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IStar Financial 10-K 2010

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(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, 2009

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   95-6881527
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

1114 Avenue of the Americas, 39th Floor
New York, NY

 

10036
(Address of principal executive offices)   (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:
 
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: None

          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 o 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.

Large accelerated filer o   Accelerated filer ý

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, 2009 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 $267.1 million, based upon the closing price of $2.84 on the New York Stock Exchange composite tape on such date.

          As of February 16, 2010, there were 94,195,478 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 2010 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.



TABLE OF CONTENTS

 
  Page

PART I

   

Item 1. Business

 
1

Item 1A. Risk Factors

 
13

Item 1B. Unresolved Staff Comments

 
22

Item 2. Properties

 
23

Item 3. Legal Proceedings

 
23

Item 4. Submission of Matters to a Vote of Security Holders

 
24

PART II

   

Item 5. Market for Registrant's Equity and Related Share Matters

 
25

Item 6. Selected Financial Data

 
28

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

 
31

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 
51

Item 8. Financial Statements and Supplemental Data

 
53

Item 9. Changes in and Disagreements with Registered Public Accounting Firm on Accounting and Financial Disclosure

 
123

Item 9A. Controls and Procedures

 
123

Item 9B. Other Information

 
123

PART III

   

Item 10. Directors, Executive Officers and Corporate Governance of the Registrant

 
124

Item 11. Executive Compensation

 
124

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 
124

Item 13. Certain Relationships, Related Transactions and Director Independence

 
124

Item 14. Principal Registered Public Accounting Firm Fees and Services

 
124

PART IV

   

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

 
124

SIGNATURES

 
130

Table of Contents


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 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are included with respect to, among other things, iStar Financial Inc.'s (the "Company's") current business plan, business strategy, portfolio management 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.

Overview

        iStar Financial Inc., or the "Company," is a publicly-traded finance company focused on the commercial real estate industry. The Company primarily provides custom-tailored financing to high-end private and corporate owners of real estate, including senior and mezzanine real estate debt, senior and mezzanine corporate capital, as well as corporate net lease financing and equity. The Company, which is taxed as a real estate investment trust, or "REIT," seeks to generate attractive risk-adjusted returns on equity to shareholders by providing innovative and value-added financing solutions to its customers. The Company delivers customized financing products to sophisticated real estate borrowers and corporate customers who require a high level of flexibility and service. The Company's two primary lines of business are lending and corporate tenant leasing.

        The lending business is primarily comprised of senior and mezzanine real estate loans that typically range in size from $20 million to $150 million and have original terms generally ranging from three to ten years. These loans may be either fixed-rate (based on the U.S. Treasury rate plus a spread) or variable-rate (based on LIBOR plus a spread) and are structured to meet the specific financing needs of the borrowers. The Company also provides senior and subordinated capital to corporations, particularly those engaged in real estate or real estate related businesses. These financings may be either secured or unsecured, typically range in size from $20 million to $150 million and have initial maturities generally ranging from three to ten years. As part of the lending business, the Company also acquires whole loans, loan participations and debt securities which present attractive risk-reward opportunities.

        The Company's corporate tenant leasing business provides capital to corporations and other owners who control facilities leased to single creditworthy customers. The Company's net leased assets are generally mission critical headquarters or distribution facilities that are subject to long-term leases with public companies, many of which are rated corporate credits. Most of the leases provide for expenses at the facility to be paid by the corporate customer on a triple net lease basis. Corporate tenant lease, or

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"CTL," transactions have initial terms generally ranging from 15 to 20 years and typically range in size from $20 million to $150 million.

        The Company's primary sources of revenues are interest income, which is the interest that borrowers pay on loans, and operating lease income, which is the rent that corporate customers pay to lease CTL properties. The Company primarily generates income through the "spread" or "margin," which is the difference between the revenues generated from loans and leases and interest expense and the cost of CTL operations.

        The Company began its business in 1993 through private investment funds and became publicly traded in 1998. Since that time, the Company has grown through the origination of new lending and leasing transactions, as well as through corporate acquisitions, including the acquisition of TriNet Corporate Realty Trust, Inc. in 1999, the acquisitions of Falcon Financial Investment Trust and of a significant non-controlling interest in Oak Hill Advisors, L.P. and affiliates in 2005, and the acquisition of the commercial real estate lending business and loan portfolio which we refer to as the "Fremont CRE," of Fremont Investment and Loan, or "Fremont," a division of Fremont General Corporation, in 2007.

Current Market Conditions

        The financial market conditions that began in late 2007, including the economic recession and tightening of credit markets, continued to significantly impact the commercial real estate market and financial services industry in 2009. The severe economic downturn led to a decline in commercial real estate values which, combined with a lack of available debt financing for commercial and residential real estate assets, limited borrowers' ability to repay or refinance their loans. Further, the ability of many of the Company's borrowers to sell units in residential projects has been adversely impacted by current economic conditions and the lack of end loan financing available to residential unit purchasers. The combination of these factors continued to adversely affect the Company's business, financial condition and operating performance in 2009, resulting in significant additions to non-performing assets, increases in the related provision for loan losses and a reduction in the level of liquidity available to finance its operations. These economic factors and their effects on the Company's operations have resulted in increases in its financing costs, a continuing inability to access the unsecured debt markets, depressed prices for its Common Stock, the continued suspension of quarterly Common Stock dividends and has narrowed the Company's margin of compliance with debt covenants. In addition, we have significantly curtailed our asset origination activities, reduced operating expenses and focused on asset management in order to maximize recoveries from existing asset resolutions. A more detailed discussion of how current market conditions have impacted the Company is provided in Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations."

Risk Management

        The Company's risk management team is comprised of over 120 professionals with in-house experience in asset management, legal, corporate credit, loan servicing, project and construction management and engineering. The risk management team includes a rated loan servicer, iStar Asset Services, or "iSAS," that provides the Company's customers with responsive post-closing support. The Company employs a proactive risk management strategy centered on information sharing and frequent customer contact.

        The Company has a quarterly risk rating process that enables it to evaluate, monitor and manage asset-specific credit issues and identify credit trends on a portfolio-wide basis. The quarterly risk rating process allows the Company to create a common language and framework to evaluate risk and the adequacy of the loan loss provision and reserves. A detailed credit review of each asset is performed quarterly with ratings of "1" to "5" assigned ("1" represents the lowest level of risk, "5" represents the

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highest level of risk). Risk ratings provide the Company with a means of identifying assets that warrant a greater degree of monitoring and senior management attention.

        The Company also has collateral and customer monitoring risk management systems that enable it to proactively review the performance of its asset base. Risk management information is generated from collateral-level controls, customer reporting requirements and on-site asset monitoring programs.

        iSAS, the Company's rated loan servicing subsidiary, and the Company's corporate tenant lease asset management personnel are responsible for managing the Company's asset base, including monitoring customers' compliance with their respective loan and leasing agreements, collecting customer payments and analyzing and distributing customer performance information throughout the Company. iSAS performs servicing responsibilities primarily for Company owned assets and is currently rated "strong" by Standard & Poor's.

        Loan customers are required to comply with periodic covenant tests and typically must submit collateral performance information, such as monthly operating statements and operating budgets, to the Company. The Company may also require customers to deposit cash into escrow accounts to cover major capital expenditures, such as expected re-tenanting costs, and typically requires approval rights over major decisions impacting collateral cash flows. In some cases, collateral cash receipts must be deposited into lock-box bank accounts with the Company before the net cash, after debt service, is distributed to its customers. In addition, the Company has a formal annual inspection program designed to ensure that its corporate tenant lease customers are complying with their lease terms.

        The Company's risk management team employs an asset specific approach to managing and resolving loans that may become non-performing as well as other real estate owned assets ("OREO") and real estate held for investment assets ("REHI"). Asset performance or collectability can deteriorate due to a variety of factors, including adverse market conditions, construction delays and overruns, or a borrower's financial condition or managerial capabilities. Once an asset's performance or collectability begins deteriorating and we believe the asset will become a non-performing loan ("NPL"), the team seeks to formulate asset resolution strategies which may include, but are not limited to the following:

    Foreclosing on a loan to gain title to the underlying property collateral. Once title is obtained, the risk management team puts in place an asset-specific plan designed to maximize the value of the collateral—which can include completing the construction or renovation of the property, continuing the sale of condominium units, leasing or increasing the occupancy of the property, engaging a third party property manager or selling the entire asset or a partial interest to a third party. In appropriate circumstances the Company may also seek to collect under guarantees of the loan;

    Selling the existing mortgage note to a third party;

    Entering into a restructuring discussion with the borrower. Typical loan terms that may be changed or modified in a restructuring include: the interest rate, loan amount, maturity date or the level of borrower support through guarantees or letters of credit.

        The risk management team responsible for a non-performing loan or OREO/REHI resolution presents its proposed plan to the Company's senior management team for discussion and approval. The resolution plan is monitored as part of the Company's asset management meetings and its quarterly risk rating process. Asset resolution strategies may be modified as conditions change.

Financing Strategy

        The Company has utilized a wide range of debt and equity capital resources to finance its investment and growth strategies. Prior to the onset of the credit crisis, the Company's primary sources of liquidity were its unsecured bank credit facilities, issuances of unsecured debt and equity securities in capital

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markets transactions and repayments of loans. However, liquidity in the capital markets has been severely constrained since the beginning of the credit crisis, increasing the Company's cost of funds and effectively eliminating its access to the unsecured debt markets—previously its primary source of debt financing. The Company has also seen its stock price decline significantly, which has limited its ability to access additional equity capital. As a result, the Company has sought alternative sources of liquidity primarily through secured debt financings and sales of assets. The Company has sought, and will continue to seek to raise capital through means other than unsecured financing, such as additional secured financing, asset sales, 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

        Given the economic conditions within the commercial real estate market, the uncertainty associated with the timing of scheduled loan repayments and the increased constraints in the financing markets, the Company's new loan and CTL originations were limited during 2008 and 2009. Prior to 2008, the Company's investment strategy targeted specific sectors of the real estate and corporate credit markets in which it believed it could deliver innovative, custom-tailored and flexible financial solutions to its customers, thereby differentiating its financial products from those offered by other capital providers.

