STAR-12.31.2014-10K
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-K
(Mark One)
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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
_______________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class:
 
Name of Exchange on which registered:
Common Stock, $0.001 par value
 
New York Stock Exchange
8.000% Series D Cumulative Redeemable
Preferred Stock, $0.001 par value
 
New York Stock Exchange
7.875% Series E Cumulative Redeemable
Preferred Stock, $0.001 par value
 
New York Stock Exchange
7.8% Series F Cumulative Redeemable
Preferred Stock, $0.001 par value
 
New York Stock Exchange
7.65% Series G Cumulative Redeemable
Preferred Stock, $0.001 par value
 
New York Stock Exchange
7.50% Series I Cumulative Redeemable
Preferred Stock, $0.001 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
 
 
 
Title of each class:
 
Name of Exchange on which registered:
4.50% Series J Convertible Perpetual
Preferred Stock, $0.001 par value
 
N/A


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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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 the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):
 
 
 
 
 
 
 
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 June 30, 2014 the aggregate market value of the common stock, $0.001 par value per share of iStar Financial Inc. ("Common Stock"), held by non-affiliates (1) of the registrant was approximately $1.2 billion, based upon the closing price of $14.98 on the New York Stock Exchange composite tape on such date.
As of February 20, 2015, there were 85,374,846 shares of Common Stock outstanding.
(1)
For purposes of this Annual Report only, includes all outstanding Common Stock other than Common Stock held directly by the registrant's directors and executive officers.
DOCUMENTS INCORPORATED BY REFERENCE
1.
Portions of the registrant's definitive proxy statement for the registrant's 2015 Annual Meeting, to be filed within 120 days after the close of the registrant's fiscal year, are incorporated by reference into Part III of this Annual Report on Form 10-K.
 


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PART I

Item 1.    Business
Explanatory Note for Purposes of the "Safe Harbor Provisions" of Section 21E of the Securities Exchange Act of 1934, as amended
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are included with respect to, among other things, iStar Financial Inc.'s current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. Important factors that iStar Financial Inc. believes might cause such differences are discussed in the section entitled, "Risk Factors" in Part I, Item 1a of this Form 10-K or otherwise accompany the forward-looking statements contained in this Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-K.
Overview
iStar 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.
The real estate finance portfolio is comprised of senior and mezzanine real estate loans that may be either fixed-rate or variable-rate and are structured to meet the specific financing needs of borrowers. The Company's portfolio also includes preferred equity investments and senior and subordinated loans to corporations, particularly to entities engaged in real estate or real estate related businesses, and may be either secured or unsecured. The Company's loan portfolio includes whole loans and loan participations.
The net lease portfolio is primarily comprised of properties owned by the Company and leased to single creditworthy tenants where the properties are subject to long-term leases. Most of the leases provide for expenses at the facilities to be paid by the tenants on a triple net lease basis. The properties in this portfolio are diversified by property type and geographic location. In addition to net lease properties owned by the Company, the Company partnered with a sovereign wealth fund in 2014 to form a venture to acquire and develop net lease assets.
The operating properties portfolio is comprised of commercial and residential properties which represent a diverse pool of assets across a broad range of geographies and property types. The Company generally seeks to reposition or redevelop these assets with the objective of maximizing their value through the infusion of capital and/or intensive asset management efforts. The commercial properties within this portfolio include office, retail, hotel and other property types. The residential properties within this portfolio are generally luxury condominium projects located in major U.S. cities where the Company's strategy is to sell individual condominium units through retail distribution channels.
The land portfolio is primarily comprised of land entitled for master planned communities as well as waterfront and urban infill land parcels located throughout the U.S. Master planned communities represent large-scale residential projects that the Company will entitle, plan and/or develop and may sell through retail channels to home builders or in bulk. Waterfront parcels are generally entitled for residential projects and urban infill parcels are generally entitled for mixed-use projects. The Company may develop these properties itself or sell to or partner with commercial real estate developers.
The Company's primary sources of revenues are operating lease income, which is the rent and reimbursements that tenants pay to lease its properties, and interest income, which is the interest that borrowers pay on loans. The Company primarily generates income through a “spread” or “margin,” which is the difference between the revenues generated from leases and loans and interest

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expense and the cost of real estate operations. In addition, the Company generates income from commercial operating property revenue and sales of its remaining residential condominium assets and from its land portfolio.
Company History and Recent Developments
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 lending and leasing transactions, as well as through corporate acquisitions. During the last several years, the composition of the Company's portfolio changed as loans were repaid and the Company acquired title to assets of defaulting borrowers. The size of the Company's lending portfolio declined and its real estate portfolio increased to include operating properties and land, in addition to net lease assets. As conditions in the economy and financing markets have improved, the Company has been increasing its originations of new lending and net lease investments, repositioning or redeveloping its operating properties and progressing on the entitlement and development of its land assets. We intend to continue these efforts, with the objective of having these assets contribute positively to earnings in the future. The Company's business segments are discussed further in "Industry Segments."
Financing Strategy
The Company has continued to strengthen its balance sheet through its financing activities. The Company has used proceeds from the issuance of unsecured notes in the capital markets over the past two years to repay secured and unsecured debt, which extended the Company's debt maturity profile, lowered its cost of capital and unencumbered a significant portion of the Company's assets allowing it to become primarily an unsecured borrower. Going forward, the Company will seek to raise capital through a variety of means, which may include unsecured and secured debt financing, debt refinancings, asset sales, issuances of equity, joint ventures and other third party capital arrangements. A more detailed discussion of the Company's current liquidity and capital resources is provided in Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Investment Strategy
During 2014, the Company committed to new investments totaling $1.27 billion, of which we funded $905.8 million. The fundings included $624.1 million in lending and other investments, $116.3 million to acquire and invest in net lease assets and $165.4 million of capital to reposition or redevelop its operating properties and develop its land assets.
One of the Company's objectives is to continue to increase its level of investing. In making new investments, the Company's strategy is to focus on the following:
Targeting the origination of custom-tailored mortgage, corporate and lease financings where customers require flexible financial solutions and "one-call" responsiveness post-closing;
Avoiding commodity businesses where there is significant direct competition from other providers of capital;
Developing direct relationships with borrowers and corporate customers in addition to sourcing transactions through intermediaries;
Adding value beyond simply providing capital by offering borrowers and corporate customers specific lending expertise, flexibility, certainty of closing and continuing relationships beyond the closing of a particular financing transaction;
Taking advantage of market anomalies in the real estate financing markets when, in the Company's view, credit is mispriced by other providers of capital; and
Evaluating relative risk adjusted returns across multiple investment markets.
Underwriting Process
The Company reviews investment opportunities with its investment professionals, as well as representatives from its legal, credit, risk management and capital markets areas. The Company has developed a process for screening potential investments called the Six Point Methodologysm. Through this process, the Company evaluates an investment opportunity prior to beginning its formal due diligence process by: (1) evaluating the source of the opportunity; (2) evaluating the quality of the collateral, corporate credit or lessee, as well as the market and industry dynamics; (3) evaluating the borrower equity, corporate sponsorship and/or guarantors; (4) determining the optimal legal and financial structure for the transaction given its risk profile; (5) performing an alternative investment test; and (6) evaluating the liquidity of the investment and the ability to match fund the asset. Participation is encouraged from professionals in all disciplines throughout the entire origination process, from the initial consideration of the opportunity, through the Six Point Methodologysm and into the preparation and distribution of an approval memorandum for the Company's internal and/or Board of Directors investment committees and into the documentation and closing process.
Any commitment to make an investment of $25 million or less ($50 million or less in the case of a corporate debt instrument or aggregate debt instruments issued by a single corporate issuer) in any transaction or series of related transactions requires the approval of the Chief Executive Officer and Chief Investment Officer. Any commitment in excess of $25 million but less than or

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equal to $50 million requires the further approval of the Company's internal investment committee, consisting of senior management representatives from all of the Company's key disciplines. Any commitment in excess of $50 million but less than or equal to $75 million requires the further approval of the Investment Committee of the Board of Directors. Any commitment in excess of $75 million, and any strategic investment such as a corporate merger, acquisition or material transaction involving the Company's entry into a new line of business, requires the approval of the Board of Directors.
Hedging Strategy
The Company finances its business with a combination of fixed-rate and variable-rate debt and its asset base consists of fixed-rate and variable-rate investments. Its variable-rate assets and liabilities create a natural hedge against changes in variable interest rates. This means that as interest rates increase, the Company earns more on its variable-rate lending assets and pays more on its variable-rate debt obligations and, conversely, as interest rates decrease, the Company earns less on its variable-rate lending assets and pays less on its variable-rate debt obligations. When the Company's variable-rate debt obligations differ significantly from its variable-rate lending assets, the Company may utilize derivative instruments to limit the impact of changing interest rates on its net income. The Company also uses derivative instruments to limit its exposure to changes in currency rates in respect of certain investments denominated in foreign currencies. The derivative instruments the Company uses are typically in the form of interest rate swaps, interest rate caps and foreign exchange contracts.
Portfolio Overview
As of December 31, 2014, based on current gross carrying values, the Company's total investment portfolio has the following characteristics ($ in millions)(1):
Asset Type


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Property Type
Property/Collateral Types
 
Real Estate Finance
 
Net Lease
 
Operating Properties
 
Land
 
Total
 
% of
Total
Office / Industrial
 
$
158,544

 
$
909,249

 
$
323,720

 
$

 
$
1,391,513

 
26.7
%
Land
 
33,081

 

 

 
1,093,484

 
1,126,565

 
21.7
%
Mixed Use / Mixed Collateral
 
432,801

 

 
244,996

 

 
677,797

 
13.0
%
Entertainment / Leisure
 

 
570,205

 

 

 
570,205

 
11.0
%
Hotel
 
262,448

 
136,080

 
54,041

 

 
452,569

 
8.7
%
Other Property Types
 
296,115

 
9,482

 

 

 
305,597

 
5.9
%
Retail
 
115,557

 
57,348

 
121,194

 

 
294,099

 
5.7
%
Condominium
 
112,797

 

 
156,481

 

 
269,278

 
5.2
%
Strategic Investments
 

 

 

 

 
109,384

 
2.1
%
Total
 
$
1,411,343

 
$
1,682,364

 
$
900,432

 
$
1,093,484

 
$
5,197,007

 
100.0
%

Geography
Geographic Region
 
Real Estate Finance
 
Net Lease
 
Operating Properties
 
Land
 
Total
 
% of
Total
Northeast
 
$
643,940

 
$
385,782

 
$
144,058

 
$
193,414

 
$
1,367,194

 
26.3
%
West
 
79,736

 
426,323

 
95,752

 
397,347

 
999,158

 
19.2
%
Mid-Atlantic
 
319,962

 
143,165

 
132,824

 
194,175

 
790,126

 
15.2
%
Southeast
 
79,449

 
255,320

 
287,632

 
140,318

 
762,719

 
14.7
%
Southwest
 
129,403

 
234,256

 
186,305

 
144,211

 
694,175

 
13.4
%
Central
 
101,948

 
92,916

 
51,744

 
9,362

 
255,970

 
4.9
%
Various
 
27,149

 
142,574

 
2,117

 
14,657

 
186,497

 
3.6
%
Strategic Investments(2)
 

 

 

 

 
109,384

 
2.1
%
International(2)
 
29,756

 
2,028

 

 

 
31,784

 
0.6
%
Total
 
$
1,411,343

 
$
1,682,364

 
$
900,432

 
$
1,093,484

 
$
5,197,007

 
100.0
%
Explanatory Notes:
_______________________________________________________________________________

(1)
Based on the carrying value of our total investment portfolio gross of accumulated depreciation and general loan loss reserves.
(2)
Strategic investments include $15.4 million of international assets. Combined, international and strategic investments include $25.5 million of European assets, including $15.0 million in the United Kingdom and $10.5 million in Germany.

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Industry Segments
The Company has four business segments: Real Estate Finance, Net Lease, Operating Properties and Land. The following describes the Company's reportable segments ($ in thousands) as of December 31, 2014:
 
Real Estate Finance
 
Net Lease
 
Operating Properties
 
Land
 
Corporate / Other(1)
 
Total
Real estate, at cost
$

 
$
1,552,483

 
$
724,430

 
$
868,650

 
$

 
$
3,145,563

Less: accumulated depreciation

 
(364,323
)
 
(96,159
)
 
(8,367
)
 

 
(468,849
)
Real estate, net

 
1,188,160

 
628,271

 
860,283

 

 
2,676,714

Real estate available and held for sale

 
4,521

 
162,782

 
118,679

 

 
285,982

Total real estate

 
1,192,681

 
791,053

 
978,962

 

 
2,962,696

Loans receivable and other lending investments, net
1,377,843

 

 

 

 

 
1,377,843

Other investments

 
125,360

 
13,220

 
106,155

 
109,384

 
354,119

Total portfolio assets
$
1,377,843

 
$
1,318,041

 
$
804,273

 
$
1,085,117

 
$
109,384

 
$
4,694,658

Explanatory Note:
_______________________________________________________________________________

(1)
Corporate/Other includes certain equity investments that are not included in a reportable segment. See Item 8—"Financial Statements and Supplemental Data—Note 6" for further detail on these investments.

