STAR-03.31.2015-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
Commission File No. 1-15371
_______________________________________________________________________________
iSTAR FINANCIAL INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
 
95-6881527
(I.R.S. Employer
Identification Number)
1114 Avenue of the Americas, 39th Floor
 
 
New York, NY
(Address of principal executive offices)
 
10036
(Zip code)
Registrant's telephone number, including area code: (212) 930-9400
_______________________________________________________________________________
Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports); and (ii) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
As of April 30, 2015, there were 85,519,852 shares of common stock, $0.001 par value per share, of iStar Financial Inc. ("Common Stock") outstanding.
 


Table of Contents

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 



Table of Contents

PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1.    Financial Statements
iStar Financial Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(unaudited)
 
As of
 
March 31,
2015
 
December 31,
2014
ASSETS
 
 
 
Real estate
 
 
 
Real estate, at cost
$
2,988,670

 
$
3,145,563

Less: accumulated depreciation
(452,397
)
 
(468,849
)
Real estate, net
2,536,273

 
2,676,714

Real estate available and held for sale
292,608

 
285,982

Total real estate
2,828,881

 
2,962,696

Loans receivable and other lending investments, net
1,537,846

 
1,377,843

Other investments
341,549

 
354,119

Cash and cash equivalents
625,352

 
472,061

Accrued interest and operating lease income receivable, net
18,450

 
16,367

Deferred operating lease income receivable
96,279

 
98,262

Deferred expenses and other assets, net
204,223

 
181,785

Total assets
$
5,652,580

 
$
5,463,133

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
158,251

 
$
180,902

Debt obligations, net
4,261,528

 
4,022,684

Total liabilities
4,419,779

 
4,203,586

Commitments and contingencies

 

Redeemable noncontrolling interests
13,203

 
11,199

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

 
22

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

 
4

High Performance Units
9,800

 
9,800

Common Stock, $0.001 par value, 200,000 shares authorized, 146,181 issued and 85,520 outstanding at March 31, 2015 and 145,807 issued and 85,191 outstanding at December 31, 2014
146

 
146

Additional paid-in capital
4,007,540

 
4,007,514

Retained earnings (deficit)
(2,579,771
)
 
(2,556,469
)
Accumulated other comprehensive income (loss) (see Note 11)
(5,116
)
 
(971
)
Treasury stock, at cost, $0.001 par value, 60,661 shares at March 31, 2015 and 60,617 shares at December 31, 2014
(263,512
)
 
(262,954
)
Total iStar Financial Inc. shareholders' equity
1,169,113

 
1,197,092

Noncontrolling interests
50,485

 
51,256

Total equity
1,219,598

 
1,248,348

Total liabilities and equity
$
5,652,580

 
$
5,463,133

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

1

Table of Contents

iStar Financial Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
For the Three Months Ended March 31,
 
2015
 
2014
Revenues:
 
 
 
Operating lease income
$
59,139

 
$
62,108

Interest income
34,896

 
27,914

Other income
10,564

 
14,584

Land development revenue
8,258

 
4,143

Total revenues
112,857

 
108,749

Costs and expenses:
 
 
 
Interest expense
54,632

 
57,456

Real estate expense
39,634

 
42,613

Land development cost of sales
6,891

 
3,654

Depreciation and amortization
18,501

 
18,613

General and administrative
20,753

 
19,788

Provision for (recovery of) loan losses
4,293

 
(3,400
)
Impairment of assets

 
2,979

Other expense
2,123

 
221

Total costs and expenses
146,827

 
141,924

Income (loss) before earnings from equity method investments and other items
(33,970
)
 
(33,175
)
Loss on early extinguishment of debt, net
(168
)
 
(1,180
)
Earnings from equity method investments
6,547

 
3,177

Income (loss) from continuing operations before income taxes
(27,591
)
 
(31,178
)
Income tax (expense) benefit
(5,878
)
 
507

Income (loss) from continuing operations(1)
(33,469
)
 
(30,671
)
Income from sales of real estate
21,156

 
16,494

Net income (loss)
(12,313
)
 
(14,177
)
Net (income) loss attributable to noncontrolling interests
1,841

 
(454
)
Net income (loss) attributable to iStar Financial Inc. 
(10,472
)
 
(14,631
)
Preferred dividends
(12,830
)
 
(12,830
)
Net (income) loss allocable to HPU holders and Participating Security holders(2)(3)
749

 
889

Net income (loss) allocable to common shareholders
$
(22,553
)
 
$
(26,572
)
Per common share data(1):
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations—Basic and diluted
$
(0.26
)
 
$
(0.31
)
Net income (loss) attributable to iStar Financial Inc.—Basic and diluted
$
(0.26
)
 
$
(0.31
)
Weighted average number of common shares—Basic and diluted
85,497

 
84,819

Per HPU share data(1)(2):
 
 
 
Income (loss) attributable to iStar Financial Inc. from continuing operations—Basic and diluted
$
(49.93
)
 
$
(59.27
)
Net income (loss) attributable to iStar Financial Inc.—Basic and diluted
$
(49.93
)
 
$
(59.27
)
Weighted average number of HPU share—Basic and diluted
15

 
15

Explanatory Notes:
_______________________________________________________________________________

(1)
Income (loss) from continuing operations attributable to iStar Financial Inc. was $(31.6) million and $(31.3) million for the three months ended March 31, 2015 and 2014, respectively. See Note 13 for details on the calculation of earnings per share.
(2)
HPU holders are current and former Company employees who purchased high performance common stock units under the Company's High Performance Unit Program.
(3)
Participating Security holders are non-employee directors who hold common stock equivalents and restricted stock awards granted under the Company's Long Term Incentive Plans that are eligible to participate in dividends (see Note 12 and Note 13).

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

2

Table of Contents

iStar Financial Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2015
 
2014
Net income (loss)
$
(12,313
)
 
$
(14,177
)
Other comprehensive income (loss):
 
 
 
Reclassification of (gains)/losses on available-for-sale securities into earnings upon realization(1)
(2,531
)
 

Reclassification of (gains)/losses on cash flow hedges into earnings upon realization(2)
150

 
135

Unrealized gains/(losses) on available-for-sale securities
(575
)
 
68

Unrealized gains/(losses) on cash flow hedges
(945
)
 
(1,762
)
Unrealized gains/(losses) on cumulative translation adjustment
(244
)
 
163

Other comprehensive income (loss)
(4,145
)
 
(1,396
)
Comprehensive income (loss)
(16,458
)
 
(15,573
)
Comprehensive (income) loss attributable to noncontrolling interests
1,844

 
(454
)
Comprehensive income (loss) attributable to iStar Financial Inc. 
$
(14,614
)
 
$
(16,027
)
Explanatory Notes:
_______________________________________________________________________________

(1)
Included in "Other income" on the Company's Consolidated Statements of Operations.
(2)
For the three months ended March 31, 2015 and 2014, $35 and $135, respectively, are included in "Interest expense" on the Company's Consolidated Statements of Operations. For the three months ended March 31, 2015, $115 is included in "Earnings from equity method investments" on the Company Consolidated Statements of Operations.