        The Company implemented its investment strategy by:

    Focusing on the origination of large, structured mortgage, corporate and lease financings where customers require flexible financial solutions and "one-call" responsiveness post-closing.

    Avoiding commodity businesses in which there is significant direct competition from other providers of capital such as conduit lending and investments in commercial or residential mortgage-backed securities.

    Developing direct relationships with borrowers and corporate customers as opposed to sourcing transactions solely 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 the Company believes credit is mispriced by other providers of capital, such as the spread between lease yields and the yields on corporate customers' underlying credit obligations.

        The Company seeks to invest in a mix of portfolio financing transactions to create asset diversification and single-asset financings of properties with strong, long-term competitive market positions. The Company's credit process focuses on:

    Building diversification by asset type, property type, obligor, loan/lease maturity and geography.

    Financing commercial real estate assets in major metropolitan markets.

    Underwriting assets using conservative assumptions regarding collateral value and future property performance.

    Evaluating relative risk adjusted returns across multiple investment markets.

    Focusing on replacement costs as the long-term determinant of real estate values.

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        Substantially all of the Company's investments have been in assets with customers based in the United States. As of December 31, 2009, based on current gross carrying values, the Company's total investment portfolio has the following characteristics:

Asset Type

GRAPHIC

Property Type

GRAPHIC

Geography

GRAPHIC

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Underwriting Process

        The Company discusses and analyzes investment opportunities in meetings which are attended by 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 or corporate credit, as well as its market or industry dynamics; (3) evaluating the equity or corporate sponsor; (4) determining whether it can implement an appropriate 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 its ability to match fund the asset.

        The Company's underwriting process provides for feedback and review by key disciplines within the Company, including investments, credit, risk management, legal/structuring and capital markets. Participation is encouraged from professionals in these 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 a memorandum for the Company's internal and/or Board of Directors investment committees.

        Any commitment to make an investment of $25 million or less in any transaction or series of related transactions requires the approval of the Chief Executive Officer and Chief Investment Officer. Any commitment in an amount in excess of $25 million but less than or equal to $75 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 an amount in excess of $75 million but less than or equal to $150 million requires the further approval of the Investment Committee of the Board of Directors. Any commitment in an amount in excess of $150 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 full Board of Directors.

Hedging Strategy

        The Company has variable-rate lending assets and variable-rate debt obligations. These 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's interest rate risk management policy requires that it enter into hedging transactions when it is determined, based on sensitivity models, that the impact of various increasing or decreasing interest rate scenarios could have a significant negative effect on its net interest income. The Company does not use derivative instruments for speculative purposes. The derivative instruments the Company uses are typically in the form of interest rate swaps and interest rate caps.

Industry Segments

        The Company has determined that it has two reportable operating segments: Real Estate Lending and Corporate Tenant Leasing. The Real Estate Lending segment includes all of the Company's activities related to senior and mezzanine real estate debt and corporate capital investments, OREO and REHI. The Corporate Tenant Leasing segment includes all of the Company's activities related to the ownership and leasing of corporate facilities. Segment revenue and profit information is presented in Note 17 of the Company's Notes to Consolidated Financial Statements.

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Real Estate Lending

        The Company's Real Estate Lending segment includes loans and other lending investments, real estate held for investment and other real estate owned.

        Loans and other lending investments primarily consists of senior mortgage loans that are secured by commercial and residential real estate assets. A smaller portion of the portfolio consists of subordinated mortgage loans that are secured by subordinated interests in commercial and residential real estate assets, corporate/partnership loans, which are typically unsecured and may be senior or subordinate and corporate debt securities.

        As of December 31, 2009, a significant portion of the Company's loan portfolio was designated as non-performing. Non-performing loans are placed on non-accrual status and reserves for loan losses are recorded to the extent these loans are determined to be impaired. See Note 3 to the Company's Notes to Consolidated Financial Statements for a discussion of the Company's policies regarding non-performing loans and reserves for loan losses.

        REHI and OREO consist of properties acquired through foreclosure or through deed-in-lieu of foreclosure in full or partial satisfaction of non-performing loans. Properties are designated as REHI or OREO depending on the Company's strategic plan to realize the maximum value from the collateral received. The Company will designate properties as REHI if it intends to hold, operate or develop a property for a period of at least twelve months and will designate properties as OREO if it intends to market a property for sale in the near term.

        As of December 31, 2009, the Company's Real Estate Lending segment included the following ($ in thousands):

 
  Loan/Property
Count
  Carrying Value   % of Total  

Performing loans:

                   
 

Senior mortgages

    108   $ 3,616,697     40.7 %
 

Subordinated mortgages

    17     401,532     4.5 %
 

Corporate/Partnership loans

    19     887,555     9.9 %
                 
 

Subtotal

    144     4,905,784        

Non-performing loans:

                   
 

Senior mortgages

    73     3,751,050     42.0 %
 

Subordinated mortgages

    4     89,798     1.0 %
 

Corporate/Partnership loans

    6     70,074     0.8 %
                 
 

Subtotal

    83     3,910,922        
                 
 

Total loans

    227     8,816,706        

Reserve for loan losses

          (1,417,949 )   (15.9 )%
                   
 

Total loans, net

          7,398,757        

Other lending investments—securities

    5     262,805     2.9 %
                 
 

Total Loans and other lending investments, net

    232     7,661,562        

Real estate held for investment, net

   
15
   
422,664
   
4.7

%

Other real estate owned

   
25
   
839,141
   
9.4

%
               
 

Total Real estate lending long-lived assets, net

    272   $ 8,923,367     100.0 %
               

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        Summary of Collateral/Property Types—As of December 31, 2009, assets in the Company's real estate lending segment had the following collateral and property characteristics ($ in thousands):

Collateral/Property Type
  Performing
Loans and
Securities
  Non-
performing
Loans
  OREO &
REHI
  Total   % of
Total
 

Land

  $ 482,705   $ 1,218,108   $ 402,252   $ 2,103,065     20.3 %

Condo:

                               
 

Construction—Completed

    549,134     848,439     487,718     1,885,291     18.2 %
 

Construction—In Progress

    964,654     210,165         1,174,819     11.4 %
 

Conversion

    109,824     74,664     114,400     298,888     2.9 %

Mixed Use/Mixed Collateral

    330,647     348,491     19,761     698,899     6.8 %

Entertainment/Leisure

    156,983     267,399         424,382     4.1 %

Retail

    687,458     243,915     41,587     972,960     9.4 %

Multifamily

    131,653     238,089     86,936     456,678     4.4 %

Hotel

    372,897     234,005     83,300     690,202     6.7 %

Office

    203,305     107,554     7,384     318,243     3.1 %

Corporate—Real Estate

    674,110     61,754         735,864     7.1 %

Industrial/R&D

    295,555     52,817         348,372     3.4 %

Other

    209,664     5,522     18,467     233,653     2.2 %
                       

Gross carrying value

  $ 5,168,589   $ 3,910,922   $ 1,261,805   $ 10,341,316     100.0 %
                       

        Summary of Loan Interest Rate Characteristics—As of December 31, 2009, the Company's loans and other lending investments had the following interest rate characteristics ($ in thousands):

 
  Carrying
Value
  % of
Total
  Weighted
Average
Accrual Rate
 

Fixed-rate loans

  $ 1,809,703     19.9 %   9.11 %

Variable-rate loans(1)

    3,358,886     37.0 %   5.99 %

Non-performing loans

    3,910,922     43.1 %   N/A  
                 

Gross carrying value

  $ 9,079,511     100.0 %      
                 

Explanatory Note:


(1)
As of December 31, 2009, amount includes $1.87 billion of loans with a weighted average interest rate floor of 3.86%.

        Summary of Loan Maturities—As of December 31, 2009, the Company's loans and other lending investments had the following maturity characteristics ($ in thousands):

Year of Maturity
  Number of
Loans
Maturing
  Carrying
Value
  % of
Total
 

2010

    74   $ 2,399,853     26.4 %

2011

    12     517,821     5.7 %

2012

    15     1,065,489     11.7 %

2013

    7     227,718     2.5 %

2014

    6     162,031     1.8 %

2015

    3     133,171     1.5 %

2016

    8     203,204     2.2 %

2017

    5     50,984     0.6 %

2018

    8     45,992     0.5 %

2019

    4     32,713     0.4 %

2020 and thereafter

    7     329,613     3.6 %
               

Total performing loans

    149     5,168,589     56.9 %

Non-performing loans

    83     3,910,922     43.1 %
               

Gross carrying value

    232   $ 9,079,511     100.0 %
               

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Corporate Tenant Leasing

        The Company has pursued the origination of CTL transactions by structuring purchase/leasebacks and by acquiring facilities subject to existing long-term net leases. In a typical purchase/leaseback transaction, the Company purchases a corporation's facility and leases it back to that corporation subject to a long-term net lease. This structure allows the corporate customer to reinvest the proceeds from the sale of its facilities into its core business, while the Company benefits from a long term income stream. The Company generally intends to hold its CTL assets for long-term investment. However, subject to certain tax restrictions, the Company may dispose of assets if it deems the disposition to be in the Company's best interests and may either reinvest the disposition proceeds, use the proceeds to reduce debt, or distribute the proceeds to shareholders.

