock, vested High Performance Units and certain unvested restricted stock units and common share equivalents will be entitled to receive distributions if, as and when the Board of Directors authorizes and declares distributions. However, rights to distributions may be subordinated to the rights of holders of preferred stock, when preferred stock is issued and outstanding. In addition, the Company's new secured credit Facility (see Item 8 - "Financial Statements and Supplemental Data-Note 19") permits the Company to distribute 100% of its REIT taxable income on an annual basis, for so long as the Company maintains its qualification as a REIT. The new secured credit Facility restricts the Company from paying any common dividends if it ceases to qualify as a REIT. In any liquidation, dissolution or winding up of the Company, each outstanding share of Common Stock and HPU share equivalent will entitle its holder to a proportionate share of the assets that remain after the Company pays its liabilities and any preferential distributions owed to preferred shareholders.
The Company did not declare or pay dividends on its Common Stock for the years ended December 31, 2010 and 2009. The Company declared and paid dividends aggregating $8.0 million,
$11.0 million, $7.8 million, $6.1 million and $9.4 million on its Series D, E, F, G, and I preferred stock, respectively, for each of the years ended December 31, 2010 and 2009. There are no dividend arrearages on any of the preferred shares currently outstanding.
Distributions to shareholders will generally be taxable as ordinary income, although all or a portion of such distributions may be designated by the Company as capital gain or may constitute a tax-free return of capital. The Company annually furnishes to each of its shareholders a statement setting forth the distributions paid during the preceding year and their characterization as ordinary income, capital gain or return of capital.
No assurance can be given as to the amounts or timing of future distributions, as such distributions are subject to the Company's taxable income after giving effect to its net operating loss carryforwards, financial condition, capital requirements, debt covenants, any change in the Company's intention to maintain its REIT qualification and such other factors as the Company's Board of Directors deems relevant. In addition, based upon recent guidance announced by the Internal Revenue Service, the Company may elect to satisfy some of its 2011 REIT distribution requirements, if any, through stock dividends.
Issuer Purchases of Equity Securities
None.
Disclosure of Equity Compensation Plan Information
Explanatory Notes:
(1)Stock Options-As more fully discussed in Item 8 - "Financial Statements and Supplementary Data-Note 13," there were 142,788 stock options outstanding as of December 31, 2010. These options, together with their weighted average exercise price, have been included in columns (a) and (b), above.
(2)Restricted Stock-The amount shown in column (a) includes 3,186,501 unvested restricted stock units which may vest in the future based on the employees' continued service to the Company and 11,146,518 unvested restricted stock units which may vest in the future if vesting conditions based on both the employees' continued service to the Company and the achievement of specified targets for shareholder return or Company performance are met. None of these unvested units are included in the Company's outstanding share balance (see Item 8 - "Financial Statements and Supplementary Data-Note 13" for a more detailed description of the Company's restricted stock grants). Of the securities included in column (a), 14,006,542 restricted stock units are required to be settled on a net, after-tax basis (after deducting shares for minimum required statutory withholdings); therefore, the actual number of shares issued will be less than the gross amount of the awards. The amounts shown in column (a) also include 281,958 common stock equivalents awarded to our non-employee directors in consideration of their service to us 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 awards 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 and other performance awards (see Item 8 - "Financial Statements and Supplementary Data-Note 13" for a more detailed description of the Company's Long-Term Incentive Plans).
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." Certain prior year amounts have been reclassified to conform to the 2010 presentation.
Explanatory Notes:
(1)HPU holders are current and former Company employees who purchased high performance common stock units under the Company's High Performance Unit Program. Participating Security holders are Company employees and directors who hold unvested restricted stock units and common stock equivalents granted under the Company's Long Term Incentive Plans.
(2)See Item 8 - "Financial Statements and Supplementary Data-Note 14."
(3)For the years ended December 31, 2007 and 2006, net income used to calculate earnings per diluted common share and HPU share includes joint venture income of $85 and $115, respectively.
(4)The Company generally declares common dividends in the month subsequent to the end of the quarter. During 2010 and 2009, no common dividends were declared. During 2008, no common dividends were declared for the three month periods ended September 30, 2008 and December 31, 2008. In December of 2007, the Company declared a special $0.25 dividend due to higher taxable income generated as a result of the Company's acquisition of Fremont CRE.
(5)Adjusted earnings represents net income attributable to the Company and allocable to common shareholders, HPU holders and Participating Security holders computed in accordance with GAAP, before depreciation, depletion, amortization, gain from discontinued operations, impairments of goodwill and intangible assets and extraordinary items. (See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," for a reconciliation of adjusted earnings to net income).
(6)Both Adjusted earnings and Adjusted EBITDA should be examined in conjunction with net income (loss) as shown in the Company's Consolidated Statements of Operations. Neither Adjusted earnings nor Adjusted EBITDA should be considered as an alternative to net income (loss) (determined in accordance with GAAP) as an indicator of the Company's performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is either measure indicative of funds available to fund the Company's cash needs or available for distribution to shareholders. Rather, Adjusted earnings and Adjusted EBITDA are additional measures the Company uses to analyze how its business is performing. As a commercial finance company that focuses on real estate lending, net leasing and real estate investment, the Company records significant depreciation on its real estate assets and amortization of deferred financing costs associated with its borrowings. In addition, in calculating its ratio of Adjusted EBITDA to interest expense and preferred stock dividends, the Company makes adjustments for impairments of assets and provisions for loan losses because they are significant non-cash items and the Company believes that investors may find it useful to consider the Company's coverage of its interest and preferred dividend payments without the effect of these non-cash items, as an additional measure to earnings to fixed charges. It should be noted that the Company's manner of calculating Adjusted earnings and Adjusted EBITDA may differ from the calculations of similarly-titled measures by other companies.
(7)Adjusted EBITDA is calculated as net income (loss) plus the sum of interest expense, depreciation, depletion and amortization, income taxes, provision for loan losses, impairment of assets, stock-based compensation expense and less the gain on early extinguishment of debt, net.
Explanatory Notes:
(1)For the years ended December 31, 2010, 2009, 2008, 2007 and 2006, interest expense includes $30,515, $66,876, $47,995, $18,554 and $19,327, respectively, of interest expense reclassified to discontinued operations.
(2)For the years ended December 31, 2010, 2009, 2008, 2007 and 2006, depreciation, depletion and amortization includes $7,541, $36,029, $40,811, $43,560 and $43,291, respectively, of depreciation, depletion and amortization reclassified to discontinued operations.
(3)For the years ended December 31, 2010, 2009, 2008, 2007 and 2006, impairment of assets includes $1,860, $14,430, $296, $297 and $297, respectively, of impairment of assets reclassified to discontinued operations.
(8)This ratio of earnings to fixed charges is calculated in accordance with GAAP. The Company's unsecured debt securities have a fixed charge coverage covenant which is calculated differently in accordance with the terms of the agreements.
(9)For the years ended December 31, 2010, 2009 and 2008, earnings were not sufficient to cover fixed charges by $227,249, $756,824 and $282,640, respectively, and earnings were not sufficient to cover fixed charges and preferred dividends by $269,569, $799,144 and $324,960, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 and Section 21E of the Exchange Act. Forward-looking statements are included with respect to, among other things, the Company's current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. Important factors that the Company believes might cause such differences are discussed in the section entitled, "Risk Factors" in Part I, Item 1a
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 interest-earning assets and interest-bearing liabilities. 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 further economic downturn, defaults could increase and cause us to incur additional credit losses which would adversely affect our liquidity and operating results. Such delinquencies or defaults would likely have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities. In addition, an increase in interest rates could, among other things, reduce the value of our fixed-rate interest-bearing assets and our ability to realize gains from the sale of such assets.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. We monitor the spreads between our interest-earning assets and 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 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 prepayment or interest rate exposure on our loan assets. As a result our ability to hedge these types of risks is limited. There can be no assurance that our profitability will not be adversely affected during any period as a result of changing interest rates.
The following table quantifies the potential changes in net investment income should interest rates increase by 50 or 100 basis points and decrease by 10 basis points, assuming no change in the shape of the yield curve (i.e., relative interest rates). Net investment income is calculated as revenue from loans and other lending investments and operating leases and earnings from equity method investments, less interest expense and operating costs on net lease assets for the year ended December 31, 2010. The base interest rate scenario assumes the one-month LIBOR rate of 0.26% as of December 31, 2010. Actual results could differ significantly from those estimated in the table.
Estimated Percentage Change In Net Investment Income
Explanatory Note:
(1)We have a net variable-rate debt exposure resulting in an increase in net investment income when rates decrease and a decrease in net investment income when rates increase. In addition, interest rate floors on certain of our loan assets further increase net investment income as rates decrease and decrease net investment income when rates increase. As of December 31, 2010, $823.5 million of our floating rate loans have a weighted average interest rate floor of 3.55%.
Item 8.
Item 8. Financial Statements and Supplemental Data
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of iStar Financial Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of iStar Financial Inc. and its subsidiaries (collectively, the "Company") at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedules, 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 opinions on these financial statements, on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide 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/ PricewaterhouseCoopers LLP
New York, New York
March 23, 2011
iStar Financial Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
The accompanying notes are an integral part of the consolidated financial statements.
iStar Financial Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Explanatory Notes:
(1)HPU holders are current and former Company employees who purchased high performance common stock units under the Company's High Performance Unit Program (see Note 11).
(2)Participating Security holders are Company employees and directors who hold unvested restricted stock units and common stock equivalents granted under the Company's Long Term Incentive Plans (see Notes 13 and 14).
(3)See Note 14 for amounts attributable to iStar Financial Inc. for income (loss) from continuing operations and further details on the calculation of earnings per share. The accompanying notes are an integral part of the consolidated financial statements.
iStar Financial Inc.
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2010, 2009 and 2008
(In thousands)
The accompanying notes are an integral part of the consolidated financial statements.
iStar Financial Inc.
Consolidated Statements of Changes in Equity (Continued)
For the Years Ended December 31, 2010, 2009 and 2008
(In thousands)
Explanatory Notes:
(1)See Note 11 for details on the Company's Cumulative Redeemable Preferred Stock.
(2)For the years ended December 31, 2010, 2009 and 2008, net income (loss) included $(11), $(6) and $716, respectively, of net income (loss) attributable to redeemable noncontrolling interests. The accompanying notes are an integral part of the consolidated financial statements.
iStar Financial Inc.
Consolidated Statements of Cash Flows
(In thousands)
The accompanying notes are an integral part of the consolidated financial statements.
iStar Financial Inc.
Notes to Consolidated Financial Statements
Note 1-Business and Organization
Business-iStar Financial Inc., or the "Company," is a fully-integrated finance and investment company focused on the commercial real estate industry. The Company provides custom-tailored investment capital to high-end private and corporate owners of real estate and invests directly across a range of real estate sectors. The Company, which is taxed as a real estate investment trust, or "REIT," has invested more than $35 billion over the the past two decades. The Company's three primary business segments are lending, net leasing and real estate investment. See Note 10 for discussion of the impact of recent economic conditions on the Company and business risks and uncertainties.
Organization-The Company began its business in 1993 through private investment funds and became publicly traded in 1998. Since that time, the Company has grown through the origination of new lending and leasing transactions, as well as through corporate acquisitions, including the acquisition of TriNet Corporate Realty Trust, Inc. in 1999, the acquisitions of Falcon Financial Investment Trust and of a significant non-controlling interest in Oak Hill Advisors, L.P. and affiliates in 2005, and the acquisition of the commercial real estate lending business and loan portfolio which the Company refers to as "Fremont CRE," of Fremont Investment and Loan, or "Fremont," a division of Fremont General Corporation, in 2007.
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, liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified in the Consolidated Financial Statements and the related notes to conform to the current period presentation.
Principles of Consolidation-The Consolidated Financial Statements include the financial statements of the Company, its wholly owned subsidiaries, controlled partnerships and variable interest entities ("VIEs") for which the Company is the primary beneficiary. Consolidated VIEs included OHA Strategic Credit Fund Parallel I, LP ("OHA SCF") and Madison Deutsche Andau Holdings, LP ("Madison DA") (see Note 3). All significant intercompany balances and transactions have been eliminated in consolidation.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies
Loans and other lending investments, net-Loans and other lending investments, net includes the following investments: senior mortgages, subordinate mortgages, corporate/partnership loans and other lending investments-securities. Management considers nearly all of its loans and debt securities to be held-for-investment or held-to-maturity, although certain investments may be classified as held-for-sale or available-for-sale.
Loans and other lending investments designated for sale are classified as held for sale and are carried at lower of amortized historical cost or fair value. The amount by which carrying value exceeds fair value is recorded as a valuation allowance. Subsequent changes in the valuation allowance are included in the determination of net income (loss) in the period in which the change occurs.