Additional information regarding segment revenue and profit information as well as prior period information is presented in Item 8—"Financial Statements and Supplemental Data—Note 15" and a discussion of operating results is presented in Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Real Estate Finance
The Company's real estate finance portfolio consists of senior mortgage loans that are secured by commercial real estate assets where the Company is the first lien holder. The portfolio also consists of subordinated mortgage loans that are secured by subordinated interests in commercial and residential real estate assets where the Company is in either a second lien or junior position, and corporate/partnership loans, which represent mezzanine or subordinated loans to entities for which the Company does not have a lien on the underlying asset, but may have a pledge of underlying equity ownership of such assets. In addition, the Company has preferred equity investments and debt securities classified as other lending investments.
The Company's real estate finance portfolio included the following ($ in thousands):
 
As of December 31,
 
2014
 
2013
 
Total
 
% of Total
 
Total
 
% of Total
Performing loans(1):
 
 
 
 
 
 
 
Senior mortgages
$
608,048

 
43.1
%
 
$
563,513

 
40.3
%
Subordinate mortgages
53,331

 
3.8
%
 
60,679

 
4.3
%
Corporate/partnership loans
497,246

 
35.2
%
 
429,586

 
30.7
%
Subtotal
1,158,625

 
82.1
%
 
1,053,778

 
75.3
%
Non-performing loans(1):
 
 
 
 
 
 
 
Senior mortgages
65,047

 
4.6
%
 
203,604

 
14.6
%
Total carrying value of loans
1,223,672

 
86.7
%
 
1,257,382

 
89.9
%
Other lending investments—securities
187,671

 
13.3
%
 
141,927

 
10.1
%
Total carrying value
1,411,343

 
100.0
%
 
1,399,309

 
100.0
%
General reserve for loan losses
(33,500
)
 
 
 
(29,200
)
 
 

Total loans receivable and other lending investments, net
$
1,377,843

 
 

 
$
1,370,109

 
 

Explanatory Note:
_______________________________________________________________________________

(1)
Performing and non-performing loans are presented net of asset-specific loan loss reserves of $0.8 million and $64.2 million, respectively, as of December 31, 2014 and $31.0 million and $317.0 million, respectively, as of December 31, 2013. See Item 8—"Financial Statements and Supplemental Data—Note 3" for a discussion of the Company's policies regarding non-performing loans and reserves for loan losses.

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Summary of Portfolio Characteristics—As of December 31, 2014, the Company's performing loans and other lending investments had a weighted average loan to value ratio of 70%. Additionally, the Company's performing loans were comprised of 56% fixed-rate loans and 44% variable-rate loans that had a weighted average accrual rate of 9% and a weighted average remaining term of 2.7 years.
Portfolio Activity—During the year ended December 31, 2014, the Company funded $622.4 million of loan investments, received principal repayments of $512.5 million and sold loans with a total carrying value of $30.8 million. In addition, the Company took title to properties in full satisfaction of non-performing mortgage loans with a fair value of $78.1 million, for which the properties had served as collateral. Additionally, the Company and a consortium of co-lenders formed a new unconsolidated entity which acquired, via foreclosure sale, title to a land asset which previously served as collateral for a loan receivable held by the consortium. As of December 31, 2014, the Company had a recorded equity interest of $23.5 million. See Item 8—"Financial Statements and Supplemental Data—Note 4," "Financial Statements and Supplemental Data—Note 5" and "Financial Statements and Supplemental Data—Note 6" for further details on real estate finance activities.
Summary of Interest Rate Characteristics—The Company's loans receivable and other lending investments had the following interest rate characteristics ($ in thousands):
 
 
As of December 31,
 
 
2014
 
2013
 
 
Carrying
Value
 
%
of Total
 
Weighted
Average
Accrual Rate
 
Carrying
Value
 
%
of Total
 
Weighted
Average
Accrual Rate
Fixed-rate loans and other lending investments
 
$
751,590

 
53.3
%
 
10.2
%
 
$
811,128

 
58.0
%
 
9.3
%
Variable-rate loans(1)
 
594,706

 
42.1
%
 
6.7
%
 
384,577

 
27.4
%
 
6.2
%
Non-performing loans(2)
 
65,047

 
4.6
%
 
N/A

 
203,604

 
14.6
%
 
N/A

Total carrying value
 
1,411,343

 
100.0
%
 
 
 
1,399,309

 
100.0
%
 
 

General reserve for loan losses
 
(33,500
)
 
 
 
 
 
(29,200
)
 
 

 
 

Total loans receivable and other lending investments, net
 
$
1,377,843

 
 
 
 
 
$
1,370,109

 
 

 
 


Explanatory Notes:
_______________________________________________________________________________

(1)
As of December 31, 2014 and 2013, includes $282.5 million and $117.9 million, respectively, of loans with a weighted average interest rate floor of 0.4% and 3.2%, respectively.
(2)
Performing and non-performing loans are presented net of asset-specific loan loss reserves of $0.8 million and $64.2 million, respectively, as of December 31, 2014, and $31.0 million and $317.0 million, respectively, as of December 31, 2013.
Summary of Maturities—As of December 31, 2014 the Company's loans receivable and other lending investments had the following maturities ($ in thousands)(1):
Year of Maturity
 
Number of
Loans
Maturing
 
Carrying
Value
 
%
of Total
2015
 
10

 
$
191,713

 
13.5
%
2016
 
7

 
352,040

 
24.9
%
2017
 
11

 
510,451

 
36.2
%
2018
 
7

 
48,958

 
3.5
%
2019
 
3

 
23,585

 
1.7
%
2020 and thereafter
 
6

 
219,549

 
15.6
%
Total performing loans and other lending investments
 
44

 
$
1,346,296

 
95.4
%
Non-performing loans
 
5

 
65,047

 
4.6
%
Total carrying value
 
49

 
$
1,411,343

 
100.0
%
General reserve for loan losses
 
 

 
(33,500
)
 
 

Total loans receivable and other lending investments, net
 
 

 
$
1,377,843

 
 

Explanatory Note:
_______________________________________________________________________________

(1)
Performing and non-performing loans are presented net of asset-specific loan loss reserves of $0.8 million and $64.2 million, respectively.

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Net Lease
The net lease portfolio is primarily comprised of properties owned by the Company and leased to single creditworthy tenants where the properties are subject to long-term leases. The majority of the leases provide for expenses at the facility to be paid by the tenant on a triple net lease basis. The Company generally intends to hold its net lease assets for long-term investment. However, the Company may dispose of assets if it deems the disposition to be in the Company's best interests.
During 2014, the Company partnered with a sovereign wealth fund to form a venture (the "Net Lease Venture") in which the partners plan to contribute up to an aggregate $500 million of equity to acquire and develop up to $1.25 billion of net lease assets. The Company owns a 51.9% noncontrolling interest in the venture and does not consolidate the Net Lease Venture.
Under a typical net lease agreement, the tenant agrees to pay a base monthly operating lease payment and most or all of the facility operating expenses (including taxes, utilities, maintenance and insurance). The Company generally targets corporate customers with facilities that are critical to their ongoing businesses.
The Company's net lease portfolio included the following ($ in thousands):
 
 
As of December 31,
 
 
2014
 
2013
Real estate, at cost
 
$
1,552,483

 
$
1,696,888

Less: accumulated depreciation
 
(364,323
)
 
(338,640
)
Real estate, net
 
1,188,160

 
1,358,248

Real estate available and held for sale
 
4,521

 

Other investments
 
125,360

 
16,408

Total
 
$
1,318,041

 
$
1,374,656

Summary of Portfolio Characteristics—As of December 31, 2014, the Company owned or had interests in 304 facilities, encompassing 18.7 million square feet located in 33 states. The Company's net lease assets were 96% leased with a weighted average remaining lease term of approximately 11.6 years. The annual average effective base rent per square foot, net of any tenant concessions, was $8.84 per square foot.
Portfolio Activity—During the year ended December 31, 2014, the Company funded $127.4 million to its Net Lease Venture, which acquired properties during the year, and $3.9 million of capital expenditures on existing net lease assets. The Company also sold assets with a net carrying value of $20.6 million. The Company had three net lease assets classified as held for sale as of December 31, 2014. See Item 8 —"Financial Statements and Supplemental Data—Note 4" for further details on consolidated net lease asset activities.
During 2014, the Company sold assets to its Net Lease Venture, including a net lease asset for net proceeds of $93.7 million, which approximated carrying value. The Company also sold its 72% interest in a previously consolidated entity, which owned a net lease asset subject to a non-recourse mortgage of $26.0 million at the time of sale, to the venture for net proceeds of $10.1 million, which approximated carrying value. As of December 31, 2014, the Net Lease Venture's carrying value of total assets was $348.1 million and the Company had a recorded equity interest in the venture of $125.4 million, which is included in "Other investments" on the Company's Consolidated Balance Sheets. See Item 8 —"Financial Statements and Supplemental Data—Note 6" for further details on unconsolidated net lease asset activities.

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Summary of Lease Expirations—As of December 31, 2014, lease expirations on the Company's net lease assets are as follows ($ in thousands):
Year of Lease Expiration
 
Number of
Leases
Expiring
 
Annualized In-Place
Operating
Lease Income
 
% of In-Place
Operating
Lease Income
 
% of Total
Revenue(1)
 
Square Feet of Leases Expiring (in thousands)
2015
 
3

 
$
2,681

 
1.8
%
 
0.6
%
 
267

2016
 
4

 
5,966

 
4.1
%
 
1.4
%
 
478

2017
 
4

 
4,946

 
3.4
%
 
1.1
%
 
344

2018
 
6

 
4,294

 
3.0
%
 
1.0
%
 
317

2019
 
3

 
1,076

 
0.7
%
 
0.2
%
 
95

2020
 
4

 
3,994

 
2.7
%
 
0.9
%
 
368

2021
 
4

 
5,025

 
3.5
%
 
1.1
%
 
250

2022
 
2

 
9,071

 
6.2
%
 
2.1
%
 
535

2023
 
3

 
5,415

 
3.7
%
 
1.2
%
 
205

2024
 
4

 
33,129

 
22.7
%
 
7.6
%
 
6,621

2025 and thereafter
 
16

 
70,357

 
48.2
%
 
16.0
%
 
8,434

Total
 
53

 
$
145,954

 
100.0
%
 
33.2
%
 
 

Weighted average remaining lease term
 
11.6 years

 
 
 
 

 
 

 
 


Explanatory Note:
_______________________________________________________________________________

(1)
Reflects the percentage of annualized GAAP operating lease income for leases in-place as a percentage of annualized total revenue.
Operating Properties
The operating properties portfolio is comprised of commercial and residential properties which represent a diverse pool of assets across a broad range of geographies and property types. The Company generally seeks to reposition or redevelop these assets with the objective of maximizing their value through the infusion of capital and/or intensive asset management efforts. The commercial properties within this portfolio include office, retail, hotel and other property types. The residential properties within this portfolio are generally luxury condominium projects located in major U.S. cities where the Company's strategy is to sell individual condominium units through retail distribution channels.
The Company's operating properties portfolio included the following ($ in thousands):
 
 
Commercial
 
Residential
 
 
As of December 31,
 
As of December 31,
 
 
2014
 
2013
 
2014
 
2013
Real estate, at cost
 
$
724,430

 
$
720,508

 
$

 
$

Less: accumulated depreciation and amortization
 
(96,159
)
 
(82,420
)
 

 