        Under a typical net lease agreement, the corporate customer agrees to pay a base monthly operating lease payment and all facility operating expenses (including taxes, maintenance and insurance).

        The Company generally seeks corporate customers with the following characteristics:

    Established companies with stable core businesses or market leaders in growing industries.

    Investment-grade credit strength or appropriate credit enhancements if corporate credit strength is not sufficient on a stand-alone basis.

    Commitments to the facilities that are mission-critical to their ongoing businesses.

        Summary of Tenant Credit Characteristics—As of December 31, 2009, the Company had 95 CTL customers operating in more than 37 major industry sectors, including transportation, business services, recreation, technology and communications. The majority of these customers are well-recognized national and international organizations, such as FedEx, IBM, Google, DirecTV and the U.S. Government.

        As of December 31, 2009, the Company's CTL portfolio has the following tenant credit characteristics ($ in thousands):

 
  Annualized In-Place
Operating
Lease Income(1)
  % of In-Place
Operating
Lease Income
 

Investment grade(2)

  $ 91,327     30 %

Implied investment grade(3)

    19,549     6 %

Non-investment grade

    106,610     35 %

Unrated

    91,009     29 %
           

Total

  $ 308,495     100 %
           

Explanatory Notes:


(1)
Reflects annualized GAAP operating lease income for leases in-place at December 31, 2009.

(2)
A tenant's credit rating is considered "Investment Grade" if the tenant or its guarantor has a published senior unsecured credit rating, and if such rating is not available, a corporate entity rating, of Baa3/BBB- or above by one or more of the three national rating agencies.

(3)
We consider a tenant's credit rating to be "Implied Investment Grade" if it is 100% owned by an investment-grade parent or it has no published ratings, but has credit characteristics that the Company believes are consistent with other companies that have an investment grade senior unsecured credit ratings. An example is Google, Inc.

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        Summary of CTL Asset Types—As of December 31, 2009, the Company owned 356 office, industrial, entertainment, hotel and retail facilities principally subject to net leases to 95 customers, comprising 38.8 million square feet in 39 states. Information regarding the Company's CTL assets as of December 31, 2009 is set forth below:

 
  # of
Leases
  % of In-Place
Operating Lease
Income(1)
  % of Total
Revenue(2)
 

Office

    56     45.5 %   17.6 %

Industrial/R&D

    38     29.3 %   11.3 %

Entertainment/Leisure

    10     14.9 %   5.8 %

Retail

    12     5.3 %   2.0 %

Hotel

    3     5.0 %   1.9 %
                 

Total

    119     100.0 %      
                 

Explanatory Notes:


(1)
Reflects a percentage of annualized GAAP operating lease income for leases in-place at December 31, 2009.

(2)
Reflects annualized GAAP operating lease income for leases in-place at December 31, 2009 as a percentage of annualized total revenue for the quarter ended December 31, 2009.

        Summary of CTL Asset Lease Expirations—As of December 31, 2009, lease expirations on the Company's CTL assets are as follows ($ in thousands):

Year of Lease Expiration
  Number of
Leases
Expiring
  Annualized In-Place
Operating
Lease Income(1)
  % of In-Place
Operating
Lease Income
  % of Total
Revenue(2)
 

2010

    8   $ 12,989     4.2 %   1.7 %

2011

    5     4,893     1.6 %   0.6 %

2012

    16     17,791     5.8 %   2.2 %

2013

    7     9,009     2.9 %   1.1 %

2014

    10     10,610     3.4 %   1.3 %

2015

    8     9,830     3.2 %   1.2 %

2016

    6     23,002     7.5 %   2.9 %

2017

    8     37,739     12.2 %   4.7 %

2018

    6     6,255     2.0 %   0.8 %

2019

    5     7,823     2.5 %   1.0 %

2020 and thereafter

    40     168,554     54.7 %   21.1 %
                     

Total

    119   $ 308,495     100.0 %      
                     

Weighted average remaining lease term

    10.9 years                    

Explanatory Notes:


(1)
Reflects annualized GAAP operating lease income for leases in-place at December 31, 2009.

(2)
Reflects the percentage of annualized GAAP operating lease income for leases in-place at December 31, 2009 as a percentage of annualized total revenue for the quarter ended December 31, 2009.

Policies with Respect to Other Activities

        The Company 's investment, financing and 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 anytime without a vote of 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 ratios in determining the pricing and advisability of each particular transaction.

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        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). Generally, the Company's senior mortgages, CTL assets and certain of its subordinated mortgages 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 financing 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 stockholders 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 business conduct for all of its employees and directors, including the Company's chief executive officer, chief financial officer, other executive officers and personnel. 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 Company's website at www.istarfinancial.com. The Company intends to post on its website material changes to, or waivers from, its code of conduct, if any, within two days of any such event. As of

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December 31, 2009, there were no waivers or changes since adoption of the current code of conduct in October 2002.

Employees

        As of January 29, 2010, the Company had 247 employees and believes its relationships with its employees to be good. The Company's employees are not represented by a collective bargaining agreement.

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 Securities Exchange Act of 1934, as amended, 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.

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Item 1a.    Risk Factors

        In addition to the other information in this document, 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 trading price of our common stock. For purposes of these risk factors, the terms "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 have and may continue to adversely affect our business.

        Our success is generally dependent upon economic conditions in the U.S. and, in particular, the geographic areas in which a substantial number of our investments are located. The recessionary changes in national economic conditions and in the economic conditions of the regions in which we conduct operations have had an adverse effect on our business. In addition, the commercial real estate industry and financial markets in general have been negatively impacted by volatility in the capital markets, significant declines in asset values and lack of liquidity. These factors have resulted in numerous negative implications to our business, including the inability of our customers to access capital to repay their obligations to us resulting in material increases in non-performing loans, our limited ability to execute asset sales, declines in the market price of our common stock, and the reduction in our unsecured corporate credit ratings to below investment grade, leading to increases in our financing costs and an inability to access the unsecured debt markets. These market and economic factors have combined to adversely impact our financial performance and our ability to pay dividends and may continue to do so in the future.

We have significant indebtedness 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 financing commitments and scheduled debt payments. Historically, our primary sources of liquidity have been our bank credit facilities, issuances of debt and equity securities in capital markets transactions, repayments of our loans and sales of assets. However, liquidity in the currently dislocated capital markets has been severely constrained since the beginning of the credit crisis, increasing our cost of funds and effectively eliminating our access to the unsecured debt markets—previously our primary source of debt financing. We have sought, and will continue to seek, to raise capital through means other than unsecured debt financing, such as secured debt financing, asset sales, joint ventures and other third party capital arrangements. For the upcoming year, we will require significant capital to repay $586.8 million of our 2010 debt maturities and to fund our investment activities and operating expenses, including approximately $430.0 million of unfunded commitments primarily associated with our construction loan portfolio. Furthermore, if we do not pay down our existing $1.00 billion First Priority Credit Agreement by $500.0 million in September 2010, then under the terms of the credit agreement, we would be required to apply payments of principal and net sale proceeds received by us in respect of assets constituting collateral for our obligations under that agreement toward the mandatory prepayment of the First Priority Credit Agreement, and such prepayment amounts would not be available to us for other purposes. In 2011, we have approximately $4.02 billion of scheduled debt maturities. Continued disruption in the global credit markets or further deterioration in those markets may have a material adverse effect on our ability to repay or refinance our borrowings. Although we currently expect our sources of capital to be sufficient to meet our near term liquidity needs and are actively exploring alternatives to enable us to meet our long-term debt maturities, there can be no assurance that our liquidity requirements will continue to be satisfied or that we will be able to meet our long term liquidity needs.

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We have suffered adverse consequences as a result of our credit ratings being downgraded.

        Our borrowing costs and our access to the debt capital markets depend significantly on our credit ratings. Our unsecured corporate credit ratings were reduced to below investment grade by the major national credit rating agencies, primarily due to concerns over worsening credit metrics in our loan portfolio. These reductions in our credit ratings, together with the current dislocation in the capital markets in general, have increased our borrowing costs, limited our access to the capital markets and caused restrictive covenants in our public debt instruments to become operative. Further, these downgrades could result in a decision by the lenders under our existing bank credit facilities not to extend such credit facilities after their expirations. These reductions in our credit ratings have increased our cost of funds which has reduced our earnings and adversely impacted our liquidity and competitive positions. Further downgrades could have additional adverse consequences on our business.

Covenants in our indebtedness could limit our flexibility and adversely affect our financial condition.

        Our ability to borrow under our secured credit facilities is dependent on maintaining compliance with various covenants, including a minimum tangible net worth covenant and specified financial ratios, such as fixed charge coverage, unencumbered assets to unsecured indebtedness, eligible collateral coverage and leverage. All of these covenants on the facilities are maintenance covenants and, if breached, could result in an acceleration of our facilities if a waiver or modification is not agreed upon with the requisite percentage of the unsecured lending group and the lenders on the other facilities.

        Our publicly held debt securities also contain covenants for fixed charge coverage and unencumbered assets to unsecured indebtedness ratios and our secured debt securities have an eligible collateral coverage requirement. The fixed charge coverage ratio in our publicly held securities is an incurrence test. If we do not meet the fixed charge coverage ratio, our ability to incur additional indebtedness will be restricted. The unencumbered asset to unsecured indebtedness covenant and the eligible collateral coverage covenant are maintenance covenants and, if breached and not cured within applicable cure periods, could result in acceleration of our publicly held debt unless a waiver or modification is agreed upon with the requisite percentage of the bondholders. Based on our unsecured credit ratings at December 31, 2009, the financial covenants in our publicly held debt securities, including the fixed charge coverage ratio and maintenance of unencumbered assets compared to unsecured indebtedness, are operative.