Loans classified as held-for-investment or 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 also include accrued and paid-in-kind interest and accrued exit fees that the Company determines are probable of being collected. Debt securities classified as available-for-sale are reported at fair value with unrealized gains and losses included in "Accumulated other comprehensive income" on the Company's Consolidated Balance Sheets.
For held-to-maturity and available-for-sale debt securities held in "Loans and other lending investments, net," management evaluates whether the asset is other-than-temporarily impaired when the fair market value is below carrying value. The Company considers debt securities other-than-temporarily impaired if (1) the Company has the intent to sell the security, (2) it is more likely than not that it will be required to sell the security before recovery, or (3) it does not expect to recover the entire amortized cost basis of the security. If it is determined that an other-than-temporary impairment exists, the portion related to credit losses, where the Company does not expect to recover its entire amortized cost basis, will be recognized as an "Impairment of assets" on the Company's Consolidated Statements of Operations. If the Company does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security, but the security has 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" on the Company's Consolidated Statements of Operations, and the remainder will be recorded in "Accumulated other comprehensive income" on the Company's Consolidated Balance Sheets.
Net lease assets and depreciation-Net lease assets are recorded at cost less accumulated depreciation. Certain improvements and replacements are capitalized when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance items are expensed as incurred. Depreciation is computed using the straight-line method of cost recovery over the shorter of estimated useful lives or 40 years for facilities, 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.
Net lease assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less costs to sell and are included in "Assets held for sale" on the Company's Consolidated Balance Sheets. If the estimated fair value less costs to sell is less than the carrying value, the difference will be recorded as an impairment charge and included in "Income from discontinued operations" on the Company's Consolidated Statements of Operations. Once an asset is classified as held for sale, depreciation expense is no longer recorded and historical operating results are reclassified to "Income from discontinued operations" on the Company's Consolidated Statements of Operations. As of
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies (Continued)
December 31, 2009, there were two net lease assets with an aggregate book value of $17.3 million classified as "Assets held for sale" on the Company's Consolidated Balance Sheets.
The Company periodically reviews long-lived assets to be held and used for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The value of a long-lived asset held for use is impaired only if management's estimate of the aggregate future cash 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 net lease assets that are not held for sale are recorded in "Impairment of assets," on the Company's Consolidated Statements of Operations.
The Company accounts for its acquisition of facilities by allocating the purchase price to the tangible and intangible assets and liabilities acquired based on their estimated fair values. The value of the tangible assets, consisting of land, buildings, building improvements and tenant improvements is determined as if these assets are vacant. Intangible assets may include the value of above-market or below-market, in-place leases and the value of customer relationships, which are each recorded at their relative estimated fair values.
The capitalized above-market (or below-market) lease value is amortized as a reduction of (or, increase to) operating lease income over the remaining non-cancelable term of each lease plus any renewal periods with fixed rental terms that are considered to be below-market. The Company also generally engages in sale/leaseback transactions and typically executes leases with the occupant simultaneously with the purchase of the net lease asset at market-rate rents. As such, no above-market or below-market lease value is ascribed to these transactions.
Real estate held for investment, net-Real estate held for investment, net ("REHI") consists of properties acquired through foreclosure or through deed-in-lieu of foreclosure in full or partial satisfaction of non-performing loans that the Company intends to hold, operate or develop for a period of at least 12 months. REHI assets are initially recorded at their estimated fair value. The excess of the carrying value of the loan over the estimated fair value of the property acquired is charged-off against the reserve for loan losses when title to the property is obtained. Additionally, upon acquisition of a property, tangible and intangible assets and liabilities acquired are recorded at their estimated fair values and depreciation is computed, all in the same manners as described in "Net lease assets and depreciation" above. Subsequent to acquisition, qualified development and construction costs are capitalized. Revenues and expenses related to REHI assets are recorded as "Other income" and "Operating costs-REHI and OREO," respectively, on the Company's Consolidated Statements of Operations.
The Company considers REHI assets to be long-lived and periodically reviews them for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company measures impairments for REHI assets in the same manner as net lease assets, as described in "Net lease assets and depreciation" above. Impairments of REHI assets are recorded in "Impairment of assets," on the Company's Consolidated Statements of Operations.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies (Continued)
Other real estate owned-OREO consists of properties acquired through foreclosure or by deed-in-lieu of foreclosure in full or partial satisfaction of non-performing loans that the Company intends to market for sale in the near term. OREO is recorded at the estimated fair value less costs to sell. The excess of the carrying value of the loan over the estimated fair value of the property less costs to sell is charged-off against the reserve for loan losses when title to the property is obtained. Net revenues and costs of holding the property are recorded as "Operating costs-REHI and OREO" in the Company's Consolidated Statements of Operations. Significant property improvements may be capitalized to the extent that the carrying value of the property does not exceed its estimated fair value less costs to sell.
The Company reviews the recoverability of an OREO asset's carrying value when events or circumstances indicate a potential impairment of a property's value. If impairment exists, a loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property less costs to sell. These impairments are recorded in "Impairment of assets" on the Company's Consolidated Statements of Operations.
Equity and cost method investments-Purchased equity interests that are not publicly traded and/or do not have a readily determinable fair value 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 limited liability company. The Company's periodic share of earnings and losses in equity method investees is included in "Earnings from equity method investments" on the Consolidated Statements of Operations. When the Company's ownership position is too small to provide such influence, the cost method is used to account for the equity interest. Equity and cost method investments are included in "Other investments" on the Company's Consolidated Balance Sheets.
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 "Impairment of assets" on the Company's Consolidated Statements of Operations.
Timber and timberlands-In January 2005, TimberStar Operating Partnership, L.P. ("TimberStar") was created to acquire and manage a diversified portfolio of timberlands. During 2008, the Company sold all of its timberland investments. The Company consolidated this partnership for financial statement purposes. TimberStar's operating results for 2008 have been reclassified and are presented in "Income (loss) from discontinued operations" on its Consolidated Statements of Operations.
TimberStar previously owned a 46.7% interest in TimberStar Southwest Holdco LLC ("TimberStar Southwest"), which the Company accounted for under the equity method. In April 2008, the Company sold its joint venture interest and recorded a gain in "Gain on sale of joint venture interest" and "Gain attributable to noncontrolling interests" on its Consolidated Statements of Operations (see Note 7).
Cash and cash equivalents-Cash and cash equivalents include cash held in banks or invested in money market funds with original maturity terms of less than 90 days.
Restricted cash-Restricted cash represents amounts required to be maintained under certain of the Company's debt obligations and OREO, leasing and derivative transactions.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies (Continued)
Consolidation-Variable interest entities-The Company adopted Accounting Standards Update ("ASU") 2009-17 on January 1, 2010. In accordance with the standard, the Company evaluated 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.
The Company has investments in certain funds that meet the deferral criteria in ASU 2010-10 and will continue to assess consolidation of these entities under the overall guidance on the consolidation of VIEs in Accounting Standards Codification ("ASC") 810-10. The consolidation evaluation is similar to the process noted above, except that the primary beneficiary is the party that will receive a majority of the VIE's anticipated losses, a majority of the VIE's expected residual returns, or both. In addition, for entities that meet the deferral criteria, the Company reassesses its initial evaluation of the primary beneficiary and whether an entity is a VIE upon the occurrence of certain reconsideration events.
Consolidated VIEs-The Company did not consolidate any new entities as the result of the adoption of ASU 2009-17. The Company continues to consolidate OHA Strategic Credit Fund Parallel I, L.P. ("OHA SCF"), which was created to invest in distressed and undervalued loans, bonds, equities and other investments. As of December 31, 2010 and 2009, OHA SCF had $45.7 million and $40.3 million, respectively, of total assets, no debt, and $0.1 million of noncontrolling interests. The investments held by this entity are presented in "Other investments" on the Company's Consolidated Balance Sheets. As of December 31, 2010, the Company had a total unfunded commitment of $26.8 million to this entity.
The Company also continues to consolidate Madison Deutsche Andau Holdings, LP ("Madison DA"), which was created to invest in mortgage loans secured by real estate in Europe. As of December 31, 2010 and 2009, Madison DA had $58.0 million and $63.2 million, respectively, of total assets, no debt, and $8.6 million and $9.5 million of noncontrolling interests, respectively. The investments held by this entity are presented in "Loans and other lending investments, net" on the Company's Consolidated Balance Sheets.
Unconsolidated VIEs-On January 1, 2010, the Company deconsolidated Moor Park Real Estate Partners II, L.P. Incorporated ("Moor Park") as a result of the adoption of ASU 2009-17. Moor Park is a third-party managed fund that was created to make investments in European real estate as a 33% investor along-side a sister fund. The Company determined it did not have the power to direct matters that most significantly impact the activities of the VIE due to its interest as a limited partner. There was no cumulative effect adjustment resulting from the deconsolidation and the investment continues to be classified in "Other investments" on the Company's Consolidated Balance Sheets. As of December 31, 2010, the Company's carrying value in Moor Park was $12.7 million. The Company's maximum exposure to loss from this investment would not exceed the carrying value of its investment.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies (Continued)
In addition, the Company determined 26 of its other investments were 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, 2010, the Company's maximum exposure to loss from these investments would not exceed the sum of the $203.9 million carrying value of the investments and $24.9 million of related unfunded commitments.
Deferred expenses-Deferred expenses include leasing costs and financing fees. Leasing costs include brokerage, legal and other costs which are amortized over the life of the respective leases. External fees and costs incurred to obtain long-term financing have been deferred and are amortized over the term of the respective borrowing using the effective interest method or the straight line method, as appropriate. Amortization of leasing costs and deferred financing fees are included in the Company's "Depreciation and amortization" and "Interest expense," respectively, on the Company's Consolidated Statements of Operations.
Identified intangible assets and goodwill-Upon the acquisition of a business, the Company records intangible assets acquired at their estimated fair values separate and apart from goodwill. The Company determines whether such intangible assets have finite or indefinite lives. As of December 31, 2010, all such intangible assets acquired by the Company have finite lives. The Company amortizes finite lived intangible assets based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the business acquired. The Company reviews finite lived intangible assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If the Company determines the carrying value of an intangible asset is not recoverable it will record an impairment charge to the extent its carrying value exceeds its estimated fair value. Impairments of intangible assets are recorded in "Impairment of assets" on the Company's Consolidated Statements of Operations.
During the year ended December 31, 2008, the Company recorded non-cash charges of $21.5 million to reduce the carrying value of certain intangible assets related to the Fremont CRE acquisition and other acquisitions, based on their updated estimated fair values.
As of December 31, 2010 and 2009, the Company had $42.8 million and $55.9 million, respectively, of unamortized finite lived intangible assets primarily related to the prior acquisition of net lease assets and REHI. The total amortization expense for these intangible assets was $9.0 million, $12.2 million and $13.7 million for the years ended December 31, 2010, 2009 and 2008, respectively. The estimated aggregate amortization costs for each of the five succeeding fiscal years are as follows ($ in thousands):
The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is done at a level of reporting
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies (Continued)
referred to as a reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair values for goodwill and other finite lived intangible assets are determined using the market approach, income approach or cost approach, as appropriate.
Due to an overall deterioration in conditions within the commercial real estate market, the Company recorded impairment charges of $4.2 million during 2009 and $39.1 million during 2008 to write-off the goodwill allocated to the Net Leasing and Real Estate Lending reporting segments, respectively. These charges were recorded in "Impairment of assets" on the Company's Consolidated Statements of Operations.
Revenue recognition-The Company's revenue recognition policies are as follows:
Loans and other lending investments: Interest income on loans and other lending investments is recognized on an accrual basis using the interest method.
On occasion, the Company may acquire loans at 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" on the Company's Consolidated Statements of Operations.
The Company considers a loan to be non-performing and places loans on non-accrual status at such time as: (1) the loan becomes 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that it will be unable to 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.
Certain of the Company's loans provide for accrual of interest at specified rates that differ from current payment terms. Interest is recognized on such loans at the accrual rate subject to management's determination that accrued interest and outstanding principal are ultimately collectible, based on the underlying collateral and operations of the borrower.
Prepayment penalties or yield maintenance payments from borrowers are recognized as additional income when received. Certain of the Company's loan investments provide for additional interest based on the borrower's operating cash flow or appreciation of the underlying collateral. Such amounts are considered contingent interest and are reflected as interest income only upon receipt of cash.
Leasing investments: Operating lease revenue is recognized on the straight-line method of accounting, generally from the later of the date the lessee takes posession of the space and it is ready for its intended use or the date of acquisition of the facility subject to existing leases. Accordingly, contractual lease payment increases are recognized evenly over the term of the lease. The periodic difference between lease revenue recognized under this method and contractual lease payment terms is recorded as "Deferred operating lease income receivable," on the Company's Consolidated Balance Sheets.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies (Continued)
Reserve for loan losses-The reserve for loan losses reflects management's estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The reserve is increased through the "Provision for loan losses" on the Company's Consolidated Statements of Operations and is decreased by charge-offs when losses are confirmed through the receipt of assets such as cash in a pre-foreclosure sale or via ownership control of the underlying collateral in full satisfaction of the loan upon foreclosure or when significant collection efforts have ceased. The Company has determined it 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 based on such factors as payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional economic factors. A reserve is established for an impaired loan when the present value of payments expected to be received, observable market prices, or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) is lower than the carrying value of that loan.
