Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
Commission File No. 1-15371
_______________________________________________________________________________
iStar Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
 
95-6881527
(I.R.S. Employer
Identification Number)
1114 Avenue of the Americas, 39th Floor
 
 
New York, NY
(Address of principal executive offices)
 
10036
(Zip code)
Registrant's telephone number, including area code: (212) 930-9400
_______________________________________________________________________________
Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports); and (ii) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
 
Emerging growth company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o    
As of August 1, 2018, there were 67,968,039 shares, $0.001 par value per share, of iStar Inc. common stock outstanding.
 


Table of Contents

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 

 
 
 



Table of Contents

PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1.    Financial Statements
iStar Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(unaudited)
 
As of
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Real estate
 
 
 
Real estate, at cost
$
2,255,537

 
$
1,629,436

Less: accumulated depreciation
(340,538
)
 
(347,405
)
Real estate, net
1,914,999

 
1,282,031

Real estate available and held for sale
37,597

 
68,588

Total real estate
1,952,596

 
1,350,619

Land and development, net
641,627

 
860,311

Loans receivable and other lending investments, net
1,052,872

 
1,300,655

Other investments
293,017

 
321,241

Cash and cash equivalents
1,039,591

 
657,688

Accrued interest and operating lease income receivable, net
10,994

 
11,957

Deferred operating lease income receivable, net
88,080

 
86,877

Deferred expenses and other assets, net
279,390

 
141,730

Total assets
$
5,358,167

 
$
4,731,078

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
249,494

 
$
238,004

Loan participations payable, net
14,709

 
102,425

Debt obligations, net
3,869,576

 
3,476,400

Total liabilities
4,133,779

 
3,816,829

Commitments and contingencies (refer to Note 11)


 


Redeemable noncontrolling interests
11,814

 

Equity:
 
 
 
iStar Inc. shareholders' equity:
 
 
 
Preferred Stock Series D, G and I, liquidation preference $25.00 per share (refer to Note 13)
12

 
12

Convertible Preferred Stock Series J, liquidation preference $50.00 per share (refer to Note 13)
4

 
4

Common Stock, $0.001 par value, 200,000 shares authorized, 67,968 and 68,236 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
68

 
68

Additional paid-in capital
3,350,750

 
3,352,665

Retained deficit
(2,325,291
)
 
(2,470,564
)
Accumulated other comprehensive income (loss) (refer to Note 13)
(2,233
)
 
(2,482
)
Total iStar Inc. shareholders' equity
1,023,310

 
879,703

Noncontrolling interests
189,264

 
34,546

Total equity
1,212,574

 
914,249

Total liabilities and equity
$
5,358,167

 
$
4,731,078

_______________________________________________________________________________
Note - Refer to Note 2 for details on the Company's consolidated variable interest entities ("VIEs").

The accompanying notes are an integral part of the consolidated financial statements.

1

Table of Contents

iStar Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Operating lease income
$
44,609

 
$
47,002

 
$
90,407

 
$
94,349

Interest income
25,212

 
28,645

 
51,909

 
57,703

Other income
20,823

 
139,510

 
36,142

 
151,374

Land development revenue
80,927

 
132,710

 
357,356

 
152,760

Total revenues
171,571

 
347,867

 
535,814

 
456,186

Costs and expenses:
 
 
 
 
 
 
 
Interest expense
43,172

 
48,807

 
88,353

 
99,952

Real estate expense
37,043

 
34,684

 
73,224

 
70,274

Land development cost of sales
83,361

 
122,466

 
306,768

 
138,376

Depreciation and amortization
10,767

 
13,171

 
21,878

 
25,451

General and administrative(1)
23,228

 
27,218

 
52,041

 
52,392

Provision for (recovery of) loan losses
18,892

 
(600
)
 
18,037

 
(5,528
)
Impairment of assets
6,088

 
10,284

 
10,188

 
14,696

Other expense
3,716

 
16,276

 
4,882

 
18,145

Total costs and expenses
226,267

 
272,306

 
575,371

 
413,758

Income (loss) before earnings from equity method investments and other items
(54,696
)
 
75,561

 
(39,557
)
 
42,428

Loss on early extinguishment of debt, net
(2,164
)
 
(3,315
)
 
(2,536
)
 
(3,525
)
Earnings (losses) from equity method investments
(7,278
)
 
5,515

 
(3,946
)
 
11,217

Gain on consolidation of equity method investment
67,877

 

 
67,877

 

Income from continuing operations before income taxes
3,739

 
77,761

 
21,838

 
50,120

Income tax expense
(128
)
 
(1,644
)
 
(249
)
 
(2,251
)
Income from continuing operations
3,611

 
76,117

 
21,589

 
47,869

Income from discontinued operations

 
173

 

 
4,939

Gain from discontinued operations

 
123,418

 

 
123,418

Income tax expense from discontinued operations

 
(4,545
)
 

 
(4,545
)
Income from sales of real estate(2)
56,895

 
844

 
73,943

 
8,954

Net income
60,506

 
196,007

 
95,532

 
180,635

Net income attributable to noncontrolling interests
(9,509
)
 
(5,710
)
 
(9,604
)
 
(4,610
)
Net income attributable to iStar Inc. 
50,997

 
190,297

 
85,928

 
176,025

Preferred dividends
(8,124
)
 
(12,830
)
 
(16,248
)
 
(25,660
)
Net income allocable to common shareholders
$
42,873

 
$
177,467

 
$
69,680

 
$
150,365

Per common share data:
 
 
 
 
 
 
 
Income attributable to iStar Inc. from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.63

 
$
0.81

 
$
1.03

 
$
0.37

Diluted
$
0.54

 
$
0.69

 
$
0.89

 
$
0.35

Net income attributable to iStar Inc.:
 
 
 
 
 
 
 
Basic
$
0.63

 
$
2.46

 
$
1.03

 
$
2.09

Diluted
$
0.54

 
$
2.04

 
$
0.89

 
$
1.76

Weighted average number of common shares:
 
 
 
 
 
 
 
Basic
67,932

 
72,142

 
67,922

 
72,104

Diluted
83,694

 
88,195

 
83,682

 
88,156

_______________________________________________________________________________
(1)
For the three months ended June 30, 2018 and 2017, includes $2.2 million and $2.9 million, respectively, of equity-based compensation associated with iPIP Plans (refer to Note 14). For the six months ended June 30, 2018 and 2017, includes $10.2 million and $7.9 million, respectively, of equity-based compensation associated with iPIP Plans (refer to Note 14). These plans are liability-based plans which are marked-to-market quarterly and such marks are based upon the performance of the assets underlying the plans as of the quarterly measurement dates; however, actual amounts cannot be determined until the end date of the plans and the ultimate repayment or monetization of the related assets.
(2)
Income from sales of real estate represents gains from sales of real estate that do not qualify as discontinued operations.