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

3


iStar Financial Inc.
Consolidated Statements of Changes in Equity
For the Three Months Ended March 31, 2015 and 2014
(In thousands)
(unaudited)



 
 
iStar Financial Inc. Shareholders' Equity
 
 
 
 
 
 
Preferred
Stock(1)
 
Preferred Stock Series J(1)
 
HPU's
 
Common
Stock at
Par
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock at
Cost
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2014
 
$
22

 
$
4

 
$
9,800

 
$
146

 
$
4,007,514

 
$
(2,556,469
)
 
$
(971
)
 
$
(262,954
)
 
$
51,256

 
$
1,248,348

Dividends declared—preferred
 

 

 

 

 

 
(12,830
)
 

 

 

 
(12,830
)
Issuance of stock/restricted stock unit amortization, net
 

 

 

 

 
3,054

 

 

 

 

 
3,054

Net income (loss) for the period(2)
 

 

 

 

 

 
(10,472
)
 

 

 
(819
)
 
(11,291
)
Change in accumulated other comprehensive income (loss)
 

 

 

 

 

 

 
(4,145
)
 

 

 
(4,145
)
Repurchase of stock
 

 

 

 

 

 

 

 
(558
)
 

 
(558
)
Change in additional paid in capital attributable to redeemable noncontrolling interest
 

 

 

 

 
(3,028
)
 

 

 

 

 
(3,028
)
Contributions from noncontrolling interests
 

 

 

 

 

 

 

 

 
52

 
52

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 

 
(4
)
 
(4
)
Balance at March 31, 2015
 
$
22

 
$
4

 
$
9,800

 
$
146

 
$
4,007,540

 
$
(2,579,771
)
 
$
(5,116
)
 
$
(263,512
)
 
$
50,485

 
$
1,219,598



4


iStar Financial Inc.
Consolidated Statements of Changes in Equity
For the Three Months Ended March 31, 2015 and 2014
(In thousands)
(unaudited)


 
 
iStar Financial Inc. Shareholders' Equity
 
 
 
 
 
 
Preferred
Stock(1)
 
Preferred Stock Series J(1)
 
HPU's
 
Common
Stock at
Par
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock at
Cost
 
Noncontrolling
Interests
 
Total
Equity
Balance at December 31, 2013
 
$
22

 
$
4

 
$
9,800

 
$
144

 
$
4,022,138

 
$
(2,521,618
)
 
$
(4,276
)
 
$
(262,954
)
 
$
58,205

 
$
1,301,465

Dividends declared—preferred
 

 

 

 

 

 
(12,830
)
 

 

 

 
(12,830
)
Issuance of stock/restricted stock unit amortization, net
 

 

 

 
1

 
(8,589
)
 

 

 

 

 
(8,588
)
Net income (loss) for the period(2)
 

 

 

 

 

 
(14,631
)
 

 

 
938

 
(13,693
)
Change in accumulated other comprehensive income (loss)
 

 

 

 

 

 

 
(1,396
)
 

 

 
(1,396
)
Change in additional paid in capital attributable to redeemable noncontrolling interest
 

 

 

 

 
(246
)
 

 

 

 

 
(246
)
Distributions to noncontrolling interests
 

 

 

 

 

 

 

 

 
(2,595
)
 
(2,595
)
Balance at March 31, 2014
 
$
22

 
$
4

 
$
9,800

 
$
145

 
$
4,013,303

 
$
(2,549,079
)
 
$
(5,672
)
 
$
(262,954
)
 
$
56,548

 
$
1,262,117


Explanatory Notes:
_______________________________________________________________________________

(1)
See Note 11 for details on the Company's Cumulative Redeemable Preferred Stock.
(2)
For the three months ended March 31, 2015 and 2014, net income (loss) shown above excludes $(1,022) and $(484) of net loss attributable to redeemable noncontrolling interests.
The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

iStar Financial Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(12,313
)
 
$
(14,177
)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
 
 
 
Provision for (recovery of) loan losses
4,293

 
(3,400
)
Impairment of assets

 
2,979

Depreciation and amortization
18,501

 
18,613

Payments for withholding taxes upon vesting of stock-based compensation
(1,683
)
 
(13,456
)
Non-cash expense for stock-based compensation
3,238

 
2,075

Amortization of discounts/premiums and deferred financing costs on debt
4,025

 
4,668

Amortization of discounts/premiums and deferred interest on loans
(19,303
)
 
(12,527
)
Earnings from equity method investments
(6,547
)
 
(3,177
)
Distributions from operations of equity method investments
3,946

 
8,630

Deferred operating lease income
(1,796
)
 
(2,691
)
Income from sales of real estate and land development
(22,523
)
 
(16,983
)
Other operating activities, net
2,463

 
1,725

Changes in assets and liabilities:
 
 
 
Changes in accrued interest and operating lease income receivable, net
(2,083
)
 
(804
)
Changes in deferred expenses and other assets, net
5,229

 
6,418

Changes in accounts payable, accrued expenses and other liabilities
(27,801
)
 
(42,714
)
Cash flows from operating activities
(52,354
)
 
(64,821
)
Cash flows from investing activities:
 
 
 
Investment originations and fundings
(188,044
)
 
(193,943
)
Capital expenditures on real estate assets
(34,669
)
 
(27,902
)
Acquisitions of real estate assets

 
(2,412
)
Repayments of and principal collections on loans
34,992

 
102,928

Net proceeds from sales of loans
5,595

 

Net proceeds from sales of real estate
155,372

 
161,233

Distributions from other investments
4,260

 
19,558

Contributions to other investments
(1,231
)
 
(22,978
)
Other investing activities, net
7,671

 
(1,023
)
Cash flows from investing activities
(16,054
)
 
35,461

Cash flows from financing activities:
 
 
 
Borrowings from debt obligations
250,000

 
2,067

Repayments of debt obligations
(12,328
)
 
(60,863
)
Preferred dividends paid
(12,830
)
 
(12,830
)
Other financing activities, net
(3,143
)
 
(2,984
)
Cash flows from financing activities
221,699

 
(74,610
)
Changes in cash and cash equivalents
153,291

 
(103,970
)
Cash and cash equivalents at beginning of period
472,061

 
513,568

Cash and cash equivalents at end of period
$
625,352

 
$
409,598

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

6

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





Note 1—Business and Organization

Business—iStar Financial Inc., or the "Company," is a fully-integrated finance and investment company focused on the commercial real estate industry. The Company provides custom-tailored investment capital to high-end private and corporate owners of real estate and invests directly across a range of real estate sectors. The Company, which is taxed as a real estate investment trust, or "REIT," has invested more than $35 billion over the past two decades. The Company's primary business segments are real estate finance, net lease, operating properties and land (see Note 15).