Substantially all of the Company's impaired loans are collateral dependent and impairment is measured using the estimated fair value of collateral, less costs to sell. The Company generally uses the income approach through internally developed valuation models to estimate the fair value of the collateral for such loans. In more limited cases, the Company obtains external "as is" appraisals for loan collateral, generally when third party participations exist. Valuations are performed or obtained at the time a loan is determined to be impaired and designated non-performing, and they are updated if circumstances indicate that a significant change in value has occurred. In limited cases, appraised values may be discounted when real estate markets rapidly deteriorate.
A loan is also considered impaired if its terms are modified in a troubled debt restructuring ("TDR"). A TDR occurs when the Company grants a concession to a borrower in financial difficulty by modifying
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies (Continued)
the original terms of the loan. 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.
Allowance for doubtful accounts-The allowance for doubtful accounts reflects management's estimate of losses inherent in the accrued operating lease income receivable and deferred operating lease income receivable balances as of the balance sheet date and incorporates an asset-specific component, as well as a general, formula-based reserve based on management's evaluation of the credit risks associated with these receivables. At December 31, 2010 and 2009, the total allowance for doubtful accounts was $1.4 million and $2.8 million, respectively.
Derivative instruments and hedging activity-The Company recognizes 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.
Derivatives, such as foreign currency hedges and interest rate caps, that are not designated hedges are considered economic hedges, with changes in fair value reported in current earnings in "Other expense" on the Company's Consolidated Statements of Operations. The Company does not enter into derivatives for trading purposes.
Stock-based compensation-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. The Company recognizes compensation cost for performance-based awards if and when the Company concludes that it is probable that the performance condition will be achieved. Compensation cost for market condition-based awards is determined using a Monte Carlo model to simulate a range of possible future stock prices for the Company's Common Stock, which is reflected in the grant date fair value. All compensation cost for market-condition based awards in which the service conditions are met is recognized 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" on the Company's Consolidated Statements of Operations.
Disposal of long-lived assets-The results of operations from net lease and timber assets that were sold or held for sale in the current and prior periods are classified as "Income from discontinued operations" on the Company's Consolidated Statements of Operations even though such income was actually recognized by the Company prior to the asset sale. Gains from the sale of net lease and timber assets are classified as "Gain from discontinued operations" and "Gain from discontinued operations attributable to noncontrolling interests" on the Company's Consolidated Statements of Operations.
Income taxes-The Company has elected to be qualified and taxed as a REIT under section 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company is subject to federal income taxation at corporate rates on its REIT taxable income, however, the Company is allowed a deduction for the amount of dividends paid to its shareholders, thereby subjecting the distributed net income of the Company to taxation at the shareholder level only. In addition, the Company is allowed several other 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 shelter a portion of its operating cash flow from its dividend payout requirement under federal tax laws. The Company intends to operate in a manner consistent with and to elect to be treated as a REIT for tax purposes.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies (Continued)
The Company can participate in certain activities from which it was previously precluded in order to maintain its qualification as a REIT, as long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Code, subject to certain limitations. As such, the Company, through its taxable REIT subsidiaries ("TRSs"), is engaged in various real estate related opportunities, including but not limited to: (1) managing corporate credit-oriented investment strategies; (2) certain activities related to the purchase and sale of timber and timberlands; (3) servicing certain loan portfolios; and (4) managing activities related to certain foreclosed assets. The Company will consider other investments through TRS entities if suitable opportunities arise. The Company's TRS entities are not consolidated for federal income tax purposes and are taxed as corporations. For financial reporting purposes, current and deferred taxes are provided for in the portion of earnings recognized by the Company with respect to its interest in TRS entities. For the years ended December 31, 2010, 2009 and 2008, the Company recorded total income tax expense of $7.0 million, $4.1 million and $10.2 million, respectively, which was included in "Other expense" on the Company's Consolidated Statements of Operations. Total cash paid for taxes for the years ended December 31, 2010, 2009 and 2008, was $7.3 million, $2.9 million and $9.0 million, respectively. The Company also recognizes interest expense and penalties related to uncertain tax positions, if any, as income tax expense, included in "Other expense" on the Company's Consolidated Statements Operations.
Deferred income taxes 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. At December 31, 2010 and 2009, the Company had net deferred tax liabilities of $13.7 million and $9.3 million, respectively, included in "Accounts payable, accrued expenses and other liabilities" on the Company's Consolidated Balance Sheets. These deferred tax liabilities are primarily due to timing differences relating to equity method investments. At December 31, 2010 and 2009, the Company had deferred tax assets of $29.9 million and $19.0 million, respectively, that were each fully offset by valuation allowances. These amounts consist primarily of net operating loss carryforwards and expenses not currently deductible related to TRS entities which will expire through 2030. These valuation allowances were established based on the Company's conclusion that it is more likely than not that the deductions and carryforwards will not be utilized during the carryforward periods.
As of December 31, 2010, the Company had approximately $148.1 million of net operating loss carryforwards at the corporate REIT level, which can generally be used to offset ordinary taxable income in future years and will expire through 2030 if unused. The amount of net operating loss carryforwards will be subject to finalization of the 2010 tax returns and could be materially different from such amounts as of December 31, 2010.
Earnings per share-The Company uses the two-class method in calculating EPS when it issues securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, the company declares dividends on its common stock. Vested HPU shares are entitled to dividends of the Company when dividends are declared. Basic earnings per share ("Basic EPS") for the Company's Common Stock and HPU shares are computed by dividing net income allocable to common shareholders and HPU holders by the weighted average number of shares of Common Stock and HPU shares outstanding for the period, respectively. Diluted earnings per share ("Diluted EPS") is calculated similarly, however, it reflects the potential dilution that could occur if
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies (Continued)
securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower earnings per share amount.
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are deemed a ("Participating Security") and are included in the computation of earnings per share pursuant to the two-class method. The Company's unvested restricted stock units with rights to dividends and common stock equivalents issued under its Long-Term Incentive Plans are considered participating securities and have been included in the two-class method when calculating EPS.
New Accounting Pronouncements
In July 2010, Financial Accounting Standards Board ("FASB") issued ASU 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses," ("ASU 2010-20"), which outlined specific disclosures that are required for the allowance for credit losses and all finance receivables. Finance receivables includes loans and other arrangements with a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset on an entity's statement of financial position. ASU 2010-20 requires companies to provide disaggregated levels of disclosure by portfolio segment and class to enable users of the financial statement to understand the nature of credit risk, how the risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period. Required disclosures under ASU 2010-20 as of the end of a reporting period were effective for the Company's December 31, 2010 reporting period and disclosures regarding activities during a reporting period are effective for the Company's March 31, 2011 interim reporting period. The Company adopted this standard for its year ended December 31, 2010 reporting period, as required, and determined it has one portfolio segment: commercial real estate lending, with three classes: senior mortgages that are collateralized by real estate assets, subordinate mortgages that are collateralized by subordinated interests in real estate assets, and corporate/partnership loans which are typically unsecured and may be senior or subordinate and corporate debt securities. See Note 4 for additional disclosures required by the adoption of this standard.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("ASU 2009-17"), which eliminated the exemption for qualifying special purpose entities, created a new approach for determining who should consolidate a VIE, and required an ongoing reassessment to determine if a company should consolidate a VIE. This standard was effective for interim and annual periods beginning after November 15, 2009. The Company adopted ASU 2009-17 on January 1, 2010, as required. In addition, in February 2010, the FASB issued ASU 2010-10, "Consolidation (Topic 810): Amendments for Certain Investments Funds" ("ASU 2010-10"), which amended certain provisions of ASC 810-10. ASU 2010-10 deferred the effective date of ASU 2009-17 for reporting enterprises' interest in certain entities and for certain money market mutual funds. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in ASC 810-10 (previously Statement of Financial Accounting Standards ("SFAS") No. 167) or other applicable consolidation guidance. In addition, ASU 2010-10 amended certain provisions to change how a decision maker or service provider determined whether its contract represented a variable interest. The Company adopted ASU 2010-10 on January 1, 2010, as required, and as a result, deferred the effective date of ASC 810-10 for certain entities that met the criteria. See Consolidation-Variable interest entities above for further details on the adoption of both ASU 2009-17 and ASU 2010-10.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 3-Summary of Significant Accounting Policies (Continued)
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140" ("ASU 2009-16"), which eliminated the qualifying special-purpose entity concept, created a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarified and changed the de-recognition criteria for a transfer to be accounted for as a sale, changed the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests were received by the transferor and required new disclosures. The Company adopted ASU 2009-16 on January 1, 2010, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
Note 4-Loans and Other Lending Investments, net
The following is a summary of the Company's loans and other lending investments by class ($ in thousands):
Explanatory Notes:
(1)Loans and other lending investments are presented net of unearned income, unamortized discounts and premiums and net unamortized deferred fees and costs. In total, these amounts represented a net discount of $62.7 million and $97.0 million as of December 31, 2010 and 2009, respectively.
(2)Managed Loan Value represents the Company's carrying value of a loan, gross of reserves for loan losses and the outstanding participation interest on loans in the Fremont CRE portfolio. During the year ended December 31, 2010, the Company funded $356.3 million under existing loan commitments and received gross principal repayments of $2.06 billion, of which a portion of these repayments were allocable to the Fremont Participation (as defined below). During the same period, the Company sold loans with a total carrying value of $808.8 million, for which it recognized charge-offs of $109.1 million.
In addition, during the year ended December 31, 2010, the Company received title to properties in full or partial satisfaction of non-performing mortgage loans with a gross carrying value (gross of asset-specific reserves) of $1.41 billion, for which the properties had served as collateral, and recorded charge-offs
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 4-Loans and Other Lending Investments, net (Continued)
totaling $631.9 million related to these loans. These properties were recorded as REHI or OREO on the Company's Consolidated Balance Sheets (see Note 5).
Reserve for Loan Losses-Changes in the Company's reserve for loan losses were as follows: ($ in thousands):
As of December 31, 2010, the Company's recorded investment in loans and the associated reserve for loan losses were as follows ($ in thousands):
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 loans. This process is discussed in more detail in "Reserve for loan losses" in Note 3. As of December 31, 2010, the Company's recorded investment in loans, presented by class and by credit quality, as indicated by risk rating, was as follows ($ in thousands):
Explanatory Note:
(1)Risk ratings are assigned to loans based on the risk of loss relative to principal outstanding. The Company also assigns risk ratings to non-performing loans based on risk of loss relative to carrying value, which is net of asset-specific reserves. As of December 31, 2010, non-performing loans net of asset-specific reserves were $1.35 billion, with weighted average net risk ratings of 3.55 and 4.50 for senior mortgages and corporate/partnership loans, respectively.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 4-Loans and Other Lending Investments, net (Continued)
As of December 31, 2010, the Company's recorded investment in loans, aged by payment status and presented by class, were as follows ($ in thousands):
Explanatory Note:
(1)All loans with payments more than 90 days past due are classified as non-performing and are on non-accrual status.
Impaired Loans-As of December 31, 2010, the Company's recorded investment in impaired loans, presented by class, were as follows ($ in thousands)(1):
Explanatory Notes:
(1)All of the Company's non-accrual loans are impaired and included in the table above. In addition, certain loans modified through troubled debt restructurings with a recorded investment of $294.3 million are also included as impaired loans although they are considered performing and on accrual status.
(2)Includes $16.8 million of impaired loans acquired with deteriorated credit quality.
(3)Represents the Company's recorded interest income on cash payments from impaired loans. For the years ended December 31, 2009 and 2008, such amounts were $14.3 million and $5.3 million, respectively. Fremont Participation-On July 2, 2007, the Company sold a $4.20 billion participation interest ("Fremont Participation") in the $6.27 billion Fremont CRE portfolio. During the year ended December 31, 2010, the Company repaid the participation interest in full. While the Fremont Participation
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 4-Loans and Other Lending Investments, net (Continued)
interest was outstanding, the holder of the participation received floating interest at LIBOR + 1.50% and 70% of all principal collected from the Fremont CRE portfolio, including principal collected from amounts funded on the loans subsequent to the acquisition of the portfolio and proceeds received from asset sales. As a result of the repayment, the Company now retains 100% of proceeds from sales and repayments of assets associated with the Fremont CRE portfolio, and the assets included in the portfolio are eligible for selection by the Company's lenders to serve as collateral for the Company's borrowings under its secured credit facilities and secured notes.