The accompanying notes are an integral part of the consolidated financial statements.

2

Table of Contents

iStar Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
60,506

 
$
196,007

 
$
95,532

 
$
180,635

Other comprehensive income (loss):
 
 
 
 
 
 
 
Impact from adoption of new accounting standards (refer to Note 3)

 

 
276

 

Reclassification of (gains)/losses on cumulative translation adjustment into earnings upon realization(1)
721

 

 
721

 

Reclassification of losses on cash flow hedges into earnings upon realization(2)
(1,795
)
 
(313
)
 
(1,786
)
 
(191
)
Unrealized gains (losses) on available-for-sale securities
15

 
583

 
(956
)
 
566

Unrealized gains (losses) on cash flow hedges
7

 
(146
)
 
2,358

 
394

Unrealized gains (losses) on cumulative translation adjustment
(256
)
 
172

 
(364
)
 
(229
)
Other comprehensive income (loss)
(1,308
)
 
296


249

 
540

Comprehensive income
59,198

 
196,303

 
95,781

 
181,175

Comprehensive (income) attributable to noncontrolling interests
(9,509
)
 
(5,710
)
 
(9,604
)
 
(4,610
)
Comprehensive income attributable to iStar Inc. 
$
49,689

 
$
190,593

 
$
86,177

 
$
176,565

_______________________________________________________________________________
(1)
Amounts were reclassified to "Earnings from equity method investments" in the Company's consolidated statements of operations.
(2)
Amounts reclassified to "Interest expense" in the Company's consolidated statements of operations are $30 and $60 for the three and six months ended June 30, 2017, respectively. Amount reclassified to "Gain on consolidation of equity method investment" in the Company's consolidated statements of operations is $1,876 for the three and six months ended June 30, 2018. Amounts reclassified to "Earnings from equity method investments" in the Company's consolidated statements of operations are $81 and $90 for the three and six months ended June 30, 2018, respectively, and $70 and $164 for the three and six months ended June 30, 2017, respectively.

The accompanying notes are an integral part of the consolidated financial statements.

3


iStar Inc.
Consolidated Statements of Changes in Equity
For the Six Months Ended June 30, 2018 and 2017
(In thousands)
(unaudited)




 
 
iStar Inc. Shareholders' Equity
 
 
 
 
 
 
Preferred
Stock(1)
 
Preferred Stock Series J(1)
 
Common
Stock at
Par
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Equity
Balance as of December 31, 2017
 
$
12

 
$
4

 
$
68

 
$
3,352,665

 
$
(2,470,564
)
 
$
(2,482
)
 
$
34,546

 
$
914,249

Dividends declared—preferred
 

 

 

 

 
(16,248
)
 

 

 
(16,248
)
Issuance of stock/restricted stock unit amortization, net
 

 

 
1

 
6,388

 

 

 

 
6,389

Net income for the period
 

 

 

 

 
85,928

 

 
9,604

 
95,532

Change in accumulated other comprehensive income (loss)
 

 

 

 

 

 
(27
)
 

 
(27
)
Repurchase of stock
 

 

 
(1
)
 
(8,303
)
 

 

 

 
(8,304
)
Contributions from noncontrolling interests
 

 

 

 

 

 

 
9

 
9

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(43,174
)
 
(43,174
)
Change in noncontrolling interest attributable to consolidation of equity method investment (refer to Note 7)
 

 

 

 

 

 

 
188,279

 
188,279

Impact from adoption of new accounting standards (refer to Note 3)
 

 

 

 

 
75,593

 
276

 

 
75,869

Balance as of June 30, 2018
 
$
12

 
$
4

 
$
68

 
$
3,350,750

 
$
(2,325,291
)
 
$
(2,233
)
 
$
189,264

 
$
1,212,574

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
$
22

 
$
4

 
$
72

 
$
3,602,172

 
$
(2,581,488
)
 
$
(4,218
)
 
$
43,120

 
$
1,059,684

Dividends declared—preferred
 

 

 

 

 
(25,660
)
 

 

 
(25,660
)
Issuance of stock/restricted stock unit amortization, net
 

 

 

 
1,699

 

 

 

 
1,699

Net income for the period(2)
 

 

 

 

 
176,025

 

 
5,946

 
181,971

Change in accumulated other comprehensive income
 

 

 

 

 

 
540

 

 
540

Change in additional paid in capital attributable to redeemable noncontrolling interest
 

 

 

 
110

 

 

 

 
110

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(12,988
)
 
(12,988
)
Balance as of June 30, 2017
 
$
22

 
$
4

 
$
72

 
$
3,603,981

 
$
(2,431,123
)
 
$
(3,678
)
 
$
36,078

 
$
1,205,356

_______________________________________________________________________________
(1)
Refer to Note 13 for details on the Company's Preferred Stock.
(2)
For the six months ended June 30, 2017, net income (loss) shown above excludes $(1,336) of net loss attributable to redeemable noncontrolling interests.

The accompanying notes are an integral part of the consolidated financial statements.

4

Table of Contents

iStar Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
For the Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
95,532

 
$
180,635

Adjustments to reconcile net income to cash flows from operating activities:
 
 
 
Provision for (recovery of) loan losses
18,037

 
(5,528
)
Impairment of assets
10,188

 
14,696

Depreciation and amortization
21,878

 
26,352

Non-cash expense for stock-based compensation
12,593

 
9,796

Amortization of discounts/premiums and deferred financing costs on debt obligations, net
7,900

 
6,615

Amortization of discounts/premiums on loans and deferred interest on loans, net
(18,487
)
 
(31,445
)
Deferred interest on loans received
39,254

 
23,177

Gain from consolidation of equity method investment
(67,877
)
 

Gain from discontinued operations

 
(123,418
)
(Earnings) losses from equity method investments
3,946

 
(11,217
)
Distributions from operations of other investments
6,745

 
35,502

Deferred operating lease income
(3,752
)
 
(3,070
)
Income from sales of real estate
(73,943
)
 
(9,462
)
Land development revenue in excess of cost of sales
(50,588
)
 
(14,384
)
Loss on early extinguishment of debt, net
2,536

 
3,525

Other operating activities, net
3,281

 
10,606

Changes in assets and liabilities:
 
 
 
Changes in accrued interest and operating lease income receivable
1,530

 
2,798

Changes in deferred expenses and other assets, net
(2,426
)
 
(7,567
)
Changes in accounts payable, accrued expenses and other liabilities
(27,483
)
 
3,941

Cash flows provided by (used in) operating activities
(21,136
)
 
111,552

Cash flows from investing activities:
 
 
 
Originations and fundings of loans receivable, net
(294,476
)
 
(130,701
)
Capital expenditures on real estate assets
(17,805
)
 
(16,346
)
Capital expenditures on land and development assets
(61,577
)
 
(53,894
)
Acquisitions of real estate assets
(3,390
)
 