        Our secured credit facilities and our public debt securities contain cross-default provisions which would allow the lenders and the bondholders 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. In addition, our secured credit facilities, unsecured credit facilities and the indentures governing our public debt securities provide that the lenders and bondholders may declare an event of default and accelerate our indebtedness to them if there is a nonpayment default under our other recourse indebtedness in excess of specified thresholds and, if the holders of the other indebtedness are permitted to accelerate, in the case of our secured credit facilities, or accelerate, in the case of our unsecured credit facilities and the bond indentures, the other recourse indebtedness.

        Our current level of financial performance and credit metrics has put pressure on our ability to meet these financial covenants. In particular, our tangible net worth at December 31, 2009 was approximately $1.7 billion, which is not significantly above the financial covenant minimum requirement in our secured credit facilities of $1.5 billion. While we believe we are in compliance with our covenants as of the date of this report, there can be no assurance that we will be able to stay in compliance if our financial performance and credit metrics do not improve or if we do not have sufficient eligible assets to satisfy our collateral coverage covenants. In addition, we may be forced to take actions outside of management's operating strategy that will enable us to meet our covenants in the near term but may adversely affect our earnings in the longer term.

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Changes in market conditions could adversely affect the market price of our common stock.

        The market value of our common stock is based upon general stock and bond market conditions, as well as the market's perception of our growth potential, current and future expectations of our financial performance and prospects for payment of cash dividends by the Company. Consequently, our common stock may trade at prices that are higher or lower than our book value per share of common stock. The current economic conditions impacting financial markets and the commercial real estate industry combined with the our recent financial performance have resulted in a significant decline in the market price of our Common Stock. If our financial performance does not improve, the market price of our common stock could be further adversely impacted.

Our reserves for loan losses may prove inadequate, which could have a material adverse effect on our financial results.

        We maintain financial reserves to protect against potential losses and conduct a review of the adequacy of these reserves on a quarterly basis. Our reserves reflect management's current judgment of the probability and severity of losses within our portfolio, based on this quarterly review. However, estimation of ultimate loan losses, provision expenses and loss reserves is a complex process and 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, our non-performing loans have increased materially, driven by the weak economy and the disruption of the credit markets which have adversely impacted the ability and willingness of many of our borrowers to service their debt and refinance our loans to them at maturity. We recorded significant provisions for loan losses in 2009 based upon the performance of our assets and conditions in the financial markets and overall economy. 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 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 relate to our determination of the reserve for loan losses, the fair value of certain financial instruments (including loans and related collateral and investment securities) and the valuation of CTL, OREO and REHI assets and intangible 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.

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 CTL portfolio performance, levels of non-performing assets, 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.

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We have suffered losses when a borrower defaults on a loan and the underlying collateral is not sufficient, and we may suffer additional losses in the future.

        We have suffered significant losses since the onset of the financial crisis arising from several factors, including general market conditions, reductions in collateral values, failures of borrowers to comply with covenants and guarantees, borrower inability and unwillingness to repay their loans and increasing costs of foreclosure. We may continue to suffer from these factors in the future, as discussed below.

        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, which are not secured. 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, 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 debt 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 needed for us 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.

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

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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 risks associated with construction lending.

        Our loan portfolio includes loans made to developers to construct commercial and residential projects. The primary risks to us of construction loans are the potential for cost over-runs, the developer's failure to meet a project delivery schedule and the inability of a borrower to sell or refinance the project at completion and repay our loan. Further, the ability of many of our borrowers to sell units in residential projects has been adversely impacted by current economic conditions and lack of end loan financing available to residential unit purchasers. These risks could require us to fund more money than we originally anticipated in order to complete and carry the project and have caused and could continue to cause the developers to lose leases and/or sales contracts, which may cause us to suffer additional losses on our loans.

We may experience losses if the creditworthiness of our corporate tenants deteriorates and they are unable to meet their lease obligations.

        We own the properties leased to the tenants of our CTL assets and receive rents from the tenants during the terms of our 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 CTL 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. 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.

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 corporate 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 corporate tenants or the failure of corporate 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 corporate tenants.

We are subject to risks relating to our asset concentration.

        Our portfolio consists primarily of large balance commercial real estate loans, OREO assets, REHI assets and corporate tenant leases. Our asset base is generally diversified by asset type, obligor, property type and geographic location. However, as of December 31, 2009, approximately 27.1% of the gross carrying value of our assets related to apartment/residential assets, 15.4% related to land, 13.3% related to office properties and 9.4% related to industrial properties. All of these types of collateral have been

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adversely affected by the ongoing financial crisis. In addition, as of December 31, 2009, approximately 33.4% of the gross carrying value of our assets related to properties located in the western U.S., 18.7% related to properties located in the northeastern U.S. and 15.6% related to properties located in the southeastern U.S. These regions include areas such as Florida and California that have been particularly hard hit by the downturn in the residential real estate markets. Additionally, as of December 31, 2009, the Company had loans collateralized by in-progress condo construction assets that represented approximately 10.6% of the total investment portfolio. These loans typically do not generate cash flows and have unique additional risks related to such issues as cost overruns, delays and the ability to repay with proceeds through unit sales. We may suffer additional losses on our assets based on these concentrations.

        In addition, our AutoStar business, totaling 4.4% of the portfolio, focuses on customers in the automotive retail industry. To the extent these customers are adversely affected by the current downturn in the U.S. automotive markets, our investments in the automotive retail industry may also be adversely affected. Our financial position and operating performance could be adversely impacted by additional losses based upon these concentrations.

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 corporate tenant 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 being willing to rent space at 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 earthquakes 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. Absent succeeding to ownership or control of real property, a secured lender is not likely to be subject to any of these forms of environmental liability. Additionally, under our CTL 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.

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        Approximately 26.5% of the gross carrying value of our assets as of December 31, 2009, were located in the Western and Northwestern United States, geographic areas at higher risk for earthquakes. In addition, a significant number of our properties are located in New York City and other major urban areas which, in recent years, have been high risk geographical areas for terrorism and threats of terrorism. Future earthquakes 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 CTL assets 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 earthquake or terrorist attack, whether or not insured, could have a material adverse effect on our financial performance, the market prices 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 its obligations with respect to claims payments due to a deterioration in its financial condition.

Declines in the market values of our investments may adversely affect periodic reported results.

        Current economic conditions and volatility in the securities markets have led to certain of our investments experiencing significant declines in market value, which have adversely impacted our financial position and results of operations. Given the recent volatility of asset prices and economic uncertainty, there is continued risk that further declines in market values could occur, resulting in additional writedowns of assets within our investment portfolio. Any such charges may result in volatility in our reported earnings and may adversely affect the market price of our common stock.

        We make investments in leveraged finance directly through our portfolio of corporate loans and debt securities, which had a carrying value of approximately $565.0 million at December 31, 2009, and indirectly through our interest in Oak Hill Advisors, L.P. and its affiliates. The stress in the mortgage and overall financial markets extended to the leveraged finance market and caused the market prices of bank debt and bonds to trade lower. Significant prolonged reductions in the trading prices of debt securities we hold may cause us to reduce the carrying value of our assets by taking a charge to earnings. In addition, the value of our investment in Oak Hill Advisors, L.P. and its affiliates and its ability to earn performance fees are subject to the risks of a material deterioration in the leveraged finance market.

        Most of our equity investments and many of our investments in debt securities will be in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. We may periodically measure the fair value of these investments, based upon available information and management's judgment. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. 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.

We utilize interest rate hedging arrangements which may adversely affect our borrowing cost and expose us to other risks.

        We have variable-rate lending assets and debt obligations. These assets and liabilities create a natural hedge against changes in variable interest rates. This means that as interest rates increase, we earn more on our variable-rate lending assets and pay more on our variable-rate debt obligations and, conversely, as interest rates decrease, we earn less on our variable-rate lending assets and pay less on our variable-rate debt obligations. When our variable-rate debt obligations differ significantly from our variable rate lending assets, we utilize derivative instruments to limit the impact of changing interest rates on our net income. The derivative instruments we use are typically in the form of interest rate swaps and interest rate caps.

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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 effectively limit the maximum interest rate on variable-rate debt obligations.

        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 is complex and no strategy can completely insulate us from risks associated with such fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition.

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. Declines in our stock price may hinder our ability to pay competitive compensation and may result in the loss of key 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.

We are highly dependent on information systems, and systems failures could significantly disrupt our business.

        As a financial services firm, our business is highly dependent on communications, information, financial and operational systems. Any failure or interruption of our systems could cause delays or other problems in our business activities, which could have a material adverse effect on our operations and financial performance.

Our growth is dependent on leverage, which may create other risks.

        Our success is dependent, in part, upon our ability to grow assets through leverage. Our charter does not limit the amount of indebtedness that we may incur and stockholder approval is not required for changes to our financing strategy. If we decided to increase our leverage, it could lead to reduced or negative cash flow and reduced liquidity.

        Leverage creates an opportunity for increased net income, but at the same time creates risks. For example, leverage magnifies changes in our net worth. We will incur leverage only when there is an expectation that it will enhance returns, although there can be no assurance that our use of leverage will prove to be beneficial. Moreover, there can be no assurance that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets or a financial loss if we are required to liquidate assets at a commercially inopportune time.

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 the stockholders. A change in these policies could adversely affect our financial condition or results of operations or the market price of our common stock.

