SFI-06.30.2013-10Q
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, 2013
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 FINANCIAL 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 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, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting 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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
As of August 1, 2013, there were 85,381,078 shares of Common Stock outstanding, $0.001 par value per share, of iStar Financial Inc. ("Common Stock") outstanding.
 


Table of Contents

iStar Financial Inc.
Index to Form 10-Q
 
 
Page
 
 
 
 
 
 


Table of Contents

PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1.    Financial Statements
iStar Financial Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(unaudited)
 
As of
 
June 30, 2013
 
December 31, 2012
ASSETS
 
 
 
Real estate
 
 
 
Real estate, at cost
$
3,172,352

 
$
3,226,648

Less: accumulated depreciation
(421,675
)
 
(427,625
)
Real estate, net
$
2,750,677

 
$
2,799,023

Real estate available and held for sale
524,092

 
635,865

 
$
3,274,769

 
$
3,434,888

Loans receivable and other lending investments, net
1,513,636

 
1,829,985

Other investments
189,618

 
398,843

Cash and cash equivalents
715,906

 
256,344

Restricted cash
50,413

 
36,778

Accrued interest and operating lease income receivable, net
9,463

 
15,226

Deferred operating lease income receivable
89,278

 
84,735

Deferred expenses and other assets, net
103,697

 
93,990

Total assets
$
5,946,780

 
$
6,150,789

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
112,759

 
$
132,460

Debt obligations, net
4,402,447

 
4,691,494

Total liabilities
$
4,515,206

 
$
4,823,954

Commitments and contingencies

 

Redeemable noncontrolling interests
12,254

 
13,681

Equity:
 
 
 
iStar Financial Inc. shareholders' equity:
 
 
 
Preferred Stock Series D, E, F, G and I, liquidation preference $25.00 per share (see Note 11)
22

 
22

Convertible Preferred Stock Series J, liquidation preference $50.00 per share (see Note 11)
4

 

High Performance Units
9,800

 
9,800

Common Stock, $0.001 par value, 200,000 shares authorized, 144,290 issued and 85,373 outstanding at June 30, 2013 and 142,699 issued and 83,782 outstanding at December 31, 2012
144

 
143

Additional paid-in capital
4,019,423

 
3,832,780

Retained earnings (deficit)
(2,430,158
)
 
(2,360,647
)
Accumulated other comprehensive income (loss) (see Note 11)
(2,366
)
 
(1,185
)
Treasury stock, at cost, $0.001 par value, 58,917 shares at June 30, 2013 and December 31, 2012
(241,969
)
 
(241,969
)
Total iStar Financial Inc. shareholders' equity
$
1,354,900

 
$
1,238,944

Noncontrolling interests
64,420

 
74,210

Total equity
$
1,419,320

 
$
1,313,154

Total liabilities and equity
$
5,946,780

 
$
6,150,789

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

2

Table of Contents

iStar Financial 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,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Operating lease income
$
57,522

 
$
54,111

 
$
115,995

 
$
107,305

Interest income
29,682

 
36,448

 
54,349

 
73,651

Other income
13,125

 
16,659

 
24,517

 
27,354

Total revenues
$
100,329

 
$
107,218

 
$
194,861

 
$
208,310

Costs and expenses:
 
 
 
 
 
 
 
Interest expense
$
69,157

 
$
94,474

 
$
140,723

 
$
179,818

Real estate expense
37,065

 
38,172

 
74,966

 
73,242

Depreciation and amortization
17,389

 
16,740

 
34,772

 
32,909

General and administrative
20,876

 
19,792

 
42,723

 
42,637

Provision for loan losses
5,020

 
26,531

 
15,226

 
44,031

Impairment of assets

 
6,150

 

 
6,900

Other expense
146

 
3,907

 
5,770

 
4,360

Total costs and expenses
$
149,653

 
$
205,766

 
$
314,180

 
$
383,897

Income (loss) before earnings from equity method investments and other items
$
(49,324
)
 
$
(98,548
)
 
$
(119,319
)
 
$
(175,587
)
Gain (loss) on early extinguishment of debt, net
(15,242
)
 
(4,868
)
 
(24,784
)
 
(3,164
)
Earnings from equity method investments
8,323

 
18,420

 
30,001

 
53,206

Income (loss) from continuing operations before income taxes
$
(56,243
)
 
$
(84,996
)
 
$
(114,102
)
 
$
(125,545
)
Income tax expense
(429
)
 
(3,477
)
 
(4,504
)
 
(4,748
)
Income (loss) from continuing operations(1)
$
(56,672
)
 
$
(88,473
)
 
$
(118,606
)
 
$
(130,293
)
Income (loss) from discontinued operations
(324
)
 
(773
)
 
616

 
(14,140
)
Gain from discontinued operations
8,279

 
24,851

 
13,323

 
27,257

Income from sales of residential property
34,319

 
13,266

 
58,016

 
19,999

Net income (loss)
$
(14,398
)
 
$
(51,129
)
 
$
(46,651
)
 
$
(97,177
)
Net (income) loss attributable to noncontrolling interests
311

 
722

 
500

 
696

Net income (loss) attributable to iStar Financial Inc.
$
(14,087
)
 
$
(50,407
)
 
$
(46,151
)
 
$
(96,481
)
Preferred dividends
(12,780
)
 
(10,580
)
 
(23,360
)
 
(21,160
)
Net (income) loss allocable to HPU holders and Participating Security holders(2)(3)
866

 
1,991

 
2,247

 
3,852

Net income (loss) allocable to common shareholders
$
(26,001
)
 
$
(58,996
)
 
$
(67,264
)
 
$
(113,789
)
Per common share data(1):
 
 
 
 
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.40
)
 
$
(0.98
)
 