Changes in the outstanding Fremont Participation balance were as follows ($ in thousands):
Securities-Other lending investments-securities included the following ($ in thousands):
During the year ended December 31, 2010, the Company recognized $9.0 million in net gains resulting from a $205.0 million prepayment of held-to-maturity debt securities and sales of its remaining available-for-sale debt securities.
During the years ended December 31, 2009 and 2008, the Company determined that unrealized credit related losses on certain held-to-maturity and available-for-sale debt securities were other-than-temporary and recorded impairment charges totaling $11.7 million and $120.0 million, respectively, in "Impairment of assets" on the Company's Consolidated Statements of Operations. There are no other-than-temporary
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 4-Loans and Other Lending Investments, net (Continued)
impairments recorded in "Accumulated other comprehensive income" on the Company's Consolidated Balance Sheet as of December 31, 2010 and 2009.
As of December 31, 2010, the contractual maturities of the Company's securities were as follows ($ in thousands):
Encumbered Loans-As of December 31, 2010 and 2009, loans and other lending investments with a carrying value of $2.92 billion and $4.39 billion, respectively, were pledged as collateral under the Company's secured indebtedness.
Note 5-Real Estate Held for Investment, net and Other Real Estate Owned
During the years ended December 31, 2010 and 2009, the Company received title to properties with an aggregate estimated fair value at the time of foreclosure of $773.3 million and $1.30 billion, respectively, in full or partial satisfaction of non-performing mortgage loans for which those properties had served as collateral. Of the properties received in 2010 and 2009, properties with a value of $424.2 million and $399.6 million, respectively, were classified as REHI and $349.1 million and $904.2 million, respectively, were classified as OREO, based on management's current intention to either hold the properties over a longer period or to market them for sale.
Real Estate Held for Investment, net-REHI consisted of the following ($ in thousands):
The Company records REHI operating income in "Other income" and REHI operating expenses in "Operating costs-REHI and OREO," on the Company's Consolidated Statements of Operations, as follows ($ in thousands):
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 5-Real estate held for investment, net and Other real estate owned (Continued)
Other Real Estate Owned-The Company's OREO consisted of the following property types ($ in thousands):
During the years ended December 31, 2010 and 2009, the Company sold OREO assets with a carrying value of $455.4 million and $280.2 million, respectively. For the years ended December 31, 2010, 2009 and 2008, the Company recorded net impairment charges to OREO properties totaling $19.1 million, $78.6 million and $55.6 million, respectively, and recorded net expenses related to holding costs for OREO properties of $33.0 million, $28.4 million and $9.3 million, respectively.
Encumbered REHI and OREO-As of December 31, 2010 and 2009, REHI assets with a carrying value of $28.4 million and $27.1 million, respectively, and OREO assets with a carrying value of $232.1 million and $232.7 million, respectively, were pledged as collateral for the Company's secured indebtedness.
Note 6-Net Lease Assets, net
The Company's investments in net lease assets, at cost, were as follows ($ in thousands):
On June 25, 2010, the Company completed the sale of a portfolio of 32 net lease assets to a single purchaser for a gross purchase price of $1.35 billion that resulted in a net gain of $250.3 million. The aggregate carrying value of the portfolio of assets was $1.05 billion. In relation to this transaction, the Company reduced its gain on sale and recorded a liability of $30.0 million based upon certain contingent obligations potentially owing to the purchaser. Proceeds from this transaction were used to repay a $947.9 million term loan collateralized by the properties being sold that was scheduled to mature in April 2011, as well as for general corporate purposes. See Note 9 for additional details on the repayment of the debt collateralized by these assets. As part of the purchaser's financing for the transaction, the Company provided the purchaser with $105.6 million of mezzanine loans, which were subsequently paid down to $26.8 million as of December 31, 2010.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 6-Net Lease Assets, net (Continued)
Summarized financial information for discontinued operations related to the sale of the portfolio of 32 net lease assets is as follows ($ in thousands):
In addition to the sale of the portfolio of assets noted above, during the year ended December 31, 2010, the Company sold net lease assets with a carrying value of $119.7 million, which resulted in gains of $20.1 million. For the year ended December 31, 2010, the Company recorded impairment charges on net lease assets of $6.1 million, of which $1.9 million was included in "Income from discontinued operations" on the Company's Consolidated Statements of Operations.
During the year ended December 31, 2009 the Company sold net lease assets with carrying values of $52.1 million, which resulted in gains of $12.4 million. During the same period, the Company recorded impairment charges on net lease assets of $33.5 million of which $14.4 million was included in "Income from discontinued operations" on the Company's Consolidated Statements of Operations. During the year ended December 31, 2008, the Company sold net lease assets with carrying values of $359.7 million, which resulted in gains of $64.5 million. During the same period, the Company recorded impairment charges on net lease assets of $11.3 million.
The Company receives reimbursements from customers for certain facility operating expenses including common area costs, insurance and real estate taxes. Customer expense reimbursements for the years ended December 31, 2010, 2009 and 2008 were $29.8 million, $36.4 million and $38.8 million, respectively. Of these amounts, $24.0 million, $24.7 million and $24.7 million, respectively, were included as a reduction of "Operating costs-net lease assets," and the remainder was included in "Income from discontinued operations" on the Company's Consolidated Statements of Operations.
Future Minimum Operating Lease Payments-Future minimum operating lease payments under non-cancelable leases, excluding customer reimbursements of expenses, in effect at December 31, 2010, are as follows ($ in thousands):
Encumbered Net Lease Assets-As of December 31, 2010 and 2009, net lease assets with a net book value of $1.02 billion and $2.59 billion, respectively, were encumbered with mortgages or pledged as collateral for the Company's secured indebtedness.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 7-Other Investments
Other investments consist of the following items ($ in thousands):
Equity Method Investments
The Company's equity method investments and its proportionate share of their results were as follows ($ in thousands):
Oak Hill-As of December 31, 2010, the Company owned 46.22% interests in Oak Hill Advisors, L.P., Oak Hill Credit Alpha MGP, LLC, Oak Hill Credit Opportunities MGP, LLC, OHA Strategic Credit Fund, LLC, OHA Leveraged Loan Portfolio GenPar, LLC, Oak Hill Credit OPP Fund, LP, OHA Structured Products MGP, LLC, 47.5% interest in OHA Finance MGP, LLC, OHA Capital Solutions MGP, LLC, and 48.1% interests in OHSF GP Partners II, LLC and OHSF GP Partners (Investors), LLC, (collectively, "Oak Hill"). The Company appointed to its Board of Directors a member that holds a substantial investment in Oak Hill. As such Oak Hill is a related party of the Company. Oak Hill engages in investment and asset management services. Upon acquisition of the original interests in Oak Hill, there was a difference between the Company's carrying value of its equity investments and the underlying equity in the net assets of Oak Hill of $200.2 million. The Company allocated this value to identifiable intangible assets of $81.8 million and goodwill of $118.4 million. The unamortized balance related to intangible assets for these investments was $39.5 million and $45.3 million as of December 31, 2010 and 2009, respectively.
LNR-On July 29, 2010, the Company acquired an ownership interest of approximately 24% in LNR Property Corporation ("LNR"). LNR is a servicer and special servicer of commercial mortgage loans and CMBS and a diversified real estate investment, finance and management company. In the transaction, the Company and a group of investors, including other creditors of LNR, acquired 100% of the common stock of LNR in exchange for cash and the extinguishment of existing senior notes of LNR's parent holding company (the "Holdco Notes"). The Company contributed $100.0 million aggregate principal amount of Holdco Notes and $100.0 million in cash in exchange for an equity interest of $120.0 million. During the three months ended December 31, 2010, the Company executed the discounted payoff of a $25.0 million principal value loan with LNR for which it received proceeds of $24.5 million in full repayment.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 7-Other Investments (Continued)
The Company records its investment in LNR on a one-quarter lag. Therefore, the equity in earnings for the year ended December 31, 2010 represents the Company's share of LNR's results of operations from the date of acquisition through September 30, 2010. During the quarter ended December 31, 2010, LNR settled a deferred liability, of which it expects approximately $8.2 million will be allocable to the Company. This amount, along with the Company's share of LNR's other operating results for the fourth quarter ended December 31, 2010, will be recognized in the Company's Consolidated Statements of Operations during the three months ending March 31, 2011.
LNR consolidates certain commercial mortgage-backed securities and collateralized debt obligation trusts for which it is the primary beneficiary. The assets of these trusts (primarily commercial mortgage loans), which aggregate approximately $142.4 billion as of September 30, 2010, are the sole source of repayment of the related liabilities, which are non-recourse to LNR and its equity holders, including the Company. Changes in the fair value of these assets each period are offset by changes in the fair value of the related liabilities through LNR's consolidated income statement. As of December 31, 2010, the carrying amount of the Company's investment in LNR does not materially differ from its share of LNR's equity.
Below is a summary of LNR's latest available financial information ($ in thousands)(1):
Explanatory Note:
(1)Results and balances include amounts from consolidated VIEs.
Madison Funds-As of December 31, 2010, the Company owned a 29.52% interest in Madison International Real Estate Fund II, LP, a 32.92% interest in Madison International Real Estate Fund III, LP and a 29.52% interest in Madison GP1 Investors, LP (collectively, the "Madison Funds"). The Madison Funds invest in illiquid ownership positions of entities that own real estate assets. The Company has determined that all of these entities are variable interest entities and that an external member is the primary beneficiary.
TimberStar Southwest-Prior to selling its interest, the Company owned a 46.7% interest in TimberStar Southwest Holdco LLC ("TimberStar Southwest"), through its majority owned subsidiary TimberStar. The Company accounted for this investment under the equity method due to the venture's external partners having certain participating rights giving them shared control. In April 2008, the Company closed on the sale of TimberStar Southwest for a gross sales price of $1.71 billion, including the
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 7-Other Investments (Continued)
assumption of debt. The Company received net proceeds of $417.0 million for its interest in the venture and recorded a gain of $280.2 million, which includes $18.6 million attributable to noncontrolling interests. These amounts were recorded in "Gain on sale of joint venture interest" and "Gain attributable to noncontrolling interests" on the Company's Consolidated Statements of Operations.
Other Equity Method Investments-The Company also had smaller investments in several other entities that were accounted for under the equity method where the Company has ownership interests up to 50.0%. Several of these investments are in real estate related funds or other strategic investment opportunities within niche markets.
During the years ended December 31, 2010 and 2009, the Company recognized impairment charges on certain of its equity method investments of $1.2 million and $4.7 million, respectively.
During the year ended December 31, 2009, the Company recorded a non-cash out-of-period charge of $9.4 million to recognize additional losses from an equity method investment as a result of additional depreciation expense that should have been recorded at the equity method entity. This adjustment was recorded as a reduction to "Other investments" on the Company's Consolidated Balance Sheets and a decrease to "Earnings from equity method investments," on the Company's Consolidated Statements of Operations. The Company concluded that the amount of losses that should have been recorded in periods beginning in July 2007 were not material to any of its previously issued financial statements. The Company also concluded that the cumulative out-of-period charge was not material to the fiscal year in which it has been recorded. As such, the charge was recorded in the Company's Consolidated Statements of Operations for the year ended December 31, 2009, rather than restating prior periods.
Summarized Financial Information-The following table presents the investee level summarized financial information of the Company's equity method investments, excluding LNR ($ in thousands):
Cost Method Investments
The Company has investments in several real estate related funds or other strategic investment opportunities that are accounted for under the cost method. During the years ended December 31, 2009 and 2008, the Company determined that unrealized losses on certain of its cost method investments were other-than-temporary and recorded impairment charges of $7.5 million and $87.0 million, respectively.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 7-Other Investments (Continued)
During the year ended December 31, 2008, the Company redeemed its interest in a profits participation that was originally received as part of a prior lending investment and carried as a cost method investment prior to redemption. As a result of the transaction, the Company received cash of $44.2 million and recorded an equal amount of income in "Other income" on the Company's Consolidated Statements of Operations. In addition, during 2008, the Company also exchanged an investment with a carrying value of $97.4 million, net of noncontrolling interest, for a $109.0 million loan receivable, which resulted in a net gain of $12.0 million. The gain was recorded in "Other income" on the Consolidated Statements of Operations.
Timber and timberlands
On June 30, 2008, the Company closed on the sale of its Maine timber property for net proceeds of $152.7 million, resulting in a total gain of $27.0 million, which includes $3.7 million attributable to noncontrolling interests. These gains are included in "Gain from discontinued operations" and "Gain from discontinued operations attributable to noncontrolling interests" on the Company's Consolidated Statements of Operations. The Company reflected net income from the operations of its Maine timber property of $2.3 million in "Income from discontinued operations" for the year ended December 31, 2008.