Repayments of and principal collections on loans receivable and other lending investments, net
552,696

 
367,028

Net proceeds from sales of real estate
238,834

 
154,291

Net proceeds from sales of land and development assets
170,662

 
146,713

Cash, cash equivalents and restricted cash acquired upon consolidation of equity method investment
13,608

 

Distributions from other investments
22,296

 
11,275

Contributions to and acquisition of interest in other investments
(53,012
)
 
(139,139
)
Other investing activities, net
(1,357
)
 
5,317

Cash flows provided by investing activities
566,479

 
344,544

Cash flows from financing activities:
 
 
 
Borrowings from debt obligations and convertible notes
332,746

 
854,637

Repayments and repurchases of debt obligations
(412,215
)
 
(632,237
)
Preferred dividends paid
(16,248
)
 
(25,660
)
Repurchase of stock
(8,304
)
 

Payments for deferred financing costs
(4,921
)
 
(12,243
)
Payments for withholding taxes upon vesting of stock-based compensation
(4,008
)
 
(511
)
Payments for debt prepayment or extinguishment costs

 
(3,637
)
Distributions to noncontrolling interests

(43,174
)
 
(12,759
)
Other financing activities, net
8

 
(661
)
Cash flows provided by (used in) financing activities
(156,116
)
 
166,929

Effect of exchange rate changes on cash
30

 
7

Changes in cash, cash equivalents and restricted cash
389,257

 
623,032

Cash, cash equivalents and restricted cash at beginning of period
677,733

 
354,627

Cash, cash equivalents and restricted cash at end of period
$
1,066,990

 
$
977,659

Supplemental disclosure of non-cash investing and financing activity:
 
 
 
Fundings and repayments of loan receivables and loan participations, net

$
(87,800
)
 
$
(52,406
)
Accounts payable for capital expenditures on land and development assets
12,473

 
2,984

Accounts payable for capital expenditures on real estate assets

 
1,488

Receivable from sales of real estate and land parcels

 
3,139

Acquisitions of land and development assets through foreclosure
4,600

 

Financing provided on sales of land and development assets, net
142,639

 

Increase in net lease assets upon consolidation of equity method investment
844,550

 

Increase in debt obligations upon consolidation of equity method investment
464,706

 

Increase in noncontrolling interests upon consolidation of equity method investment
200,093

 

The accompanying notes are an integral part of the consolidated financial statements.

5

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements
(unaudited)





Note 1—Business and Organization

Business—iStar Inc. (the "Company") finances, invests in and develops real estate and real estate related projects as part of its fully-integrated investment platform. The Company also provides management services for its ground lease equity method investment and net lease joint ventures (refer to Note 7). The Company has invested approximately $40 billion of capital over the past two decades and is structured as a real estate investment trust ("REIT") with a diversified portfolio focused on larger assets located in major metropolitan markets. The Company's primary reportable business segments are real estate finance, net lease, operating properties and land and development (refer to Note 17).

Organization—The Company began its business in 1993 through the management of private investment funds and became publicly traded in 1998. Since that time, the Company has grown through the origination of new investments and corporate acquisitions.

Note 2—Basis of Presentation and Principles of Consolidation
Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 Annual Report").
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year. Certain prior year amounts have been reclassified in the Company's consolidated financial statements and the related notes to conform to the current period presentation.
Principles of Consolidation—The consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries, controlled partnerships and VIEs for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. The Company's involvement with VIEs affects its financial performance and cash flows primarily through amounts recorded in "Operating lease income," "Interest income," "Earnings from equity method investments," "Real estate expense" and "Interest expense" in the Company's consolidated statements of operations. The Company has provided no financial support to those VIEs that it was not previously contractually required to provide.    

6

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Consolidated VIEs—The Company consolidates VIEs for which it is considered the primary beneficiary. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE's respective assets. The Company did not have any unfunded commitments related to consolidated VIEs as of June 30, 2018. The following table presents the assets and liabilities of the Company's consolidated VIEs as of June 30, 2018 and December 31, 2017 ($ in thousands):
 
As of
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Real estate
 
 
 
Real estate, at cost
$
817,979

 
$
47,073

Less: accumulated depreciation
(4,593
)
 
(2,732
)
Real estate, net
813,386

 
44,341

Land and development, net
242,213

 
212,408

Other investments
88

 

Cash and cash equivalents
12,918

 
10,704

Accrued interest and operating lease income receivable, net
557

 
230

Deferred expenses and other assets, net
179,129

 
29,929

Total assets
$
1,248,291

 
$
297,612

LIABILITIES
 
 
 
Accounts payable, accrued expenses and other liabilities
$
99,784

 
$
38,616

Debt obligations, net
464,706

 

Total liabilities
564,490

 
38,616


Unconsolidated VIEs—The Company has investments in VIEs where it is not the primary beneficiary and accordingly the VIEs have not been consolidated in the Company's consolidated financial statements. As of June 30, 2018, the Company's maximum exposure to loss from these investments does not exceed the sum of the $88.5 million carrying value of the investments, which are classified in "Other investments" and "Loans receivable and other lending investments, net" on the Company's consolidated balance sheets, and $22.7 million of related unfunded commitments.

Note 3—Summary of Significant Accounting Policies

The following paragraphs describe the impact on the Company's consolidated financial statements from the adoption of Accounting Standards Updates ("ASUs") on January 1, 2018.

ASU 2014-09ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Certain contracts with customers, including lease contracts and financial instruments and other contractual rights, are not within the scope of the new guidance. The Company's revenue within the scope of the guidance is primarily ancillary income related to its operating properties. The Company adopted ASU 2014-09 using the modified retrospective approach and the adoption did not have a material impact on the Company's consolidated financial statements.

ASU 2016-01 and ASU 2018-03ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), addressed certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, provided technical corrections and improvements to ASU 2016-01. ASU 2016-01 requires entities to measure equity investments not accounted for under the equity method at fair value and recognize changes in fair value in net income. For equity investments without readily determinable fair values, entities may elect a measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for
subsequent observable price changes. Upon adoption, entities must record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the standard is adopted. ASU 2016-01 also eliminated the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The adoption of ASU 2016-01 and ASU 2018-03 did not have a material impact on the Company's consolidated financial statements.

ASU 2016-15ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), was issued to reduce diversity in practice in how certain cash receipts and cash payments, including debt prepayment or debt extinguishment costs, distributions from equity method investees, and other separately identifiable cash flows, are presented and classified in the statement of cash flows. The adoption of ASU 2016-15 was retrospective and resulted in an increase to cash flows provided by operating activities of $9.3 million and a decrease to cash flows provided by financing activities of $9.3 million for the six months ended June 30, 2017, primarily resulting from the reclassification of cash payments made related to the extinguishment of debt.
ASU 2016-18ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"), requires that restricted cash be included with cash and cash equivalents when reconciling beginning and ending cash and cash equivalents on the statement of cash flows and requires disclosure of what is included in restricted cash. The adoption of ASU 2016-18 did not have a material impact on the Company's consolidated financial statements. The adoption of ASU 2016-18 was retrospective and resulted in a decrease to cash flows provided by operating activities of $0.7 million and a decrease to cash flows provided by investing activities of $1.8 million for the six months ended June 30, 2017.