Real estate, net
 
$
628,271

 
$
638,088

 
$

 
$

Real estate available and held for sale
 
6,989

 
7,300

 
155,793

 
221,028

Other investments
 
12,532

 
13,809

 
688

 
2,223

Total portfolio assets
 
$
647,792

 
$
659,197

 
$
156,481

 
$
223,251


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Commercial Properties
Summary of Portfolio Characteristics—As of December 31, 2014, commercial properties within the operating properties portfolio included 29 facilities, encompassing 6.0 million square feet located in 10 states. Commercial properties include office, industrial and retail buildings along with marinas and hotels. The Company had 3 commercial properties classified as held for sale as of December 31, 2014. The Company’s commercial properties were primarily acquired through either foreclosure or deed in lieu of foreclosure in connection with the resolution of loans.
The Company classifies commercial properties as either stabilized or transitional. In determining whether a commercial property is stabilized or transitional, the Company analyzes certain performance metrics, primarily occupancy and yield. Stabilized commercial properties generally have occupancy levels above 80% and/or generate yields resulting in an adequate return based upon the properties’ risk profiles. Transitional commercial properties are generally those properties that do not meet these criteria. As of December 31, 2014, stabilized commercial properties had a total carrying value of $109.4 million, or 15% of the portfolio, and generated an unleveraged weighted average effective yield of 7.8% on gross carrying value for the year ended December 31, 2014. Stabilized commercial properties were 88% leased as of December 31, 2014. Transitional commercial properties had a total carrying value of $634.6 million, or 85% of the portfolio, and generated an unleveraged weighted average effective yield of 2.5% on gross carrying value for the year ended December 31, 2014. Transitional commercial properties were 58% leased as of December 31, 2014.
Portfolio Activity—During the year ended December 31, 2014, the Company acquired title to three properties with a total fair value of $72.4 million through the resolution of non-performing loans, purchased properties for $2.3 million and sold properties with a carrying value of $29.8 million which resulted in a net gain of $4.4 million. In addition, the Company funded $25.7 million of capital expenditures. During the year ended December 31, 2014, the Company's hotel properties had revenues of $21.7 million and expenses of $22.7 million.
As of December 31, 2014, lease expirations on commercial properties, excluding hotels and marinas, within the operating properties portfolio were as follows ($ in thousands):
Year of Lease Expiration
 
Number of
Leases
Expiring
 
Annualized In-Place
Operating
Lease Income
 
% of In-Place
Operating
Lease Income
 
% of Total
Revenue(1)
 
Square Feet of Leases Expiring (in thousands)
2015
 
155

 
6,196

 
9.7
%
 
1.4
%
 
324
2016
 
45

 
3,330

 
5.2
%
 
0.8
%
 
381
2017
 
52

 
5,515

 
8.7
%
 
1.3
%
 
269
2018
 
50

 
6,678

 
10.5
%
 
1.5
%
 
422
2019
 
46

 
6,521

 
10.2
%
 
1.5
%
 
213
2020
 
27

 
5,139

 
8.1
%
 
1.2
%
 
196
2021
 
27

 
5,464

 
8.6
%
 
1.2
%
 
471
2022
 
21

 
3,821

 
6.0
%
 
0.9
%
 
153
2023
 
15

 
5,749

 
9.0
%
 
1.3
%
 
268
2024
 
19

 
3,255

 
5.1
%
 
0.7
%
 
226
2025 and thereafter
 
41

 
12,036

 
18.9
%
 
2.7
%
 
404
Total
 
498

 
63,704

 
100.0
%
 
14.5
%
 
 
Weighted average remaining lease term
 
6.3 years

 
 
 
 

 
 

 
 

Explanatory Note:
_______________________________________________________________________________

(1)
Reflects the percentage of annualized GAAP operating lease income for leases in-place as a percentage of annualized total revenue.
Residential Properties
Summary of Portfolio Characteristics—As of December 31, 2014, residential properties within the operating properties portfolio included 13 residential projects, representing approximately 332 units located within luxury condominium projects in major cities throughout the United States.

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Portfolio Activity—During the year ended December 31, 2014, the Company sold 457 residential property units for net proceeds of $236.2 million, resulting in gains on sales of residential units of $79.1 million. During the same period, the Company funded $35.5 million of capital expenditures related to these projects, purchased $2.4 million of residential properties and incurred $25.6 million of net carrying costs that were reflected in "Real estate expenses" on the Company's Consolidated Statements of Operations.
Land
The Company's land portfolio included the following ($ in thousands):
 
 
As of December 31,
 
 
2014
 
2013
Real estate, net
 
$
860,283

 
$
799,845

Real estate available and held for sale
 
118,679

 
132,189

Other investments
 
106,155

 
29,765

Total
 
$
1,085,117

 
$
961,799

Summary of Portfolio Characteristics—As of December 31, 2014, the Company's land portfolio included 32 properties, comprised of 11 master planned community ("MPC") projects, 15 infill land parcels and 6 waterfront land parcels located throughout the United States. MPCs represent large-scale residential projects that the Company will entitle, plan and/or develop and may sell through retail channels to home builders or in bulk. The remainder of the Company’s land includes infill and waterfront parcels located in and around major cities that the Company will develop, sell to or partner with commercial real estate developers. Waterfront parcels are generally entitled for residential projects and urban infill parcels are generally entitled for mixed-use projects.
Portfolio Activity—Revenue from the Company's land portfolio consists primarily of lot sales from wholly-owned properties, recorded as "Land sales revenue," as well as the Company's share of earnings from unconsolidated entities in which the Company holds an interest recorded within "Earnings from equity method investments," both on the Company's Consolidated Statements of Operations. For the year ended December 31, 2014, the Company recognized revenue from its land portfolio of $15.2 million and cost of sales of $12.8 million for consolidated land assets and earnings from equity method investments of $14.9 million for unconsolidated land investments. Additionally, during the year ended December 31, 2014, the Company funded $80.1 million of capital expenditures in the portfolio and acquired title to or equity interests in $29.0 million of land assets through resolution of non-performing loans. The Company also transferred land assets of $9.5 million to newly formed unconsolidated entities during the year.
As of December 31, 2014, the Company had 6 land projects in production, 13 in development and 13 in the pre-development phase. The Company's land projects in production as of December 31, 2014 are listed below ($ in millions):
Project
 
Property Type
 
Location
 
Anticipated Completion Date(1)
 
Net Book Value
 
2014 Revenue
 
Units Sold in 2014(2)
 
Estimated Remaining Units(2)
Magnolia Green
 
MPC
 
Richmond, VA
 
2026
 
$
89,683

 
$
7,862

 
114

 
2,669

Asbury Park
 
Waterfront
 
Asbury Park, NJ
 
2025
 
81,769

 
6,696

 
14

 
2,446

Tetherow
 
MPC
 
Bend, OR
 
2020
 
14,657

 
6,626

 
29

 
106

Spring Mountain Ranch Phase 1(3)
 
MPC
 
Riverside, CA
 
2016
 
21,105

 
4,847

 
60

 
375

Naples Reserve
 
MPC
 
Naples, FL
 
2018
 
53,818

 
703

 
7

 
1,109

Marina Palms(3)(4)
 
Waterfront
 
N. Miami Beach, FL
 
2016
 
30,677

 
54,210

 

 
468

Total Land Projects in Production
 
 
 
 
 
$
291,709

 
$
80,944

 
224

 
7,173

Explanatory Notes:
_______________________________________________________________________________

(1)
Anticipated completion dates are subject to change as a result of factors that may be outside of the Company's control, such as uncertainty with rezoning, obtaining governmental permits and approvals, concerns of community associations and reliance on third party contractors.
(2)
Estimated remaining entitled units may include single-family lots, condos, multifamily rental units and hotel keys, as applicable, for the respective properties.
(3)
These land projects are accounted under the equity method of accounting. Revenue represents the gross share of revenues from the sale of units, which is reflected in earnings from equity method investments. During the year ended December 31, 2014, the Company recognized earnings from equity method investments of $14.7 million for Marina Palms and $0.2 million for Spring Mountain Ranch Phase 1.
(4)
Sales activity resulted in the venture receiving non-refundable deposits on 332 units under contract as of December 31, 2014.

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Policies with Respect to Other Activities
The Company's investment, financing and corporate governance policies (including conflicts of interests policies) are managed under the ultimate supervision of the Company's Board of Directors. The Company can amend, revise or eliminate these policies at any time without a vote of its shareholders. The Company currently intends to make investments in a manner consistent with the requirements of the Internal Revenue Code of 1986, as amended (the "Code") for the Company to qualify as a REIT.
Investment Restrictions or Limitations
The Company does not have any prescribed allocation among investments or product lines. Instead, the Company focuses on corporate and real estate credit underwriting to develop an analysis of the risk/reward trade-offs in determining the pricing and advisability of each particular transaction.
The Company believes that it is not, and intends to conduct its operations so as not to become, regulated as an investment company under the Investment Company Act. The Investment Company Act generally exempts entities that are "primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" (collectively, "Qualifying Interests"). The Company intends to rely on current interpretations of the Securities and Exchange Commission in an effort to qualify for this exemption. Based on these interpretations, the Company, among other things, must maintain at least 55% of its assets in Qualifying Interests and at least 25% of its assets in real estate-related assets (subject to reduction to the extent the Company invests more than 55% of its assets in Qualifying Interests). The Company's senior mortgages, real estate assets and certain of its subordinated mortgages generally constitute Qualifying Interests. Subject to the limitations on ownership of certain types of assets and the gross income tests imposed by the Code, the Company also may invest in the securities of other REITs, other entities engaged in real estate activities or other issuers, including for the purpose of exercising control over such entities.
Competition
The Company operates in a competitive market. See Item 1a—Risk factors—"We compete with a variety of investment, financing and leasing sources for our customers," for a discussion of how we may be affected by competition.
Regulation
The operations of the Company are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things: (1) regulate credit granting activities; (2) establish maximum interest rates, finance charges and other charges; (3) require disclosures to customers; (4) govern secured transactions; and (5) set collection, foreclosure, repossession and claims-handling procedures and other trade practices. Although most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges and on certain collection practices and creditor remedies, and require licensing of lenders and financiers and adequate disclosure of certain contract terms. The Company is also required to comply with certain provisions of the Equal Credit Opportunity Act that are applicable to commercial loans.
In the judgment of management, existing statutes and regulations have not had a material adverse effect on the business conducted by the Company. It is not possible at this time to forecast the exact nature of any future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon the future business, financial condition or results of operations or prospects of the Company.
The Company has elected and expects to continue to qualify to be taxed as a REIT under Section 856 through 860 of the Code. As a REIT, the Company must generally distribute at least 90% of its net taxable income, excluding capital gains, to its shareholders each year. In addition, the Company must distribute 100% of its net taxable income each year to avoid paying federal income taxes. REITs are also subject to a number of organizational and operational requirements in order to elect and maintain REIT qualification. These requirements include specific share ownership tests and asset and gross income tests. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its net taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to state and local taxes and to federal income tax and excise tax on its undistributed income.
Code of Conduct
The Company has adopted a Code of Conduct that sets forth the principles of conduct and ethics to be followed by our directors, officers and employees. The purpose of the Code of Conduct is to promote honest and ethical conduct, compliance with applicable governmental rules and regulations, full, fair, accurate, timely and understandable disclosure in periodic reports, prompt internal reporting of violations of the Code of Conduct and a culture of honesty and accountability. A copy of the Code of Conduct has been provided to each of our directors, officers and employees, who are required to acknowledge that they have received and will comply with the Code of Conduct. A copy of the Company's Code of Conduct has been previously filed with the SEC and is incorporated by reference in this Annual Report on Form 10-K as Exhibit 14.0. The Code of Conduct is also available on the

11

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Company's website at www.istarfinancial.com. The Company will disclose to shareholders material changes to its Code of Conduct, or any waivers for directors or executive officers, if any, within four business days of any such event. As of December 31, 2014, there have been no amendments to the Code of Conduct and the Company has not granted any waivers from any provision of the Code of Conduct to any directors or executive officers.
Employees
As of January 30, 2015, the Company had 182 employees and believes it has good relationships with its employees. The Company's employees are not represented by any collective bargaining agreements.
Other
In addition to this Annual Report, the Company files quarterly and special reports, proxy statements and other information with the SEC. All documents are filed with the SEC and are available free of charge on the Company's corporate website, which is www.istarfinancial.com. Through the Company's website, the Company makes available free of charge its annual proxy statement, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those Reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. You may also read and copy any document filed at the public reference facilities at 100 F Street, N.E., Washington, D.C. 25049. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC's electronic data gathering, analysis and retrieval system ("EDGAR") via electronic means, including on the SEC's homepage, which can be found at www.sec.gov.
Item 1a.    Risk Factors
In addition to the other information in this report, you should consider carefully the following risk factors in evaluating an investment in our securities. Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on our business, financial condition, results of operations, cash flows and market price of our common stock. The risks set forth below speak only as of the date of this report and we disclaim any duty to update them except as required by law. For purposes of these risk factors, the terms "our Company," "we," "our" and "us" refer to iStar Financial Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
Risks Related to Our Business
Changes in general economic conditions may adversely affect our business.
Our success is generally dependent upon economic conditions in the U.S. and, in particular, the geographic areas in which our investments are located. Substantially all businesses, including ours, were negatively affected by the previous economic recession and resulting illiquidity and volatility in the credit and commercial real estate markets. Although the commercial real estate and credit markets have improved, such markets remain volatile and it is not possible for us to predict whether these trends will continue in the future or quantify the impact of these or other trends on our financial results. Deterioration in economic trends could have a material adverse effect on our financial performance, liquidity and our ability to meet our debt obligations.
Our credit ratings will impact our borrowing costs.
Our borrowing costs and our access to the debt capital markets depend significantly on our credit ratings. Our unsecured corporate credit ratings from major national credit rating agencies are currently below investment grade. Having below investment grade credit ratings increases our borrowing costs and caused restrictive covenants in our public debt instruments to become operative. These restrictive covenants are described below in "Covenants in our indebtedness could limit our flexibility and adversely affect our financial condition." These factors have adversely impacted our financial performance and will continue to do so unless our credit ratings improve.
Covenants in our indebtedness could limit our flexibility and adversely affect our financial condition.
Our outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness of at least 1.2x and a restriction on debt incurrence based upon the effect of the debt incurrence on our fixed charge coverage ratio. If any of our covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of our debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders. While our ability to incur new indebtedness under the fixed charge coverage ratio is currently limited, which may put limitations on our ability to make new investments, we are permitted to incur indebtedness for the purpose of refinancing existing indebtedness and for other permitted purposes under the indentures governing our debt securities.
Our secured credit facilities entered into in March 2012, which we refer to as our March 2012 Secured Credit Facilities, contain certain covenants, including covenants relating to collateral coverage, dividend payments, restrictions on fundamental