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

Note 2—Basis of Presentation and Principles of Consolidation
Basis of Presentation—The accompanying unaudited Consolidated Financial Statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. These unaudited Consolidated Financial Statements and related Notes should be read in conjunction with the Consolidated Financial Statements and related Notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as amended on Form 10-K/A on March 27, 2015 (the "2014 Annual Report").
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
In the opinion of management, the accompanying Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year. Certain prior year amounts have been reclassified in the Consolidated Financial Statements and the related Notes to conform to the 2015 presentation.
During the year ended December 31, 2014, the Company determined that its classification of proceeds received from land sales for the quarterly periods ended March 31, June 30 and September 30, 2014 was incorrectly classified as a component of cash flows from operating activities rather than cash flows from investing activities. The Company evaluated the impact on the previously issued statements of cash flows for the aforementioned periods and concluded that it was not material. However, in order to correctly present such cash flows, the Company will revise the amounts as those financial statements are presented in the respective 2015 quarterly filings. The impact of the correction for the three months ended March 31, 2014 is as follows:
 
 
As Previously Reported
 
Change
 
As Revised
Cash flows from operating activities:
 
 
 
 
 
 
Three months ended March 31, 2014
 
$
(60,678
)
 
$
(4,143
)
 
$
(64,821
)
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
Three months ended March 31, 2014
 
$
31,318

 
$
4,143

 
$
35,461

Principles of Consolidation—The Consolidated Financial Statements include the financial statements of the Company, its wholly owned subsidiaries, controlled partnerships and variable interest entities ("VIEs") for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's involvement with VIEs affects its financial performance and cash flows primarily through amounts recorded in "Operating lease income," "Earnings from equity method investments," "Real estate expense" and "Interest expense" in the Company's Consolidated Statements of Operations. The Company has not provided financial support to those VIEs that it was not previously contractually required to provide.    

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


Consolidated VIEs—As of March 31, 2015, the Company consolidated 4 VIEs for which it is considered the primary beneficiary. At March 31, 2015, the total assets of these consolidated VIEs were $162.7 million and total liabilities were $13.3 million. The classifications of these assets are primarily within "Real estate, net" and "Other investments" on the Company's Consolidated Balance Sheets. The classifications of liabilities are primarily within "Accounts payable, accrued expenses and other liabilities" on the Company's Consolidated Balance Sheets. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE's respective assets. The Company's total unfunded commitments related to consolidated VIEs was $38.8 million as of March 31, 2015.

Unconsolidated VIEs—As of March 31, 2015, 25 of the Company's investments were in VIEs where it is not the primary beneficiary and accordingly the VIEs have not been consolidated in the Company's Consolidated Financial Statements. As of March 31, 2015, the Company's maximum exposure to loss from these investments does not exceed the sum of the $166.3 million carrying value of the investments, which are classified in "Other investments" on the Company's Consolidated Balance Sheets, and $22.7 million of related unfunded commitments.

Note 3—Summary of Significant Accounting Policies

As of March 31, 2015, the Company's significant accounting policies, which are detailed in the Company's 2014 Annual Report, have not changed materially.
New Accounting PronouncementsIn May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") which supersedes existing industry-specific guidance, including ASC 360-20, Real Estate Sales. The new standard is principles-based and requires more estimates and judgment than current guidance. Certain contracts with customers, including lease contracts and financial instruments and other contractual rights, are not within the scope of the new guidance. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. Management is evaluating the impact of the guidance on the Company's Consolidated Financial Statements.
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU 2014-12") which requires a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition in accordance with Topic 718, Compensation—Stock Compensation. ASU 2014-12 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Management does not believe the guidance will have a material impact on the Company's Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15") which requires management to evaluate whether there is substantial doubt that the Company is able to continue operating as a going concern within one year after the date the financial statements are issued or available to be issued. If there is substantial doubt, additional disclosure is required, including the principal condition or event that raised the substantial doubt, the Company's evaluation of the condition or event in relation to its ability to meet its obligations and the Company's plan to alleviate (or, which is intended to alleviate) the substantial doubt. ASU 2014-15 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. Management does not believe the guidance will have a material impact on the Company's Consolidated Financial Statements.
In November 2014, the FASB issued ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity ("ASU 2014-16") which eliminates the diversity in practice for the accounting for hybrid financial instruments issued in the form of a share. ASU 2014-16 requires management to consider all terms and features, whether stated or implied, of a hybrid instrument when determining whether the nature of the instrument is more akin to a debt instrument or an equity instrument. Embedded derivative features, which are accounted for separately from host contracts, should also be considered in the analysis of the hybrid instrument. ASU 2014-16 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Management does not believe the guidance will have a material impact on the Company's Consolidated Financial Statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis ("ASU 2015-02") which updates the consolidation model for limited partnerships and similar legal entities. ASU 2015-02 includes the evaluation of fees paid to a decision maker as a variable interest and amends the effect of fee arrangements and related parties on the primary beneficiary determination. The guidance is effective for interim and annual reporting periods beginning after December 15, 2015.

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


Early adoption is permitted. Management is evaluating the impact of the guidance on the Company's Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03") which requires debt issuance costs to be presented as a deduction from the carrying value of the related debt obligation in the balance sheet, which is consistent with the presentation of debt discounts. The guidance is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Management does not believe the guidance will have a material impact on the Company's Consolidated Financial Statements.
Note 4—Real Estate
The Company's real estate assets were comprised of the following ($ in thousands):
 
Net Lease
 
Operating
Properties
 
Land
 
Total
As of March 31, 2015
 
 
 
 
 
 
 
Land and land improvements
$
314,151

 
$
141,043

 
$
860,903

 
$
1,316,097

Buildings and improvements
1,234,104

 
438,469

 

 
1,672,573

Less: accumulated depreciation and amortization
(370,818
)
 
(72,822
)
 
(8,757
)
 
(452,397
)
Real estate, net
1,177,437

 
506,690

 
852,146

 
2,536,273

Real estate available and held for sale
11,307

 
139,853

 
141,448

 
292,608

Total real estate
$
1,188,744

 
$
646,543

 
$
993,594

 
$
2,828,881

As of December 31, 2014
 
 
 
 
 
 
 
Land and land improvements
$
311,890

 
$
146,417

 
$
868,650

 
$
1,326,957

Buildings and improvements
1,240,593

 
578,013

 

 
1,818,606

Less: accumulated depreciation and amortization
(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


Real Estate Available and Held for Sale—As of March 31, 2015 and December 31, 2014, the Company had $132.9 million and $155.8 million, respectively, of residential properties available for sale in its operating properties portfolio.

During the three months ended March 31, 2015, the Company reclassified residential units with a carrying value of $22.9 million to held for sale due to substantial completion of construction and active marketing of the units for sale. In addition, the Company reclassified net lease assets with a carrying value of $7.5 million, residential lots with a carrying value of $3.9 million and land with a carrying value of $2.8 million to held for sale due to executed contracts with third parties.