The following table provides a reconciliation of the cash and cash equivalents and restricted cash reported in the Company's consolidated balance sheets that total to the same amount as reported in the consolidated statements of cash flows (in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
 
December 31, 2016
Cash and cash equivalents
 
$
1,039,591

 
$
657,688

 
$
954,279

 
$
328,744

Restricted cash included in deferred expenses and other assets, net(1)
 
27,399

 
20,045

 
23,380

 
25,883

Total cash, cash equivalents and restricted cash reported in the consolidated statements of cash flows
 
$
1,066,990

 
$
677,733

 
$
977,659

 
$
354,627

_______________________________________________________________________________
(1)
Restricted cash represents amounts required to be maintained under certain of the Company's debt obligations, loans, leasing, land development, sale and derivative transactions.

ASU 2017-01The adoption of ASU 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01"), did not have a material impact on the Company's consolidated financial statements. Under ASU 2017-01, certain transactions previously accounted for as business combinations under the former accounting guidance will be accounted for as asset acquisitions under ASU 2017-01. As a result, the Company expects more transaction costs to be capitalized relating to real estate acquisitions as a result of ASU 2017-01.

7

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


ASU 2017-05ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets ("ASU 2017-05"), simplifies GAAP by eliminating several accounting differences between transactions involving assets and transactions involving businesses. The amendments in ASU 2017-05 require an entity to initially measure a retained noncontrolling interest in a nonfinancial asset at fair value consistent with how a retained noncontrolling interest in a business is measured. Also, if an entity transfers ownership interests in a consolidated subsidiary that is within the scope of ASC 610-20 and continues to have a controlling financial interest in that subsidiary, ASU 2017-05 requires the entity to account for the transaction as an equity transaction, which is consistent with how changes in ownership interests in a consolidated subsidiary that is a business are recorded when a parent retains a controlling financial interest in the business. The Company adopted ASU 2017-05 using the modified retrospective approach which was applied to all contracts. On January 1, 2018, the Company recorded a step-up in basis to fair value of its retained noncontrolling interest relating to the sale of its ground lease business (refer to Note 4) and other transactions where the Company sold or contributed real estate to a venture and previously recognized partial gains. Prior to the adoption of ASU 2017-05, the Company was required to recognize gains on only the portion of its interest transferred to third parties and was precluded from recognizing a gain on its retained noncontrolling interest which was carried at the Company’s historical cost basis. The adoption of ASU 2017-05 had the following impact on the Company's consolidated financial statements (in thousands):
 
 
 
 
Impact from ASU 2017-05 on January 1, 2018
 
 
 
 
December 31, 2017
 
 
January 1, 2018
Other investments
 
$
321,241

 
$
75,869

 
$
397,110

Total assets
 
4,731,078

 
75,869

 
4,806,947

 
 
 
 
 
 
 
Retained earnings (deficit)
 
$
(2,470,564
)
 
$
75,869

 
$
(2,394,695
)
Total equity
 
914,249

 
75,869

 
990,118


ASU 2017-12ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"), was issued to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The Company adopted ASU 2017-12 on January 1, 2018 and the adoption did not have a material impact on the Company's consolidated financial statements.

New Accounting PronouncementsIn June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity. This amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company currently records a general reserve that covers performing loans and reserves for loan losses are recorded when: (i) available information as of each balance sheet date indicates that it is probable a loss has occurred in the portfolio; and (ii) the amount of the loss can be reasonably estimated. The formula-based general reserve is derived from estimated principal default probabilities and loss severities applied to groups of loans based upon risk ratings assigned to loans with similar risk characteristics during our quarterly loan portfolio assessment. The Company estimates loss rates based on historical realized losses experienced within its portfolio and take into account current economic conditions affecting the commercial real estate market when establishing appropriate time frames to evaluate loss experience. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Management does not believe the guidance will have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. For operating leases, a lessee will be required to do the following: (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position; (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and (iii) classify all cash payments within operating activities in the statement of cash flows. In July 2018, the FASB issued ASU 2018-11, Leases (“ASU 2018-11”), to address two requirements of ASU 2016-02. ASU 2018-11 allows entities to recognize a cumulative-effect adjustment from the application of ASU 2016-02 to the opening balance of retained earnings in the period of adoption. In addition, ASU 2018-11 provides lessors with a practical expedient to not separate

8

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


non-lease components from the associated lease component if certain conditions are met. For operating lease arrangements for which the Company is the lessee, primarily the lease of office space, the Company expects the impact of ASU 2016-02 to be the recognition of a right-of-use asset and lease liability on its consolidated balance sheets. The accounting applied by the Company as a lessor will be largely unchanged from that applied under previous GAAP. However, in certain instances, a new long-term lease of land subsequent to adoption could be classified as a sales-type lease, which could result in the Company derecognizing the underlying asset and recording a profit or loss on sale and the net investment in the lease. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. Management is evaluating the impact of the guidance on the Company's consolidated financial statements.
Note 4—Real Estate
The Company's real estate assets were comprised of the following ($ in thousands):
 
Net Lease(1)
 
Operating
Properties
 
Total
As of June 30, 2018
 
 
 
 
 
Land, at cost
$
335,926

 
$
181,973

 
$
517,899

Buildings and improvements, at cost
1,495,393

 
242,245

 
1,737,638

Less: accumulated depreciation
(298,730
)
 
(41,808
)
 
(340,538
)
Real estate, net
1,532,589

 
382,410

 
1,914,999

Real estate available and held for sale (2)

 
37,597

 
37,597

Total real estate
$
1,532,589

 
$
420,007

 
$
1,952,596

As of December 31, 2017
 
 
 
 
 
Land, at cost
$
219,092

 
$
203,278

 
$
422,370

Buildings and improvements, at cost
888,959

 
318,107

 
1,207,066

Less: accumulated depreciation
(292,268
)
 
(55,137
)
 
(347,405
)
Real estate, net
815,783

 
466,248

 
1,282,031

Real estate available and held for sale (2)

 
68,588

 
68,588

Total real estate
$
815,783

 
$
534,836

 
$
1,350,619

_______________________________________________________________________________
(1)
On June 30, 2018, the Company consolidated the Net Lease Venture (refer to Note 7) and recorded $743.6 million to "Real estate, net" on the Company's consolidated balance sheet.
(2)
As of June 30, 2018 and December 31, 2017, the Company had $36.7 million and $48.5 million, respectively, of residential condominiums available for sale in its operating properties portfolio.