12

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changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. In particular, we are required to maintain collateral coverage of 1.25x outstanding borrowings. In addition, for so long as we maintain our qualification as a REIT, the March 2012 Secured Credit Facilities permit us to distribute 100% of our REIT taxable income on an annual basis. We may not pay common dividends if we cease to qualify as a REIT.
Our March 2012 Secured Credit Facilities contain cross default provisions that would allow the lenders to declare an event of default and accelerate our indebtedness to them if we fail to pay amounts due in respect of our other recourse indebtedness in excess of specified thresholds or if the lenders under such other indebtedness are otherwise permitted to accelerate such indebtedness for any reason. The indentures governing our unsecured public debt securities permit the bondholders to declare an event of default and accelerate our indebtedness to them if our other recourse indebtedness in excess of specified thresholds is not paid at final maturity or if such indebtedness is accelerated. A default by us on our indebtedness would have a material adverse effect on our business and the market prices of our Common Stock.
We have significant indebtedness and funding commitments and limitations on our liquidity and ability to raise capital may adversely affect us.
Sufficient liquidity is critical to the management of our balance sheet and our ability to meet our scheduled debt payments and our funding commitments to borrowers. We have relied on secured borrowings, proceeds from issuance of unsecured debt, repayments from our loan assets and proceeds from asset sales to fund our operations and meet our debt maturities, and we expect to continue to rely primarily on these sources of liquidity for the foreseeable future. While we had access to various sources of capital in 2014, our ability to access capital in the future will be subject to a number of factors, many of which are outside of our control, such as conditions prevailing in the credit and real estate markets. There can be no assurance that we will have access to liquidity when needed or on terms that are acceptable to us. We may also encounter difficulty in selling assets or executing capital raising strategies on acceptable terms in a timely manner, which could impact our ability to make scheduled repayments on our outstanding debt. Failure to repay or refinance our borrowings as they come due would be an event of default under the relevant debt instruments, which could result in a cross default and acceleration of our other outstanding debt obligations. Failure to meet funding commitments could cause us to be in default of our financing commitments to borrowers. Any of the foregoing could have a material adverse effect on our business and stock price.
We may utilize derivative instruments to hedge risk, which may adversely affect our borrowing cost and expose us to other risks.
The derivative instruments we may use are typically in the form of interest rate swaps, interest rate caps and foreign exchange contracts. Interest rate swaps effectively change variable-rate debt obligations to fixed-rate debt obligations or fixed-rate debt obligations to variable-rate debt obligations. Interest rate caps limit our exposure to rising interest rates. Foreign exchange contracts limit or offset our exposure to changes in currency rates in respect of certain investments denominated in foreign currencies.
Our use of derivative instruments also involves the risk that a counterparty to a hedging arrangement could default on its obligation and the risk that we may have to pay certain costs, such as transaction fees or breakage costs, if a hedging arrangement is terminated by us. As a matter of policy, we enter into hedging arrangements with counterparties that are large, creditworthy financial institutions typically rated at least "A/A2" by S&P and Moody's, respectively.
Developing an effective strategy for dealing with movements in interest rates and foreign currencies is complex and no strategy can completely insulate us from risks associated with such fluctuations. There can be no assurance that any hedging activities will have the desired beneficial impact on our results of operations or financial condition.
Significant increases in interest rates could have an adverse effect on our operating results.
Our operating results depend in part on the difference between the interest and related income earned on our assets and the interest expense incurred in connection with our interest bearing liabilities. Changes in the general level of interest rates prevailing in the financial markets will affect the spread between our interest earning assets and interest bearing liabilities subject to the impact of interest rate floors and caps, as well as the amounts of floating rate assets and liabilities. Any significant compression of the spreads between interest earning assets and interest bearing liabilities could have a material adverse effect on us. In the event of a significant rising interest rate environment, rates could exceed the interest rate floors that exist on certain of our floating rate debt and create a mismatch between our floating rate loans and our floating rate debt that could have a significant adverse effect on our operating results. In addition, an increase in interest rates could, among other things, reduce the value of our fixed-rate interest bearing assets and our ability to realize gains from the sale of such assets. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control.

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We are required to make a number of judgments in applying accounting policies, and different estimates and assumptions could result in changes to our financial condition and results of operations.
Material estimates that are particularly susceptible to significant change underlie our determination of the reserve for loan losses, which is based primarily on the estimated fair value of loan collateral, as well as the valuation of real estate assets and deferred tax assets. While we have identified those accounting policies that are considered critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could have a material adverse effect on our financial performance and results of operations and actual results may differ materially from our estimates.
Our reserves for loan losses may prove inadequate, which could have a material adverse effect on our financial results.
We maintain loan loss reserves to offset potential future losses. Our general loan loss reserve reflects management's then-current estimation of the probability and severity of losses within our portfolio. In addition, our determination of asset-specific loan loss reserves relies on material estimates regarding the fair value of loan collateral. Estimation of ultimate loan losses, provision expenses and loss reserves is a complex and subjective process. As such, there can be no assurance that management's judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses. Such losses could be caused by factors including, but not limited to, unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate or markets in which our borrowers or their properties are located. In particular, during the previous financial crisis, the weak economy and disruption of the credit markets adversely impacted the ability and willingness of many of our borrowers to service their debt and refinance our loans to them at maturity. If our reserves for credit losses prove inadequate we may suffer additional losses which would have a material adverse effect on our financial performance and results of operations.
We have suffered losses when a borrower defaults on a loan and the underlying collateral value is not sufficient, and we may suffer additional losses in the future.
We have suffered losses arising from borrower defaults on our loan assets and we may suffer additional losses in the future. In the event of a default by a borrower on a non-recourse loan, we will only have recourse to the real estate-related assets collateralizing the loan. If the underlying collateral value is less than the loan amount , we will suffer a loss. Conversely, we sometimes make loans that are unsecured or are secured only by equity interests in the borrowing entities. These loans are subject to the risk that other lenders may be directly secured by the real estate assets of the borrower. In the event of a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying real estate. In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the borrower prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or managers of the assets.
We sometimes obtain individual or corporate guarantees from borrowers or their affiliates. In cases where guarantees are not fully or partially secured, we typically rely on financial covenants from borrowers and guarantors which are designed to require the borrower or guarantor to maintain certain levels of creditworthiness. Where we do not have recourse to specific collateral pledged to satisfy such guarantees or recourse loans, or where the value of the collateral proves insufficient, we will only have recourse as an unsecured creditor to the general assets of the borrower or guarantor, some or all of which may be pledged to satisfy other lenders. There can be no assurance that a borrower or guarantor will comply with its financial covenants, or that sufficient assets will be available to pay amounts owed to us under our loans and guarantees. As a result of these factors, we may suffer additional losses which could have a material adverse effect on our financial performance.
In the event of a borrower bankruptcy, we may not have full recourse to the assets of the borrower in order to satisfy our loan. In addition, certain of our loans are subordinate to other debts of the borrower. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt receives payment. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through "standstill" periods) and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy and borrower litigation can significantly increase collection costs and losses and the time necessary to acquire title to the underlying collateral, during which time the collateral may decline in value, causing us to suffer additional losses.
If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a borrower may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or increasing interest rates may hinder a borrower's ability to refinance our loan because the underlying property cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we could suffer additional loss which may adversely impact our financial performance.

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We are subject to additional risks associated with loan participations.
Some of our loans are participation interests or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control.
We are subject to additional risk associated with owning and developing real estate.
We have obtained title to a number of assets that previously served as collateral on defaulted loans. These assets are predominantly land and operating properties. These assets expose us to additional risks, including, without limitation:
We must incur costs to carry these assets and in some cases make repairs to defects in construction, make improvements to, or complete the assets, which requires additional liquidity and results in additional expenses that could exceed our original estimates and impact our operating results.
Real estate projects are not liquid and, to the extent we need to raise liquidity through asset sales, we may be limited in our ability to sell these assets in a short-time frame.
Uncertainty associated with rezoning, obtaining governmental permits and approvals, concerns of community associations, reliance on third party contractors, increasing commodity costs and threatened or pending litigation may materially delay our completion of rehabilitation and development activities and materially increase their cost to us.
The values of our real estate investments are subject to a number of factors outside of our control, including changes in the general economic climate, changes in interest rates and the availability of attractive financing, over-building or decreasing demand in the markets where we own assets, and changes in law and governmental regulations.

The residential market has experienced significant downturns that could recur and adversely affect us.
As of December 31, 2014, we owned land and residential operating properties with a net carrying value of $1.24 billion. The housing market in the United States has previously been affected by weakness in the economy, including high unemployment levels and weak consumer confidence. Although the economy has continued to strengthen, it is uncertain whether the recovery is sustainable. It is possible another downturn could occur again in the near future and adversely impact our portfolio, and accordingly our financial performance.
We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their lease obligations.
We own properties leased to tenants of our real estate assets and receive rents from tenants during the contracted term of such leases. A tenant's ability to pay rent is determined by its creditworthiness, among other factors. If a tenant's credit deteriorates, the tenant may default on its obligations under our lease and may also become bankrupt. The bankruptcy or insolvency of our tenants or other failure to pay is likely to adversely affect the income produced by our real estate assets. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. If a tenant files for bankruptcy, we may not be able to evict the tenant solely because of such bankruptcy or failure to pay. A court, however, may authorize a tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In addition, certain amounts paid to us within 90 days prior to the tenant's bankruptcy filing could be required to be returned to the tenant's bankruptcy estate. In any event, it is highly unlikely that a bankrupt or insolvent tenant would pay in full amounts it owes us under a lease that it intends to reject. In other circumstances, where a tenant's financial condition has become impaired, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is likely less than the total contractual rental amount. Without regard to the manner in which the lease termination occurs, we are likely to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant. In any of the foregoing circumstances, our financial performance could be materially adversely affected.
We are subject to risks relating to our asset concentration.
Our portfolio consists primarily of real estate and commercial real estate loans which are generally diversified by asset type, obligor, property type and geographic location. However, as of December 31, 2014, approximately 27% of the carrying value of our assets related to office properties, 22% related to land, 13% related to mixed use/mixed collateral properties and 11% related to entertainment/leisure properties. All of these property types have been adversely affected by the previous economic recession. In addition, as of December 31, 2014, approximately 26% of the carrying value of our assets related to properties located in the northeastern U.S. (including 14% in New York), 19% related to properties located in the western U.S. (including 15% in California), 15% related to properties located in the mid-Atlantic U.S., 15% related to properties located in the southeastern region of the U.S.