$
(0.95
)
 
$
(1.51
)
Diluted
$
(0.40
)
 
$
(0.98
)
 
$
(0.95
)
 
$
(1.51
)
Net income (loss) attributable to iStar Financial Inc.:
 
 
 
 
 
 
 
Basic
$
(0.31
)
 
$
(0.70
)
 
$
(0.79
)
 
$
(1.36
)
Diluted
$
(0.31
)
 
$
(0.70
)
 
$
(0.79
)
 
$
(1.36
)
Weighted average number of common shares—basic
85,125

 
84,113

 
84,975

 
83,834

Weighted average number of common shares—diluted
85,125

 
84,113

 
84,975

 
83,834

Per HPU share data(1)(2):
 
 
 
 
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations:
 
 
 
 
 
 
 
Basic
$
(74.87
)
 
$
(185.13
)
 
$
(179.87
)
 
$
(285.46
)
Diluted
$
(74.87
)
 
$
(185.13
)
 
$
(179.87
)
 
$
(285.46
)
Net income (loss) attributable to iStar Financial Inc.:
 
 
 
 
 
 
 
Basic
$
(57.74
)
 
$
(132.73
)
 
$
(149.81
)
 
$
(256.80
)
Diluted
$
(57.74
)
 
$
(132.73
)
 
$
(149.81
)
 
$
(256.80
)
Weighted average number of HPU shares—basic and diluted
15

 
15

 
15

 
15

Explanatory Notes:
_______________________________________________________________________________
(1)
Income (loss) from continuing operations attributable to iStar Financial Inc. for the three months ended June 30, 2013 and 2012 was $(56.4) million and $(87.8) million, respectively, and for the six months ended June 30, 2013, and 2012 was $(118.1) million and $(129.6) million, respectively. See Note 13 for details on the calculation of earnings per share.
(2)
HPU holders are current and former Company employees who purchased high performance common stock units under the Company's High Performance Unit Program (see Note 11).
(3)
Participating Security holders are Company employees and directors who hold unvested restricted stock units, restricted stock awards and common stock equivalents granted under the Company's Long Term Incentive Plans that are eligible to participate in dividends (see Note 12 and Note 13).
The accompanying notes are an integral part of the consolidated financial statements.

3

Table of Contents

iStar Financial Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(unaudited)

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
(14,398
)
 
$
(51,129
)
 
$
(46,651
)
 
$
(97,177
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Reclassification of (gains)/losses on available-for-sale securities into earnings upon realization(1)
(603
)
 

 
(593
)
 

Reclassification of (gains)/losses on cash flow hedges into earnings upon realization(2)
79

 
(68
)
 
151

 
(240
)
Reclassification of (gains)/losses on cumulative translation adjustment into earnings upon realization(1)
(1,310
)
 

 
(1,310
)
 

Unrealized gains/(losses) on available-for-sale securities
(496
)
 
477

 
(281
)
 
634

Unrealized gains/(losses) on cash flow hedges
1,188

 
(85
)
 
1,226

 
(490
)
Unrealized gains/(losses) on cumulative translation adjustment
240

 
108

 
(374
)
 
(283
)
Other comprehensive income (loss)
$
(902
)
 
$
432

 
$
(1,181
)
 
$
(379
)
Comprehensive income (loss)
$
(15,300
)
 
$
(50,697
)
 
$
(47,832
)
 
$
(97,556
)
Net (income) loss attributable to noncontrolling interests
311

 
722

 
500

 
696

Comprehensive income (loss) attributable to iStar Financial Inc.
$
(14,989
)
 
$
(49,975
)
 
$
(47,332
)
 
$
(96,860
)
Explanatory Notes:
_______________________________________________________________________________
(1)
Included in "Earnings from equity method investments" on the Company's Consolidated Statements of Operations.
(2)
Included in "Other expense" on the Company's Consolidated Statements of Operations.

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


4

Table of Contents

iStar Financial Inc.
Consolidated Statements of Changes in Equity
For the Six Months Ended June 30, 2013
(In thousands)
(unaudited)

 
iStar Financial Inc. Shareholders' Equity
 
 
 
 
 
Preferred
Stock(1)
 
Preferred Stock Series J(1)
 
HPU's
 
Common
Stock at
Par
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock at
Cost
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2012
$
22

 
$

 
$
9,800

 
$
143

 
$
3,832,780

 
$
(2,360,647
)
 
$
(1,185
)
 
$
(241,969
)
 
$
74,210

 
$
1,313,154

Issuance of Preferred Stock

 
4

 

 

 
193,506

 

 

 

 

 
193,510

Dividends declared—preferred

 

 

 

 

 
(23,360
)
 

 

 

 
(23,360
)
Issuance of stock/restricted stock amortization, net

 

 

 
1

 
(5,119
)
 

 

 

 

 
(5,118
)
Net loss for the period(2)

 

 

 

 

 
(46,151
)
 

 

 
927

 
(45,224
)
Change in accumulated other comprehensive income (loss)

 

 

 

 

 

 
(1,181
)
 

 

 
(1,181
)
Additional paid-in capital attributable to redeemable noncontrolling interest(4)

 

 

 

 
(1,744
)
 

 

 

 

 
(1,744
)
Contributions from noncontrolling interests(3)

 

 

 

 

 

 

 

 
9,687

 
9,687

Distributions to noncontrolling interests(4)

 

 

 

 

 

 

 

 
(20,404
)
 
(20,404
)
Balance at June 30, 2013
$
22

 
$
4

 
$
9,800

 
$
144

 
$
4,019,423

 
$
(2,430,158
)
 
$
(2,366
)
 
$
(241,969
)
 
$
64,420

 
$
1,419,320

Explanatory Notes:
_______________________________________________________________________________
(1)
See Note 11 for details on the Company's Cumulative Redeemable Preferred Stock.
(2)
For the six months ended June 30, 2013 net loss shown above excludes $1.4 million of net loss attributable to redeemable noncontrolling interests.
(3)
Includes $9.4 million of operating property assets contributed by a noncontrolling partner (see Note 4).
(4)
Includes $8.8 million payment to redeem a noncontrolling member's interest.
The accompanying notes are an integral part of the consolidated financial statements.