Disposition of Ground Lease Business—In April 2017, institutional investors acquired a controlling interest in the Company's ground lease business through the merger of a Company subsidiary and related transactions (the "Acquisition Transactions"). Ground leases generally represent ownership of the land underlying commercial real estate projects that is triple net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon ("Ground Lease"). The Company's Ground Lease business was a component of the Company's net lease segment and consisted of 12 properties subject to long-term net leases including seven Ground Leases and one master lease (covering five properties). The acquiring entity was a newly formed unconsolidated entity named Safety, Income & Growth Inc. ("SAFE"). The carrying value of the Company's Ground Lease assets was approximately $161.1 million. Shortly before the Acquisition Transactions, the Company completed the $227.0 million 2017 Secured Financing on its Ground Lease assets (refer to Note 10). The Company received all of the proceeds of the 2017 Secured Financing. The Company received an additional $113.0 million of proceeds in the Acquisition Transactions, including $55.5 million that the Company contributed to SAFE in its initial capitalization. As a result of the Acquisition Transactions, the Company deconsolidated the 12 properties and the associated 2017 Secured Financing. The Company accounts for its investment in SAFE as an equity method investment (refer to Note 7). The Company accounted for this transaction as an in substance sale of real estate and recognized a gain of $123.4 million, reflecting the aggregate gain less the fair value of the Company's retained interest in SAFE. As a result of the adoption of ASU 2017-05 (refer to Note 3), on January 1, 2018, the Company recorded an increase to retained earnings of $55.5 million, bringing the Company's aggregate gain on the sale of its Ground Lease business to approximately $178.9 million.

9

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Discontinued Operations—The transactions described above involving the Company's Ground Lease business qualified for discontinued operations and the following table summarizes income from discontinued operations for the three and six months ended June 30, 2017 ($ in thousands)(1)(2):
 
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Revenues
 
$
678

 
$
5,922

Expenses
 
(505
)
 
(1,491
)
Income from sales of real estate
 

 
508

Income from discontinued operations
 
$
173

 
$
4,939

_______________________________________________________________________________
(1)
The transactions closed on April 14, 2017. Revenues primarily consisted of operating lease income and expenses primarily consisted of depreciation and amortization and real estate expense.
(2)
For the six months ended June 30, 2017, cash flows provided by operating activities and cash flows used in investing activities from discontinued operations was $5.7 million and $0.5 million, respectively.

Other Dispositions—The following table presents the net proceeds and income recognized for properties sold, by property type ($ in millions):
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Operating Properties
 
 
 
 
       Proceeds(1)
 
$
196.2

 
$
17.6

       Income from sales of real estate(1)
 
49.0

 
2.7

 
 
 
 
 
Net Lease
 
 
 
 
       Proceeds(2)
 
$
38.4

 
$
19.5

       Income from sales of real estate(2)
 
24.9

 
6.2

 
 
 
 
 
Total
 
 
 
 
       Proceeds
 
$
234.6

 
$
37.1

       Income from sales of real estate
 
73.9

 
8.9

_______________________________________________________________________________
(1)
During the six months ended June 30, 2018, the Company sold four operating properties and recognized $49.0 million of gains in "Income from sales of real estate" in the Company's consolidated statements of operations, of which $9.8 million was attributable to a noncontrolling interest at one of the properties.
(2)
During the six months ended June 30, 2018, the Company sold three net lease assets and recognized $24.9 million of gains in "Income from sales of real estate" in the Company's consolidated statements of operations.

Impairments—During the six months ended June 30, 2018, the Company recorded aggregate impairments of $8.9 million resulting from the exercise of a below-market lease renewal option related to a net lease asset and a real estate asset held for sale due to contracts to sell the remaining four condominium units at the property. During the six months ended June 30, 2017, the Company recorded an impairment of $4.4 million on a real estate asset held for sale due to shifting demand in the local condominium market along with a change in the Company's exit strategy.
Tenant Reimbursements—The Company receives reimbursements from tenants for certain facility operating expenses including common area costs, insurance, utilities and real estate taxes. Tenant expense reimbursements were $5.0 million and $10.6 million for the three and six months ended June 30, 2018, respectively. Tenant expense reimbursements were $5.2 million and $10.7 million for the three and six months ended June 30, 2017, respectively. These amounts are included in "Operating lease income" in the Company's consolidated statements of operations.

10

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Allowance for Doubtful Accounts—As of June 30, 2018 and December 31, 2017, the allowance for doubtful accounts related to real estate tenant receivables was $1.3 million and $1.3 million, respectively, and the allowance for doubtful accounts related to deferred operating lease income was $1.5 million and $1.3 million as of June 30, 2018 and December 31, 2017, respectively. These amounts are included in "Accrued interest and operating lease income receivable, net" and "Deferred operating lease income receivable, net," respectively, on the Company's consolidated balance sheets.
Note 5—Land and Development

The Company's land and development assets were comprised of the following ($ in thousands):
 
As of
 
June 30,
 
December 31,
 
2018
 
2017
Land and land development, at cost(1)
$
649,783

 
$
868,692

Less: accumulated depreciation
(8,156
)
 
(8,381
)
Total land and development, net
$
641,627

 
$
860,311

_______________________________________________________________________________
(1)
During the six months ended June 30, 2018, the Company funded capital expenditures on land and development assets of $61.6 million.

Acquisitions—During the six months ended June 30, 2018, the Company acquired, via foreclosure, title to a land asset which had a total fair value of $4.6 million and had previously served as collateral for loans receivable held by the Company. No gain or loss was recorded in connection with this transaction.

Dispositions—During the six months ended June 30, 2018 and 2017, the Company sold land parcels and residential lots and units and recognized land development revenue of $357.4 million and $152.8 million, respectively. In connection with the sale of two land parcels totaling 93 acres during the six months ended June 30, 2018, the Company originated an aggregate $145.0 million of financing to the buyers. $81.2 million was repaid in the second quarter 2018. During the six months ended June 30, 2018 and 2017, the Company recognized land development cost of sales of $306.8 million and $138.4 million, respectively, from its land and development portfolio.

In connection with the resolution of litigation involving a dispute over the purchase and sale of approximately 1,250 acres of land in Prince George’s County, Maryland, during the three and six months ended June 30, 2017, the Company recognized $114.0 million of land development revenue and $106.3 million of land development cost of sales.

Impairments—During the six months ended June 30, 2018, the Company recorded an impairment of $1.3 million on a land and development asset based upon market comparable sales. During the six months ended June 30, 2017, the Company recorded an impairment of $10.1 million on a land and development asset due to a change in the Company's exit strategy.