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and 13% related to properties located in the southwestern U.S. These regions include areas that were particularly hard hit by the prior downturn in the residential real estate markets. In addition, we have $25.5 million of European assets, which are subject to increased risks due to the economic uncertainty in the Eurozone. We may suffer additional losses on our assets due to these concentrations.
We underwrite the credit of prospective borrowers and tenants and often require them to provide some form of credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although our loans and real estate assets are geographically diverse and the borrowers and tenants operate in a variety of industries, to the extent we have a significant concentration of interest or operating lease revenues from any single borrower or customer, the inability of that borrower or tenant to make its payment could have an adverse effect on us. As of December 31, 2014, our five largest borrowers or tenants of net lease assets collectively accounted for approximately 21% of our 2014 revenues, of which no single customer accounts for more than 6%.
Lease expirations, lease defaults and lease terminations may adversely affect our revenue.
Lease expirations and lease terminations may result in reduced revenues if the lease payments received from replacement tenants are less than the lease payments received from the expiring or terminating corporate tenants. In addition, lease defaults or lease terminations by one or more significant tenants or the failure of tenants under expiring leases to elect to renew their leases could cause us to experience long periods of vacancy with no revenue from a facility and to incur substantial capital expenditures and/or lease concessions in order to obtain replacement tenants. Leases representing approximately 22.5% of our in-place operating lease income are scheduled to expire during the next five years.
We compete with a variety of financing and leasing sources for our customers.
The financial services industry and commercial real estate markets are highly competitive. Our competitors include finance companies, other REITs, commercial banks and thrift institutions, investment banks and hedge funds. Our competitors seek to compete aggressively on the basis of a number of factors including transaction pricing, terms and structure. We may have difficulty competing to the extent we are unwilling to match our competitors' deal terms in order to maintain our interest margins and/or credit standards. To the extent that we match competitors' pricing, terms or structure, we may experience decreased interest margins and/or increased risk of credit losses, which could have an adverse effect on our financial performance.
We face significant competition within our net leasing business from other owners, operators and developers of properties, many of which own properties similar to ours in markets where we operate. Such competition may affect our ability to attract and retain tenants and reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may result in their owners offering lower rental rates than we would or providing greater tenant improvement allowances or other leasing concessions. This combination of circumstances could adversely affect our revenues and financial performance.
We are subject to certain risks associated with investing in real estate, including potential liabilities under environmental laws and risks of loss from weather conditions, man-made or natural disasters, climate change and terrorism.
Under various U.S. federal, state and local environmental laws, ordinances and regulations, a current or previous owner of real estate (including, in certain circumstances, a secured lender that succeeds to ownership or control of a property) may become liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property. Those laws typically impose cleanup responsibility and liability without regard to whether the owner or control party knew of or was responsible for the release or presence of such hazardous or toxic substances. The costs of investigation, remediation or removal of those substances may be substantial. The owner or control party of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners of real properties for personal injuries associated with asbestos-containing materials. While a secured lender is not likely to be subject to these forms of environmental liability, when we foreclose on real property, we become an owner and are subject to the risks of environmental liability. Additionally, under our net lease assets we require our tenants to undertake the obligation for environmental compliance and indemnify us from liability with respect thereto. There can be no assurance that our tenants will have sufficient resources to satisfy their obligations to us.
Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts, fires and other environmental conditions can damage properties we own. As of December 31, 2014, approximately 22% of the carrying value of our assets was located in the western and northwestern U.S., geographic areas at higher risk for earthquakes. Additionally, we own properties located near the coastline and the value of our properties will potentially be subject to the risks associated with long-term effects of climate change. A significant number of our properties are located in major urban areas which, in recent years,

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have been high risk geographical areas for terrorism and threats of terrorism. Certain forms of terrorism including, but not limited to, nuclear, biological and chemical terrorism, political risks, environmental hazards and/or Acts of God may be deemed to fall completely outside the general coverage limits of our insurance policies or may be uninsurable or cost prohibitive to justify insuring against.  Furthermore, if the U.S. Terrorism Risk Insurance Program Reauthorization Act is repealed or not extended or renewed upon its expiration, the cost for terrorism insurance coverage may increase and/or the terms, conditions, exclusions, retentions, limits and sublimits of such insurance may be materially amended, and may effectively decrease the scope and availability of such insurance to the point where it is effectively unavailable. Future weather conditions, man-made or natural disasters, effects of climate change or acts of terrorism could adversely impact the demand for, and value of, our assets and could also directly impact the value of our assets through damage, destruction or loss, and could thereafter materially impact the availability or cost of insurance to protect against these events. Although we believe our owned real estate and the properties collateralizing our loan assets are adequately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance to our tenants. Any weather conditions, man-made or natural disasters, terrorist attack or effect of climate change, whether or not insured, could have a material adverse effect on our financial performance, the market price of our Common Stock and our ability to pay dividends. In addition, there is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to claims payments due to a deterioration in its financial condition.
From time to time we make investments in companies over which we do not have sole control. Some of these companies operate in industries that differ from our current operations, with different risks than investing in real estate.
From time to time we make debt or equity investments in other companies that we may not control or over which we may not have sole control. Although these businesses generally have a significant real estate component, some of them operate in businesses that are different from our primary business segments. Consequently, investments in these businesses, among other risks, subject us to the operating and financial risks of industries other than real estate and to the risk that we do not have sole control over the operations of these businesses.
From time to time we may make additional investments in or acquire other entities that may subject us to similar risks. Investments in entities over which we do not have sole control, including joint ventures, present additional risks such as having differing objectives than our partners or the entities in which we invest, or becoming involved in disputes, or competing with those persons. In addition, we rely on the internal controls and financial reporting controls of these entities and their failure to maintain effectiveness or comply with applicable standards may adversely affect us.
Declines in the market values of our equity investments may adversely affect periodic reported results.
Most of our equity investments are in funds or companies that are not publicly traded and their fair value may not be readily determinable. We may periodically estimate the fair value of these investments, based upon available information and management's judgment. Because such valuations are inherently uncertain, they may fluctuate over short periods of time. In addition, our determinations regarding the fair value of these investments may be materially higher than the values that we ultimately realize upon their disposal, which could result in losses that have a material adverse effect on our financial performance, the market price of our common stock and our ability to pay dividends.
Quarterly results may fluctuate and may not be indicative of future quarterly performance.
Our quarterly operating results could fluctuate; therefore, reliance should not be placed on past quarterly results as indicative of our performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others, variations in loan and real estate portfolio performance, levels of non-performing assets and related provisions, market values of investments, costs associated with debt, general economic conditions, the state of the real estate and financial markets and the degree to which we encounter competition in our markets.
Our ability to retain and attract key personnel is critical to our success.
Our success depends on our ability to retain our senior management and the other key members of our management team and recruit additional qualified personnel. We rely in part on equity compensation to retain and incentivize our personnel. In addition, if members of our management join competitors or form competing companies, the competition could have a material adverse effect on our business. Efforts to retain or attract professionals may result in additional compensation expense, which could affect our financial performance.

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We are highly dependent on information systems, and systems failures or security breaches could significantly disrupt our business.
Our business is highly dependent on communications, information, financial and operational systems. Any failure or interruption of our systems, including as a result of a security breach could cause delays or other problems in our business activities, which could have a material adverse effect on our operations and financial performance.
We may change certain of our policies without stockholder approval.
Our charter does not set forth specific percentages of the types of investments we may make. We can amend, revise or eliminate our investment financing and conflict of interest policies at any time at our discretion without a vote of our shareholders. A change in these policies could adversely affect our financial condition or results of operations or the market price of our common stock.
Certain provisions in our charter may inhibit a change in control.
Generally, to maintain our qualification as a REIT under the Code, not more than 50% in value of our outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of our taxable year. The Code defines "individuals" for purposes of the requirement described in the preceding sentence to include some types of entities. Under our charter, no person may own more than 9.8% of our outstanding shares of stock, with some exceptions. The restrictions on transferability and ownership may delay, deter or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interest of the security holders.
We would be subject to adverse consequences if we fail to qualify as a REIT.
We believe that we have been organized and operated in a manner so as to qualify for taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 1998. However, our qualification as a REIT has depended and will continue to depend on our ability to meet various requirements concerning, among other things, the ownership of our outstanding stock, the nature of our assets, the sources of our income and the amount of our distributions to our shareholders.
If we were to fail to qualify as a REIT for any taxable year, we would not be allowed a deduction for distributions to our shareholders in computing our net taxable income and would be subject to U.S. federal income tax, including any applicable alternative minimum tax, or "AMT," on our net taxable income at regular corporate rates, as well as applicable state and local taxes. Unless entitled to relief under certain Code provisions, we would also be disqualified from treatment as a REIT for the four subsequent taxable years following the year during which our REIT qualification was lost. In that case, we may need to borrow money or sell assets to pay taxes. As a result, cash available for distribution would be reduced for each of the years involved. Furthermore, it is possible that future economic, market, legal, tax or other considerations may cause our REIT qualification to be revoked.
Our Secured Credit Facilities (see Item 8—"Financial Statements and Supplemental Data—Note 8") prohibit us from paying dividends on our common stock if we no longer qualify as a REIT.
To qualify as a REIT, we may be forced to borrow funds, sell assets or take other actions during unfavorable market conditions.
To qualify as a REIT, we generally must distribute to our shareholders at least 90% of our net taxable income, excluding net capital gains each year, and we will be subject to U.S. federal income tax, as well as applicable state and local taxes, to the extent that we distribute less than 100% of our net taxable income each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
In the event that principal, premium or interest payments with respect to a particular debt instrument that we hold are not made when due, we may nonetheless be required to continue to recognize the unpaid amounts as taxable income. In addition, we may be allocated taxable income in excess of cash flow received from some of our partnership investments. Due to these and other potential timing differences between income recognition or expense deduction and cash receipts or disbursements, there is a significant risk that we may have substantial taxable income in excess of cash available for distribution. In order to qualify as a REIT and avoid the payment of income and excise taxes, we may need to borrow funds or take other actions to meet our REIT distribution requirements for the taxable year in which the "phantom income" is recognized.

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Complying with the REIT requirements may cause us to forego and/or liquidate otherwise attractive investments.
In order to meet the income, asset and distribution tests under the REIT rules, we may be required to take or forego certain actions. For instance, we may not be able to make certain investments and we may have to liquidate other investments. In addition, we may be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. These actions could have the effect of reducing our income and amounts available for distribution to our shareholders.
Certain of our business activities may potentially be subject to the prohibited transaction tax, which could reduce the return on your investment.
For so long as we qualify as a REIT, our ability to dispose of certain properties may be restricted under the REIT rules, which generally impose a 100% penalty tax on any gain recognized on "prohibited transactions," which refers to the disposition of property that is deemed to be inventory or held primarily for sale to customers in the ordinary course of our business, subject to certain exceptions. Whether property is inventory or otherwise held primarily for sale depends on the particular facts and circumstances. The Internal Revenue Code provides a safe harbor that, if met, allows a REIT to avoid being treated as engaged in a prohibited transaction. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with the safe harbor. The 100% tax does not apply to gains from the sale of foreclosure property or to property that is held through a taxable REIT subsidiary or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates. We intend to structure our activities to avoid prohibited transaction characterization.
Certain of our activities, including our use of taxable REIT subsidiaries, are subject to taxes that could reduce our cash flows.
Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay some U.S. federal, state, local and non-U.S. taxes on our income and property, including taxes on any undistributed income, taxes on income from certain activities conducted as a result of foreclosures, and property and transfer taxes. We would be required to pay taxes on net taxable income that we fail to distribute to our shareholders. In addition, we may be required to limit certain activities that generate non-qualifying REIT income, such as land development and sales of condominiums, and/or we may be required to conduct such activities through "taxable REIT subsidiaries," and we hold a significant amount of assets in our "taxable REIT subsidiaries," including assets that we have acquired through foreclosure, assets that may be treated as dealer property and other assets that could adversely affect our ability to qualify as a REIT if held directly by us. As a result, we will be required to pay income taxes on the taxable income generated by these assets. There are also limitations on the ability of taxable REIT subsidiaries to make interest payments to affiliated REITs. Furthermore, we will be subject to a 100% penalty tax to the extent our economic arrangements with our tenants or our taxable REIT subsidiaries are not comparable to similar arrangements among unrelated parties. We will also be subject to a 100% tax to the extent we derive income from the sale of assets to customers in the ordinary course of business other than through our taxable REIT subsidiaries. To the extent we or our taxable REIT subsidiaries are required to pay U.S. federal, state, local or non-U.S. taxes, we will have less cash available for distribution to our shareholders.
We have substantial net operating and net capital loss carry forwards which we use to offset our tax and distribution requirements. In the event that we experience an "ownership change" for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, our ability to use these losses will be limited. An "ownership change" is determined based upon complex rules which track the changes in ownership that occur in our Common Stock for a trailing three year period. We have experienced volatility and significant trading in our Common Stock in recent years. The occurrence of an ownership change is generally beyond our control and, if triggered, may increase our tax and distribution obligations for which we may not have sufficient cash flow.
A failure to comply with the limits on our ownership of and relationship with our taxable REIT subsidiaries would jeopardize our REIT qualification and may result in the application of a 100% excise tax.
No more than 25% of the value of a REIT's total assets may consist of stock or securities of one or more taxable REIT subsidiaries. This requirement limits the extent to which we can conduct activities through taxable REIT subsidiaries or expand the activities that we conduct through taxable REIT subsidiaries. The values of some of our assets, including assets that we hold through taxable REIT subsidiaries may not be subject to precise determination, and values are subject to change in the future. In addition, we hold certain mortgage and mezzanine loans to one or more of our taxable REIT subsidiaries that are secured by real property. We treat these loans as qualifying assets for purposes of the REIT asset tests to the extent that such mortgage loans are secured by real property and such mezzanine loans are secured by an interest in a limited liability company that holds real property, and pursuant to a private letter ruling we received from the IRS we do not treat such loans as subject to the limitation that securities from taxable REIT subsidiaries must constitute no more than 25% of our total assets. We are entitled to rely upon this private letter ruling only to the extent that we did not misstate or omit a material fact in the ruling request and that we continue to operate in