5

Table of Contents

iStar Financial Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
For the Six Months
Ended June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(46,651
)
 
$
(97,177
)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
 
 
 
Provision for loan losses
15,226

 
44,031

Impairment of assets
550

 
25,303

Depreciation and amortization
34,750

 
34,418

Payments for withholding taxes upon vesting of stock-based compensation
(13,790
)
 
(11,657
)
Non-cash expense for stock-based compensation
9,921

 
8,113

Amortization of discounts/premiums and deferred financing costs on debt
10,403

 
17,679

Amortization of discounts/premiums and deferred interest on loans
(16,262
)
 
(29,442
)
Earnings from equity method investments
(30,001
)
 
(53,206
)
Distributions from operations of equity method investments
10,211

 
56,769

Deferred operating lease income
(6,477
)
 
(5,466
)
Income from sales of residential property
(58,016
)
 
(19,999
)
Gain from discontinued operations
(13,323
)
 
(27,257
)
(Gain) loss on early extinguishment of debt, net
13,270

 
3,164

Repayments and repurchases of debt - debt discount and prepayment penalty
(20,394
)
 
(17,326
)
Other operating activities, net
4,109

 
3,879

Changes in assets and liabilities:
 
 
 
Changes in accrued interest and operating lease income receivable, net
5,763

 
3,278

Changes in deferred expenses and other assets, net
4,702

 
(5,882
)
Changes in accounts payable, accrued expenses and other liabilities
(10,527
)
 
3,723

Cash flows from operating activities
$
(106,536
)
 
$
(67,055
)
Cash flows from investing activities:
 
 
 
Investment originations and fundings
$
(98,118
)
 
$
(23,877
)
Capital expenditures on real estate assets
(47,660
)
 
(32,714
)
Contributions to unconsolidated entities
(3,248
)
 
(6,145
)
Repayments of and principal collections on loans
298,633

 
332,045

Net proceeds from sales of loans
79,671

 
56,998

Net proceeds from sales of real estate
260,937

 
311,102

Net proceeds from sale of unconsolidated entity
220,281

 

Distributions from unconsolidated entities
20,437

 
41,586

Changes in restricted cash held in connection with investing activities
(23,133
)
 
(462,605
)
Other investing activities, net
908

 
(384
)
Cash flows from investing activities
$
708,708

 
$
216,006

Cash flows from financing activities:
 
 
 
Borrowings under secured credit facilities
$
657,847

 
$
850,465

Repayments under secured credit facilities
(971,531
)
 
(392,124
)
Repayments under unsecured credit facilities

 
(244,046
)
Borrowings under secured term loans
9,412

 

Repayments under secured term loans
(3,594
)
 
(54,767
)
Borrowings under unsecured notes
565,000

 
264,029

Repayments under unsecured notes
(96,312
)
 
(259,584
)
Repurchases and redemptions of unsecured notes
(447,664
)
 
(396,356
)
Payments for deferred financing costs
(12,857
)
 
(3,248
)
Preferred dividends paid
(23,360
)
 
(21,160
)
Proceeds from issuance of preferred stock
193,510

 

Other financing activities, net
(13,061
)
 
(5,143
)
Cash flows from financing activities
$
(142,610
)
 
$
(261,934
)
Changes in cash and cash equivalents
$
459,562

 
$
(112,983
)
Cash and cash equivalents at beginning of period
256,344

 
356,826

Cash and cash equivalents at end of period
$
715,906

 
$
243,843

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

6

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




Note 1—Business and Organization
Business—iStar Financial Inc., or the "Company," is a fully-integrated finance and investment company focused on the commercial real estate industry. The Company provides custom-tailored investment capital to high-end private and corporate owners of real estate and invests directly across a range of real estate sectors. The Company, which is taxed as a real estate investment trust, or "REIT," has invested more than $35 billion over the past two decades. The Company's primary business segments are real estate finance, net lease, operating properties and land.
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.
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, 2012.
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 Consolidated Financial Statements and the related Notes to conform to the 2013 presentation.
During the interim period ended June 30, 2012, the Company changed the classification within its cash flow statement for certain transactions involving the repurchase of its debt that was initially issued at a discount, as well as certain payments involving the potential acquisition of real estate. The Company believes the new classification is a more meaningful reflection of these transactions (collectively the “Reclassification”) and changed the Company's cash flows from the initially reported amounts as follows:
 
 
As Previously Reported
 
Change
 
As Reclassified
Cash flows from operations:
 
 
 
 
 
 
Six months Ended June 30, 2012
 
$
(57,196
)
 
$
(9,859
)
 
$
(67,055
)
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
Six months Ended June 30, 2012
 
$
206,147

 
$
9,859

 
$
216,006

The above changes to the amounts for the six months ended June 30, 2012 were classified in connection with the Company's filing on Form 10-Q for the six months ended June 30, 2013.
Principles of Consolidation—The Consolidated Financial Statements include the financial statements of the Company, its wholly owned subsidiaries, controlled partnerships and variable interest entities ("VIEs") for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