Acquisitions—The following acquisitions of real estate were reflected in the Company's Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 ($ in thousands):
 
For the Three Months Ended March 31,
 
 
2015
 
2014
 
Acquisitions of real estate assets

 
2,412

(1)

Explanatory Note:
_______________________________________________________________________________

(1)
During the three months ended March 31, 2014, the Company purchased one condominium unit for $2.4 million.


9

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


Dispositions—During the three months ended March 31, 2015 and 2014, the Company sold residential condominiums for total net proceeds of $49.0 million and $47.7 million, respectively, and recorded income from sales of real estate totaling $17.6 million and $16.5 million, respectively. During the three months ended March 31, 2015, the Company sold residential lots from three of its master planned community properties, condominium units from an infill property and residential lots from another infill property for proceeds of $8.3 million which had associated cost of sales of $6.9 million. During the three months ended March 31, 2014, the Company sold residential lots from two of our master planned community properties for proceeds of $4.1 million and which had cost of sales of $3.7 million.
During the three months ended March 31, 2015, the Company, through a consolidated entity for which it has a 90% ownership interest, sold a leasehold interest in a commercial operating property for net proceeds of $93.5 million and simultaneously entered into a ground lease with an initial term of 99 years. In connection with this transaction, the Company recorded a lease incentive asset of $38.1 million, which is included in "Deferred expenses and other assets, net" on the Company's Consolidated Balance Sheets, and deferred a gain of $5.3 million, which is included in "Accounts payable, accrued expenses and other liabilities" on the Company's Consolidated Balance Sheets.
During the three months ended March 31, 2015, the Company sold a net lease asset for net proceeds of $4.9 million resulting in a gain of $3.5 million. The gain was recorded in "Income from sale of real estate" on the Company's Consolidated Statements of Operations.
During the three months ended March 31, 2014, the Company sold a net lease asset for net proceeds of $93.7 million which approximated carrying value to a newly formed unconsolidated entity in which the Company has a noncontrolling equity interest of 51.9% (see Note 6).
During the three months ended March 31, 2014, the Company sold properties with a carrying value of $6.7 million for proceeds that approximated carrying value. During the same period, the Company also sold a net lease asset for net proceeds of $7.8 million. The Company recorded an impairment loss of $3.0 million in connection with the sale.
Tenant Reimbursements—The Company receives reimbursements from tenants for certain facility operating expenses including common area costs, insurance, utilities and real estate taxes. Tenant expense reimbursements were $7.0 million and $8.5 million for the three months ended March 31, 2015 and 2014, respectively. These amounts are included in "Operating lease income" on the Company's Consolidated Statements of Operations.
Redeemable Noncontrolling Interest—The Company has redeemable noncontrolling interests for which it records changes in the fair value over the redemption periods. At March 31, 2015 and December 31, 2014, the interest which is not currently redeemable had a carrying value of $9.3 million and $9.9 million, respectively, and an estimated redemption value of $23.6 million at both dates.
Allowance for Doubtful Accounts—As of March 31, 2015 and December 31, 2014, the allowance for doubtful accounts related to real estate tenant receivables was $1.4 million and $1.3 million, respectively, and the allowance for doubtful accounts related to deferred operating lease income was $2.4 million and $2.4 million, respectively.

10

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


Note 5—Loans Receivable and Other Lending Investments, net

The following is a summary of the Company's loans receivable and other lending investments by class ($ in thousands):
 
As of
Type of Investment
March 31,
2015
 
December 31,
2014
Senior mortgages
$
876,765

 
$
737,535

Corporate/Partnership loans
548,115

 
497,796

Subordinate mortgages
27,822

 
53,331

Total gross carrying value of loans
1,452,702

 
1,288,662

Reserves for loan losses
(102,783
)
 
(98,490
)
Total loans receivable, net
1,349,919

 
1,190,172

Other lending investments—securities
187,927

 
187,671

Total loans receivable and other lending investments, net(1)
$
1,537,846

 
$
1,377,843


Explanatory Note:
_______________________________________________________________________________

(1)
The Company's recorded investment in loans as of March 31, 2015 and December 31, 2014 includes accrued interest of $8.8 million and $7.0 million, respectively, which are included in "Accrued interest and operating lease income receivable, net" on the Company's Consolidated Balance Sheets.

During the three months ended March 31, 2015, the Company sold a loan with a carrying value of $5.5 million. No gain or loss was recognized as a result of the transaction. Gains and losses on sales of loans are included in "Other income" on the Company's Consolidated Statements of Operations.

Reserve for Loan Losses—Changes in the Company's reserve for loan losses were as follows ($ in thousands):
 
For the Three Months Ended March 31,
 
2015
 
2014
Reserve for loan losses at beginning of period
$
98,490

 
$
377,204

Provision for (recovery of) loan losses(1)
4,293

 
(3,400
)
Charge-offs

 
(3,728
)
Reserve for loan losses at end of period
$
102,783

 
$
370,076


Explanatory Note:
_______________________________________________________________________________
(1)
For the three months ended March 31, 2015 and 2014, the provision for loan losses includes recoveries of previously recorded loan loss reserves of $0.2 million and $5.2 million, respectively.


11

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


The Company's recorded investment in loans (comprised of a loan's carrying value plus accrued interest) and the associated reserve for loan losses were as follows ($ in thousands):
 
Individually
Evaluated for
Impairment(1)
 
Collectively
Evaluated for
Impairment(2)
 
Total
As of March 31, 2015
 
 
 
 
 
Loans
$
137,045

 
$
1,324,454

 
$
1,461,499

Less: Reserve for loan losses
(64,783
)
 
(38,000
)
 
(102,783
)
Total
$
72,262

 
$
1,286,454

 
$
1,358,716

As of December 31, 2014
 
 
 
 
 
Loans
$
139,672

 
$
1,156,031

 
$
1,295,703

Less: Reserve for loan losses
(64,990
)
 
(33,500
)
 
(98,490
)
Total
$
74,682

 
$
1,122,531

 
$
1,197,213


Explanatory Notes:
_______________________________________________________________________________

(1)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net discount of $0.2 million and $0.2 million as of March 31, 2015 and December 31, 2014, respectively. The Company's loans individually evaluated for impairment primarily represent loans on non-accrual status and therefore, the unamortized amounts associated with these loans are not currently being amortized into income.
(2)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs aggregating to a net discount of $11.5 million and $10.6 million as of March 31, 2015 and December 31, 2014, respectively.

Credit Characteristics—As part of the Company's process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. Risk ratings are based on judgments which are inherently uncertain and there can be no assurance that actual performance will be similar to current expectation.