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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 stockholders. As a result of the current credit crisis, it may be difficult for us to meet one or more of the requirements for qualification as a REIT including, but not limited to, our distribution requirement.

        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 stockholders 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. 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 bank credit facilities 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 stockholders 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. Our net taxable income could exceed our available cash flow as a result of, among other things, a difference in timing between the actual receipt of cash and inclusion of income for U.S. federal income tax purposes, the recognition of non-cash taxable income, the effect of non-deductible capital expenditures or required debt principal repayments.

        In order to qualify as a REIT and avoid the payment of income and excise taxes, we may need to borrow funds on a short-term, or possibly long-term, basis, sell assets or pay distributions in the form of taxable dividends of our common stock to meet our REIT distribution requirement, even if prevailing market conditions are not favorable for these borrowings, asset dispositions or stock distributions.

Certain of our activities are subject to taxes and could result in taxes allocated to our Shareholders.

        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. We would be required to pay taxes on net taxable income that we fail to distribute to our stockholders. In addition, our "taxable REIT

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subsidiaries" are fully taxable corporations, and there are 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. 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 stockholders.

        We do not intend to invest a material portion of our assets in real estate mortgage investment conduits, or "REMICs," or taxable mortgage pools. In the event we were to own REMIC or taxable mortgage pool residual interests, or treated as owning such residual interests, a portion of our income from these assets could be treated as "excess inclusion income."

        IRS guidance indicates that our excess inclusion income will be allocated among our shareholders in proportion to our dividends paid. A shareholder's share of our excess inclusion income (i) would not be allowed to be offset by any net operating losses otherwise available to the shareholder, (ii) would be subject to tax as unrelated business taxable income in the hands of most tax-exempt shareholders, and (iii) would result in the application of U.S. federal income tax withholding at a rate of 30%, without reduction for any otherwise applicable income tax treaty, in the hands of a non-U.S. shareholder.

        In addition, the IRS has taken the position that we are subject to tax at the highest U.S. federal corporate income tax rate on our excess inclusion income allocated to "disqualified organizations" (generally, tax-exempt investors that are not subject to U.S. federal income tax on unrelated business taxable income, including governmental organizations and charitable remainder trusts) that hold our stock in record name. Further, the IRS has taken the position that broker/dealers and nominees holding our stock in "street name" on behalf of disqualified organizations are subject to U.S. federal income tax at the highest U.S. federal corporate income tax rate on our excess inclusion income allocated to such disqualified organizations. Similarly, a regulated investment company or other pass-through entity may be subject to U.S. federal income tax at the highest U.S. federal corporate income tax rate on our excess inclusion income to the extent such entities are owned by disqualified organizations.

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.

Item 1B.    Unresolved Staff Comments

        None.

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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, general facsimile number and web address are (212) 930-9400, (212) 930-9494 and www.istarfinancial.com, respectively. The lease for the Company's primary corporate office space expires in February 2021. The Company's primary regional offices are located in Atlanta, Georgia; Boston, Massachusetts; Chicago, Illinois; Dallas, Texas; Hartford, Connecticut; San Francisco, California and three offices in the Los Angeles, California metropolitan area (Brea, Irvine and Santa Monica).

        See Item 1—"Corporate Tenant Leasing," for a discussion of CTL facilities 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

Citiline Holdings, Inc., et al. v. iStar Financial, Inc., et al.

        In April 2008, two putative class action complaints were filed in the United States District Court for the Southern District of New York naming the Company and certain of its current and former executive officers as defendants and alleging violations of the Securities Act of 1933, as amended. Both suits were purportedly filed on behalf of the same putative class of investors who purchased common stock in the Company's December 13, 2007 public offering (the "Company's Offering"). The two complaints were consolidated in a single proceeding (the "Citiline Action") on April 30, 2008.

        On November 17, 2008, Plumbers Union Local No. 12 Pension Fund and Citiline Holdings, Inc. were appointed Lead Plaintiffs to pursue the Citiline Action. Plaintiffs filed a Consolidated Amended Complaint on February 2, 2009, purportedly on behalf of a putative class of investors who purchased iStar common stock between December 6, 2007 and March 6, 2008 (the "Complaint"). The Complaint named as defendants the Company, certain of its current and former executive officers, and certain investment banks who served as underwriters in the Company's Offering. The Complaint reasserted claims for alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, and added claims for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. Plaintiffs allege the defendants made certain material misstatements and omissions relating to the Company's continuing operations, including the value of the Company's loan portfolio and certain debt securities held by the Company. The Complaint seeks certification as a class action, unspecified compensatory damages plus interest and attorneys fees, and rescission of the public offering. No class has been certified and discovery has not begun. The Company and its current and former officers filed a motion to dismiss the Complaint on April 27, 2009, which was fully briefed as of August 20, 2009 and is pending before the Court.

        The Company believes the Citiline Action has no merit and intends to defend itself vigorously against it.

Shareholder Letters

        In June 2009, the Company received a letter from a law firm stating that the firm represented a shareholder of the Company holding an unidentified number of shares. The letter states that the shareholder is concerned that certain officers and directors of the Company published misleading statements and made material omissions between July 2007 and March 2008 and defrauded the Company and wasted its assets by repurchasing $10 million of common stock of the Company during that period. The letter demands that the board of directors of the Company commence an independent investigation of these matters, take action to recover damages caused by the alleged misconduct and implement corporate governance reforms to prevent the recurrence of the alleged misconduct. As of the date of this report, no lawsuit has been filed by this shareholder.

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        In June 2009, the Company received a letter from a law firm stating that the firm represented shareholders of the Company holding more than 329,000 shares of common and preferred stock of the Company. The letter asserts that these shareholders have suffered monetary harm arising from alleged material misrepresentations in and omissions from the Company's proxy statement relating to its 2009 annual meeting and that the officers and directors of the Company have committed breaches of fiduciary duties that have proximately caused damage to all Company shareholders. The letter purports to serve as a demand required by any and all applicable statutes should litigation commence in the future. As of the date of this report, no lawsuit has been filed by these shareholders.

        A special committee of the Company's independent directors has been established. The special committee has retained independent counsel and, with its counsel's assistance, is reviewing the matters described in the letters.

Item 4.    Submission of Matters to a Vote of Security Holders

        There were no matters submitted to a vote of security holders during the fourth quarter of 2009.

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PART II

Item 5.    Market for Registrant's Equity and Related Share Matters

        The Company's Common Stock trades on the New York Stock Exchange ("NYSE") under the symbol "SFI."

        The high and low closing prices per share of Common Stock are set forth below for the periods indicated.

Quarter Ended
  High   Low  

2008

             

March 31, 2008

  $ 27.66   $ 13.76  

June 30, 2008

  $ 22.06   $ 13.21  

September 30, 2008

  $ 13.67   $ 1.75  

December 31, 2008

  $ 3.34   $ 0.97  

2009

             

March 31, 2009

  $ 2.99   $ 0.76  

June 30, 2009

  $ 3.98   $ 2.51  

September 30, 2009

  $ 3.37   $ 2.04  

December 31, 2009

  $ 3.08   $ 2.09  

        On February 16, 2010, the closing sale price of the Common Stock as reported by the NYSE was $2.94. The Company had 3,078 holders of record of Common Stock as of February 16, 2010.

        At December 31, 2009, the Company had five series of preferred stock outstanding: 8.000% Series D Preferred Stock, 7.875% Series E Preferred Stock, 7.8% Series F Preferred Stock, 7.65% Series G Preferred Stock and 7.50% Series I Preferred Stock. Each of the Series D, E, F, G and I preferred stock is publicly traded.

Dividends

        The Board of Directors has not established any minimum distribution level. In order to maintain its qualification as a REIT, the Company intends to pay dividends to its shareholders that, on an annual basis, will represent at least 90% of its taxable income (which may not necessarily equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gains. The Company has recorded net operating losses and may record significant 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 equivalent 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 permit the Company to distribute 100% of its REIT taxable income on an annual basis, for so long as the Company maintains its qualifications as a REIT. The secured credit facilities 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 equivalents 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.

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        The following table sets forth the dividends paid or declared by the Company on its Common Stock:

Quarter Ended
  Shareholder
Record Date
  Dividend/
Share
 

2008(1)

           

March 31, 2008

  March 17, 2008   $ 0.8700  

June 30, 2008

  July 15, 2008   $ 0.8700  

September 30, 2008(2)

       

December 31, 2008(2)

       

2009

           

March 31, 2009(2)

       

June 30, 2009(2)

       

September 30, 2009(2)

       

December 31, 2009(2)

       

Explanatory Notes:


(1)
For tax reporting purposes, the 2008 dividends were classified as 10.8% ($0.1886) ordinary dividend, 76.1% ($1.3244) 15% capital gain and 13.1% ($0.2270) 25% Section 1250 capital gain. Of the ordinary dividend, 25.6% ($0.0483) qualifies as a qualifying dividend for those shareholders who held shares of the Company for the entire year.

(2)
No dividends were declared or paid.

        The Company declared and paid dividends aggregating $8.0 million, $11.0 million, $7.8 million, $6.1 million and $9.4 million on its Series D, E, F, G, and I preferred stock, respectively, for the year ended December 31, 2009. There are no dividend arrearages on any of the preferred shares currently outstanding.

        Distributions to shareholders will generally be taxable as ordinary income, although a portion of such dividends may be designated by the Company as capital gain or may constitute a tax-free return of capital. The Company annually furnishes to each of its shareholders a statement setting forth the distributions paid during the preceding year and their characterization as ordinary income, capital gain or return of capital.