11

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Note 6—Loans Receivable and Other Lending Investments, net

The following is a summary of the Company's loans receivable and other lending investments by class ($ in thousands):
 
As of
Type of Investment
June 30,
2018
 
December 31,
2017
Senior mortgages
$
849,192

 
$
791,152

Corporate/Partnership loans(1)
129,988

 
488,921

Subordinate mortgages
9,822

 
9,495

Total gross carrying value of loans
989,002

 
1,289,568

Reserves for loan losses
(54,495
)
 
(78,489
)
Total loans receivable, net
934,507

 
1,211,079

Other lending investments—securities
118,365

 
89,576

Total loans receivable and other lending investments, net
$
1,052,872

 
$
1,300,655

_______________________________________________________________________________
(1)
In the second quarter 2018, the Company resolved a non-performing loan with a carrying value of $145.8 million. Refer to "Impaired Loans" section below.

Reserve for Loan Losses—Changes in the Company's reserve for loan losses were as follows ($ in thousands):
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Reserve for loan losses at beginning of period
 
$
69,466

 
$
79,389

 
$
78,489

 
$
85,545

Provision for (recovery of) loan losses
 
18,892

 
(600
)
 
18,037

 
(5,528
)
Charge-offs
 
(33,863
)
 

 
(42,031
)
 
(1,228
)
Reserve for loan losses at end of period
 
$
54,495

 
$
78,789

 
$
54,495

 
$
78,789


12

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)



The Company's recorded investment in loans (comprised of a loan's carrying value plus accrued interest) and the associated reserve for loan losses were as follows ($ in thousands):
 
Individually
Evaluated for
Impairment(1)
 
Collectively
Evaluated for
Impairment(2)
 
Total
As of June 30, 2018
 
 
 
 
 
Loans
$
67,068

 
$
927,074

 
$
994,142

Less: Reserve for loan losses
(40,395
)
 
(14,100
)
 
(54,495
)
Total(3)
$
26,673

 
$
912,974

 
$
939,647

As of December 31, 2017
 
 
 
 
 
Loans
$
237,877

 
$
1,056,944

 
$
1,294,821

Less: Reserve for loan losses
(60,989
)
 
(17,500
)
 
(78,489
)
Total(3)
$
176,888

 
$
1,039,444

 
$
1,216,332

_______________________________________________________________________________
(1)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs totaling net discounts of $0.5 million and $0.7 million as of June 30, 2018 and December 31, 2017, respectively. The Company's loans individually evaluated for impairment primarily represent loans on non-accrual status; therefore, the unamortized amounts associated with these loans are not currently being amortized into income.
(2)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs totaling net discounts of $3.7 million and net premiums of $6.2 million as of June 30, 2018 and December 31, 2017, respectively.
(3)
The Company's recorded investment in loans as of June 30, 2018 and December 31, 2017, including accrued interest of $5.1 million and $5.3 million, respectively, is included in "Accrued interest and operating lease income receivable, net" on the Company's consolidated balance sheets. As of June 30, 2018 and December 31, 2017, the total amounts exclude $118.4 million and $89.6 million, respectively, of securities that are evaluated for impairment under ASC 320.

Credit Characteristics—As part of the Company's process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. Risk ratings, which range from 1 (lower risk) to 5 (higher risk), are based on judgments, which are inherently uncertain, and there can be no assurance that actual performance will be similar to current expectation. The Company designates loans as non-performing at such time as: (1) the loan becomes 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt.

The Company's recorded investment in performing loans, presented by class and by credit quality, as indicated by risk rating, was as follows ($ in thousands):
 
As of June 30, 2018
 
As of December 31, 2017
 
Performing
Loans
 
Weighted
Average
Risk Ratings
 
Performing
Loans
 
Weighted
Average
Risk Ratings
Senior mortgages
$
786,399

 
2.78

 
$
713,057

 
2.72

Corporate/Partnership loans
130,823

 
2.85

 
334,364

 
2.85

Subordinate mortgages
9,852

 
3.00

 
9,523

 
3.00

  Total
$
927,074

 
2.79

 
$
1,056,944

 
2.77



13

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


The Company's recorded investment in loans, aged by payment status and presented by class, was as follows ($ in thousands):
 
Current
 
Less Than
and Equal
to 90 Days
 
Greater
Than
90 Days(1)
 
Total
Past Due
 
Total
As of June 30, 2018
 
 
 
 
 
 
 
 
 
Senior mortgages
$
792,399

 
$

 
$
61,068

 
$
61,068

 
$
853,467

Corporate/Partnership loans
130,823

 

 

 

 
130,823

Subordinate mortgages
9,852

 

 

 

 
9,852

Total
$
933,074

 
$

 
$
61,068

 
$
61,068

 
$
994,142

As of December 31, 2017
 
 
 
 
 
 
 
 
 
Senior mortgages
$
719,057

 
$

 
$
75,343

 
$
75,343

 
$
794,400

Corporate/Partnership loans
334,364

 

 
156,534

 
156,534

 
490,898

Subordinate mortgages
9,523

 

 

 

 
9,523

Total
$
1,062,944

 
$

 
$
231,877

 
$
231,877

 
$
1,294,821

_______________________________________________________________________________
(1)
As of June 30, 2018, the Company had two loans which were greater than 90 days delinquent and were in various stages of resolution, including legal and foreclosure-related proceedings and environmental matters, and ranged from 3.0 to 9.0 years outstanding. As of December 31, 2017, the Company had four loans which were greater than 90 days delinquent and were in various stages of resolution, including legal and foreclosure-related proceedings and environmental matters, and ranged from 1.0 to 9.0 years outstanding.

Impaired LoansIn the second quarter 2018, the Company resolved a non-performing loan with a carrying value of $145.8 million. The Company received a $45.8 million cash payment and a preferred equity position with a face value of $100.0 million that is mandatorily redeemable in five years. The Company recorded the preferred equity at its fair value of $77.0 million and will accrue interest over the expected duration of the position. In addition, the Company recorded a $21.4 million loan loss provision and simultaneously charged-off of the remaining unpaid balance.

The Company's recorded investment in impaired loans, presented by class, was as follows ($ in thousands)(1):
 
As of June 30, 2018
 
As of December 31, 2017
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
67,068

 
$
67,451

 
$
(40,395
)
 
$
81,343

 
$
81,431

 
$
(48,518
)
Corporate/Partnership loans

 

 

 
156,534

 
145,849

 
(12,471
)
Total
$
67,068

 
$
67,451

 
$
(40,395
)
 
$
237,877

 
$
227,280

 
$
(60,989
)
____________________________________________________________
(1)
All of the Company's non-accrual loans are considered impaired and included in the table above.