The Company's recorded investment in performing loans, presented by class and by credit quality, as indicated by risk rating, was as follows ($ in thousands):
 
As of March 31, 2015
 
As of December 31, 2014
 
Performing
Loans
 
Weighted
Average
Risk Ratings
 
Performing
Loans
 
Weighted
Average
Risk Ratings
Senior mortgages
$
751,828

 
2.80

 
$
611,009

 
2.73

Corporate/Partnership loans
552,601

 
3.83

 
501,620

 
3.88

Subordinate mortgages
28,129

 
3.61

 
53,836

 
2.87

  Total
$
1,332,558

 
3.24

 
$
1,166,465

 
3.23


As of March 31, 2015, the Company's recorded investment in loans, aged by payment status and presented by class, were as follows ($ in thousands):
 
Current
 
Less Than
and Equal
to 90 Days
 
Greater
Than
90 Days(1)
 
Total
Past Due
 
Total
Senior mortgages
$
764,062

 
$
20,693

 
$
96,014

 
$
116,707

 
$
880,769

Corporate/Partnership loans
552,601

 

 

 

 
552,601

Subordinate mortgages
28,129

 

 

 

 
28,129

Total
$
1,344,792

 
$
20,693

 
$
96,014

 
$
116,707

 
$
1,461,499


Explanatory Note:
_______________________________________________________________________________

(1)
As of March 31, 2015, the Company had 3 loans which were greater than 90 days delinquent and were in various stages of resolution, including legal proceedings, environmental concerns and foreclosure-related proceedings, and ranged from 5.0 to 6.0 years outstanding.

12

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


Impaired Loans—The Company's recorded investment in impaired loans, presented by class, were as follows ($ in thousands)(1):
 
As of March 31, 2015
 
As of December 31, 2014
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
130,336

 
129,428

 
(64,440
)
 
130,645

 
129,744

 
(64,440
)
Corporate/Partnership loans
6,709

 
6,736

 
(343
)
 
9,027

 
9,057

 
(550
)
Total
137,045

 
136,164

 
(64,783
)
 
139,672

 
138,801

 
(64,990
)

Explanatory Note:
_______________________________________________________________________________

(1)
All of the Company's non-accrual loans are considered impaired and included in the table above. In addition, as of March 31, 2015 and December 31, 2014, certain loans modified through troubled debt restructurings with a recorded investment of $8.1 million and $10.4 million, respectively, are also included as impaired loans in accordance with GAAP although they are performing and on accrual status. The Company did not have impaired loans with no related allowance recorded.

The Company's average recorded investment in impaired loans and interest income recognized, presented by class, were as follows ($ in thousands):
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
Senior mortgages
$

 
$

 
$
48,512

 
$
501

Subtotal

 

 
48,512

 
501

With an allowance recorded:
 
 
 
 
 
 
 
Senior mortgages
130,491

 
17

 
578,041

 
53

Corporate/Partnership loans
7,868

 
9

 
93,565

 
65

Subtotal
138,359

 
26

 
671,606

 
118

Total:
 
 
 
 
 
 
 
Senior mortgages
130,491

 
17

 
626,553

 
554

Corporate/Partnership loans
7,868

 
9

 
93,565

 
65

Total
$
138,359

 
$
26

 
$
720,118

 
$
619


Troubled Debt Restructurings—During the three months ended March 31, 2015 and 2014, the Company did not modify any loans that were determined to be troubled debt restructurings.
Generally when granting concessions, the Company will seek to protect its position by requiring incremental pay downs, additional collateral or guarantees and in some cases lookback features or equity kickers to offset concessions granted should conditions impacting the loan improve. The Company's determination of credit losses is impacted by troubled debt restructurings whereby loans that have gone through troubled debt restructurings are considered impaired, assessed for specific reserves, and are not included in the Company's assessment of general loan loss reserves. Loans previously restructured under troubled debt restructurings that subsequently default are reassessed to incorporate the Company's current assumptions on expected cash flows and additional provision expense is recorded to the extent necessary. As of March 31, 2015, there were no unfunded commitments associated with modified loans considered troubled debt restructurings.

13

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


Securities—Other lending investments—securities includes the following ($ in thousands):
 
Face Value
 
Amortized Cost Basis
 
Net Unrealized Gain (Loss)
 
Estimated Fair Value
 
Net Carrying Value
As of March 31, 2015
 
 
 
 
 
 
 
 
 
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
Municipal debt securities
$
1,010

 
$
1,010

 
$
153

 
$
1,163

 
$
1,163

Held-to-Maturity Securities
 
 
 
 
 
 
 
 
 
Corporate debt securities
174,227

 
186,764

 

 
193,045

 
186,764

Total
$
175,237

 
$
187,774

 
$
153

 
$
194,208

 
$
187,927

As of December 31, 2014
 
 
 
 
 
 
 
 
 
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
Municipal debt securities
$
1,020

 
$
1,020

 
$
147

 
$
1,167

 
$
1,167

Held-to-Maturity Securities
 
 
 
 
 
 
 
 
 
Corporate debt securities
176,254

 
186,504

 

 
190,199

 
186,504

Total
$
177,274

 
$
187,524

 
$
147

 
$
191,366

 
$
187,671


Note 6—Other Investments

The Company's other investments and its proportionate share of results from equity method investments were as follows ($ in thousands):
 
Carrying Value as of
 
Equity in Earnings for the
Three Months Ended March 31,
 
March 31, 2015
 
December 31, 2014
 
2015
 
2014
iStar Net Lease I LLC ("Net Lease Venture")
$
124,464

 
$
125,361

 
$
1,633

 
$
(362
)
Other real estate equity investments
86,166

 
88,848

 
(1,302
)
 
934

Other investments
50,725

 
63,262

 
1,733

 
3,334

Madison Funds
44,997

 
45,971

 
(37
)
 
(402
)
Marina Palms, LLC ("Marina Palms")
35,197

 
30,677

 
4,520

 
(327
)
Total other investments
341,549

 
354,119

 
$
6,547

 
$
3,177


Net Lease Venture—During the three months ended March 31, 2014, the Company partnered with a sovereign wealth fund to form a new unconsolidated entity in which the Company has a noncontrolling equity interest of approximately 51.9%. This entity is not a VIE and the Company does not have controlling interest due to the substantive participating rights of its partner. The partners plan to contribute up to an aggregate $500 million of equity to acquire and develop net lease assets over time. The Company is responsible for sourcing new opportunities and managing the venture and its assets in exchange for a promote and management fee. Several of the Company's officers whose time is substantially devoted to the net lease venture own a total of 0.6% equity ownership in the venture via co-investment. These officers are also entitled to an amount equal to 50% of any promote payment received based on the 47.5% partner's interest. During the three months ended March 31, 2014, the Company sold a net lease asset for net proceeds of $93.7 million, which approximated carrying value, to the venture. As of March 31, 2015 and December 31, 2014, the venture's carrying value of total assets was $346.8 million and $348.1 million, respectively.
Marina Palms—As of March 31, 2015, the Company owned a 47.5% equity interest and a $10.0 million preferred partnership interest in Marina Palms. As of March 31, 2015 and December 31, 2014, the venture's carrying value of total assets was $275.8 million and $265.7 million, respectively.
Other real estate equity investments—As of March 31, 2015, the Company's other real estate equity investments included equity interests in real estate ventures ranging from 16% to 86%, comprised of investments of $12.3 million in operating properties and $73.7 million in land assets. As of December 31, 2014, the Company's real estate equity investments included $13.2 million in operating properties and $75.5 million in land assets.