7

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



Consolidated VIEs—As of June 30, 2013, the Company consolidated five VIEs for which the Company is considered the primary beneficiary. The assets and liabilities of the consolidated VIEs are included in the Company's Consolidated Balance Sheets. The Company's total unfunded commitments related to consolidated VIEs is $49.2 million as of June 30, 2013.
Unconsolidated VIEs—As of June 30, 2013, 28 of the Company's other investments were 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, 2013, the Company's maximum exposure to loss from these investments does not exceed the sum of the $161.0 million carrying value of the investments and $8.1 million of related unfunded commitments.
Note 3—Summary of Significant Accounting Policies
As of June 30, 2013, the Company's significant accounting policies, which are detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, have not changed materially.
New Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This guidance is the culmination of the board's redeliberation on reporting reclassification adjustments from accumulated other comprehensive income. The standard requires that companies present information about reclassification adjustments from accumulated other comprehensive income in their interim and annual financial statements in a single note or on the face of the financial statements. This ASU is effective for interim and annual reporting periods beginning after December 15, 2012. The Company adopted this ASU beginning with the reporting period ended March 31, 2013. The adoption did not have a material impact on the financial statements.
Note 4—Real Estate
The Company's real estate assets were comprised of the following ($ in thousands):
 
Net Lease
Assets
 
Operating
Properties
 
Land
 
Total
As of June 30, 2013
 
 
 
 
 
 
 
Land and land improvements
$
336,562

 
$
132,028

 
$
769,298

 
$
1,237,888

Buildings and improvements
1,292,675

 
641,789

 

 
1,934,464

Less: accumulated depreciation and amortization
(326,375
)
 
(92,480
)
 
(2,820
)
 
(421,675
)
Real estate, net
$
1,302,862

 
$
681,337

 
$
766,478

 
$
2,750,677

Real estate available and held for sale
8,694

 
335,571

 
179,827

 
524,092

Total real estate
$
1,311,556

 
$
1,016,908

 
$
946,305

 
$
3,274,769

As of December 31, 2012
 
 
 
 
 
 
 
Land and land improvements
$
344,239

 
$
132,028

 
$
786,114

 
$
1,262,381

Buildings and improvements
1,295,081

 
669,186

 

 
1,964,267

Less: accumulated depreciation and amortization
(315,699
)
 
(109,634
)
 
(2,292
)
 
(427,625
)
Real estate, net
$
1,323,621

 
$
691,580

 
$
783,822

 
$
2,799,023

Real estate available and held for sale

 
454,587

 
181,278

 
635,865

Total real estate
$
1,323,621

 
$
1,146,167

 
$
965,100

 
$
3,434,888

Real estate available and held for sale—As of June 30, 2013 and December 31, 2012, the Company had $298.8 million and $374.1 million, respectively, of residential properties available for sale in its operating properties portfolio. The Company is actively marketing and selling condominium units in these projects.
Acquisitions—During the six months ended June 30, 2013, the Company acquired, via foreclosure, title to a property previously serving as collateral on a loan receivable. The Company contributed the property to a newly-formed entity, of which it owns 63%. Based on the control provisions in the partnership agreement, the Company consolidates the entity and reflects its partner's share of the equity in "Noncontrolling interests" on the Company's Consolidated Balance Sheets. The acquisition was accounted for at fair value whereby the assets acquired were valued at $25.5 million, which reflects adjustments made to finalize

8

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



the initial accounting of the purchase price allocation of the assets and noncontrolling interest. No gain or loss was recorded in conjunction with this transaction.
During the six months ended June 30, 2012, the Company acquired title to properties previously serving as collateral on its loan receivables with a total fair value of $185.8 million at the time of foreclosure. These properties included $172.4 million of residential operating properties and $13.4 million of commercial operating properties.
Dispositions—During the three months ended June 30, 2013 and 2012, the Company sold 103 and 168 condominium units, respectively, and recorded income from sales of residential properties totaling $30.9 million and $13.3 million, respectively. During the six months ended June 30, 2013 and 2012, the Company sold 199 and 262 condominium units, respectively, and recorded income from sales of residential properties totaling $54.6 million and $20.0 million, respectively.
During the six months ended June 30, 2013, the Company sold land for net proceeds of $21.4 million to a newly-formed unconsolidated entity in which the Company also received a preferred partnership interest and a 47.5% equity interest. The Company recognized a gain of $3.4 million, reflecting the proportionate share of our sold interest, which is recorded as "Income from sales of residential property" in the Company's Consolidated Statements of Operations.
Additionally, during the six months ended June 30, 2013, the Company sold three net lease assets with a carrying value of $13.5 million resulting in a net gain of $3.4 million. During the same period the Company sold three commercial operating properties with a carrying value of $43.2 million resulting in a net gain of $9.9 million. These gains were recorded as "Gain from discontinued operations" in the Company's Consolidated Statement of Operations. The Company also sold other land assets with a carrying value of $5.5 million for proceeds that approximated carrying value.
On April 30, 2012, the Company sold a portfolio of 12 net lease assets with a carrying value of $105.7 million and recorded a gain of $24.9 million resulting from the transaction, which is recorded in "Gain from discontinued operations" in the Company's Consolidated Statement of Operations.
Additionally, during the six months ended June 30, 2012, the Company sold two net lease assets with a carrying value of $9.8 million, resulting in a net gain of $2.4 million, which is recorded in "Gain from discontinued operations" in the Company's Consolidated Statement of Operations. During 2012, the Company also sold five commercial operating properties with a carrying value of $10.3 million, resulting in a net loss of $1.4 million, and land assets with a carrying value of $2.7 million for proceeds that approximated carrying value.
Discontinued Operations—The following table summarizes income (loss) from discontinued operations for the three and six months ended June 30, 2013 and 2012 ($ in thousands):
 
For the Three Months
Ended June 30,
 
For the Six Months
Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenues
$
872

 
$
3,037

 
$
2,810

 
$
7,939

Total expenses
(769
)
 