        No assurance can be given as to the amounts or timing of future distributions, as such distributions are subject to the Company's taxable income after giving effect to its net operating loss carryforwards, financial condition, capital requirements, debt covenants, any change in the Company's intention to maintain its REIT qualification and such other factors as the Company's Board of Directors deems relevant. In addition, based upon recent guidance announced by the Internal Revenue Service, the Company may elect to satisfy some of its 2010 REIT distribution requirements, if any, through stock dividends.

Issuer Purchases of Equity Securities

 
  Total Number of
Shares
Purchased
  Average Price Paid
per Share
  Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans
  Maximum
Dollar Value of
Shares
that May Yet be
Purchased Under
the Plans(1)
 

November 1—November 30, 2009

    2,253,600   $ 2.45     2,253,600   $ 24,005,405  

December 1—December 31, 2009

    983,250   $ 2.54     983,250   $ 21,533,813  

Explanatory Note:


(1)
On March 13, 2009, the Company authorized the repurchase, from time to time, on the open market or otherwise, of up to $50 million of its Common Stock at prevailing market prices or at negotiated prices, including pursuant to one or more trading plans. There is no fixed expiration date to this stock repurchase program.

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Disclosure of Equity Compensation Plan Information

 
  (a)
  (b)
  (c)
 
Plans Category
  Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
  Weighted-average
exercise price of
outstanding options,
warrants and rights
  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-stock options(1)

    520,138   $ 19.08     N/A  

Equity compensation plans approved by security holders-restricted stock awards(2)

    14,268,646     N/A     3,489,034  
                 

Total

    14,788,784           3,489,034  
                 

Explanatory Notes:


(1)
Stock Options—As more fully discussed in Note 13 to the Company's Consolidated Financial Statements, there were 520,138 stock options outstanding as of December 31, 2009. These options, together with their weighted-average exercise price, have been included in columns (a) and (b), above.

(2)
Restricted Stock—The amount shown in column (a) includes 2.5 million unvested restricted stock units which may vest in the future based on the passage of time and 11.5 million unvested restricted stock units which may vest in the future if vesting conditions based on both the passage of time and the achievement of specified targets for shareholder return are met. None of these unvested units are included in the Company's outstanding share balance (see Note 13 to the Company's Notes to Consolidated Financial Statements for a more detailed description of the Company's restricted stock grants). Of the 14.8 million securities included in column (a) 10.9 million restricted stock units are required to be settled on a net, after-tax basis (after deducting shares for minimum required statutory withholdings); therefore, the actual number of shares issued will be less than the gross amount of the awards. The amounts shown in column (a) also include 197,385 common stock equivalents awarded to our non-employee directors in consideration of their service to us as directors. The Company awards common stock equivalents to each non-employee director on the date of each annual meeting of shareholders or upon hiring a new board member, pursuant to the Company's Non-Employee Directors' Deferral Plan, which was approved by the Company's shareholders in May 2008. Common stock equivalents represent rights to receive shares of Common Stock, or cash in amount equal to the fair market value of the Common Stock, at the date the Common Stock Equivalents are settled based upon individual elections made by each director. Common stock equivalents have dividend equivalent rights beginning on the date of grant. The 3.5 million 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 Note 13 to the Company's Consolidated Financial Statements for a more detailed description of the Company's Long-Term Incentive Plan).

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Item 6.    Selected Financial Data

        The following table sets forth selected financial data on a consolidated historical basis for the Company. This information should be read in conjunction with the discussions set forth in Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations." Certain prior year amounts have been reclassified to conform to the 2009 presentation.

 
  For the Years Ended December 31,  
 
  2009   2008   2007   2006   2005  
 
  (In thousands, except per share data and ratios)
 

OPERATING DATA:

                               

Interest income

  $ 557,809   $ 947,661   $ 998,008   $ 575,598   $ 406,668  

Operating lease income

    305,007     308,742     306,513     285,555     262,625  

Other income

    30,468     97,851     99,938     70,824     80,133  
                       
 

Total revenue

    893,284     1,354,254     1,404,459     931,977     749,426  
                       

Interest expense

    481,116     666,706     629,260     429,613     312,806  

Operating costs-corporate tenant lease assets

    23,467     23,059     27,915     22,159     20,622  

Depreciation and amortization

    97,869     94,726     83,690     66,258     61,609  

General and administrative

    127,044     143,902     156,534     95,358     61,971  

Provision for loan losses

    1,255,357     1,029,322     185,000     14,000     2,250  

Impairment of other assets

    122,699     295,738     144,184     5,683      

Impairment of goodwill

    4,186     39,092              

Other expense

    104,795     37,234     8,927     874     2,014  
                       
 

Total costs and expenses

    2,216,533     2,329,779     1,235,510     633,945     461,272  
                       

Income (loss) before earnings from equity method investments, minority interest and other items

    (1,323,249 )   (975,525 )   168,949     298,032     288,154  
 

Gain (loss) on early extinguishment of debt

    547,349     393,131     225         (46,004 )
 

Gain on sale of joint venture interest

        280,219              
 

Earnings from equity method investments

    5,298     6,535     29,626     12,391     3,016  
                       

Income (loss) from continuing operations

    (770,602 )   (295,640 )   198,800     310,423     245,166  
 

Income (loss) from discontinued operations

    (11,671 )   22,415     29,970     41,384     37,373  
 

Gain from discontinued operations

    12,426     91,458     7,832     24,227     6,354  
                       

Net income (loss)

    (769,847 )   (181,767 )   236,602     376,034     288,893  
 

Net (income) loss attributable to noncontrolling interests

    1,071     991     816     (1,207 )   (980 )
 

Gains attributable to noncontrolling interests

        (22,249 )            
                       

Net income (loss) attributable to iStar Financial Inc. 

    (768,776 )   (203,025 )   237,418     374,827     287,913  
 

Preferred dividend requirements

    (42,320 )   (42,320 )   (42,320 )   (42,320 )   (42,320 )
                       

Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders, HPU holders and Participating Security holders(1)

  $ (811,096 ) $ (245,345 ) $ 195,098   $ 332,507   $ 245,593  
                       

Per common share data(2):

                               
 

Income (loss) attributable to iStar Financial Inc. from continuing operations:

                               
   

Basic

  $ (7.89 ) $ (2.68 ) $ 1.19   $ 2.25   $ 1.75  
   

Diluted(3)

  $ (7.89 ) $ (2.68 ) $ 1.18   $ 2.23   $ 1.74  
 

Net income (loss) attributable to iStar Financial Inc.:

                               
   

Basic

  $ (7.88 ) $ (1.85 ) $ 1.48   $ 2.81   $ 2.13  
   

Diluted(3)

  $ (7.88 ) $ (1.85 ) $ 1.47   $ 2.78   $ 2.11  

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  For the Years Ended December 31,  
 
  2009   2008   2007   2006   2005  
 
  (In thousands, except per share data and ratios)
 

Per HPU share data(2):

                               
 

Income (loss) attributable to iStar Financial Inc. from continuing operations:

                               
   

Basic

  $ (1,503.13 ) $ (505.47 ) $ 224.40   $ 425.60   $ 331.00  
   

Diluted(3)

  $ (1,503.13 ) $ (505.47 ) $ 223.27   $ 422.07   $ 327.73  
 

Net income (loss) attributable to iStar Financial Inc.:

                               
   

Basic

  $ (1,501.73 ) $ (349.87 ) $ 279.53   $ 530.94   $ 402.73  
   

Diluted(3)

  $ (1,501.73 ) $ (349.87 ) $ 278.07   $ 526.47   $ 398.73  

Dividends declared per common share(4)

   
 
$

1.74
 
$

3.60
 
$

3.08
 
$

2.93
 

SUPPLEMENTAL DATA:

                               

Adjusted diluted earnings (loss) attributable to iStar Financial, Inc. and allocable to common shareholders and HPU holders(5)(6)

  $ (708,595 ) $ (359,295 ) $ 355,707   $ 429,922   $ 391,884  

EBITDA(6)(7)

  $ (168,362 ) $ 612,325   $ 1,013,087   $ 904,537   $ 687,571  

Ratio of earnings to fixed charges(8)

    (0.5 )x   0.6 x   1.3 x   1.7 x   1.8 x

Ratio of earnings to fixed charges and preferred stock dividends

    (0.5 )x   0.6 x   1.3 x   1.6 x   1.6 x

Weighted average common shares outstanding—basic

    100,071     131,153     126,801     115,023     112,513  

Weighted average common shares outstanding—diluted

    100,071     131,153     127,542     116,057     113,668  

Weighted average HPU shares outstanding—basic and diluted

    15     15     15     15     15  

Cash flows from:

                               
 

Operating activities

  $ 76,276   $ 418,529   $ 561,337   $ 431,224   $ 515,919  
 

Investing activities

    726,221     (27,943 )   (4,745,080 )   (2,529,260 )   (1,406,121 )
 

Financing activities

    (1,074,402 )   1,444     4,182,299     2,088,617     917,150  

 
  As of December 31,  
 
  2009   2008   2007   2006   2005  
 
  (In thousands, except per share data and ratios)
 

BALANCE SHEET DATA:

                               

Loans and other lending investments, net

  $ 7,661,562   $ 10,586,644   $ 10,949,354   $ 6,799,850   $ 4,661,915  

Corporate tenant lease assets, net

    2,885,896     3,044,811     3,309,866     3,084,794     3,115,361  

Total assets

    12,810,575     15,296,748     15,848,298     11,059,995     8,532,296  

Debt obligations, net

    10,894,903     12,486,404     12,363,044     7,833,437     5,859,592  

Redeemable noncontrolling interests

    7,444     9,190     17,773     9,229     9,228  

Total equity

    1,656,118     2,446,662     2,972,170     3,016,372     2,470,954  

Explanatory Notes:


(1)
HPU holders are current and former Company employees who purchased high performance common stock units under the Company's High Performance Unit Program. Participating Security holders are Company employees and directors who hold unvested restricted stock units and common stock equivalents granted under the Company's Long Term Incentive Plan.