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accordance with the material facts described in such request, and no assurance can be given that we will always be able to do so. To the extent that any loan was recharacterized as equity, it would increase the amount of non-real estate securities that we have in our taxable REIT subsidiaries and could adversely affect our ability to meet the 25% limitation described above. If we were not able to exclude such loans to our taxable REIT subsidiaries from the 25% limitation described above, our ability to meet the REIT asset tests and other REIT requirements could be adversely affected. Accordingly, there can be no assurance that we have met or will be able to continue to comply with the taxable REIT subsidiary 25% limitation.
In addition, we may from time to time need to make distributions from a taxable REIT subsidiary in order to keep the value of our taxable REIT subsidiaries below 25% of our total assets. However, taxable REIT subsidiary dividends will generally not constitute qualifying income for purposes of the 75% REIT gross income test. While we will monitor our compliance with both this income test and the limitation on the percentage of our total assets represented by taxable REIT subsidiary securities, and intend to conduct our affairs so as to comply with both, the two may at times be in conflict with one another. For example, it is possible that we may wish to distribute a dividend from a taxable REIT subsidiary in order to reduce the value of our taxable REIT subsidiaries below 25% of our assets, but we may be unable to do so without violating the 75% REIT gross income test.
Although there are other measures we can take in such circumstances in order to remain in compliance with the requirements for REIT qualification, there can be no assurance that we will be able to comply with both of these tests in all market conditions.
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the value of our Common Stock.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. shareholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a 39.6% maximum U.S. federal income tax rate on ordinary income when paid to such shareholders. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our Common Stock.
Legislative or regulatory tax changes related to REITs could materially and adversely affect our business.
At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be changed, possibly with retroactive effect. We cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. We and our shareholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.
Our Investment Company Act exemption limits our investment discretion and loss of the exemption would adversely affect us.
We believe that we currently are not, and we intend to operate our company so that we will not be, regulated as an investment company under the Investment Company Act because we are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interest in real estate." Specifically, we are required to invest at least 55% of our assets in "qualifying real estate assets" (that is, real estate, mortgage loans and other qualifying interests in real estate), and at least an additional 25% of our assets in other "real estate-related assets," such as mezzanine loans and unsecured investments in real estate entities, or additional qualifying real estate assets.
We will need to monitor our assets to ensure that we continue to satisfy the percentage tests. Maintaining our exemption from regulation as an investment company under the Investment Company Act limits our ability to invest in assets that otherwise would meet our investment strategies. If we fail to qualify for this exemption, we could not operate our business efficiently under the regulatory scheme imposed on investment companies under the Investment Company Act, and we could be required to restructure our activities. This would have a material adverse effect on our financial performance and the market price of our securities.

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Actions of the U.S. government, including the U.S. Congress, Federal Reserve, U.S. Treasury and other governmental and regulatory bodies, to stabilize or reform the financial markets, or market responses to those actions, may not achieve the intended effect and may adversely affect our business.
The Obama Administration, Congress and regulators have increased their focus on the regulation of the financial industry. New or modified regulations and related regulatory guidance, including under the Dodd-Frank Wall Street Reform Act, or the Dodd-Frank Act, may have unforeseen or unintended adverse effects on the financial industry. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may also be adversely affected by future changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement.
In addition to the enactment of the Dodd-Frank Act, various legislative bodies have also considered altering the existing framework governing creditors' rights and mortgage products including legislation that would result in or allow loan modifications of various sorts. Such legislation may change the operating environment in substantial and unpredictable ways. We cannot predict whether new legislation will be enacted, and if enacted, the effect that it or any regulations would have on our activities, financial condition, or results of operations.
Item 1b.    Unresolved Staff Comments
None.
Item 2.    Properties
The Company's principal executive and administrative offices are located at 1114 Avenue of the Americas, New York, NY 10036. Its telephone number and web address are (212) 930-9400 and www.istarfinancial.com, respectively. The lease for the Company's principal executive and administrative offices expires in February 2021. The Company's principal regional offices are located in Atlanta, Georgia; Dallas, Texas; Hartford, Connecticut; San Francisco, California and two offices in the Los Angeles, California metropolitan area.
See Item 1—"Net Lease," "Operating Properties" and "Land" for a discussion of properties held by the Company for investment purposes and Item 8—"Financial Statements and Supplemental Data—Schedule III," for a detailed listing of such facilities.
Item 3.    Legal Proceedings
The Company and/or one or more of its subsidiaries is party to various pending litigation matters that are considered ordinary routine litigation incidental to its business as a finance and investment company focused on the commercial real estate industry, including loan foreclosure and foreclosure-related proceedings. In addition to such matters, the Company is a party to the following legal proceedings:
Shareholder Action
On March 7, 2014, a shareholder action purporting to assert derivative, class and individual claims was filed in the Circuit Court for Baltimore City, Maryland naming the Company, a number of our current and former senior executives (including our chief executive officer) and current and former directors as defendants.  The complaint sought unspecified damages and other relief and alleged breach of fiduciary duty, breach of contract and other causes of action arising out of shares of our common stock issued by the Company to our senior executives pursuant to restricted stock unit awards granted in December 2008 and modified in July 2011. On October 30, 2014, the Court granted the defendants’ Motions to Dismiss and plaintiffs’ claims against all of the defendants in this action were dismissed. Plaintiffs have filed a notice of appeal.
U.S. Home Corporation ("Lennar") v. Settlers Crossing, LLC, et al. (Civil Action No. DKC 08-1863)
On January 22, 2015, the United States District Court for the District of Maryland (the "Court") entered a judgment in favor of the Company in the matter of Lennar v. Settlers Crossing, LLC, et al. (Civil Action No. DKC 08-1863). The litigation involved a dispute over the purchase and sale of approximately 1,250 acres of land in Prince George’s County, Maryland. The Court found that the Company was entitled to specific performance and awarded damages to it in the aggregate amount of: (i) the remaining purchase price to be paid by Lennar of $114.0 million; plus (ii) interest on the unpaid amount at a rate of 12% per annum, calculated on a per diem basis, from May 27, 2008, until Lennar proceeds to settlement on the land; plus (iii) real estate taxes paid by the Company in the amount of approximately $1.6 million; plus (iv) actual and reasonable attorneys' fees and costs incurred by the Company in connection with the litigation. The Court ordered Lennar to proceed to settlement on the land and to pay the total

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amounts awarded to the Company within 30 days of the judgment. A third party is entitled to a 15% participation interest in all proceeds. Lennar has filed a notice of appeal of the Court’s judgment, orders and rulings in the action. There can be no assurance as to the timing or actual receipt by the Company of amounts awarded by the Court or to the outcome of any appeal.
Item 4.    Mine Safety Disclosures
Not applicable.
PART II
Item 5.    Market for Registrant's Equity and Related Share Matters
The Company's Common Stock trades on the New York Stock Exchange ("NYSE") under the symbol "STAR." The high and low sales prices per share of Common Stock are set forth below for the periods indicated.
 
 
2014
 
2013
Quarter Ended
 
High
 
Low
 
High
 
Low
December 31
 
$
14.60

 
$
12.30

 
$
14.65

 
$
11.57

September 30
 
$
15.27

 
$
13.26

 
$
12.25

 
$
10.20

June 30
 
$
15.19

 
$
13.94

 
$
12.55

 
$
9.99

March 31
 
$
15.91

 
$
13.79

 
$
11.00

 
$
8.26

On February 20, 2015, the closing sale price of the Common Stock as reported by the NYSE was $13.50 The Company had 2,094 holders of record of Common Stock as of February 20, 2015.
At December 31, 2014, the Company had six series of preferred stock outstanding: 8.000% Series D Preferred Stock, 7.875% Series E Preferred Stock, 7.8% Series F Preferred Stock, 7.65% Series G Preferred Stock, 7.50% Series I Preferred Stock and 4.50% Series J Preferred Stock. Each of the Series D, E, F, G and I preferred stock is listed on the NYSE. The Series J Preferred Stock is not listed on an exchange.
Dividends
The Board of Directors has not established any minimum distribution level. In order to maintain its qualification as a REIT, the Company intends to pay dividends to its shareholders that, on an annual basis, will represent at least 90% of its taxable income (which may not necessarily equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gains. The Company has recorded net operating losses and may record net operating losses in the future, which may reduce its taxable income in future periods and lower or eliminate entirely the Company's obligation to pay dividends for such periods in order to maintain its REIT qualification.
Holders of Common Stock, vested High Performance Units and certain unvested restricted stock units and common share equivalents will be entitled to receive distributions if, as and when the Board of Directors authorizes and declares distributions. However, rights to distributions may be subordinated to the rights of holders of preferred stock, when preferred stock is issued and outstanding. In addition, the Company's Secured Credit Facilities (see Item 8—"Financial Statements and Supplemental Data—Note 8") permit the Company to distribute 100% of its REIT taxable income on an annual basis for so long as the Company maintains its qualification as a REIT. The Secured Credit Facilities generally restrict the Company from paying any common dividends if it ceases to qualify as a REIT. In any liquidation, dissolution or winding up of the Company, each outstanding share of Common Stock and HPU share equivalent will entitle its holder to a proportionate share of the assets that remain after the Company pays its liabilities and any preferential distributions owed to preferred shareholders.
The Company did not declare or pay dividends on its Common Stock for the years ended December 31, 2014 and 2013. The Company declared and paid dividends of $8.0 million, $11.0 million, $7.8 million, $6.1 million, and $9.4 million on its Series D, E, F, G, and I preferred stock, respectively, during each of the years ended December 31, 2014 and 2013. During the year ended December 31, 2014 and 2013, the Company also declared and paid dividends of $9.0 million and $6.7 million, respectively, on its Series J preferred stock, which was issued in March 2013. All of the dividends qualified as return of capital for tax reporting purposes. There are no dividend arrearages on any of the preferred shares currently outstanding.
Distributions to shareholders will generally be taxable as ordinary income, although all or a portion of such distributions may be designated by the Company as capital gain or may constitute a tax-free return of capital. The Company annually furnishes to each of its shareholders a statement setting forth the distributions paid during the preceding year and their characterization as ordinary income, capital gain or return of capital.

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No assurance can be given as to the amounts or timing of future distributions, as such distributions are subject to the Company's taxable income after giving effect to its net operating loss carryforwards, financial condition, capital requirements, debt covenants, any change in the Company's intention to maintain its REIT qualification and such other factors as the Company's Board of Directors deems relevant. The Company may elect to satisfy some of its REIT distribution requirements, if any, through qualifying stock dividends.
Disclosure of Equity Compensation Plan Information
Plans Category
 
(a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
 
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans approved by security holders-restricted stock awards(1)(2)
 
598,387

 
N/A
 
4,039,384


Explanatory Note:
_______________________________________________________________________________

(1)
Restricted Stock—The amount shown in column (a) includes 319,916 unvested restricted stock units which may vest in the future based on the employees' continued service to the Company. None of these unvested units are included in the Company's outstanding share balance (see Item 8—"Financial Statements and Supplemental Data—Note 12" for a more detailed description of the Company's restricted stock grants). Substantially all of the restricted stock units included in column (a) are required to be settled on a net, after-tax basis (after deducting shares for minimum required statutory withholdings); therefore, the actual number of shares issued will be less than the gross amount of the awards. The amounts shown in column (a) also includes 278,471 of common stock equivalents and restricted stock awarded to our non-employee directors in consideration of their service to the Company as directors. Common stock equivalents represent rights to receive shares of Common Stock at the date the common stock equivalents are settled. Common stock equivalents have dividend equivalent rights beginning on the date of grant. The amount in column (c) represents the aggregate amount of stock options, shares of restricted stock awards or other performance awards that could be granted under compensation plans approved by the Company's security holders after giving effect to previously issued awards of stock options, shares of restricted stock and other performance awards (see Item 8—"Financial Statements and Supplemental Data—Note 12" for a more detailed description of the Company's Long-Term Incentive Plans).
(2)
The amount shown in column (a) does not include a currently indeterminable number of shares that may be issued upon the satisfaction of performance and vesting conditions of awards made under the Company's 2013 Performance Incentive Plan ("iPIP") approved by shareholders. In no event may the number of shares issued exceed the amount available in column (c) unless shareholders authorize additional shares (see Item 8—"Financial Statements and Supplemental Data—Note 12" for a more detailed description of iPIP.)