Note 8-Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
Explanatory Notes:
(1)Represents unamortized finite-lived intangible assets primarily related to the prior acquisition of net lease assets. Accumulated amortization on net lease intangibles was $26.6 million and $33.1 million as of December 31, 2010 and 2009, respectively. Amortization expense related to these assets was $6.4 million, $9.6 million and $8.9 million for the years ended December 31, 2010, 2009 and 2008, respectively.
(2)Accumulated depreciation on corporate furniture, fixture and equipment was $7.2 million and $9.4 million as of December 31, 2010 and 2009, respectively.
(3)Accumulated amortization on leasing costs was $5.3 million and $11.2 million as of December 31, 2010 and 2009, respectively.
(4)During the year ended December 31, 2010, in connection with certain prepayments of debt obligations, the Company expensed unamortized deferred financing fees of $21.1 million which reduced net gain on early extinguishment of debt (see Note 9). Accumulated amortization on deferred financing fees was $21.1 million and $30.3 million as of December 31, 2010 and 2009, respectively.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 8-Other Assets and Other Liabilities (Continued)
Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 9-Debt Obligations, net
As of December 31, 2010 and 2009, the Company's debt obligations were as follows ($ in thousands):
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 9-Debt Obligations, net (Continued)
Explanatory Notes:
(1)Principal balances have been fully or partially repaid subsequent to year end (see Note 19).
(2)Represents the Company's Secured Exchange Notes.
(3)As of December 31, 2010, debt premiums/ (discounts), net includes unamortized debt premiums of $109.5 million associated with the Secured Exchange Notes, which resulted from the unsecured/secured note exchange transactions completed in May 2009.
(4)The Company's convertible senior floating rate notes due October 2012 ("Convertible Notes") are convertible at the option of the holders, into 22.2 shares per $1,000 principal amount of Convertible Notes, on or after August 15, 2012, or prior to that date if (1) the price of the Company's Common Stock trades above 130% of the conversion price for a specified duration, (2) the trading price of the Convertible Notes is below a certain threshold, subject to specified exceptions, (3) the Convertible Notes have been called for redemption, or (4) specified corporate transactions have occurred. None of the conversion triggers have been met as of December 31, 2010. As of December 31, 2010, the outstanding principal balance of the Company's senior convertible notes was $787.8 million, the unamortized discount was $21.9 million and the net carrying amount of the liability was $765.9 million. As of December 31, 2010, the carrying value of the additional paid-in-capital, or equity component of the convertible notes, was $37.4 million. For the years ended December 31, 2010, 2009 and 2008, the Company recognized interest expense on the convertible notes of $17.5 million, $21.0 million and $42.3 million, respectively, of which $10.8 million, $10.0 million and $9.5 million, respectively, related to the amortization of the debt discount. Future Scheduled Maturities-As of December 31, 2010, future scheduled maturities of outstanding long-term debt obligations, net are as follows ($ in thousands)(1):
Explanatory Note:
(1)See Note 19 for pro forma disclosure of future scheduled maturities after giving effect to the new secured credit Facility and debt repayments that occurred subsequent to year end.
Credit Facilities-As of December 31, 2010, the Company had two secured bank credit facilities with outstanding borrowings of $618.9 million and $334.2 million of revolving loans maturing in June 2011 and June 2012, respectively, as well as $1.06 billion and $612.2 million of term loans maturing in June 2011 and June 2012, respectively. Borrowings under the secured credit facilities bear interest at the rate of LIBOR + 1.50% per year, subject to adjustment based upon the Company's corporate credit ratings (see Ratings Triggers below). As of December 31, 2010, there was $11.4 million immediately available to draw under the secured credit facilities. Outstanding borrowings are secured by a lien on a collateral pool which must be maintained at 1.3x outstanding borrowings. As of December 31, 2010, the total carrying value of assets pledged as collateral under the secured credit facilities and the secured exchange notes was $3.95 billion.
As of December 31, 2010, the Company's unsecured revolving credit facilities have outstanding balances of $501.4 million maturing in June 2011 and $243.8 million maturing in June 2012. Borrowings
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 9-Debt Obligations, net (Continued)
made under the unsecured revolving credit facilities bear interest at a rate of LIBOR + 0.85% per year, subject to adjustment based upon our corporate credit ratings (see Ratings Triggers below), and may not be repaid prior to maturity while the secured credit facilities remain outstanding.
In November 2010, the Company fully repaid a $1.00 billion First Priority Credit Agreement, which was due to mature in June 2012, and terminated all commitments thereunder. The repayment increased the aggregate limitation contained in the Company's secured credit facilities on its repurchases of its senior unsecured notes maturing after June 26, 2012 and its Common Stock from $350.0 million to $750.0 million; provided, however, that no more than $50.0 million may be used for Common Stock repurchases prior to December 31, 2010 and no more than $100.0 million may be used for all Common Stock repurchases.
Subsequent to year end, the Company fully repaid borrowings outstanding under its secured bank credit facilities with proceeds from the new secured credit Facility (see Note 19).
Other Secured Term Loans-Also during 2010, the Company repaid other secured term loans, including a $947.9 million non-recourse loan that was collateralized by the portfolio of 32 net lease assets sold during the period, as well as $153.3 million of other term loans with various maturities.
In connection with these repayments, the Company expensed unamortized deferred financing costs and incurred other expenses totaling $22.1 million, which reduced net gain on early extinguishment of debt during the year ended December 31, 2010.
Secured Notes-During 2009, the Company completed a series of private offers in which the Company issued $155.3 million aggregate principal amount of its 8.0% second priority senior secured guaranteed notes due 2011 ("2011 Notes") and $479.5 million aggregate principal amounts of its 10.0% second priority senior secured guaranteed notes due 2014 ("2014 Notes" and together with the 2011 Notes, the "Secured Exchange Notes") in exchange for $1.01 billion aggregate principal amount of its senior unsecured notes of various series. The Secured Exchange Notes are collateralized by a lien on the same pool of collateral pledged under the Company's secured credit facilities. In conjunction with the exchange, the Company also purchased $12.5 million par value of its outstanding senior floating rate notes due September 2009 in a cash tender offer.
The Company accounted for the issuance of the 2014 Notes in exchange for various series of senior unsecured notes as a troubled debt restructuring. As such, the Company recognized a gain on the exchange to the extent that the prior carrying value of the senior unsecured notes exceeded the total future contractual cash payments of the 2014 Notes, consisting of both principal and interest. The issuance of the 2011 Notes in exchange for senior unsecured notes was considered a modification of the original debt resulting in adjustments to the carrying amounts for any new premiums or discounts. As a result of these transactions, the Company recognized a $107.9 million gain on early extinguishment of debt, net of closing costs of $11.8 million, and recorded a deferred gain of $262.7 million which was reflected as premiums to the par value of the new debt. In addition, in connection with the exchange for the 2011 Notes, the Company incurred $4.3 million of direct costs which were recorded in "Other expense" on its Consolidated Statements of Operations. These premiums are being amortized over the terms of the 2011 Notes and the 2014 Notes as a reduction to interest expense.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 9-Debt Obligations, net (Continued)
During 2010, the Company redeemed or repurchased $155.3 million par value of 2011 Notes and $167.2 million par value of 2014 Notes, generating $71.3 million of gains on early extinguishment of debt, primarily related to the recognition of the deferred gain premiums that resulted from the May 2009 exchange. As of December 31, 2010, the remaining unamortized premium for the 2014 Notes was $109.5 million. Subsequent to year end, the Company fully redeemed its $312.3 million remaining principal amount of 2014 Notes (see Note 19).
Unsecured Notes-During the year ended December 31, 2010, the Company repurchased $592.8 million par value of its senior unsecured notes with various maturities ranging from March 2010 to March 2014 through open market repurchases generating $59.7 million in gains on early extinguishment of debt. In addition, the Company also repaid $375.7 million of unsecured notes at maturity during the year ended December 31, 2010.
During the year ended December 31, 2009, the Company repurchased, through open market and private transactions, $1.31 billion par value of its senior unsecured notes with various maturities ranging from January 2009 to March 2017. In connection with these repurchases, the Company recorded an aggregate net gain on early extinguishment of debt of $439.4 million for the year ended December 31, 2009.
Debt Covenants
The Company's outstanding unsecured debt securities contain covenants that include fixed charge coverage and unencumbered assets to unsecured indebtedness ratios. The fixed charge coverage ratio in the Company's debt securities is an incurrence test. While the Company expects that its ability to incur new indebtedness under the coverage ratio will be limited for the foreseeable future, it will continue to be permitted to incur indebtedness for the purpose of refinancing existing indebtedness and for other permitted purposes under the indentures. The unencumbered assets to unsecured indebtedness covenant is a maintenance covenant. If any of the Company's covenants is 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. Based on the Company's unsecured credit ratings, the financial covenants in its debt securities, including the fixed charge coverage ratio and maintenance of unencumbered assets to unsecured indebtedness ratio, are currently operative.
The Company's new secured credit Facility (see Note 19) contains certain covenants, including covenants relating to the delivery of information to the lenders, collateral coverage, dividend payments, restrictions on fundamental changes, transactions with affiliates and matters relating to the liens granted to the lenders. In particular, the Company is required to maintain collateral coverage of 1.25x outstanding borrowings. In addition, for so long as the Company maintains its qualification as a REIT, the new Facility permits it to distribute 100% of its REIT taxable income on an annual basis. The Company may not pay common dividends if it ceases to qualify as a REIT.
The Company's new secured credit Facility contains cross default provisions that would allow the lenders to declare an event of default and accelerate its indebtedness to them if it 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 lenders and bondholders to declare an event of default and accelerate its indebtedness to them if the Company's other recourse indebtedness
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 9-Debt Obligations, net (Continued)
in excess of specified thresholds or if such indebtedness is accelerated. The Company's unsecured credit facilities permit the lenders to accelerate its indebtedness to them if other recourse indebtedness of the Company in excess of specified thresholds is accelerated. The Company believes it is in full compliance with all the covenants in its debt instruments as of December 31, 2010.
Ratings Triggers
Borrowings under the Company's secured and unsecured credit facilities bear interest at LIBOR based rates plus an applicable margin which varies between the facilities and is determined based on the Company's corporate credit ratings. The Company's ability to borrow under its credit facilities is not dependent on the level of its credit ratings. Based on the Company's current credit ratings, further downgrades in the Company's credit ratings will have no effect on its borrowing rates under these facilities.
Note 10-Commitments and Contingencies
Business Risks and Uncertainties-The economic recession and tightening of capital markets adversely affected our business. The Company experienced significant provisions for loan losses and impairments resulting from high levels of non-performing loans and increasing amounts of real estate owned as the Company took title to assets of defaulting borrowers. The economic conditions and their effect on the Company's operations also resulted in increases in its financing costs and an inability to access the unsecured debt markets. Since the beginning of the crisis, the Company has significantly curtailed asset originations and has focused primarily on resolving problem assets, generating liquidity, retiring debt, decreasing leverage and preserving shareholder value.
The Company saw early signs of an economic recovery during 2010, including some improvements in the commercial real estate market and greater stability in the capital markets. These conditions resulted in reduced additions to non-performing loans, reductions in provisions for loan losses and increased levels of liquidity to fund operations. Despite the improvements, the impact of the economic recession continues to have an effect on the Company's operations, primarily evidenced by still elevated levels of non-performing assets. Additionally, many of the improving trends in the Company's financial condition and operating results are dependent on a sustained recovery and there can be no assurance that the recent improvement in conditions will continue in the future.
After giving effect to the new secured credit Facility and repayments of debt subsequent to year-end (see Note 19), the Company has approximately $882 million of debt maturing and minimum required amortization payments due on or before December 31, 2011. The Company believes that its available cash and expected proceeds from asset repayments and sales will be sufficient to meet its obligations and to remain in compliance with the covenants in its debt instruments during the remainder of the year. However, the timing and amounts of expected proceeds from expected asset repayments and sales are subject to factors outside of the Company's control and cannot be predicted with certainty. The Company's plans are dynamic and it may adjust its plans in response to changes in its expectations and changes in market conditions. The Company would be materially adversely affected if it is unable to repay or refinance its debt as it comes due.
Unfunded Commitments-The Company has certain off-balance sheet unfunded commitments. The Company generally funds construction and development loans and build-outs of space in net lease assets over a period of time if and when the borrowers and tenants meet established milestones and other
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 10-Commitments and Contingencies (Continued)
performance criteria. The Company refers to these arrangements as Performance-Based Commitments. In addition, the Company will sometimes establish a maximum amount of additional fundings which it will make available to a borrower or tenant for an expansion or addition to a project if it approves of the expansion or addition at its sole discretion. The Company refers to these arrangements as Discretionary Fundings. Finally, the Company has committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments. As of December 31, 2010, the maximum amounts of the fundings the Company may make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments, that it will approve all Discretionary Fundings and that 100% of its capital committed to Strategic Investments is drawn down, are as follows ($ in thousands):
Other Commitments-Total operating lease expense for the years ended December 31, 2010, 2009 and 2008 were $7.3 million, $13.3 million and $7.9 million, respectively. Future minimum lease obligations under non-cancelable operating leases are as follows ($ in thousands):
As a result of the Company's decision to remain in its current space that is leased through 2021, the Company entered into a settlement agreement with a landlord regarding a separate long-term lease for new headquarters space dated May 22, 2007 (as amended and restated, the "Lease"). Under the settlement, the Company agreed to pay the landlord a $42.4 million settlement payment in order to settle all disputes between the Company and the landlord relating to the Lease and the landlord agreed among other things, to terminate the Lease. For the year ended December 31, 2009, the Company recognized a $42.4 million lease termination expense in "Other expense" on the Company's Consolidated Statements of Operations.