14

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


The Company's average recorded investment in impaired loans and interest income recognized, presented by class, were as follows ($ in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinate mortgages
$

 
$

 
$
11,023

 
$

 
$

 
$
92

 
$
10,970

 
$

Subtotal

 

 
11,023

 

 

 
92

 
10,970

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
67,252

 

 
82,368

 

 
71,949

 

 
83,556

 

Corporate/Partnership loans
78,338

 

 
156,839

 

 
104,403

 

 
156,941

 

Subtotal
145,590

 

 
239,207

 

 
176,352

 

 
240,497

 

Total:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
67,252

 

 
82,368

 

 
71,949

 

 
83,556

 

Corporate/Partnership loans
78,338

 

 
156,839

 

 
104,403

 

 
156,941

 

Subordinate mortgages

 

 
11,023

 

 

 
92

 
10,970

 

Total
$
145,590

 
$

 
$
250,230

 
$

 
$
176,352

 
$
92

 
$
251,467

 
$


Securities—Other lending investments—securities include the following ($ in thousands):
 
Face
Value
 
Amortized Cost Basis
 
Net Unrealized Gain
 
Estimated Fair Value
 
Net Carrying Value
As of June 30, 2018
 
 
 
 
 
 
 
 
 
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
Municipal debt securities
$
21,185

 
$
21,185

 
$
655

 
$
21,840

 
$
21,840

Held-to-Maturity Securities
 
 
 
 
 
 
 
 
 
Debt securities
119,538

 
96,525

 
378

 
96,903

 
96,525

Total
$
140,723

 
$
117,710

 
$
1,033

 
$
118,743

 
$
118,365

As of December 31, 2017
 
 
 
 
 
 
 
 
 
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
Municipal debt securities
$
21,230

 
$
21,230

 
$
1,612

 
$
22,842

 
$
22,842

Held-to-Maturity Securities
 
 
 
 
 
 
 
 
 
Debt securities
66,618

 
66,734

 
1,581

 
68,315

 
66,734

Total
$
87,848

 
$
87,964

 
$
3,193

 
$
91,157

 
$
89,576



15

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


As of June 30, 2018, the contractual maturities of the Company's securities were as follows ($ in thousands):
 
Held-to-Maturity Securities
 
Available-for-Sale Securities
 
Amortized Cost Basis
 
Estimated Fair Value
 
Amortized Cost Basis
 
Estimated Fair Value
Maturities
 
 
 
 
 
 
 
Within one year
$
19,518

 
$
19,896

 
$

 
$

After one year through 5 years
77,007

 
77,007

 

 

After 5 years through 10 years

 

 

 

After 10 years

 

 
21,185

 
21,840

Total
$
96,525

 
$
96,903

 
$
21,185

 
$
21,840


Note 7—Other Investments

The Company's other investments and its proportionate share of earnings from equity method investments were as follows ($ in thousands):
 
 
 
Equity in Earnings (Losses)
 
Carrying Value as of
 
For the Three Months Ended June 30,
 
For the Six Months
Ended June 30,
 
June 30, 2018
 
December 31, 2017
 
2018
 
2017
 
2018
 
2017
Real estate equity investments
 
 
 
 
 
 
 
 
 
 
 
iStar Net Lease I LLC ("Net Lease Venture")(1)
$

 
$
121,139

 
$
2,016

 
$
1,032

 
$
4,100

 
$
2,013

Safety, Income & Growth Inc. ("SAFE")(2)
147,512

 
83,868

 
680

 
48

 
2,152

 
48

Other real estate equity investments(2)
138,716

 
102,616

 
(295
)
 
4,075

 
(25
)
 
8,549

Subtotal
286,228

 
307,623

 
2,401

 
5,155

 
6,227

 
10,610

Other strategic investments(3)
6,789

 
13,618

 
(9,679
)
 
360

 
(10,173
)
 
607

Total
$
293,017

 
$
321,241

 
$
(7,278
)
 
$
5,515

 
$
(3,946
)
 
$
11,217

____________________________________________________________
(1)
The Company consolidated the assets and liabilities of the Net Lease Venture on June 30, 2018 (refer to Net Lease Venture below).
(2)
On January 1, 2018, the Company recorded a step-up in basis to fair value of its retained noncontrolling interest relating to the sale of its Ground Lease business (refer to Note 4) and other transactions where the Company sold or contributed real estate to a venture and previously recognized partial gains. Prior to the adoption of ASU 2017-05 (refer to Note 3), the Company was required to recognize gains on only the portion of its interest transferred to third parties and was precluded from recognizing a gain on its retained noncontrolling interest, which was carried at the Company’s historical cost basis.
(3)
For the three and six months ended June 30, 2018, equity in earnings (losses) includes a $10.0 million impairment on a foreign equity method investment due to local market conditions.

Net Lease Venture—In February 2014, the Company partnered with a sovereign wealth fund to form a net lease venture (the "Net Lease Venture") to acquire and develop net lease assets and gave a right of first offer to the venture on all new net lease investments. The Company and its partner had joint decision making rights pertaining to the acquisition of new investments. Upon the expiration of the investment period on June 30, 2018, the Company obtained control of the venture through its unilateral rights of management and disposition of the assets. As a result, the expiration of the investment period resulted in a reconsideration event under GAAP and the Company determined that the Net Lease Venture is a VIE for which the Company is the primary beneficiary. Effective June 30, 2018, the Company consolidated the Net Lease Venture as an asset acquisition under ASC 810. The Company recorded a gain of $67.9 million in "Gain on consolidation of equity method investment" in the Company's consolidated statement of operations as a result of the consolidation. The Net Lease Venture had previously been accounted for as an equity method investment. The Company has an equity interest in the Net Lease Venture of approximately 51.9% and recorded a $188.3 million increase to "Noncontrolling interests" and $11.8 million increase to "Redeemable noncontrolling interest" on the Company's consolidated balance sheet as a result of the consolidation. The Company is responsible for managing the venture in exchange for a management fee and incentive fee. Several of the Company's senior executives whose time is substantially devoted to the Net

16

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Lease Venture have a 0.6% equity ownership in the venture via co-investment. These senior executives are also entitled to an amount equal to 50.0% of any incentive fee received based on the 47.5% partner's interest.
In July 2018, the Company entered into a new venture ("Net Lease Venture II") with similar investment strategies as the Net Lease Venture. The Net Lease Venture II has a right of first offer on all new net lease investments originated by the Company. The Company has an equity interest in the new venture of approximately 51.9%, which will be accounted for as an equity method investment, and is responsible for managing the venture in exchange for a management fee and incentive fee.