14

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


Madison Funds—As of March 31, 2015, the Company owned a 29.5% interest in Madison International Real Estate Fund II, LP ("MIRELF II"), a 32.9% interest in Madison International Real Estate Liquidity Fund III, LP ("MIRELF III"), a 32.9% interest in Madison International Real Estate Liquidity Fund III AIV, LP ("MIRELF III AIV") and a 29.5% interest in Madison GP1 Investors, LP (collectively, the "Madison Funds"). The Madison Funds invest in ownership positions of entities that own real estate assets. The Company determined that these entities are VIEs and that the Company is not the primary beneficiary.
Other investments—As of March 31, 2015, the Company also had smaller investments in real estate related funds and other strategic investments in several other entities that were accounted for under the equity method or cost method. During the three months ended March 31, 2015, the Company sold available-for-sale securities for proceeds of $7.3 million for realized gains of $2.5 million, which is included in "Other income" on the Company's Consolidated Statements of Operations. The amount reclassified out of accumulated other comprehensive income into earnings was determined based on the specific identification method.
Summarized investee financial information—The following tables present the investee level summarized financial information of the Company's equity method investments, which were significant subsidiaries as of March 31, 2015 ($ in thousands):
 
Revenues
 
Expenses
 
Net Income Attributable to Parent Entities
For the Three Months Ended March 31, 2015
 
 
 
 
 
Marina Palms
$
34,998

 
$
(22,638
)
 
$
12,360

Net Lease Venture
7,829

 
(4,546
)
 
3,146

 
 
 
 
 
 
For the Three Months Ended March 31, 2014
 
 
 
 
 
Marina Palms
$
17

 
$
(710
)
 
$
(693
)
Net Lease Venture(1)
944

 
(1,642
)
 
(698
)

Explanatory Note:
_______________________________________________________________________________

(1)
The Company began accounting for its investment in Net Lease Venture under the equity method of accounting on February 13, 2014, when the venture was formed. The amounts in the Company's financial statements for the three months ended March 31, 2014 are based on the balances and results from Net Lease Venture for the period from February 13, 2014 to March 31, 2014.

Note 7—Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
 
As of
 
March 31, 2015
 
December 31, 2014
Intangible assets, net(1)
$
80,429

 
$
50,088

Other assets
36,599

 
37,085

Deferred financing fees, net(2)
35,494

 
36,774

Restricted cash
19,124

 
19,283

Leasing costs, net(3)
16,662

 
20,031

Other receivables
10,802

 
13,115

Corporate furniture, fixtures and equipment, net(4)
5,113

 
5,409

Deferred expenses and other assets, net
$
204,223

 
$
181,785



15

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


Explanatory Notes:
_______________________________________________________________________________

(1)
Intangible assets, net are primarily related to the acquisition of real estate assets. This balance also includes a lease incentive asset of $38.1 million (see Note 4). Accumulated amortization on intangible assets was $35.6 million and $45.1 million as of March 31, 2015 and December 31, 2014, respectively. The amortization of above market leases decreased operating lease income on the Company's Consolidated Statements of Operations by $2.0 million and $2.3 million for the three months ended March 31, 2015 and 2014, respectively. The amortization expense for other intangible assets was $1.5 million and $2.5 million for the three months ended March 31, 2015 and 2014, respectively. These amounts are included in "Depreciation and amortization" on the Company's Consolidated Statements of Operations.
(2)
Accumulated amortization on deferred financing fees was $18.3 million and $15.4 million as of March 31, 2015 and December 31, 2014, respectively.
(3)
Accumulated amortization on leasing costs was $8.6 million and $9.0 million as of March 31, 2015 and December 31, 2014, respectively.
(4)
Accumulated depreciation on corporate furniture, fixtures and equipment was $7.3 million and $7.1 million as of March 31, 2015 and December 31, 2014, respectively.

Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
 
As of
 
March 31, 2015
 
December 31, 2014
Other liabilities(1)
$
58,353

 
$
48,256

Accrued interest payable
45,077

 
57,895

Accrued expenses
43,202

 
62,866

Intangible liabilities, net(2)
11,619

 
11,885

Accounts payable, accrued expenses and other liabilities
$
158,251

 
$
180,902


Explanatory Notes:
_______________________________________________________________________________

(1)
As of March 31, 2015 and December 31, 2014, "Other liabilities" includes $10.3 million and $6.8 million, respectively, related to a profit sharing payable to a developer for residential units sold. As of March 31, 2015 and December 31, 2014, "Other liabilities" also includes $7.5 million and $7.7 million, respectively, related to tax increment financing ("TIF") bonds which were issued by a governmental entity to fund the installation of infrastructure within one of the Company's master planned community developments. The balance represents a special assessment associated with each individual land parcel, which will decrease as the Company sells parcels.
(2)
Intangible liabilities, net are primarily related to the acquisition of real estate assets. Accumulated amortization on intangible liabilities was $5.5 million and $6.2 million as of March 31, 2015 and December 31, 2014, respectively. The amortization of intangible liabilities increased operating lease income on the Company's Consolidated Statements of Operations by $0.4 million and $0.7 million for the three months ended March 31, 2015 and 2014, respectively.

Deferred tax assets and liabilities of the Company's TRS entities were as follows ($ in thousands):
 
As of
 
March 31, 2015
 
December 31, 2014
Deferred tax assets(1)
$
57,053

 
$
54,318

Valuation allowance
(57,053
)
 
(54,318
)
Net deferred tax assets (liabilities)
$

 
$

Explanatory Note:
_______________________________________________________________________________

(1)
Deferred tax assets as of March 31, 2015 include timing differences related primarily to real estate basis of $39.1 million, investment basis of $6.2 million, deferred expenses of $5.6 million, and net operating loss carryforwards of $3.9 million. Deferred tax assets as of December 31, 2014, include timing differences related primarily to real estate basis of $39.3 million, investment basis of $5.9 million, net operating loss carryforwards of $4.1 million, and deferred expenses of $2.7 million.