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Table of Contents

Item 6.    Selected Financial Data
The following table sets forth selected financial data on a consolidated historical basis for the Company. This information should be read in conjunction with the discussions set forth in Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations."
 
 
For the Years Ended December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(In thousands, except per share data and ratios)
OPERATING DATA:
 
 
 
 
 
 
 
 
 
 
Operating lease income
 
$
243,100

 
$
234,567

 
$
216,291

 
$
195,872

 
$
183,443

Interest income
 
122,704

 
108,015

 
133,410

 
226,871

 
364,094

Other income
 
81,033

 
48,208

 
47,838

 
39,722

 
51,069

Land sales revenue
 
15,191

 

 

 

 

Total revenue
 
462,028

 
390,790

 
397,539

 
462,465

 
598,606

Interest expense
 
224,483

 
266,225

 
355,097

 
342,186

 
313,766

Real estate expense
 
163,389

 
157,441

 
151,458

 
138,714

 
121,036

Land cost of sales
 
12,840

 

 

 

 

Depreciation and amortization
 
73,571

 
71,266

 
68,770

 
58,091

 
56,668

General and administrative
 
88,806

 
92,114

 
80,856

 
105,039

 
109,526

Provision for (recovery of) loan losses
 
(1,714
)
 
5,489

 
81,740

 
46,412

 
331,487

Impairment of assets
 
34,634

 
12,589

 
13,778

 
13,239

 
12,809

Other expense
 
5,821

 
8,050

 
17,266

 
11,070

 
16,055

Total costs and expenses
 
601,830

 
613,174

 
768,965

 
714,751

 
961,347

Income (loss) before earnings from equity method investments and other items
 
(139,802
)
 
(222,384
)
 
(371,426
)
 
(252,286
)
 
(362,741
)
Gain (loss) on early extinguishment of debt, net
 
(25,369
)
 
(33,190
)
 
(37,816
)
 
101,466

 
108,923

Earnings from equity method investments
 
94,905

 
41,520

 
103,009

 
95,091

 
51,908

Loss on transfer of interest to unconsolidated subsidiary
 

 
(7,373
)
 

 

 

Income (loss) from continuing operations before income taxes
 
(70,266
)
 
(221,427
)
 
(306,233
)
 
(55,729
)
 
(201,910
)
Income tax (expense) benefit
 
(3,912
)
 
659

 
(8,445
)
 
4,719

 
(7,023
)
Income (loss) from continuing operations
 
(74,178
)
 
(220,768
)
 
(314,678
)
 
(51,010
)
 
(208,933
)
Income (loss) from discontinued operations
 

 
644

 
(17,481
)
 
(5,514
)
 
18,757

Gain from discontinued operations
 

 
22,233

 
27,257

 
25,110

 
270,382

Income from sales of real estate
 
89,943

 
86,658

 
63,472

 
5,721

 

Net income (loss)
 
15,765

 
(111,233
)
 
(241,430
)
 
(25,693
)
 
80,206

Net (income) loss attributable to noncontrolling interests
 
704

 
(718
)
 
1,500

 
3,629

 
(523
)
Net income (loss) attributable to iStar Financial Inc.
 
16,469

 
(111,951
)
 
(239,930
)
 
(22,064
)
 
79,683

Preferred dividends
 
(51,320
)
 
(49,020
)
 
(42,320
)
 
(42,320
)
 
(42,320
)
Net (income) loss allocable to HPU holders and Participating Security holders(1)
 
1,129

 
5,202

 
9,253

 
1,997

 
(1,084
)
Net income (loss) allocable to common shareholders
 
$
(33,722
)
 
$
(155,769
)
 
$
(272,997
)
 
$
(62,387
)
 
$
36,279

Per common share data(2):
 
 
 
 
 
 
 
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(0.40
)
 
$
(2.09
)
 
$
(3.37
)
 
$
(0.91
)
 
$
(2.62
)
Net income (loss) attributable to iStar Financial Inc.:
 
 
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(0.40
)
 
$
(1.83
)
 
$
(3.26
)
 
$
(0.70
)
 
$
0.39

Per HPU share data(2):
 
 
 
 
 
 
 
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(75.27
)
 
$
(396.07
)
 
$
(638.27
)
 
$
(173.66
)
 
$
(497.13
)
Net income (loss) attributable to iStar Financial Inc.:
 
 
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(75.27
)
 
$
(346.80
)
 
$
(616.87
)
 
$
(133.13
)
 
$
72.27

Dividends declared per common share
 
$

 
$

 
$

 
$

 
$


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Table of Contents

 
 
For the Years Ended December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(In thousands, except per share data and ratios)
SUPPLEMENTAL DATA:
 
 
 
 
 
 
 
 
 
 
Adjusted Income(3)
 
$
109,377

 
$
(21,677
)
 
$
(53,847
)
 
$
(3,316
)
 
$
360,525

Adjusted EBITDA(3)
 
398,717

 
298,833

 
349,754

 
376,464

 
767,663

Ratio of Adjusted EBITDA to interest expense and preferred dividends(3)
 
1.4x

 
0.9x

 
0.9x

 
1.0x

 
2.0x

Ratio of earnings to fixed charges(4)
 

 

 

 

 

Ratio of earnings to fixed charges and preferred dividends(4)
 

 

 

 

 

Weighted average common shares outstanding—basic and diluted
 
85,031

 
84,990

 
83,742

 
88,688

 
93,244

Weighted average HPU shares outstanding—basic and diluted
 
15

 
15

 
15

 
15

 
15

Cash flows from:
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
(10,342
)
 
$
(180,465
)
 
$
(191,932
)
 
$
(28,577
)
 
$
(45,883
)
Investing activities
 
159,793

 
893,447

 
1,267,047

 
1,461,257

 
3,738,823

Financing activities
 
(190,958
)
 
(455,758
)
 
(1,175,597
)
 
(1,580,719
)
 
(3,412,707
)

 
 
As of December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(In thousands)
BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
 
Real estate, net
 
$
2,676,714

 
$
2,796,181

 
$
2,739,099

 
$
2,893,482

 
$
2,599,203

Real estate available and held for sale
 
285,982

 
360,517

 
635,865

 
677,458

 
746,081

Loans receivable and other lending investments, net
 
1,377,843

 
1,370,109

 
1,829,985

 
2,860,762

 
4,587,352

Total assets
 
5,463,133

 
5,642,011

 
6,159,999

 
7,523,083

 
9,175,681

Debt obligations, net
 
4,022,684

 
4,158,125

 
4,691,494

 
5,837,540

 
7,345,433

Total equity
 
1,248,348

 
1,301,465

 
1,313,154

 
1,573,604

 
1,694,659


Explanatory Notes:
_______________________________________________________________________________

(1)
HPU holders are current and former Company employees who purchased high performance common stock units under the Company's High Performance Unit Program. Participating Security holders are Company employees and directors who hold unvested restricted stock units, restricted stock awards and common stock equivalents granted under the Company's Long Term Incentive Plans.
(2)
See Item 8—"Financial Statements and Supplemental Data—Note 13."
(3)
Adjusted income and Adjusted EBITDA should be examined in conjunction with net income (loss) as shown in our Consolidated Statements of Operations. Adjusted income and Adjusted EBITDA should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), as an indicator of our performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor are Adjusted income and Adjusted EBITDA indicative of funds available to fund our cash needs or available for distribution to shareholders. Rather, Adjusted income and Adjusted EBITDA are additional measures for us to use to analyze how our business is performing. It should be noted that our manner of calculating Adjusted income and Adjusted EBITDA may differ from the calculations of similarly-titled measures by other companies. See computation of Adjusted income and Adjusted EBITDA on pages 34 and 35.
(4)
This ratio of earnings to fixed charges is calculated in accordance with SEC Regulation S-K Item 503. The Company's unsecured debt securities have a fixed charge coverage covenant which is calculated differently in accordance with the terms of the agreements governing such securities. For the years ended December 31, 2014, 2013, 2012, 2011 and 2010, earnings were not sufficient to cover fixed charges by $89,948, $240,912, $305,450, $65,842 and $221,634, respectively, and earnings were not sufficient to cover fixed charges and preferred dividends by $141,268, $289,932, $347,770, $108,162 and $263,954, respectively.


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Table of Contents

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements are included with respect to, among other things, the Company's current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. Important factors that the Company believes might cause such differences are discussed in the section entitled, "Risk Factors" in Part I, Item 1a of this Form 10-K or otherwise accompany the forward-looking statements contained in this Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-K. For purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations, the terms "we," "our" and "us" refer to iStar Financial Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
This discussion summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity during the three-year period ended December 31, 2014. This discussion should be read in conjunction with our consolidated financial statements and related notes for the three-year period ended December 31, 2014 included elsewhere in this Annual Report on Form 10-K. These historical financial statements may not be indicative of our future performance. Certain prior year amounts have been reclassified in the Company's Consolidated Financial Statements and the related notes to conform to the current period presentation.
Introduction
iStar Financial Inc. is a fully-integrated finance and investment company focused on the commercial real estate industry. We provide custom-tailored investment capital to high-end private and corporate owners of real estate and invest directly across a range of real estate sectors. We are taxed as a real estate investment trust, or "REIT," and have invested more than $35 billion over the past two decades. Our primary business segments are real estate finance, net lease, operating properties and land.
Our real estate finance portfolio is comprised of senior and mezzanine real estate loans that may be either fixed-rate or variable-rate and are structured to meet the specific financing needs of borrowers. Our portfolio also includes preferred equity investments and senior and subordinated loans to corporations, particularly those engaged in real estate or real estate related businesses, and may be either secured or unsecured. Our loan portfolio includes whole loans and loan participations.
Our net lease portfolio is primarily comprised of properties owned by us and leased to single creditworthy tenants where the properties are subject to long-term leases. Most of the leases provide for expenses at the facility to be paid by the tenant on a triple net lease basis. The properties in this portfolio are diversified by property type and geographic location. In 2014, the Company partnered with a sovereign wealth fund to form a venture in which the partners plan to contribute equity to acquire and develop net lease assets.
Our operating properties portfolio is comprised of commercial and residential properties which represent a diverse pool of assets across a broad range of geographies and property types. We generally seek to reposition or redevelop these assets with the objective of maximizing their value through the infusion of capital and/or intensive asset management efforts. The commercial properties within this portfolio include office, retail, hotel and other property types. The residential properties within this portfolio are generally luxury condominium projects located in major U.S. cities where our strategy is to sell individual condominium units through retail distribution channels.
Our land portfolio primarily consists of 11 master planned community projects, 15 infill land parcels and 6 waterfront land parcels located throughout the United States. Master planned communities represent large-scale residential projects that we will entitle, plan and/or develop and may sell through retail channels to home builders or in bulk. We currently have entitlements at these projects for more than 25,000 lots. The remainder of the Company’s land includes infill and waterfront parcels located in and around major cities that the Company will develop, sell to or partner with commercial real estate developers. Waterfront parcels are generally entitled for residential projects and urban infill parcels are generally entitled for mixed-use projects. These projects are currently entitled for approximately 6,000 residential units, and select projects include commercial, retail and office uses. As of December 31, 2014, we had 6 land projects in production, 13 in development and 13 in the pre-development phase.