(2,464
)
 
$
(1,799
)
 
(5,459
)
Impairment of assets
(427
)
 
(1,346
)
 
(395
)
 
(16,620
)
Income (loss) from discontinued operations
$
(324
)

$
(773
)
 
$
616

 
$
(14,140
)
Impairments—During the three months ended June 30, 2013, the Company recorded $0.4 million of impairments on real estate assets, which is recorded in "Income (loss) from discontinued operations" on the Company's Consolidated Statements of Operations. During the three and six months ended June 30, 2012, the Company recorded impairments on real estate assets totaling $7.5 million and $23.5 million, respectively. Of these amounts, $1.3 million and $16.6 million, respectively, have been reclassified to discontinued operations as the assets were sold or classified as held for sale as of June 30, 2013.
Intangible assets—As of June 30, 2013 and December 31, 2012 the Company had $53.9 million and $59.9 million, respectively, of finite lived intangible assets, net of accumulated amortization of $27.0 million and $49.3 million, respectively, primarily related to the acquisition of real estate assets. The total amortization expense for these intangible assets was $3.0 million and $6.0 million for the three and six months ended June 30, 2013, respectively, and $2.8 million and $6.0 million for the three and six months ended June 30, 2012, respectively.

9

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



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 $7.9 million and $15.7 million for the three and six months ended June 30, 2013, respectively, and $7.2 million and $15.0 million for the three and six months ended June 30, 2012, respectively. These amounts are included in “Operating lease income” on the Company's Consolidated Statements of Operations.
Allowance for doubtful accounts—As of June 30, 2013 and December 31, 2012, the total allowance for doubtful accounts related to real estate tenant receivables, including deferred operating lease income receivable, was $6.0 million and $5.6 million, respectively.
Note 5—Loans Receivable and Other Lending Investments, net
The following is a summary of the Company's loans receivable and other lending investments by class ($ in thousands):
 
As of
Type of Investment
June 30, 2013
 
December 31, 2012
Senior mortgages
$
1,397,524

 
$
1,751,256

Subordinate mortgages
114,218

 
152,737

Corporate/Partnership loans
415,998

 
450,491

Total gross carrying value of loans
$
1,927,740

 
$
2,354,484

Reserves for loan losses
(479,826
)
 
(524,499
)
Total loans receivable, net
$
1,447,914

 
$
1,829,985

Other lending investments—securities
65,722

 

Total loans receivable and other lending investments, net(1)
$
1,513,636

 
$
1,829,985

Explanatory Note:
_______________________________________________________________________________
(1)
The Company's recorded investment in loans as of June 30, 2013 and December 31, 2012 includes accrued interest of $7.0 million and $9.8 million, respectively, which are included in "Accrued interest and operating lease income receivable, net" in the Company's Consolidated Balance Sheets.
During the six months ended June 30, 2013, the Company originated and funded $89.3 million of loans and other lending investments and received principal repayments of $298.6 million. During the same period, the Company sold loans with a total carrying value of $80.3 million, which resulted in net realized losses of $0.6 million. Gains and losses on sales of loans are reported in "Other income" on the Company's Consolidated Statements of Operations.
Reserve for Loan Losses—Changes in the Company's reserve for loan losses were as follows ($ in thousands):
 
For the Three Months
Ended June 30,
 
For the Six Months
Ended June 30,
 
2013
 
2012
 
2013
 
2012
Reserve for loan losses at beginning of period
$
521,795

 
$
567,179

 
$
524,499

 
$
646,624

Provision for loan losses(1)
5,020

 
26,531

 
15,226

 
44,031

Charge-offs
(46,989
)
 
(29,924
)
 
(59,899
)
 
(126,869
)
Reserve for loan losses at end of period
$
479,826

 
$
563,786

 
$
479,826

 
$
563,786

Explanatory Note:
_______________________________________________________________________________
(1)
Included in the provision for loan losses for the three and six months ended June 30, 2013 was a $6.0 million recovery related to the resolution of a non-performing loan that was previously fully reserved.

10

Table of Contents
iStar Financial Inc.
Notes to Consolidated Financial Statements
(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)
 
Loans Acquired
with Deteriorated
Credit Quality(3)
 
Total
As of June 30, 2013
 
 
 
 
 
 
 
Loans
$
994,445

 
$
930,202

 
$
9,930

 
$
1,934,577

Less: Reserve for loan losses
(447,526
)
 
(32,300
)
 

 
(479,826
)
Total
$
546,919

 
$
897,902

 
$
9,930

 
$
1,454,751

As of December 31, 2012
 
 
 
 
 
 
 
Loans
$
1,095,957

 
$
1,210,077

 
$
58,281

 
$
2,364,315

Less: Reserve for loan losses
(472,058
)
 
(33,100
)
 
(19,341
)
 
(524,499
)
Total
$
623,899

 
$
1,176,977

 
$
38,940

 
$
1,839,816

Explanatory Notes:
_______________________________________________________________________________
(1)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net discount of $2.4 million and $4.0 million as of June 30, 2013 and December 31, 2012, respectively. The Company's loans individually evaluated for impairment primarily represent loans on non-accrual status and 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 aggregating to a net discount of $5.4 million and $3.8 million as of June 30, 2013 and December 31, 2012, respectively.
(3)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net premium of $0.4 million and $0.1 million as of June 30, 2013 and December 31, 2012, respectively. These loans had cumulative principal balances of $10.3 million and $58.8 million, as of June 30, 2013 and December 31, 2012, respectively.
Credit Characteristics—As part of the Company's process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. The Company's recorded investment in performing loans, presented by class and by credit quality, as indicated by risk rating, was as follows ($ in thousands):
 