(2)
See Note 14 of the Company's Notes to the Consolidated Financial Statements.

(3)
For the years ended December 31, 2007, 2006 and 2005, net income used to calculate earnings per diluted common share and HPU share includes joint venture income of $85, $115, and $28, respectively.

(4)
The Company generally declares common dividends in the month subsequent to the end of the quarter. During 2009, no common dividends were declared. During 2008, no common dividends were declared for the three month periods ended September 30, 2008 and December 31, 2008. In December of 2007, the Company declared a special $0.25 dividend due to higher taxable income generated as a result of the Company's acquisition of Fremont CRE.

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(5)
Adjusted earnings represents net income allocable to common shareholders and HPU holders computed in accordance with GAAP, before depreciation, depletion, amortization, gain from discontinued operations, ineffectiveness on interest rate hedges, impairment of goodwill and intangible assets, extraordinary items and cumulative effect of change in accounting principle. (See Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations," for a reconciliation of adjusted earnings to net income).

(6)
Both adjusted earnings and EBITDA should be examined in conjunction with net income (loss) as shown in the Company's Consolidated Statements of Operations. Neither adjusted earnings nor EBITDA should be considered as an alternative to net income (loss) (determined in accordance with GAAP) as an indicator of the Company's performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is either measure indicative of funds available to fund the Company's cash needs or available for distribution to shareholders. Rather, adjusted earnings and EBITDA are additional measures the Company uses to analyze how its business is performing. As a commercial finance company that focuses on real estate lending and corporate tenant leasing, the Company records significant depreciation on its real estate assets and amortization of deferred financing costs associated with its borrowings. It should be noted that the Company's manner of calculating adjusted earnings and EBITDA may differ from the calculations of similarly-titled measures by other companies.

(7)
EBITDA is calculated as net income (loss) attributable to iStar Financial Inc. plus the sum of interest expense, income taxes, depreciation, depletion and amortization.

   
  For the Years Ended December 31,  
   
  2009   2008   2007   2006   2005  
   
  (in thousands)
 
 

Net income (loss) attributable to iStar Financial Inc

  $ (769,847 ) $ (181,767 ) $ 236,602   $ 376,034   $ 288,893  
 

Add: Interest expense(1)

    481,116     666,706     629,260     429,613     312,806  
 

Add: Income taxes

    4,141     10,175     6,972     891     2,014  
 

Add: Depreciation, depletion and amortization(2)

    98,238     102,745     99,427     83,058     75,574  
 

Add: Joint venture depreciation, depletion and amortization

    17,990     14,466     40,826     14,941     8,284  
                         
 

EBITDA

  $ (168,362 ) $ 612,325   $ 1,013,087   $ 904,537   $ 687,571  
                         

    Explanatory Notes:


    (1)
    For the years ended December 31, 2007, 2006 and 2005, interest expense includes $12, $194, and $247, respectively, of interest expense reclassified to discontinued operations.

    (2)
    For the years ended December 31, 2009, 2008, 2007, 2006, and 2005, depreciation, depletion and amortization includes $1,419, $6,717, $10,677, $12,567, and $11,461, respectively, of depreciation, depletion and amortization reclassified to discontinued operations.
(8)
This ratio of earnings to fixed charges is calculated in accordance with GAAP. The Company's bank credit facilities and senior notes both have fixed charge coverage covenants, however, each is calculated differently in accordance with the terms of the respective agreements. In addition, the fixed charge covenant in the bank credit facilities is a maintenance covenant while the covenant in the senior notes is an incurrence covenant. The fixed charge coverage ratios for the bank credit facilities and senior notes were 3.0x and 2.4x, respectively as of December 31, 2009.

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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 of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are included with respect to, among other things, iStar Financial Inc.'s (the "Company's") current business plan, business strategy, portfolio management 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 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, 2009. This discussion should be read in conjunction with our consolidated financial statements and related notes for the three-year period ended December 31, 2009 included elsewhere in this annual report on Form 10-K. These historical financial statements may not be indicative of our future performance. We reclassified certain items in our consolidated financial statements of prior years to conform to our current year's presentation.

Introduction

        iStar Financial Inc. is a publicly traded finance company focused on the commercial real estate industry. We primarily provide custom tailored financing to high-end private and corporate owners of real estate, including senior and mezzanine real estate debt, senior and mezzanine corporate capital, as well as corporate net lease financing and equity. We are taxed as a real estate investment trust, or "REIT" and provide innovative and value added financing solutions to our customers. We deliver customized financial products to sophisticated real estate borrowers and corporate customers who require a high level of flexibility and service. Our two primary lines of business are lending and corporate tenant leasing.

        The lending business is primarily comprised of senior and mezzanine real estate loans that typically range in size from $20 million to $150 million and have original terms generally ranging from three to ten years. These loans may be either fixed-rate (based on the U.S. Treasury rate plus a spread) or variable-rate (based on LIBOR plus a spread) and are structured to meet the specific financing needs of the borrowers. We also provide senior and subordinated capital to corporations, particularly those engaged in real estate or real estate related businesses. These financings may be either secured or unsecured, typically range in size from $20 million to $150 million and have initial maturities generally ranging from three to ten years. As part of the lending business, we also acquire whole loans, loan participations and debt securities which present attractive risk-reward opportunities.

        Our corporate tenant leasing business provides capital to corporations and other owners who control facilities leased to single creditworthy customers. Our net leased assets are generally mission critical headquarters or distribution facilities that are subject to long-term leases with public companies, many of which are rated corporate credits. Most of the leases provide for expenses at the facility to be paid by the

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corporate customer on a triple net lease basis. Corporate tenant lease, or "CTL," transactions have initial terms generally ranging from 15 to 20 years and typically range in size from $20 million to $150 million.

        Our primary sources of revenues are interest income, which is the interest that borrowers pay on loans, and operating lease income, which is the rent that corporate customers pay to lease our CTL properties. We primarily generate income through the "spread" or "margin," which is the difference between the revenues generated from loans and leases and interest expense and the cost of CTL operations.

        We began our business in 1993 through private investment funds and became publicly traded in 1998. Since that time, we have grown through the origination of new lending and leasing transactions, as well as through corporate acquisitions, including the acquisition of TriNet Corporate Realty Trust, Inc. in 1999, the acquisitions of Falcon Financial Investment Trust and of a significant non-controlling interest in Oak Hill Advisors, L.P. and affiliates in 2005, and the acquisition of the commercial real estate lending business and loan portfolio which we refer to as the "Fremont CRE," of Fremont Investment and Loan, or "Fremont," a division of Fremont General Corporation, in 2007.

Executive Overview

        The financial market conditions that began in late 2007, including the economic recession and tightening of credit markets, continued to significantly impact the commercial real estate market and financial services industry in 2009. The severe economic downturn led to a decline in commercial real estate values, which, combined with a lack of available debt financing for commercial and residential real estate assets, limited borrowers' ability to repay or refinance their loans. Further, the ability of many of our borrowers to sell units in residential projects has been adversely impacted by current economic conditions and the lack of end loan financing available to residential unit purchasers. The combination of these factors adversely affected our business, financial condition and operating performance in 2009, resulting in significant additions to non-performing assets, increases in the related provision for loan losses and a reduction in the level of liquidity available to finance our operations. These economic factors and their effect on our operations have resulted in increases in our financing costs, a continuing inability to access the unsecured debt markets, depressed prices for our Common Stock, the continued suspension of quarterly Common Stock dividends and has narrowed our margin of compliance with debt covenants.

        During the year ended 2009, we incurred a net loss of $(768.8) million on $893.3 million of revenue. These financial results primarily resulted from a provision for loan losses of $1.26 billion and impairments of other assets of $141.0 million, which were recognized during the year. The provision for loan losses was driven by an increase in non-performing loans to $4.21 billion, or 45.3% of Managed Loan Value (as defined below in "Risk Management") as of December 31, 2009, compared to $3.46 billion, or 27.5% of Managed Loan Value at December 31, 2008. The increase in non-performing loans resulted from the continued deterioration in the commercial and residential real estate markets and weakened economic conditions impacting our borrowers, who continue to have difficulty servicing their debt and refinancing or selling their projects in order to repay their loans in a timely manner. In addition, the balance of our real estate held for investment ("REHI") and other real estate owned ("OREO") assets have increased from $242.5 million as of December 31, 2008 to $1.26 billion as of December 31, 2009, as we have obtained title to properties through foreclosure or through deed-in-lieu of foreclosure as part of our effort to resolve non-performing loans. The losses were partially offset by the repurchase of $1.31 billion par value of senior unsecured notes resulting in the recognition of $439.4 million in net gains on the early extinguishment of debt.

        Our primary recourse debt instruments include our secured and unsecured bank credit facilities and our secured and unsecured public debt securities. We believe we are in full compliance with all the covenants in those debt instruments as of December 31, 2009; however, our recent financial results have put pressure on our ability to maintain compliance with certain of the debt covenants in our secured bank credit facilities. In particular, our tangible net worth at December 31, 2009 is not significantly above the

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financial covenant minimum requirement. We intend to operate our business in order to remain in compliance with the covenants in our debt instruments; however, there can be no assurance that we will be able to do so. A failure by us to satisfy a financial covenant in a debt instrument could trigger a default under that debt instrument and could give the lenders the ability to accelerate the debt if the default is not waived or cured. Most of our recourse debt instruments contain cross default and/or cross-acceleration provisions that may be triggered by defaults or accelerations of our recourse debt above specified thresholds.