The Company also has issued letters of credit totaling $14.4 million in connection with eight of its investments.
Note 11-Equity
The Company's charter provides for the issuance of up to 200.0 million shares of Common Stock, par value $0.001 per share and 30.0 million shares of preferred stock. As of December 31, 2010, 138.2 million common shares were issued and 92.3 million common shares were outstanding.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 11-Equity (Continued)
The Company had the following series of Cumulative Redeemable Preferred Stock outstanding as of December 31, 2010 and 2009:
Explanatory Notes:
(1)Holders of shares of the Series D, E, F, G and I preferred stock are entitled to receive dividends, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends. Dividends are cumulative from the date of original issue and are payable quarterly in arrears on or before the 15th day of each March, June, September and December or, if not a business day, the next succeeding business day. Any dividend payable on the preferred stock for any partial dividend period will be computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends will be payable to holders of record as of the close of business on the first day of the calendar month in which the applicable dividend payment date falls or on another date designated by the Board of Directors of the Company for the payment of dividends that is not more than 30 nor less than ten days prior to the dividend payment date.
(2)The Company declared and paid dividends aggregating $8.0 million, $11.0 million, $7.8 million, $6.1 million and $9.4 million on its Series D, E, F, G, and I preferred stock, respectively, during each of the years ended December 31, 2010 and 2009. There are no dividend arrearages on any of the preferred shares currently outstanding. The Series D, E, F, G, and I Cumulative Redeemable Preferred Stock are redeemable without premium at the option of the Company at their respective liquidation preferences beginning on October 8, 2002, July 18, 2008, September 29, 2008, December 19, 2008 and March 1, 2009, respectively.
High Performance Unit Program
In May 2002, the Company's shareholders approved the iStar Financial High Performance Unit ("HPU") Program. The program entitled employee participants ("HPU Holders") to receive distributions if the total rate of return on the Company's Common Stock (share price appreciation plus dividends) exceeded certain performance thresholds over a specified valuation period. The Company established seven HPU plans that had valuation periods ending between 2002 and 2008 and the Company has not established any new HPU plans since 2005. HPU Holders purchased their interests in High Performance Common Stock for aggregate initial purchase prices of approximately $2.8 million, $1.8 million, $1.4 million, $0.6 million, $0.7 million, $0.6 million and $0.8 million for the 2002, 2003, 2004, 2005, 2006, 2007 and 2008 plans, respectively.
The 2002, 2003 and 2004 plans all exceeded their performance thresholds and are entitled to receive distributions equivalent to the amount of dividends payable on 819,254 shares, 987,149 shares and 1,031,875 shares, respectively, of the Company's Common Stock as and when such dividends are paid on the Company's Common Stock. Each of these three plans has 5,000 shares of High Performance Common
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 11-Equity (Continued)
Stock associated with it, which is recorded as a separate class of stock within shareholders' equity on the Company's Consolidated Balance Sheets. High Performance Common Stock carries 0.25 votes per share. Net income allocable to common shareholders is reduced by the HPU holders' share of earnings.
The remaining four plans that had valuation periods which ended in 2005, 2006, 2007 and 2008, did not meet their required performance thresholds and none of the plans were funded. As a result, the Company redeemed the participants' units for approximately $1,700 resulting in the unit holders losing $2.4 million of aggregate contributions.
In addition to these plans, a high performance unit program for executive officers was established with plans having three-year valuation periods which ended December 31, 2005, 2006, 2007 and 2008. The provisions of these plans were substantially the same as the high performance unit programs for employees. The Chief Executive Officer and former President collectively purchased 100% interests in the Company's 2005, 2006, 2007 and 2008 high performance unit program for senior executive officers for an aggregate purchase price of $1.5 million. These plans did not meet the required performance thresholds and were not funded, resulting in the Chief Executive Officer and former President losing $0.9 million and $0.6 million in total contributions, respectively.
Dividends-In order to maintain its election to qualify as a REIT, the Company must currently distribute, at a minimum, an amount equal to 90% of its taxable income, excluding net capital gains, and must distribute 100% of its taxable income (including net capital gains) to avoid paying corporate federal income taxes. The Company has recorded net operating losses and may record net operating losses in the future, which may reduce its taxable income in future periods and lower or eliminate entirely the Company's obligation to pay dividends for such periods in order to maintain its REIT qualification. 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 be required to borrow to make sufficient dividend payments. The Company's new secured credit Facility permits the Company to distribute 100% of its REIT taxable income on an annual basis, for so long as the Company maintains its qualification as a REIT. The new Facility restricts the Company from paying any common dividends if it ceases to qualify as a REIT. The Company did not declare or pay any Common Stock dividends for the years ended December 31, 2010 and 2009.
For tax reporting purposes:
Explanatory Note:
(1)For the year ended December 31, 2008, 25.6% ($0.0483) of the ordinary dividend qualifies as a qualifying dividend for those shareholders who held shares of the Company for the entire year.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 11-Equity (Continued)
Stock Repurchase Program-On March 13, 2009, the Company's Board of Directors authorized the repurchase of up to $50 million of Common Stock from time to time in open market and privately negotiated purchases, including pursuant to one or more trading plans.
During the year ended December 31, 2010, the Company repurchased 2.2 million shares of its outstanding Common Stock for approximately $7.5 million, at an average cost of $3.40 per share, and the repurchases were recorded at cost. As of December 31, 2010, the Company had $14.1 million of Common Stock available to repurchase under the Board authorized stock repurchase programs.
Noncontrolling Interest-The following table presents amounts attributable to iStar Financial Inc. and allocable to common shareholders, HPU holders and Participating Security holders and excludes amounts allocable to noncontrolling interests ($ in thousands):
Note 12-Risk Management and Derivatives
Risk management
In the normal course of its on-going business operations, the Company encounters economic risk. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing 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 net lease, REHI and OREO assets by the Company as well as changes in foreign currency exchange rates.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 12-Risk Management and Derivatives (Continued)
Risk concentrations-As of December 31, 2010, the Company's total investment portfolio was comprised of the following property/collateral types ($ in thousands)(1):
Explanatory Notes:
(1)Based on the carrying value of our total investment portfolio net of asset-specific loan loss reserves and gross of general loan loss reserves and accumulated depreciation.
(2)Includes $516.2 million of other investments.
(3)Includes $16.1 million of other investments.
As of December 31, 2010, the Company's total investment portfolio had the following characteristics by geographical region ($ in thousands):
Explanatory Note:
(1)Based on the carrying value of our total investment portfolio net of asset-specific loan loss reserves but gross of general loan loss reserves and accumulated depreciation.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 12-Risk Management and Derivatives (Continued)
Concentrations of credit risks arise when a number of borrowers or customers related to the Company's investments are engaged in similar business activities, or activities in the same geographic region, or have similar 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. The Company monitors various segments of its portfolio to assess potential concentrations of credit risks. Management believes the current portfolio is reasonably well diversified and does not contain any significant concentration of credit risks.
Substantially all of the Company's net lease, REHI and OREO assets as well as assets collateralizing its loans and other lending investments are located in the United States, with California 13.0%, New York 11.4%, and Florida 10.6% representing the only significant concentrations (greater than 10.0%) as of December 31, 2010. The Company's portfolio contains significant concentrations in the following asset types as of December 31, 2010: apartment/residential 23.2%, land 16.3%, retail 12.1% and office 10.0%.
The Company underwrites the credit of prospective borrowers and customers and often requires them to provide some form of credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although the Company's loans and other lending investments and net lease assets are geographically diverse and the borrowers and customers 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 customer, the inability of that borrower or customer to make its payment could have an adverse effect on the Company. As of December 31, 2010, the Company's five largest borrowers or tenants collectively accounted for approximately 23.7% of the Company's aggregate annualized interest and operating lease revenue, of which no single customer accounts for more than 6.0%.
Derivatives
The Company's use of derivative financial instruments is primarily limited to the utilization of interest rate hedges and foreign exchange hedges. The principal objective of such hedges are to minimize the risks and/or costs associated with the Company's operating and financial structure and to manage its exposure to foreign exchange rate movements. Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements, foreign exchange rate movements, and other identified risks, but may not meet the strict hedge accounting requirements.
As of December 31, 2010, derivative liabilities with a fair value of $0.2 million were included in "Accounts payable, accrued expenses and other liabilities" on the Company's Consolidated Balance Sheet. As of December 31, 2009, derivative assets with a fair value of $0.8 million were included in "Deferred expenses and other assets, net" and derivative liabilities with a fair value of $0.3 million were included in "Accounts payable, accrued expenses and other liabilities" on the Company's Consolidated Balance Sheet.
2010 and 2009 Hedging Activity-During the years ended December 31, 2010 and 2009, the Company did not have any significant hedging activity.
2008 Hedging Activity-During the year ended December 31, 2008, the Company had the following significant hedging activity:
•The Company paid $11.1 million to terminate forward starting swap agreements with a notional amount of $250.0 million. The Company determined the forecasted transaction was not probable of
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 12-Risk Management and Derivatives (Continued)
occurring and recorded $8.2 million of losses that are recorded in "Other expense" on the Company's Consolidated Statements of Operations for the year ended December 31, 2008.
•The Company terminated $1.76 billion of pay floating interest rate swaps that were designated as fair value hedges of certain unsecured notes. As a result of the terminations, the Company received $51.1 million of cash, recorded a receivable of $19.0 million and recorded premiums to the respective unsecured notes of $65.7 million. The premiums amortize over the lives of the respective debt as an offset to "Interest expense" on the Company's Consolidated Statements of Operations. During the year ended December 31, 2008, the Company recorded a net loss of $16.7 million, related to ineffectiveness on interest rate swaps. In addition, for the year ended December 31, 2008, the Company recognized a net loss of $1.4 million for interest rate swaps not designated as hedges. All of these amounts were recorded in "Other expense" on the Company's Consolidated Statements of Operations.
Note 13-Stock-Based Compensation Plans and Employee Benefits
On May 27, 2009, the Company's shareholders approved the Company's 2009 Long-Term Incentive Plan (the "2009 LTIP") which is designed to provide incentive compensation for officers, key employees, directors and advisors of the Company. The 2009 LTIP provides for awards of stock options, shares of restricted stock, phantom shares, restricted stock units, dividend equivalent rights and other share-based performance awards. A maximum of 8,000,000 shares of Common Stock may be awarded under the 2009 LTIP, plus up to an additional 500,000 shares to the extent that a corresponding number of equity awards previously granted under the Company's 1996 Long-Term Incentive Plan expire or are cancelled or forfeited. All awards under the 2009 LTIP are made at the discretion of the Board of Directors or a committee of the Board of Directors.
The Company's 2006 Long-Term Incentive Plan (the "2006 LTIP") is designed to provide equity-based incentive compensation for officers, key employees, directors, consultants and advisers of the Company. The 2006 LTIP provides for awards of stock options, shares of restricted stock, phantom shares, dividend equivalent rights and other share-based performance awards. A maximum of 4,550,000 shares of Common Stock may be subject to awards under the 2006 LTIP provided that the number of shares of Common Stock reserved for grants of options designated as incentive stock options is 1.0 million, subject to certain anti-dilution provisions in the 2006 LTIP. All awards under this Plan are at the discretion of the Board of Directors or a committee of the Board of Directors.
The Company's 2007 Incentive Compensation Plan ("Incentive Plan") was approved and adopted by the Board of Directors in 2007 in order to establish performance goals for selected officers and other key employees and to determine bonuses that will be awarded to those officers and other key employees based on the extent to which they achieve those performance goals. Equity-based awards may be made under the Incentive Plan, subject to the terms of the Company's equity incentive plans.
As of December 31, 2010, an aggregate of 3.6 million shares remain available for awards under the Company's 2006 and 2009 LTIP.
Stock-based Compensation-The Company recorded stock-based compensation expense of $19.4 million, $23.6 million and $23.4 million for the years ended December 31, 2010, 2009 and 2008, respectively in "General and administrative" on the Company's Consolidated Statements of Operations. As of December 31, 2010,
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 13-Stock-Based Compensation Plans and Employee Benefits (Continued)
there was $14.6 million of total unrecognized compensation cost related to all unvested restricted stock units. That cost is expected to be recognized over a weighted average remaining vesting/service period of 0.96 years.