16

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


Note 8—Debt Obligations, net

As of March 31, 2015 and December 31, 2014, the Company's debt obligations were as follows ($ in thousands):
 
Carrying Value as of
 
Stated
Interest Rates
 
Scheduled
Maturity Date
 
March 31, 2015
 
December 31, 2014
 
 
Secured credit facilities and term loans:
 
 
 
 
 
 
 
2012 Tranche A-2 Facility
$
348,185

 
$
358,504

 
LIBOR + 5.75%

(1)
March 2017
2015 Revolving Credit Facility
250,000

 

 
Various
(2)
March 2018
Term loans collateralized by net lease assets
246,792

 
248,955

 
4.851% - 7.26%

(3)
Various through 2026
Total secured credit facilities and term loans
844,977

 
607,459

 
 

 
 
Unsecured notes:
 
 
 
 
 
 
 
6.05% senior notes
105,765

 
105,765

 
6.05
%
 
April 2015
5.875% senior notes
261,403

 
261,403

 
5.875
%
 
March 2016
3.875% senior notes
265,000

 
265,000

 
3.875
%
 
July 2016
3.0% senior convertible notes(4)
200,000

 
200,000

 
3.0
%
 
November 2016
1.50% senior convertible notes(5)
200,000

 
200,000

 
1.50
%
 
November 2016
5.85% senior notes
99,722

 
99,722

 
5.85
%
 
March 2017
9.0% senior notes
275,000

 
275,000

 
9.0
%
 
June 2017
4.00% senior notes
550,000

 
550,000

 
4.00
%
 
November 2017
7.125% senior notes
300,000

 
300,000

 
7.125
%
 
February 2018
4.875% senior notes
300,000

 
300,000

 
4.875
%
 
July 2018
5.00% senior notes
770,000

 
770,000

 
5.00
%
 
July 2019
Total unsecured notes
3,326,890

 
3,326,890

 
 

 
 
Other debt obligations:

 
 
 
 
 
 
Other debt obligations
100,000

 
100,000

 
LIBOR + 1.50%

 
October 2035
Total debt obligations
4,271,867

 
4,034,349

 
 

 
 
Debt discounts, net
(10,339
)
 
(11,665
)
 
 

 
 
Total debt obligations, net
$
4,261,528

 
$
4,022,684

 
 

 
 

Explanatory Notes:
_______________________________________________________________________________

(1)
The loan has a LIBOR floor of 1.25%. As of March 31, 2015, inclusive of the floor, the 2012 Tranche A-2 Facility loan incurred interest at a rate of 7.00%.
(2)
The loan bears interest at the Company's election of either (i) a base rate, which is the greater of (a) prime, (b) federal funds plus 0.5% or (c) LIBOR plus 1.00% and subject to a margin ranging from 1.25% to 1.75%, or (ii) LIBOR subject to a margin ranging from 2.25% to 2.75%. At maturity, the Company may convert outstanding borrowings to a one year term loan which matures in quarterly installments through March 2019.
(3)
As of March 31, 2015 and December 31, 2014, includes a loan with a floating rate of LIBOR plus 2.00%. As of March 31, 2015, the weighted average interest rate of these loans is 5.3%.
(4)
The Company's 3.0% senior convertible fixed rate notes due November 2016 ("3.0% Convertible Notes") are convertible at the option of the holders, into 85.0 shares per $1,000 principal amount of 3.0% Convertible Notes, at $11.77 per share at any time prior to the close of business on November 14, 2016.
(5)
The Company's 1.50% senior convertible fixed rate notes due November 2016 ("1.50% Convertible Notes") are convertible at the option of the holders, into 57.8 shares per $1,000 principal amount of 1.50% Convertible Notes, at $17.29 per share at any time prior to the close of business on November 14, 2016.


17

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


Future Scheduled Maturities—As of March 31, 2015, future scheduled maturities of outstanding long-term debt obligations are as follows ($ in thousands):
 
Unsecured Debt
 
Secured Debt
 
Total
2015 (remaining nine months)
$
105,765

 
$

 
$
105,765

2016
926,403

 

 
926,403

2017
924,722

 
348,185

 
1,272,907

2018
600,000

 
264,765

 
864,765

2019
770,000

 
31,936

 
801,936

Thereafter
100,000

 
200,091

 
300,091

Total principal maturities
3,426,890

 
844,977

 
4,271,867

Unamortized debt discounts, net
(7,656
)
 
(2,683
)
 
(10,339
)
Total long-term debt obligations, net
$
3,419,234

 
$
842,294

 
$
4,261,528


2015 Revolving Credit Facility—On March 27, 2015, the Company entered into a secured revolving credit facility with a maximum capacity of $250.0 million (the "2015 Revolving Credit Facility"). Borrowings under this credit facility bear interest at a floating rate indexed to one of several base rates plus a margin which adjusts upward or downward based upon the Company's corporate credit rating. Commitments under the revolving facility mature in March 2018. At maturity, the Company may convert outstanding borrowings to a one year term loan which matures in quarterly installments through March 2019. The facility is secured by a borrowing base of assets and there is no requirement that proceeds from the borrowing base be used to pay down outstanding borrowings.
2012 Secured Credit Facilities—In March 2012, the Company entered into an $880.0 million senior secured credit agreement providing for two tranches of term loans: a $410.0 million 2012 A-1 tranche due March 2016, which bears interest at a rate of LIBOR + 4.00% (the "2012 Tranche A-1 Facility"), and a $470.0 million 2012 A-2 tranche due March 2017, which bears interest at a rate of LIBOR + 5.75% (the "2012 Tranche A-2 Facility," together the "2012 Secured Credit Facilities"). The 2012 A-1 and A-2 tranches were issued at 98.0% of par and 98.5% of par, respectively, and both tranches include a LIBOR floor of 1.25%. Proceeds from the 2012 Secured Credit Facilities, together with cash on hand, were used to repurchase and repay at maturity $606.7 million aggregate principal amount of the Company's convertible notes due October 2012, to fully repay the $244.0 million balance on the Company's unsecured credit facility due June 2012, and to repay, upon maturity, $90.3 million outstanding principal balance of its 5.50% senior unsecured notes.

The 2012 Secured Credit Facilities are collateralized by a first lien on a fixed pool of assets. Proceeds from principal repayments and sales of collateral are applied to amortize the 2012 Secured Credit Facilities. Proceeds received for interest, rent, lease payments and fee income are retained by the Company. The Company may also make optional prepayments, subject to prepayment fees. The 2012 Tranche A-1 Facility was fully repaid in August 2013. Additionally, through March 31, 2015, the Company made cumulative amortization repayments of $121.8 million on the 2012 Tranche A-2 Facility. For the three months ended March 31, 2015 and 2014, repayments of the 2012 Tranche A-2 Facility prior to maturity resulted in losses on early extinguishment of debt of $0.2 million and $0.3 million, respectively, related to the accelerated amortization of discounts and unamortized deferred financing fees on the portion of the facility that was repaid. These amounts were included in "Loss on early extinguishment of debt, net" on the Company's Consolidated Statements of Operations.


18

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


Encumbered/Unencumbered Assets—As of March 31, 2015 and December 31, 2014, the carrying value of the Company's encumbered and unencumbered assets by asset type are as follows ($ in thousands):
 
As of
 
March 31, 2015
 
December 31, 2014
 
Encumbered Assets
 
Unencumbered Assets
 
Encumbered Assets
 
Unencumbered Assets
Real estate, net
$
886,114

 
$
1,650,159

 
$
620,378

 
$
2,056,336

Real estate available and held for sale
10,496

 
282,112

 
10,496

 
275,486

Loans receivable and other lending investments, net(1)
109,798

 
1,466,048

 
46,515

 
1,364,828

Other investments
16,367

 
325,182

 
17,708

 
336,411

Cash and other assets

 
944,304

 

 
768,475

Total
$
1,022,775

 
$
4,667,805

 
$
695,097

 
$
4,801,536


Explanatory Note:
_______________________________________________________________________________

(1)
As of March 31, 2015 and December 31, 2014, the amounts presented exclude general reserves for loan losses of $38.0 million and $33.5 million, respectively.