As of
 
June 30, 2013
 
December 31, 2012
 
Performing
Loans
 
Weighted
Average
Risk Ratings
 
Performing
Loans
 
Weighted
Average
Risk Ratings
Senior mortgages
$
668,326

 
2.75

 
$
840,593

 
2.75

Subordinate mortgages
60,750

 
3.08

 
99,698

 
2.27

Corporate/Partnership loans
409,083

 
3.81

 
444,772

 
3.69

Total
$
1,138,159

 
3.15

 
$
1,385,063

 
3.01

As of June 30, 2013, the Company's recorded investment in loans, aged by payment status and presented by class, were as follows ($ in thousands):
 
Current
 
Less Than
and Equal
to 90 Days
 
Greater
Than
90 Days
 
Total
Past Due
 
Total
Senior mortgages
$
702,619

 
$

 
$
697,999

 
$
697,999

 
$
1,400,618

Subordinate mortgages
60,750

 

 
54,136

 
54,136

 
114,886

Corporate/Partnership loans
409,083

 

 
9,990

 
9,990

 
419,073

Total
$
1,172,452

 
$

 
$
762,125

 
$
762,125

 
$
1,934,577


11

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



Impaired Loans—The Company's recorded investment in impaired loans, presented by class, were as follows ($ in thousands)(1):
 
As of June 30, 2013
 
As of December 31, 2012
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
14,411

 
$
14,339

 
$

 
$
108,077

 
$
107,850

 
$

Corporate/Partnership loans
9,990

 
10,041

 

 
10,110

 
10,160

 

Subtotal
$
24,401

 
$
24,380

 
$

 
$
118,187

 
$
118,010

 
$

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
853,573

 
$
851,343

 
$
(398,887
)
 
$
918,975

 
$
918,496

 
$
(442,760
)
Subordinate mortgages
54,136

 
53,468

 
(39,579
)
 
53,979

 
53,679

 
(39,579
)
Corporate/Partnership loans
62,336

 
62,419

 
(9,060
)
 
63,096

 
63,246

 
(9,060
)
Subtotal
$
970,045

 
$
967,230

 
$
(447,526
)
 
$
1,036,050

 
$
1,035,421

 
$
(491,399
)
Total:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
867,984

 
$
865,682

 
$
(398,887
)
 
$
1,027,052

 
$
1,026,346

 
$
(442,760
)
Subordinate mortgages
54,136

 
53,468

 
(39,579
)
 
53,979

 
53,679

 
(39,579
)
Corporate/Partnership loans
72,326

 
72,460

 
(9,060
)
 
73,206

 
73,406

 
(9,060
)
Total
$
994,446

 
$
991,610

 
$
(447,526
)
 
$
1,154,237

 
$
1,153,431

 
$
(491,399
)
Explanatory Note:
_______________________________________________________________________________
(1)
All of the Company's non-accrual loans are considered impaired and included in the table above. In addition, as of June 30, 2013 and December 31, 2012, certain loans modified through troubled debt restructurings with a recorded investment of $198.0 million and $175.0 million, respectively, are also included as impaired loans in accordance with GAAP although they are performing and on accrual status.

12

Table of Contents
iStar Financial Inc.
Notes to Consolidated Financial Statements
(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,
 
2013
 
2012
 
2013
 
2012
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
16,561

 
$
8,212

 
$
180,037

 
$
1,799

 
$
47,067

 
$
9,057

 
$
193,187

 
$
2,206

Corporate/Partnership loans
10,051

 
320

 
10,110

 

 
10,070

 
440

 
10,110

 

Subtotal
$
26,612

 
$
8,532

 
$
190,147

 
$
1,799

 
$
57,137

 
$
9,497

 
$
203,297

 
$
2,206

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
878,381

 
$
450

 
$
1,041,613

 
$
1,194

 
$
891,912

 
$
956

 
$
1,117,396

 
$
2,434

Subordinate mortgages
53,966

 

 
65,659

 

 
53,971

 

 
51,266

 

Corporate/Partnership loans
61,945

 
80

 
61,956

 
76

 
62,329

 
157

 
62,168

 
156

Subtotal
$
994,292

 
$
530

 
$
1,169,228

 
$
1,270

 
$
1,008,212

 
$
1,113

 
$
1,230,830

 
$
2,590

Total:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
894,942

 
$
8,662

 
$
1,221,650

 
$
2,993

 
$
938,979

 
$
10,013

 
$
1,310,583

 
$
4,640

Subordinate mortgages
53,966

 

 
65,659

 

 
53,971

 

 
51,266

 

Corporate/Partnership loans
71,996

 
400

 
72,066

 
76

 
72,399

 
597

 
72,278

 
156

Total
$
1,020,904

 
$
9,062

 
$
1,359,375

 
$
3,069

 
$
1,065,349

 
$
10,610

 
$
1,434,127

 
$
4,796

During the quarter ended June 30, 2013, the Company recorded interest income of $8.0 million related to the resolution of a certain non-performing loan. Interest income was not previously recorded while the loan was on non-accrual status.
Troubled Debt Restructurings—During the three and six months ended June 30, 2013 and 2012, the Company modified loans that were determined to be troubled debt restructurings. The recorded investment in these loans was impacted by the modifications as follows, presented by class ($ in thousands):
 