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Table of Contents

Executive Overview

In conjunction with improving economic and commercial real estate market conditions, we have continued to make meaningful progress towards achieving a number of our strategic corporate objectives. We increased investment originations to $1.27 billion in 2014 focused primarily within our core business segments of real estate finance and net lease, which we anticipate should drive future revenue growth. Through strategic ventures, we have partnered with other providers of capital within our net lease segment and with developers with homebuilding expertise within our land segment. In addition, we have made significant investments within our operating property and land portfolios in order to better position assets for sale.
Access to the capital markets has allowed us to extend our debt maturity profile, lower our cost of capital and become primarily an unsecured borrower. During 2014, we fully repaid our largest secured credit facility using proceeds from unsecured notes issuances. This repayment unencumbered $2.0 billion of collateral and provides us with additional liquidity as we now retain 100% of the proceeds from sales and repayments of these previously encumbered assets, rather than directing them to repay the facility. At December 31, 2014, we had $472.1 million of cash, which we expect to be used primarily to fund future investment activities.
Over the past two years, we have significantly reduced our level of non-performing loans. Non-performing loans, net of specific reserves, declined 68% to $65.0 million at December 31, 2014 from $203.6 million at December 31, 2013 as loans were repaid, sold or foreclosed on.
During the year ended December 31, 2014, three of our four business segments, including real estate finance, net lease and operating properties, contributed positively to our earnings. We continue to work on repositioning or redeveloping our transitional operating properties and progressing on the entitlement and development of our land assets in order to maximize their value. We intend to continue these efforts, with the objective of having these assets contribute positively to earnings in the future. For the year ended December 31, 2014, we recorded net loss allocable to common shareholders of $(33.7) million, compared to a loss of $(155.8) million during the prior year. Adjusted income (loss) allocable to common shareholders for the year ended December 31, 2014 was $109.4 million, compared to $(21.7) million during the prior year.

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Table of Contents

Results of Operations for the Year Ended December 31, 2014 compared to the Year Ended December 31, 2013
 
For the Years Ended
December 31,
 
 
 
 
 
2014
 
2013
 
$ Change
 
% Change
 
(in thousands)
 
 
Operating lease income
$
243,100

 
$
234,567

 
$
8,533

 
4
 %
Interest income
122,704

 
108,015

 
14,689

 
14
 %
Other income
81,033

 
48,208

 
32,825

 
68
 %
Land sales revenue
15,191

 

 
15,191

 
100
 %
Total revenue
462,028

 
390,790

 
71,238

 
18
 %
Interest expense
224,483

 
266,225

 
(41,742
)
 
(16
)%
Real estate expenses
163,389

 
157,441

 
5,948

 
4
 %
Cost of land sales
12,840

 

 
12,840

 
100
 %
Depreciation and amortization
73,571

 
71,266

 
2,305

 
3
 %
General and administrative
88,806

 
92,114

 
(3,308
)
 
(4
)%
Provision for (recovery of) loan losses
(1,714
)
 
5,489

 
(7,203
)
 
>(100)%

Impairment of assets
34,634

 
12,589

 
22,045

 
>100%

Other expense
5,821

 
8,050

 
(2,229
)
 
(28
)%
Total costs and expenses
601,830

 
613,174

 
(11,344
)
 
(2
)%
Loss on early extinguishment of debt, net
(25,369
)
 
(33,190
)
 
7,821

 
24
 %
Earnings from equity method investments
94,905

 
41,520

 
53,385

 
>100%

Loss on transfer of interest to unconsolidated subsidiary

 
(7,373
)
 
7,373

 
100
 %
Income tax (expense) benefit
(3,912
)
 
659

 
(4,571
)
 
>(100)%

Income (loss) from discontinued operations

 
644

 
(644
)
 
(100
)%
Gain from discontinued operations

 
22,233

 
(22,233
)
 
(100
)%
Income from sales of real estate
89,943

 
86,658

 
3,285

 
4
 %
Net income (loss)
$
15,765

 
$
(111,233
)
 
$
126,998

 
>100%


Revenue—Operating lease income, which primarily includes income from net lease assets and commercial operating properties, increased to $243.1 million in 2014 from $234.6 million in 2013.

Operating lease income from net lease assets increased to $151.9 million in 2014 from $147.3 million in 2013. The net lease portfolio generated an unleveraged yield of 7.5% for 2014 as compared to 7.2% for 2013 as rental rates for new leases were greater than rental rates for leases that terminated since December 31, 2013. Operating lease income for same store net lease assets, defined as net lease assets we owned on or prior to January 1, 2013 and were in service through December 31, 2014, increased to $148.3 million in 2014 from $146.2 million in 2013 due primarily to an increase in rent per occupied square foot for same store net lease assets, which was $9.86 for 2014 as compared to $9.62 for 2013. The increase in operating lease income was also due to higher occupancy rates for same store net lease assets, which was 95.2% at December 31, 2014 as compared to 93.0% at December 31, 2013. We had two net lease assets which were sold to our Net Lease Venture in 2014 that, prior to their sale, contributed an additional $2.0 million of operating lease income in 2014 as compared to 2013.

Operating lease income from commercial operating properties increased to $87.7 million in 2014 from $86.4 million in 2013 as rental rates for new leases were greater than leases that terminated since December 31, 2013. Operating lease income for same store commercial operating properties, defined as commercial operating properties, excluding hotels, we owned on or prior to January 1, 2013 and were in service through December 31, 2014, decreased to $81.6 million in 2014 from $84.9 million in 2013 due primarily to a decline in rent per occupied square foot for same store commercial operating properties, which was $24.52 for 2014 and $26.06 for 2013. The decline was partially offset by an increase in occupancy rates for same store commercial operating properties, which increased to 65.0% at December 31, 2014 from 62.8% at December 31, 2013. In addition, we acquired title to additional commercial operating properties in 2014, which contributed $4.5 million to operating lease income in 2014. Ancillary operating lease income for residential operating properties increased $2.6 million in 2014 as compared to 2013.


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Table of Contents

Interest income increased to $122.7 million in 2014 as compared to $108.0 million in 2013 due primarily to increases in the volume and interest rates of performing loans. New investment originations and additional fundings of existing loans raised our average balance of performing loans to $1.27 billion for 2014 from $1.23 billion for 2013. The weighted average yield of our performing loans increased to 9.1%, excluding $6.3 million amortization of discounts, for 2014 from 7.6% for 2013 due primarily to higher interest rates for new loan originations in 2014 and payoffs of loans with lower interest rates.
Other income increased to $81.0 million in 2014 as compared to $48.2 million in 2013. The increase was due to gains on sales of non-performing loans of $19.1 million as well as $16.5 million of income related to asset related settlements, $3.8 million of ancillary income from properties acquired in 2014 and $2.3 million of prior year tax refunds. The increases were offset in part by a decline of $7.2 million due primarily to the conversion of hotel rooms to residential units to be sold at a property and $4.0 million received for the settlement of a property-related lawsuit in 2013.
Land sales and costs—In 2014, we sold residential lots from three of our master planned community properties for proceeds of $15.2 million which had associated cost of sales of $12.8 million.
Costs and expenses—Interest expense decreased to $224.5 million in 2014 as compared to $266.2 million in 2013 due to a lower average outstanding debt balance and a lower weighted average cost of debt. The average outstanding balance of our debt declined to $4.08 billion for 2014 from $4.46 billion for 2013. Our weighted average effective cost of debt decreased to 5.5% for 2014 from 5.9% for 2013. The decline was primarily a result of the refinancing of higher interest rate senior unsecured notes with lower interest rate senior unsecured notes during 2013.
Real estate expenses increased to $163.4 million in 2014 as compared to $157.4 million in 2013. Expenses for commercial operating properties increased to $87.9 million in 2014 from $81.1 million in 2013. In 2014, expenses for same store commercial operating properties, excluding hotels, increased to $53.3 million from $51.7 million in 2013 due primarily to higher operating expenses at two properties. We acquired title to additional commercial operating properties in 2014, which contributed $9.2 million to real estate expenses in 2014. Additionally, expenses for hotel properties decreased to $22.7 million in 2014 from $28.5 million in 2013 due primarily to the conversion of hotel rooms to residential units being sold at a hotel property. Costs associated with residential units increased to $25.6 million in 2014 from $19.8 million in 2013 due to sales assessments at one of our residential properties and carrying costs for additional residential units where construction was completed, offset by a reduction of expenses due to the sale of residential units since December 31, 2013. Carry costs and other expenses on our land assets decreased to $26.9 million in 2014 as compared to $33.8 million in 2013, primarily related to a decrease in costs incurred on certain land assets prior to development.
General and administrative expenses decreased to $88.8 million in 2014 as compared to $92.1 million in 2013, primarily due to a reduction in stock-based compensation expense, based on the full amortization of certain previously issued awards, which were fully amortized in 2013.
The net recovery of loan losses was $1.7 million in 2014 as compared to a net provision for loan losses of $5.5 million in 2013. Included in the net recovery for 2014 were recoveries of previously recorded loan loss reserves of $10.1 million, provisions for specific reserves of $4.1 million and an increase of $4.3 million in the general reserve due primarily to new investment originations. Included in the net recovery for 2013 were specific reserves of $72.5 million, which were established on non-performing loans, offset by recoveries of previously recorded loan loss reserves of $63.1 million during the year.
In 2014, we recorded impairments on real estate assets totaling $34.6 million resulting from changes in business strategies for a residential property and a land asset, continued unfavorable local market conditions at two real estate properties and the sale of net lease assets. In 2013, we recorded $14.4 million of impairments on real estate assets, including $1.8 million recorded in discontinued operations, due primarily to a changes in local market conditions and a change in business strategy for a residential property.

Loss on early extinguishment of debt, net—In 2014 and 2013, we incurred losses on early extinguishment of debt of $25.4 million and $33.2 million, respectively. Together with cash on hand, net proceeds from the 2014 issuances of our 4.00% senior unsecured notes due November 2017 and our 5.00% senior unsecured notes due July 2019 were used to fully repay and terminate our secured credit facility entered into in February 2013. As a result, in 2014, we expensed $22.8 million relating to accelerated amortization of discount and fees associated with the payoff of that secured credit facility. We also recorded $2.6 million of losses related to the accelerated amortization of discounts and fees in connection with amortization payments that we made on our secured credit facilities.

In 2013, we incurred $7.7 million of losses on the early extinguishment of debt due to the accelerated amortization of discounts and fees in connection with the refinancing of a secured credit facility. We also recorded $13.2 million of losses related to the accelerated amortization of discounts and fees in connection with amortization payments that we made on our secured credit

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facilities. We also redeemed our 5.95% senior unsecured notes due October 2013 and 5.70% senior unsecured notes due March 2014 prior to maturity and incurred $12.3 million of losses related to prepayment penalties and the acceleration of amortization of discounts.

Earnings from equity method investments—Earnings from equity method investments increased to $94.9 million in 2014 as compared to $41.5 million in 2013. In 2014, we recognized $56.8 million of income resulting from asset sales by two of our equity method investees and a legal settlement received by one of the investees. We also recognized $14.7 million of earnings related to sales activity from an equity method investee and $9.0 million of income related to carried interest from a previously held strategic investment. The increase was offset by $12.0 million of income primarily related to asset sales by one of our strategic investments in 2013 and the sale of our interest in LNR Property Corp. in April 2013. We had no equity in earnings from LNR during 2014 as compared to 2013 in which we recorded net equity in earnings of $14.5 million.

Loss on transfer of interest to unconsolidated subsidiary—In 2013, we entered into a venture with a national homebuilder to jointly develop residential lots in the first phase of Spring Mountain Ranch, a 1,400-lot master planned community. We contributed the initial phase of land, which had a carrying value of $24.1 million, to the venture in exchange for a retained interest of $16.7 million, resulting in a $7.4 million loss.

Income tax (expense) benefit—Income taxes are primarily generated by assets held in our taxable REIT subsidiaries ("TRS's"). Income taxes increased to a net tax expense of $3.9 million in 2014 as compared to a tax benefit of $0.7 million in 2013. The period to period difference was due primarily to taxable income generated by sales of TRS properties.

Discontinued operations—In 2014, we adopted ASU 2014-08 (see Note 3), which raised the threshold for discontinued operations reporting to disposals of components that are considered strategic shifts in a company's business. There were no disposals that met this threshold during 2014. Income (loss) from discontinued operations in 2013 includes operating results from net lease assets and commercial operating properties held for sale or sold as of December 31, 2013. During 2013, we sold commercial operating properties with a total carrying value of $72.6 million, which resulted in a net gain of $18.6 million and net lease assets with a total carrying value of $18.7 million which resulted in a net gain of $2.2 million.

Income from sales of real estate—In 2014 and 2013, we sold residential condominiums for total net proceeds of $236.2 million and $269.7 million, respectively, that resulted in income of $79.1 million and $82.6 million, respectively. In 2014, we sold net lease assets with a carrying value of $8.0 million resulting in a net gain of $5.7 million and a commercial operating property with a carrying value of $29.4 million resulting in a gain of $4.6 million. In 2013, we sold land for proceeds of $36.7 million that resulted in income of $4.0 million.


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Results of Operations for the Year Ended December 31, 2013 compared to the Year Ended December 31, 2012
 
For the Years Ended
December 31,
 
 
 
 
 
2013
 
2012
 
$ Change
 
% Change
 
(in thousands)
 
 
Operating lease income
$
234,567

 
$
216,291