During the three and six months ended June 30, 2018, the Company recorded management fees of $0.7 million and $1.3 million, respectively, and $0.5 million and $0.9 million during the three and six months ended June 30, 2017, respectively, from the Net Lease Venture which are included in "Other income" in the Company's consolidated statements of operations.
Safety, Income & Growth Inc.—The Company and two institutional investors capitalized SIGI Acquisition, Inc. ("SIGI") on April 14, 2017 to acquire, manage and capitalize Ground Leases. The Company contributed $55.5 million for an initial 49.1% noncontrolling interest in SIGI and the two institutional investors contributed an aggregate $57.5 million for an initial 50.9% controlling interest in SIGI. A wholly-owned subsidiary of the Company that held the Company's Ground Lease business and assets merged with and into SIGI on April 14, 2017 with SIGI surviving the merger and being renamed Safety, Income & Growth Inc. ("SAFE"). Through this merger and related transactions, the institutional investors acquired a controlling interest in the Company's Ground Lease business. The Company's carrying value of the Ground Lease assets was approximately $161.1 million. Shortly before the Acquisition Transactions, the Company completed the $227.0 million 2017 Secured Financing on its Ground Lease assets (refer to Note 10). The Company received all of the proceeds of the 2017 Secured Financing. The Company received an additional $113.0 million of proceeds in the Acquisition Transactions, including $55.5 million that the Company contributed to SAFE in its initial capitalization. As a result of the Acquisition Transactions, the Company deconsolidated the 12 properties and the associated 2017 Secured Financing. The Company accounted for this transaction as an in substance sale of real estate and recognized a gain of $123.4 million, reflecting the aggregate gain less the fair value of the Company's retained interest in SAFE. As a result of the adoption of ASU 2017-05, on January 1, 2018, the Company recorded an increase to retained earnings of $55.5 million, bringing the Company's aggregate gain on the sale of its Ground Lease business to approximately $178.9 million.
On June 27, 2017, SAFE completed its initial public offering (the "Offering") raising $205.0 million in gross proceeds and concurrently completed a $45.0 million private placement to the Company. In addition, the Company paid $18.9 million in organization and offering costs of the up to $25.0 million in organization and offering costs it agreed to pay in connection with the Offering and concurrent private placement. The Company expensed the portion of offering costs that was attributable to other investors in "Other expense" in the Company's consolidated statements of operations and capitalized the portion of offering costs attributable to the Company's ownership interest in "Other investments" on the Company's consolidated balance sheets. Subsequent to the initial public offering, the Company purchased 2.2 million shares of SAFE's common stock for $41.7 million, representing an average cost of $18.67 per share, pursuant to two 10b5-1 plans in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended, under which the Company could buy shares of SAFE's common stock in the open market. As of June 30, 2018, the Company owned approximately 39.8% of SAFE's common stock outstanding.

In addition, subsequent to SAFE's initial public offering, trusts established by Jay Sugarman, the Company's Chairman and Chief Executive Officer, and Geoffrey Jervis, the Company's former Chief Operating Officer and former Chief Financial Officer, purchased 26,000 shares in the aggregate of SAFE's common stock for an aggregate $0.5 million, representing an average cost of $19.20 per share, pursuant to a 10b5-1 plan in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended.
A wholly-owned subsidiary of the Company is the external manager of SAFE and is entitled to a management fee, payable solely in shares of SAFE's common stock, equal to the sum of 1.0% of SAFE's total equity up to $2.5 billion and 0.75% of SAFE's total equity in excess of $2.5 billion. The Company is not entitled to receive any performance or incentive compensation. The Company is also entitled to receive expense reimbursements, including for the allocable costs of its personnel that perform certain legal, accounting, due diligence tasks and other services that third-party professionals or outside consultants otherwise would perform. The Company waived both the management fee and certain of the expense reimbursements through June 30, 2018. For the three and six months ended June 30, 2018, the Company waived $0.9 million and $1.8 million, respectively, of management fees and $0.4 million and $0.8 million, respectively, of expense reimbursements. The Company has an exclusivity agreement with SAFE pursuant to which it agreed, subject to certain exceptions, that it will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a Ground Lease unless it has first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity.

17

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


In August 2017, the Company committed to provide a $24.0 million loan to the ground lessee of a Ground Lease originated at SAFE. The loan has an initial term of one year and will be used for the renovation of a medical office building in Atlanta, GA. $13.0 million of the loan was funded as of June 30, 2018. The transaction was approved by the Company's and SAFE's independent directors. 
In October 2017, the Company closed on a 99-year Ground Lease and a $80.5 million construction financing commitment to support the ground-up development of Great Oaks Multifamily, a to-be-built 301-unit community within the Great Oaks Master Plan of San Jose, CA. The transaction includes a combination of: (i) a newly created Ground Lease and up to a $7.2 million leasehold improvement allowance; and (ii) a $80.5 million leasehold first mortgage. The Company entered into a forward purchase contract with SAFE under which SAFE would acquire the Ground Lease in November 2020 for approximately $34.0 million. The forward purchase contract was approved by the Company's and SAFE's independent directors. 
In May 2018, the Company provided a $19.9 million mortgage loan to the ground lessee of a Ground Lease originated at SAFE. The loan has an initial term of one year and will be used for the acquisition of 100 and 200 Glenridge Point, two multi-tenant office buildings in Atlanta, GA. The transaction was approved by the Company's and SAFE's independent directors. 
In June 2018, the Company sold two industrial facilities located in Miami, FL to a third-party and simultaneously structured and entered into two Ground Leases. The Company then sold the two Ground Leases to SAFE. Net proceeds from the transactions totaled $36.1 million and the Company recognized a $24.5 million gain on sale. The transactions were approved by the Company's and SAFE's independent directors. 
Other real estate equity investments—As of June 30, 2018, the Company's other real estate equity investments include equity interests in real estate ventures ranging from 15.5% to 95.0%, comprised of investments of $62.0 million in operating properties and $76.7 million in land assets. As of December 31, 2017, the Company's other real estate equity investments included $38.8 million in operating properties and $61.3 million in land assets.
In December 2016, the Company sold a land and development asset to a newly formed unconsolidated entity in which the Company owns a 50.0% equity interest. This entity is a VIE and the Company does not have a controlling interest due to shared control of the entity with its partner. The Company and its partner each made a $7.0 million contribution to the venture and the Company provided financing to the entity in the form of a $27.0 million senior loan commitment, of which $26.8 million and $25.4 million was funded as of June 30, 2018 and December 31, 2017, respectively, and is included in "Loans receivable and other lending investments, net" on the Company's consolidated balance sheets. During the three and six months ended June 30, 2018, the Company recorded $0.5 million and $1.0 million of interest income, respectively, on the senior loan. During the three and six months ended June 30, 2017, the Company recorded $0.5 million and $0.9 million of interest income, respectively, on the senior loan.

Other strategic investments—As of June 30, 2018 and December 31, 2017, the Company also had investments in real estate related funds and other strategic investments in real estate entities.

18

Table of Contents
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Note 8—Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
 
As of
 
June 30, 2018
 
December 31, 2017
Intangible assets, net(1)
$
162,014

 
$
27,124

Other receivables(2)
47,355

 
56,369

Other assets(3)
29,952

 
23,081

Restricted cash
27,399

 
20,045

Leasing costs, net(4)
7,141

 
9,050

Corporate furniture, fixtures and equipment, net(5)
4,362

 
4,652

Deferred financing fees, net
1,167

 
1,409

Deferred expenses and other assets, net
$
279,390

 
$