Stock Options-Changes in options outstanding during the year ended December 31, 2010, are as follows (amounts in thousands, except for weighted average strike price):
The following table summarizes information concerning outstanding and exercisable options as of December 31, 2010 (options in thousands):
The Company has not issued any options since 2003. During the years ended December 31, 2010 and December 31, 2009, no options were exercised. Cash received from option exercises during the year ended December 31, 2008 was $5.2 million. The intrinsic value of options exercised during the year ended December 31, 2008 was $2.0 million.
Restricted Stock Units-Changes in non-vested restricted stock units during the year ended December 31, 2010 were as follows ($ in thousands, except per share amounts):
2010 Activity-On February 17, 2010, the Company granted 1,516,074 service-based restricted stock units to employees that represent the right to receive an equivalent number of shares of the Company's Common Stock (after deducting shares for minimum required statutory withholdings) if and when the units vest. These units will cliff vest on February 17, 2012 if the employee is employed by the Company on that date and carry dividend equivalent rights that entitle the holder to receive dividend payments prior to vesting, if and when dividends are paid on shares of the Company's Common Stock. The grant date fair value of these awards was $4.7 million. As of December 31, 2010, 1,359,024 of these awards remained outstanding.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 13-Stock-Based Compensation Plans and Employee Benefits (Continued)
On March 2, 2010, the Company granted 806,518 performance-based restricted stock units to its Chairman and Chief Executive Officer. These units represent the right to receive an equivalent number of shares of the Company's Common Stock (after deducting shares for minimum required statutory withholdings) if and when the units vest. The performance-based units will cliff vest on March 2, 2012 if certain performance and service conditions have been achieved, relating to reductions in the Company's general and administrative expenses, retirement of debt and continued employment. The performance conditions were satisfied during the year ended December 31, 2010, therefore, vesting is now based solely on continued employment through March 2, 2012. Since the performance conditions have been achieved, these units now carry dividend equivalent rights that entitle the holder to receive dividend payments, if and when dividends are paid on shares of the Company's Common Stock. The grant date fair value of these performance based units was $3.2 million which is being recognized ratably over the service period. As of December 31, 2010, all of these awards remained outstanding.
On December 31, 2010, 341,199 market-condition based restricted stock units that were granted to employees on January 18, 2008 were forfeited as the market vesting condition was not met. These awards were to cliff vest on December 31, 2010 only if the total shareholder return on the Company's Common Stock was at least 20% (compounded annually, including dividends) from the date of the award through the end of the vesting period. Total shareholder return was based on the average NYSE closing prices for the Company's Common Stock for the 20 days prior to (a) the date of the award on January 18, 2008 (which was $25.04) and (b) December 31, 2010. Since shareholder return during that period was less than the established target, these awards were canceled.
Other Outstanding Awards-In addition to the awards granted in 2010, noted above, the following awards remained outstanding as of December 31, 2010:
•8,340,000 market-condition based restricted stock units granted to executives and other officers of the Company on December 19, 2008. These units will vest in one installment on January 1, 2012 only if the Common Stock achieves a price of $10.00 or more (average NYSE closing price over 20 consecutive trading days) prior to December 19, 2011 and the employee is thereafter employed on the vesting date. These awards established $4.00 and $7.00 price targets for the first and second measurement periods ended December 19, 2009 and December 19, 2010, respectively, which were not achieved, therefore only the $10.00 price target remains applicable. If this price target is achieved, the units will thereafter be entitled to dividend equivalent payments as dividends are paid on the Company's Common Stock. Upon vesting of these units, holders will receive shares of the Company's Common Stock in the amount of the vested units, net of statutory minimum tax withholdings. On May 27, 2009, the Company's shareholders approved the 2009 LTIP, which authorized additional shares of the Company's Common Stock to be available for awards under the Company's equity compensation plans including for settlement of these units. The approval converted the Company's accounting for the units from liability-based to equity-based.
•2,000,000 market-condition based restricted stock units contingently awarded to the Company's Chairman and Chief Executive Officer on October 9, 2008 and approved by shareholders on May 27, 2009. These units will cliff vest in one installment on October 9, 2011 only if the total shareholder return on the Company's Common Stock is at least 25% per year (compounded at the end of the three year vesting period, including dividends). Total shareholder return will be based on the average NYSE closing prices for the Company's Common Stock for the 20 days prior to: (a) the date of the award on October 9, 2008 (which was $3.38); and (b) the vesting date (which must be at
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 13-Stock-Based Compensation Plans and Employee Benefits (Continued)
least $6.58 if no dividends are paid). No dividends will be paid on these units prior to vesting. These units are required to be settled on a net, after-tax basis (after deducting shares for minimum required statutory withholdings); therefore the actual number of shares issued will be less than the gross amount of the award.
•1,575,000 restricted stock units awarded to certain officers on October 9, 2008, as special retention incentive, which will cliff vest in one installment on October 9, 2011, if the holders are employed on the vesting date. The unvested units are entitled to receive dividend equivalent payments as dividends are paid on shares of the Company's Common Stock.
•252,477 service-based restricted stock units with original vesting terms ranging from three to five years that are entitled to be paid dividends as dividends are paid on shares of the Company's Common Stock.
The fair values of the market-condition based restricted stock units, were determined by utilizing a Monte Carlo model to simulate a range of possible future stock prices for the Company's Common Stock. The following assumptions were used to estimate the fair value of market-condition based awards:
Explanatory Notes:
(1)Contingent equity-based restricted stock units awarded on October 9, 2008 were measured on May 27, 2009, the date the Company's shareholders approved the grant of the award.
(2)The units granted on December 19, 2008 were re-measured on May 27, 2009 when they became equity-based awards in accordance with ASC 718-20-55-135 to 138.
The total fair value of restricted stock units vested during the years ended December 31, 2010, 2009 and 2008 was $1.7 million, $1.4 million and $10.1 million, respectively.
Common Stock Equivalents-Non-employee directors are awarded common stock equivalents ("CSEs") at the time of the annual shareholders' meeting in consideration for their services on the Company's Board of Directors. The CSEs generally vest at the time of the next annual shareholders meeting and pay dividends in an amount equal to the dividends paid on an equivalent number of shares of the Company's Common Stock from the date of grant, as and when dividends are paid on the Common Stock. During the year ended December 31, 2010, the Company awarded to Directors 84,573 CSEs at a fair value per share of $5.91 at the time of grant. The CSE awards are classified as liability-based awards due to the fact that they can be settled in shares of stock or cash at the Directors' option. As of December 31, 2010, 281,958 CSEs, with an aggregate intrinsic value of $2.2 million were outstanding.
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
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 13-Stock-Based Compensation Plans and Employee Benefits (Continued)
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 Board of Directors, the Company may make matching contributions on the participant's behalf of up to 50% of the first 10% of the participant's annual compensation. The Company made gross contributions of approximately $1.1 million, $1.3 million and $1.5 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Note 14-Earnings Per Share
EPS is calculated using the two-class method, which allocates earnings among common stock and participating securities to calculate EPS when an entity's capital structure includes either two or more classes of common stock or common stock and participating securities. HPU holders are current and former Company employees who purchased high performance common stock units under the Company's High Performance Unit (HPU) Program (see Note 11). These HPU units have been treated as a separate class of common stock.
The following table presents a reconciliation of income (loss) from continuing operations used in the basic and diluted EPS calculations ($ in thousands, except for per share data):
Explanatory Note:
(1)In accordance with ASC 260-10-65-1, "Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships," ("ASC 260-10-65-1") the total dividends paid to Participating Security holders during the period have been deducted from income (loss) from continuing operations.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 14-Earnings Per Share (Continued)
Explanatory Note:
(1)Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to common shareholders has been adjusted for net (income) loss attributable to noncontrolling interests and preferred dividends. In addition, for the year ended December 31, 2008, income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to common shareholders has been adjusted to exclude dividends paid to Participating Security holders (see preceding table).
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 14-Earnings Per Share (Continued)
For the years ended December 31, 2010, 2009 and 2008, the following shares were anti-dilutive ($ in thousands):
Explanatory Note:
(1)For the periods ended December 31, 2010, 2009 and 2008, anti-dilutive restricted stock units exclude 3.2 million, 2.5 million and 4.4 million, respectively, of unvested restricted stock units that have dividend equivalent rights as they are considered Participating Securities.
Note 15-Comprehensive Income (Loss)
The statement of comprehensive income (loss) attributable to iStar Financial, Inc. is as follows ($ in thousands):
Unrealized gains/(losses) on available-for-sale securities, cash flow hedges and foreign currency translation adjustments are recorded as adjustments to shareholders' equity through "Accumulated other comprehensive income" on the Company's Consolidated Balance Sheets and are not included in net
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 15-Comprehensive Income (Loss) (Continued)
income unless realized. As of December 31, 2010 and 2009, accumulated other comprehensive income reflected in the Company's shareholders' equity is comprised of the following ($ in thousands):
Note 16-Fair Values
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs to be used in valuation techniques to measure fair value:
Level 1: Unadjusted quoted prices in active markets that are 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;
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. Other 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.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 16-Fair Values (Continued)
The following table summarizes the Company's assets and liabilities recorded at fair value on a recurring and non-recurring basis by the above categories ($ in thousands):
In addition to the Company's disclosures regarding assets and liabilities recorded at fair value in the financial statements, it is also required to disclose the estimated fair values of all financial instruments, regardless of whether they are recorded at fair value in the financial statements.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 16-Fair Values (Continued)
The book and estimated fair values of financial instruments were as follows ($ in thousands)(1):
Explanatory Note:
(1)The carrying values of other financial instruments including cash and cash equivalents, restricted cash, accrued interest receivable and accounts payable, approximate the fair values of the instruments. The fair value of other financial instruments, including derivative assets and liabilities and marketable securities are included in the previous table.
Given the nature of certain assets and liabilities, clearly determinable market based valuation inputs are often not available, therefore, these assets and liabilities are valued using internal 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 two tables are described more fully below for each type of asset and liability.
Derivatives-The Company uses interest rate swaps, interest rate caps and foreign currency derivatives to manage its interest rate and foreign currency risk. The valuation of these instruments is determined using discounted cash 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.
Securities-All of the Company's available-for-sale and impaired held-to-maturity debt and equity securities are actively traded and have been valued using quoted market prices. The Company's traded marketable securities are valued using market quotes, to the extent they are available, or broker quotes that fall within Level 2 of the fair value hierarchy.
Impaired loans-The Company's loans 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 significant judgments in respect to discount rates, capitalization rates and the timing and amounts of estimated future cash flows that are all considered Level 3 inputs. These cash flows generally include property revenues, lot and unit sale prices and velocity, operating costs, and costs of
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 16-Fair Values (Continued)
completion. In more limited cases, the Company obtains external "as is" appraisals for loan collateral, generally when third party participations exist, and appraised values may be discounted when real estate markets rapidly deteriorate.
Impaired equity method investments-If the Company determines an equity method investment is other than temporarily impaired it records an impairment charge to adjust the investment to its estimated fair market value. To estimate the fair value of an investment in a fund that invests in real estate, the Company estimates the fair value of the individual properties held within the fund using a discounted cash flow methodology through internally developed valuation models. This approach requires the Company to make significant judgments with respect to discount rates, capitalization rates and the timing and amounts of estimated future cash flows that are all considered Level 3 inputs. These cash flows are primarily based on expected future leasing rates and operating costs.
Impaired OREO assets-If the Company determines an OREO asset is impaired it records an impairment charge to adjust the asset to its estimated fair market value. Due to the nature of the individual properties in the OREO portfolio, the Company 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 significant judgments with respect to discount rates, capitalization rates and the timing and amounts of estimated future cash flows that are all considered Level 3 inputs. These cash flows generally include property revenues, lot and unit sale prices and velocity, operating costs, and costs of completion.
Impaired net lease assets held for sale-The estimated fair value of impaired net lease assets held for sale is determined using observable market information, typically including contracted prices with prospective purchasers.
Impaired net lease assets-If the Company determines a net lease asset is impaired it records an impairment charge to adjust the asset to its estimated fair market value. Due to the nature of the individual properties in the net lease portfolio, 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 significant judgments with respect to discount rates, capitalization rates and the timing and amounts of estimated future cash flows that are all considered Level 3 inputs. These cash flows are primarily based on expected future leasing rates and operating costs.
Loans and other lending investments-The Company estimates the fair value of its performing loans and other lending investments using a discounted cash flow methodology. This method discounts estimated future cash flows using rates management determines best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality.