Debt Covenants

The Company's outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness of at least 1.2x and a covenant not to incur new indebtedness, if on a pro forma basis, the Company's fixed charge coverage ratio is 1.5x or lower, except for incurrences of permitted debt. If any of the Company's covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of its debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders.

The Company's 2012 Secured Credit Facilities and the 2015 Revolving Credit Facility contain certain covenants, including covenants relating to collateral coverage, dividend payments, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. In particular, the 2012 Secured Credit Facilities require the Company to maintain collateral coverage of at least 1.25x outstanding borrowings on the facilities. The 2015 Revolving Credit Facility requires the Company to maintain both collateral coverage of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x. In addition, for so long as the Company maintains its qualification as a REIT, the 2012 Secured Credit Facilities and the 2015 Revolving Credit Facility permit the Company to distribute 100% of its REIT taxable income on an annual basis (prior to deducting certain cumulative net operating loss carryforwards in the case of the 2015 Revolving Credit Facility). The Company may not pay common dividends if it ceases to qualify as a REIT.

The Company's 2012 Secured Credit Facilities and the 2015 Revolving Credit Facility contain cross default provisions that would allow the lenders to declare an event of default and accelerate the Company's indebtedness to them if the Company fails to pay amounts due in respect of its other recourse indebtedness in excess of specified thresholds or if the lenders under such other indebtedness are otherwise permitted to accelerate such indebtedness for any reason. The indentures governing the Company's unsecured public debt securities permit the bondholders to declare an event of default and accelerate the Company's indebtedness to them if the Company's other recourse indebtedness in excess of specified thresholds is not paid at final maturity or if such indebtedness is accelerated.

19

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


Note 9—Commitments and Contingencies

Unfunded Commitments—The Company generally funds construction and development loans and build-outs of space in net lease assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. The Company refers to these arrangements as Performance-Based Commitments. In addition, the Company sometimes establishes a maximum amount of additional funding which it will make available to a borrower or tenant for an expansion or addition to a project if it approves of the expansion or addition in its sole discretion. The Company refers to these arrangements as Discretionary Fundings. Finally, the Company has committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.

As of March 31, 2015, the maximum amount of fundings the Company may be required to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments, that it approves all Discretionary Fundings and that 100% of its capital committed to Strategic Investments is drawn down, are as follows ($ in thousands):
 
Loans and Other Lending Investments
 
Real Estate
 
Other
Investments
 
Total
Performance-Based Commitments
$
600,213

 
$
12,081

 
$
27,221

 
$
639,515

Strategic Investments

 

 
45,762

 
45,762

Discretionary Fundings
18,065

 

 

 
18,065

Total
$
618,278

 
$
12,081

 
$
72,983

 
$
703,342


Legal Proceedings—The Company and/or one or more of its subsidiaries is party to various pending litigation matters that are considered ordinary routine litigation incidental to the Company's business as a finance and investment company focused on the commercial real estate industry, including loan foreclosure and foreclosure-related proceedings. In addition to such matters, the Company is a party to the following legal proceedings:

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 its current and former senior executives (including its 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 common stock issued by the Company to its 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. On March 4, 2015, the Maryland Court of Special Appeals issued a notice docketing the appeal in that court and scheduling oral arguments for November 2015.

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 U.S. Home Corporation ("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; 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 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 and other motions regarding 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.

On a quarterly basis, the Company evaluates developments in legal proceedings that could require a liability to be accrued and/or disclosed. Based on its current knowledge, and after consultation with legal counsel, the Company believes it is not a party to, nor are any of its properties the subject of, any pending legal proceeding that would have a material adverse effect on the Company's Consolidated Financial Statements.


20

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


Note 10—Derivatives
The Company's use of derivative financial instruments is primarily limited to the utilization of interest rate swaps, interest rate caps and foreign exchange contracts. The principal objective of such financial instruments is to minimize the risks and/or costs associated with the Company's operating and financial structure and to manage its exposure to interest rates and foreign exchange rates. Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements, foreign exchange rate movements, and other identified risks, but may not meet the strict hedge accounting requirements.
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 ($ in thousands):
 
Derivative Assets as of
 
Derivative Liabilities as of
 
March 31, 2015
 
December 31, 2014
 
March 31, 2015
 
December 31, 2014
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives Designated in Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
N/A
 
$

 
N/A
 
$

 
Other Liabilities
 
$
676

 
Other Liabilities
 
$
478

Interest rate swaps
N/A
 

 
Other Assets
 
52

 
Other Liabilities
 
234

 
N/A
 

Total
 
 
$

 
 
 
$
52

 
 
 
$
910

 
 
 
$
478

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not Designated in Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Other Assets
 
$
2,180

 
Other Assets
 
$
1,534

 
N/A
 
$

 
N/A
 
$

Interest rate cap
Other Assets
 
2,739

 
Other Assets
 
4,775

 
N/A
 

 
N/A
 

Total
 
 
$
4,919

 
 
 
$
6,309

 
 
 
$

 
 
 
$

The tables below present the effect of the Company's derivative financial instruments on the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2015 and 2014 ($ in thousands):
Derivatives Designated in Hedging Relationships
 
Location of Gain (Loss)
Recognized in Income
 
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings
 (Ineffective Portion)
For the Three Months Ended March 31, 2015
 
 
 
 
 
 
Interest rate cap
 
Interest Expense
 
$

 
$
(77
)
 
N/A
Interest rate cap
 
Earnings from equity method investments
 
(7
)
 

 
N/A
Interest rate swaps
 
Interest Expense
 
(376
)
 
42

 
N/A
Interest rate swap
 
Earnings from equity method investments
 
(364
)
 
(115
)
 
N/A
Foreign exchange contracts
 
Earnings from equity method investments
 
(198
)
 

 
N/A
For the Three Months Ended March 31, 2014
 
 
 
 
 
 
Interest rate cap
 
Interest Expense
 
(962
)
 

 
N/A
Interest rate swap
 
Interest Expense
 
(348
)
 
(135
)
 
N/A
Foreign exchange contracts
 
Earnings from equity method investments
 
(452
)
 

 
N/A

21

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


 
 
 
 
Amount of Gain or (Loss)
Recognized in Income
 
 
Location of Gain or
(Loss) Recognized in
Income
 
For the Three Months Ended March 31,
Derivatives not Designated in Hedging Relationships
 
2015
 
2014
Interest rate cap
 
Other Expense
 
$
(2,036
)
 
$

Foreign exchange contracts
 
Other Expense
 
2,289

 
1,498

F