For the Three Months Ended June 30,
 
2013
 
2012
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
Senior mortgages
2

 
$
71,758

 
$
71,758

 
1

 
$
4,561

 
$
4,561

 
For the Six Months Ended June 30,
 
2013
 
2012
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
Senior mortgages
3

 
$
144,432

 
$
136,758

 
6

 
$
310,342

 
$
264,868


13

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



During the three months ended June 30, 2013, the Company restructured one performing loan with a recorded investment of $3.2 million to grant a maturity extension of one year. The Company also extended a payoff option on a loan with a recorded investment of $68.6 million that was classified as non-performing.
During the six months ended June 30, 2013, the Company restructured three loans that were considered troubled debt restructurings. In addition to the loans modified during the current quarter that are described above, the Company restructured one non-performing loan with a recorded investment of $72.7 million. The Company received a $13.3 million paydown and accepted a discounted payoff option, with final payment expected to be made in January 2014 and the loan was reclassified from non-performing to performing status as the Company believes the borrower can perform under the modified terms of the agreement.
During the three months ended June 30, 2012, the Company restructured one loan that was considered a troubled debt restructuring. The Company extended the term of this performing loan by one year with the interest rate unchanged.
Troubled debt restructurings that occurred during the six months ended June 30, 2012 included the modifications of performing loans with a combined recorded investment of $62.6 million. The modified terms of these loans granted maturity extensions ranging from three months to one year and included conditional extension options in certain cases dependent on borrower-specific performance hurdles. In each case, the Company believes the borrowers can perform under the modified terms of the loans and continues to classify these loans as performing.
Non-performing loans with a combined recorded investment of $247.7 million were also modified during the six months ended June 30, 2012 and continued to be classified as non-performing subsequent to modification. Included in this balance was a loan with a recorded investment of $181.5 million prior to modification, for which the Company agreed to reduce the outstanding principal balance and recorded charge-offs totaling $45.5 million, and also reduced the loan's interest rate. The remaining non-performing loans were granted maturity extensions ranging from one month to seven months and the interest rate was reduced on one loan.
Generally when granting concessions, the Company will seek to protect its position by requiring incremental pay downs, additional collateral or guarantees and in some cases lookback features or equity kickers to offset concessions granted should conditions impacting the loan improve. The Company's determination of credit losses is impacted by troubled debt restructurings whereby loans that have gone through troubled debt restructurings are considered impaired, assessed for specific reserves, and are not included in the Company's assessment of general loan loss reserves. Loans previously restructured under troubled debt restructurings that subsequently default are reassessed to incorporate the Company's current assumptions on expected cash flows and additional provision expense is recorded to the extent necessary. As of June 30, 2013, the Company had $21.4 million of unfunded commitments associated with modified loans considered troubled debt restructurings.
Troubled debt restructurings that subsequently defaulted during the period were as follows ($ in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
Number
of Loans
 
Outstanding
Recorded
Investment
 
Number
of Loans
 
Outstanding
Recorded
Investment
 
Number
of Loans
 
Outstanding
Recorded
Investment
 
Number
of Loans
 
Outstanding
Recorded
Investment
Senior mortgages
1

 
$
26,693

 
1

 
$
26,120

 
1

 
$
26,693

 
1

 
$
26,120


Securities—During the six months ended June 30, 2013, the Company originated a mandatorily redeemable preferred equity investment of $65.7 million, which has a term of three years with two 12-month extensions. The Company has an unfunded commitment of $80.3 million, which it expects to fund later this year. The investment is classified as a held-to-maturity debt security as the Company has the ability and intent to hold the investment until maturity. As of June 30, 2013, the estimated fair value approximated the net carrying amount.


14

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



Note 6—Other Investments
The Company's other investments and its proportionate share of results from equity method investments were as follows ($ in thousands):
 
Carrying Value as of
 
Equity in Earnings
 
June 30, 2013
 
December 31, 2012
 
For the Three Months
Ended June 30,
 
For the Six Months
Ended June 30,
 
 
 
 
 
2013
 
2012
 
2013
 
2012
LNR
$

 
$
205,773

 
$
1,719

 
$
8,674

 
$
16,465

 
$
20,811

Madison Funds
60,109

 
56,547

 
4,865

 
(767
)
 
7,124

 
8,731

Oak Hill Funds
24,624

 
29,840

 
909

 
508

 
2,065

 
3,883

Real estate equity investments
47,684

 
47,619

 
957

 
8,719

 
2,721

 
15,490

Other equity method investments
48,166

 
47,939

 
(127
)
 
1,286

 
1,626

 
4,291

Total equity method investments
$
180,583

 
$
387,718

 
$
8,323

 
$
18,420

 
$
30,001

 
$
53,206

Other
9,035

 
11,125

 
 
 
 
 
 
 
 
Total other investments
$
189,618

 
$
398,843

 
 
 
 
 
 
 
 
Equity Method Investments
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.
On April 22, 2013, the Company completed the sale of its 24% equity interest in LNR and received $220.3 million in net proceeds, which approximated our carrying value on the disposition date. Approximately $25.2 million of net proceeds were placed in escrow for potential indemnification obligations through April 2014. The Company is not currently aware that any material indemnification claims are probable of occurring.
The following tables represent the latest available investee level summarized financial information for LNR ($ in thousands)(1):
 
For the Three Months
Ended March 31,
 
For the Six Months
Ended March 31,
 
2013
 
2012
 
2013
 
2012
Income Statements
 
 
 
 
 
 
 
Total revenue(2)
$
68,779

 
$
71,337

 
$
146,579

 
$
148,696

Income tax expense
$
1,121

 
$
1,805

 
$
1,401

 
$
3,642

Net income attributable to LNR
$
42,452

 
$
36,178

 
$
231,701

 
$
86,799

iStar's ownership percentage
24
%
 
24
%
 
24
%
 
24
%
Subtotal
$
10,178

 
$
8,674

 
$
55,553

 
$
20,811

Basis difference(3)
$
(8,459
)
 
$

 
$
(39,088
)
 
$

iStar's equity in earnings from LNR
$
1,719

 
$
8,674

 
$
16,465

 
$
20,811


15

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



 
As of March 31,
 
As of September 30,
 
2013
 
2012
Balance Sheets
 
 
 