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. 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.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 17-Segment Reporting
The Company has determined that it has three reportable segments based on how management reviews and manages its business. These reportable segments include: Real Estate Lending, Net Leasing and Real Estate Investment. The Real Estate Lending segment includes all of the Company's activities related to senior and mezzanine real estate debt and corporate capital investments. The Net Leasing segment includes all of the Company's activities related to the ownership and leasing of corporate facilities. The Real Estate Investment segment includes all of the Company's activities related to the operations, repositioning and ultimate disposition of distressed REHI and OREO properties.
The Company evaluates performance based on the following financial measures for each segment ($ in thousands):
Explanatory Notes:
(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
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 17-Segment Reporting (Continued)
not related to any reporting segment, as well as the Company's timber operations, none of which are considered material separate segments.
(2)Total revenue represents all revenue earned during the period related to the assets in each segment. Revenue from the Real Estate Lending segment primarily represents interest income, revenue from the Net Leasing segment primarily represents operating lease income and revenue from Real Estate Investment primarily represents operating revenues from REHI properties.
(3)General and administrative excludes stock-based compensation expense of $19.4 million, $23.6 million and $23.5 million for the years ended December 31, 2010, 2009 and 2008, respectively.
(4)The following is a reconciliation of segment profit (loss) to income (loss) from continuing operations ($ in thousands):
(5)Intangible assets included in Net Leasing at December 31, 2010, 2009 and 2008 were $24.5 million, $48.8 million and $58.5 million, respectively. Intangible assets included in Corporate/Other at December 31, 2009 and 2008 were $1.1 million and $2.7 million, respectively.
(6)Prior period presentation has been restated to conform with current period presentation.
(7)Goodwill included in Net Leasing at December 31, 2008 was $4.2 million.
Note 18-Quarterly Financial Information (Unaudited)
The following table sets forth the selected quarterly financial data for the Company ($ in thousands, except per share amounts).
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 18-Quarterly Financial Information (Unaudited) (Continued)
Explanatory Notes:
(1)During the quarter ended June 30, 2010, the Company recorded gains from discontinued operations of $250.3 million for the sale of a portfolio of 32 net lease assets (see Note 5). During the quarter ended December 31, 2010, the Company recorded provision for loan losses of $54.2 million.
(2)During the quarter ended December 31, 2009, the Company recorded provision for loan losses of $216.4 million, impairment of assets of $61.8 million and a net gain on early extinguishment of debt of $100.4 million.
Note 19-Subsequent Events
In January 2011, the Company fully redeemed its $312.3 million remaining principal amount of 10% senior secured notes due June 2014. This redemption fully retired the remaining senior secured notes issued in the Company's May 2009 exchange offer. In connection with this redemption, the Company expects to record a gain on early extinguishment of debt of approximately $109 million in its Consolidated Statement of Operations for the quarter ending March 31, 2011. In addition, the Company repaid the $107.8 million outstanding principal balance of its senior unsecured notes due in March 2011 upon maturity.
In March 2011, the Company entered into a new $2.95 billion senior secured credit agreement comprised of a $1.50 billion term loan facility bearing interest at a rate of LIBOR plus 3.75% and maturing in June 2013 (the "Tranche A-1 Facility") and a $1.45 billion term loan facility bearing interest at a rate of LIBOR plus 5.75% maturing in June 2014 (the "Tranche A-2 Facility"), together the "Facility." Both tranches include a LIBOR floor of 1.25%. Proceeds from the new secured credit Facility were used to fully repay the $1.67 billion and $0.9 billion outstanding under the Company's existing secured credit facilities, which were due to mature in June 2011 and June 2012, respectively. Proceeds were also used to repay $175.0 million of the Company's unsecured credit facilities due in June 2011. The Company expects to use the remaining proceeds to repay unsecured debt maturing in the first half of 2011 as well as for other corporate purposes.
The new secured credit Facility is collateralized by a first lien on a fixed pool of assets consisting of loans, net lease assets and OREO assets with a designated aggregate value of approximately $3.69 billion at the time of closing. The Company is required to maintain collateral coverage of 1.25x outstanding borrowings until the final maturity of the new Facility. Proceeds from principal repayments and sales of collateral will be applied to amortize the new Facility. Proceeds in respect to additional investment amounts and interest, rent, lease payments and fee income will be retained by the Company.
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 19-Subsequent Events (Continued)
The Tranche A-1 Facility requires that aggregate cumulative amortization payments of not less than $200.0 million shall be made on or before December 30, 2011, not less than $450.0 million on or before June 30, 2012, not less than $750.0 million on or before December 31, 2012 and not less than $1.50 billion on or before June 28, 2013. The Tranche A-2 Facility will begin amortizing six months after the repayment in full of the Tranche A-1 Facility, such that the not less than $150.0 million of cumulative amortization payments shall be made on or before the six month anniversary of repayment of the A-1 Facility, with additional cumulative amortization payments of $150 million due on or before each six month anniversary thereafter until the Tranche A-2 Facility is fully repaid.
After giving effect to the new Facility and other repayments/redemptions described above, the Company's future scheduled maturities of outstanding long-term debt obligations, net are as follows ($ in thousands):
iStar Financial Inc.
Schedule II-Valuation and Qualifying Accounts and Reserves
($ in thousands)
Explanatory Notes:
(1)See Note 4 to the Company's Consolidated Financial Statements.
(2)See Note 3 to the Company's Consolidated Financial Statements.
iStar Financial, Inc.
Schedule III-Real Estate and Accumulated Depreciation
As of December 31, 2010
($ in thousands)
iStar Financial, Inc.
Schedule III-Real Estate and Accumulated Depreciation (Continued)
As of December 31, 2010
($ in thousands)
iStar Financial, Inc.
Schedule III-Real Estate and Accumulated Depreciation (Continued)
As of December 31, 2010
($ in thousands)
iStar Financial, Inc.
Schedule III-Real Estate and Accumulated Depreciation (Continued)
As of December 31, 2010
($ in thousands)
iStar Financial, Inc.
Schedule III-Real Estate and Accumulated Depreciation (Continued)
As of December 31, 2010
($ in thousands)
iStar Financial, Inc.
Schedule III-Real Estate and Accumulated Depreciation (Continued)
As of December 31, 2010
($ in thousands)
Explanatory Note:
(1)Consists of properties pledged as collateral under the Company's secured indebtedness with a total book value of $1.04 billion.
iStar Financial, Inc.
Schedule III-Real Estate and Accumulated Depreciation (Continued)
($ in thousands)
1. Reconciliation of Real Estate:
The following table reconciles Real Estate from January 1, 2008 to December 31, 2010:
2. Reconciliation of Accumulated Depreciation:
The following table reconciles Accumulated Depreciation from January 1, 2008 to December 31, 2010:
iStar Financial Inc.
Schedule IV-Mortgage Loans on Real Estate
As of December 31, 2010
($ in thousands)
Explanatory Notes:
(1)Amounts are presented net of asset-specific reserves of $683.9 million on impaired loans. Impairment is measured using the estimated fair value of collateral, less costs to sell.
(2)The carrying amount of mortgages approximated the federal income tax basis.
(3)Loan is in default with $193.7 million of principal that is more than 90 days delinquent. Loan is designated as non-performing and is on non-accrual status.
(4)As of December 31, 2010, includes a LIBOR interest rate floor of 4%.
iStar Financial Inc.
Schedule IV-Mortgage Loans on Real Estate (Continued)
($ in thousands)
1. Reconciliation of Mortgage Loans on Real Estate:
The following table reconciles Mortgage Loans on Real Estate from January 1, 2008 to December 31, 2010(1):
Explanatory Notes:
(1)Balances represent the carrying value of loans, which are net of asset specific reserves.
(2)Amount includes amortization of discount, deferred interest capitalized and mark-to-market adjustments resulting from changes in foreign exchange rates.
(3)Amounts are presented net of charge-offs of $804.7 million, $680.4 million and $223.5 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Item 9.
Item 9. Changes in and Disagreements with Registered Public Accounting Firm on Accounting and Financial Disclosure
None.
Item 9a.
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 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. The disclosure committee reports directly to the Company's Chief Executive Officer and Chief Financial Officer. The Chief Financial Officer is currently a member of the disclosure committee.
Based upon their evaluation as of December 31, 2010, the Chief Executive Officer and Chief Financial 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 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 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, 2010.
The Company's internal control over financial reporting as of December 31, 2010, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 53.
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.
Item 9b. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance of the Registrant
Portions of the Company's definitive proxy statement for the 2011 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.
Item 11. Executive Compensation
Portions of the Company's definitive proxy statement for the 2011 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Portions of the Company's definitive proxy statement for the 2011 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.
Item 13. Certain Relationships, Related Transactions and Director Independence
Portions of the Company's definitive proxy statement for the 2011 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.
Item 14. Principal Registered Public Accounting Firm Fees and Services
Portions of the Company's definitive proxy statement for the 2011 annual meeting of shareholders to be filed within 120 days after the close of the Company's fiscal year are incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(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.
INDEX TO EXHIBITS
Explanatory Notes:
(1)Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1999 filed on March 30, 2000.
(2)Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 filed on May 15, 2000.
(3)Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 filed on August 14, 2000.
(4)Incorporated by reference from the Company's Form S-3 filed on February 12, 2001.
(5)Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 filed on November 14, 2002.
(6)Incorporated by reference from the Company's Current Report on Form 8-A filed on July 8, 2003.
(7)Incorporated by reference from the Company's Current Report on Form 8-A filed on September 25, 2003.
(8)Incorporated by reference from the Company's Current Report on Form 8-A filed on December 10, 2003.
(9)Incorporated by reference from the Company's Current Report on Form 8-K filed on December 12, 2003.
(10)Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 15, 2004.
(11)Incorporated by reference from the Company's Current Report on Form 8-A filed on February 27, 2004.
(12)Incorporated by reference from the Company's DEF14A filed on April 28, 2004.
(13)Incorporated by reference from the Company's Form S-4 filed on May 21, 2004.
(14)Incorporated by reference from the Company's Form S-4 filed on May 25, 2004.
(15)Incorporated by reference from the Company's Form S-4 filed on June 9, 2004.
(16)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.
(17)Incorporated by reference from Falcon Financial Investment Trust's Form 8-K filed on January 24, 2005.
(18)Incorporated by reference from the Company's Current Report on Form 8-K filed on March 1, 2005.
(19)Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2005 filed on May 10, 2005.
(20)Incorporated by reference from the Company's Current Report on Form 8-K filed on April 20, 2005.
(21)Incorporated by reference from the Company's Current Report on Form 8-K filed on December 20, 2005.
(22)Incorporated by reference from the Company's Current Report on Form 8-K filed on January 10, 2006.
(23)Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2005 filed on March 16, 2006.
(24)Incorporated by reference from the Company's Current Report on Form 8-K filed on February 24, 2006.
(25)Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on November 8, 2006.
(26)Incorporated by reference from the Company's Definitive Proxy Statement filed on April 27, 2009.
(27)Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 filed on August 8, 2006.
(28)Incorporated by reference from the Company's Current Report on Form 8-K filed on January 16, 2007.
(29)Incorporated by reference from the Company's Current Report on Form 8-K filed on January 25, 2007.
(30)Incorporated by reference from the Company's Current Report on Form 8-K filed on March 15, 2007.
(31)Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed on May 9, 2007.
(32)Incorporated by reference from the Company's Current Report on Form 8-K filed on July 2, 2007.
(33)Incorporated by reference from the Company's Current Report on Form 8-K filed on October 19, 2007.
(34)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.
(35)Incorporated by reference from the Company's Current Report on Form 8-K filed on May 27, 2008.
(36)Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed on August 10, 2009.
(37)Incorporated by reference from the Company's Current Report on Form 8-K filed on May 8, 2009.
(38)Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed on May 8, 2009.
(39)Incorporated by reference from the Company's Current Report on Form 8-K filed on March 19, 2009.
(40)Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 6, 2010.
SIGNATURES
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.
iSTAR FINANCIAL INC.
Registrant
Date: March 23, 2011
/s/ JAY SUGARMAN
Jay Sugarman
Chairman of the Board of Directors and Chief
Executive Officer (Principal executive officer)
Date: March 23, 2011
/s/ DAVID DISTASO
David DiStaso
Chief Financial 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: March 23, 2011
/s/ JAY SUGARMAN
Jay Sugarman
Chairman of the Board of Directors
Chief Executive Officer
Date: March 23, 2011
/s/ GLENN R. AUGUST
Glenn R. August
Director
Date: March 23, 2011
/s/ ROBERT W. HOLMAN, JR.
Robert W. Holman, Jr.
Director
Date: March 23, 2011
/s/ ROBIN JOSEPHS
Robin Josephs
Director
Date: March 23, 2011
/s/ JOHN G. MCDONALD
John G. McDonald
Director
Date: March 23, 2011
/s/ GEORGE R. PUSKAR
George R. Puskar
Director
Date: March 23, 2011
/s/ DALE A. REISS
Dale A. Reiss
Director
Date: March 23, 2011
/s/ JEFFREY A. WEBER
Jeffrey A. Weber
Director