Total assets(2)
$
1,675,581

 
$
1,384,337

Total debt(2)
$
492,590

 
$
398,912

Total liabilities(2)
$
575,738

 
$
517,088

Noncontrolling interests
$
1,603

 
$
1,560

LNR Property LLC equity
$
1,098,241

 
$
865,689

iStar's ownership percentage
24
%
 
24
%
iStar's equity in LNR(4)
$

 
$
205,773

Explanatory Notes:
_______________________________________________________________________________
(1)
The Company records its investment in LNR on a one quarter lag, therefore, amounts in the Company's financial statements for the three and six months ended June 30, 2013 and 2012 are based on balances and results from LNR for the three and six months ended March 31, 2013 and 2012.
(2)
LNR consolidates certain commercial mortgage-backed securities and collateralized debt obligation trusts that are considered VIEs (and for which it is the primary beneficiary), that have been excluded from the amounts presented above. As of March 31, 2013 and September 30, 2012, the assets of these trusts, which aggregated $92.50 billion and $97.52 billion, respectively, were the sole source of repayment of the related liabilities, which aggregated approximately $92.15 billion and $97.21 billion, respectively, and are non-recourse to LNR and its equity holders, including the Company. In addition, total revenue presented above includes $21.1 million and $16.3 million for the three months ended March 31, 2013 and 2012, respectively, and $50.4 million and $45.1 million for the six months ended March 31, 2013 and 2012, respectively, of servicing fee revenue that is eliminated upon consolidation of the VIE's at the LNR level. This income is then added back through consolidation at the LNR level as an adjustment to income allocable to noncontrolling entities and has no net impact on net income attributable to LNR.
(3)
The Company has limited its recognition of its proportionate share of earnings in LNR for the three and six months ended June 30, 2013 to the amount of proceeds it received from the sale.
(4)
Represents the Company's investment in LNR at June 30, 2013 and December 31, 2012, respectively.
Madison Funds—As of June 30, 2013, 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 ownership positions of entities that own real estate assets. The Company determined that these entities are variable interest entities and that the Company is not the primary beneficiary.
Oak Hill Funds—As of June 30, 2013, the Company owned a 5.92% interest in OHA Strategic Credit Master Fund, L.P. ("OHASCF"). OHASCF was formed to acquire and manage a diverse portfolio of assets, investing in distressed, stressed and undervalued loans, bonds, equities and other investments. The Company determined that this entity is a variable interest entity and that the Company is not the primary beneficiary.
Real estate equity investments—During the quarter ended June 30, 2013, the Company sold land for net proceeds of $21.4 million to a newly formed unconsolidated entity in which the Company has a preferred partnership interest and a 47.5% equity interest. The Company has a recorded equity interest of $10.6 million, which represents the Company's proportionate share of the assets retained on a carryover basis.
As of June 30, 2013, the Company's real estate equity investments included equity interests in real estate ventures ranging from 31% to 70%, comprised of investments of $16.4 million in net lease assets, $18.2 million in operating properties and $13.1 million in other land assets. As of December 31, 2012, the Company's real estate equity investments included $16.4 million in net lease assets, $25.7 million in operating properties and $5.5 million in land assets. One of the Company's equity investments in operating properties represents a 33% interest in residential property units. The Company's earnings from its interest in this property includes income from sales of residential units of $1.5 million and $10.2 million for the three months ended June 30, 2013 and 2012, respectively, and $4.0 million and $18.2 million for the six months ended June 30, 2013 and 2012, respectively.
Other Equity Method Investments—The Company also had smaller investments in several other entities that were accounted for under the equity method. Several of these investments are in real estate related funds or other strategic investments.


16

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



Note 7—Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
 
As of
 
June 30, 2013
 
December 31, 2012
Deferred financing fees, net(1)
$
33,929

 
$
26,629

Leasing costs, net(2)
20,277

 
20,205

Other receivables
9,498

 
11,517

Prepaid expenses
7,218

 
5,218

Corporate furniture, fixtures and equipment, net(3)
6,947

 
7,537

Derivative asset
2,471

 

Other assets
23,357

 
22,884

Deferred expenses and other assets, net
$
103,697

 
$
93,990

Explanatory Notes:
_______________________________________________________________________________
(1)
Accumulated amortization on deferred financing fees was $4.9 million and $4.1 million as of June 30, 2013 and December 31, 2012, respectively.
(2)
Accumulated amortization on leasing costs was $5.6 million and $6.6 million as of June 30, 2013 and December 31, 2012, respectively.
(3)
Accumulated depreciation on corporate furniture, fixtures and equipment was $5.9 million and $6.2 million as of June 30, 2013 and December 31, 2012, respectively.

Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
 
As of
 
June 30, 2013
 
December 31, 2012
Accrued interest payable
$
36,730

 
$
29,521

Accrued expenses
38,716

 
50,467

Property taxes payable
10,573

 
8,206

Unearned operating lease income
8,976

 
11,294

Security deposits and other investment deposits(1)
5,133

 
13,717

Derivative liabilities
2,043

 
3,435

Other liabilities
10,588

 
15,820

Accounts payable, accrued expenses and other liabilities
$
112,759

 
$
132,460

Explanatory Note:
_______________________________________________________________________________
(1)
During the six months ended June 30, 2013, $8.9 million of restricted cash collateralizing a letter of credit related to one of the Company's loan investments was disbursed.

17

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



Deferred tax assets and liabilities of the Company's TRS entities were as follows ($ in thousands):
 
As of
 
June 30, 2013
 
December 31, 2012
Deferred tax assets(1)
$
51,473

 
$
40,800

Valuation allowance
(51,473
)
 
(40,800
)
Net deferred tax assets (liabilities)