        From a liquidity perspective, we expect to continue to experience significant uncertainty with respect to our sources of funds. Our cash flow may be affected by a variety of factors, many of which are outside our control, including volatility in the financial markets, our borrowers' ability to repay their obligations and other general business conditions. As of December 31, 2009, we had $224.6 million of unrestricted cash. For the upcoming year, we will require significant capital to repay $586.8 million of our 2010 debt maturities and to fund our investment activities and operating expenses, including approximately $430.0 million of unfunded commitments primarily associated with our construction loan portfolio. In addition, under the terms of our First Priority Credit Agreement, if we do not pay down the outstanding balance of that loan by $500 million by September 30, 2010, payments of principal and net sale proceeds received by us in respect of assets constituting collateral for our obligations under this agreement must be applied toward the mandatory prepayment of the loan and commitment reductions under the agreement.

        We expect to need additional liquidity over the coming year to supplement expected loan repayments and cash generated from operations in order to meet our debt maturities and funding obligations. During 2009, we utilized our unencumbered assets to generate additional liquidity through secured financing transactions and a secured note exchange transaction, and also sold various assets. In addition, we have significantly curtailed our asset origination activities, reduced operating expenses and focused on asset management in order to maximize recoveries from existing asset resolutions. We intend to utilize all available sources of funds in today's financing environment, which could include additional financings secured by our assets, increased levels of asset sales, joint ventures and other third party capital to meet our liquidity requirements. There can be no assurance that we will possess sufficient liquidity to meet all of our debt service requirements in 2010. In addition we are exploring various alternatives to enable us to meet our significant 2011 debt maturities. The failure to execute such alternatives successfully prior to debt maturities would have material adverse consequences on us.

        We have reacted to market conditions and liquidity and debt covenant pressures by implementing various initiatives that we believe will guide us through the difficult business conditions which we expect to persist through 2010. Our public debt securities continue to trade at significant discounts to par. We have been able to partially mitigate the impact of the decline in operating results through the recognition of gains associated with the repurchase and retirement of debt at a discount, which has contributed to our ability to maintain compliance with our debt covenants and has enabled us to reduce outstanding indebtedness at discounts to par. We expect to continue to use available funds and other strategies to seek to retire our debt at a discount; however, there can be no assurance that our efforts in this regard will be successful.

        Our plan is dynamic and we expect to adjust our plan as market conditions change. If we are unable to successfully implement our plan, our cash flows, debt covenant compliance, financial position and results of operations would be materially adversely affected.

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Results of Operations for the Year Ended December 31, 2009 compared to the Year Ended December 31, 2008

 
  2009   2008   $ Change   % Change  
 
  (in thousands)
   
   
 

Interest income

  $ 557,809   $ 947,661   $ (389,852 )   (41 )%

Operating lease income

    305,007     308,742     (3,735 )   (1 )%

Other income

    30,468     97,851     (67,383 )   (69 )%
                     
 

Total revenue

    893,284     1,354,254     (460,970 )   (34 )%
                     

Interest expense

    481,116     666,706     (185,590 )   (28 )%

Operating costs—corporate tenant lease assets

    23,467     23,059     408     2 %

Depreciation and amortization

    97,869     94,726     3,143     3 %

General and administrative

    127,044     143,902     (16,858 )   (12 )%

Provision for loan losses

    1,255,357     1,029,322     226,035     22 %

Impairment of other assets

    122,699     295,738     (173,039 )   (59 )%

Impairment of goodwill

    4,186     39,092     (34,906 )   (89 )%

Other expense

    104,795     37,234     67,561     >100 %
                     
 

Total costs and expenses

    2,216,533     2,329,779     (113,246 )   (5 )%
                     

Gain on early extinguishment of debt

    547,349     393,131     154,218     39 %

Gain on sale of joint venture interest

        280,219     (280,219 )   (100 )%

Earnings from equity method investments

    5,298     6,535     (1,237 )   (19 )%

Income (loss) from discontinued operations

    (11,671 )   22,415     (34,086 )   >(100 )%

Gain from discontinued operations

    12,426     91,458     (79,032 )   (86 )%
                   

Net loss

  $ (769,847 ) $ (181,767 ) $ (588,080 )   >100 %
                   

        Revenue—The significant decline in interest income year over year is primarily a result of a 40.0% decrease in the carrying value of performing loans to $4.91 billion at the end of 2009 from $8.18 billion at the end of 2008. In addition to having assets move from performing to non-performing status (see "Risk Management" for additional discussion of non-performing loans), we also had loan repayments and sales that contributed to the decline in income generating loans. Lower interest rates also contributed to the decline in interest income with one-month LIBOR averaging 0.33% in 2009 versus 2.68% in 2008. The impact of declining rates on loans has been tempered by interest rate floors, resulting in a weighted average interest rate of 3.86% in effect on approximately $1.87 billion of loans at December 31, 2009.

        The year over year change in other income was primarily driven by certain one-time transactions in 2008 including $44.2 million of income recognized from the redemption of a participation interest in a lending investment and $12.0 million of income recognized when we exchanged a cost method equity investment for a loan receivable. Additionally, other loan related income, such as prepayment penalties, declined by $27.5 million from 2009 to 2008. Slightly offsetting this increase were $15.0 million of realized and unrealized gains on trading securities held in our other investment portfolio.

        Operating lease income from our CTL assets has remained relatively consistent year over year.

        Costs and expenses—Increases in provisions for loan losses and other expenses were more than offset by fewer asset impairments and lower interest expense and general and administrative expenses to result in an overall decrease in costs and expenses.

        As noted above and discussed further in "Risk Management" and "Executive Overview", increases in our provisions for loan losses were caused by the continued deterioration in the commercial real estate market and weakened economic conditions that have negatively impacted our borrowers' ability to service their debt and refinance their loans at maturity. This has resulted in additional asset-specific reserves due

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to the increasing level of non-performing loans within the portfolio along with declining values of real estate collateral that secure such loans.

        Impairment charges relating to certain of our securities and equity investments were $182.3 million lower in 2009 as compared to 2008. These assets include available-for-sale and held-to-maturity investments that were determined to be other-than-temporarily impaired based on having trading prices below our carrying values. Also included in 2008 were $21.5 million of impairments of finite lived intangible assets, to reduce their carrying values to their revised estimated fair values. These decreases were offset by $21.9 million of higher CTL impairments (of which $14.1 million was reclassified to income from discontinued operations) caused by deteriorating sub-market conditions and lower than expected rents in certain areas. Impairments of OREO assets also increased by $22.9 million to reduce certain assets to their revised estimated fair values less costs to sell.

        Deteriorating market conditions also led to impairment charges related to goodwill. In 2008, we recorded a $39.1 million impairment charge to eliminate the goodwill in our real estate lending reporting unit. In 2009, we recorded $4.2 million further impairments to reduce the goodwill related to our corporate tenant leasing reporting unit to zero.

        The significant decline in interest expense year over year is primarily a result of reducing our outstanding debt balances from repurchases and repayments. In an effort to generate gains on certain of our debt securities which have traded at discounts to par, as discussed further below, we repurchased $1.31 billion par value of our senior unsecured notes during 2009 and we also repaid an additional $628.3 million at maturity. In addition, we completed an exchange of senior unsecured notes for new second-lien senior secured notes in May 2009, further described in "Liquidity and Capital Resources". This exchange resulted in a $262.7 million deferred gain reflected as a premium to the new notes which is being amortized as a reduction to interest expense over the terms of the new notes. In 2009, we recognized $35.1 million in amortization of this premium as a reduction to interest expense. Lower LIBOR rates also contributed to our decrease in interest expense, with our average borrowing rates decreasing to 4.15% in 2009 from 5.02% in 2008.

        General and administrative expenses decreased primarily due to lower payroll and employee related costs from reductions in headcount.

        Other expense was higher primarily due to a $42.4 million charge incurred during 2009 pursuant to a settlement agreement under which we terminated a long-term lease for new headquarters space and settled all disputes with a landlord. The remaining increase in other expense primarily relates to additional holding costs associated with the increasing number of OREO and REHI properties during the year.

        Gain on early extinguishment of debt—In 2009, we retired $1.31 billion par value of our senior unsecured notes though open market repurchases at discounts to par and recognized $439.4 million in gain on early extinguishment of debt. Additionally we completed our secured note exchange transactions and purchased $12.5 million of our outstanding senior floating rates notes in a cash tender offer, which resulted in an aggregate net gain on early extinguishment of debt of $107.9 million. During 2008, we retired $900.7 million par value of our senior unsecured notes through open market repurchases at discounts to par which resulted in an aggregate net gain on early extinguishment of debt of $393.1 million.

        Gain on sale of joint venture interest—In April 2008, we closed on the sale of our TimberStar Southwest joint venture for a gross sales price of $1.71 billion, including the assumption of debt. We received net proceeds of $417.0 million for our interest in the venture and recorded a gain of $280.2 million.

        Income (loss) from discontinued operations—Income (loss) from discontinued operations in 2009 included impairment charges of $14.1 million on CTL assets sold during the year or held for sale at the end of the year. In 2008, income (loss) from discontinued operations included higher operating results for CTL and TimberStar assets sold or classified as held for sale in 2008 and 2009.

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        Gain from discontinued operations—During 2009, we sold four CTL assets and recognized gains of $12.4 million. During 2008, we sold several CTL assets and our Maine timber property for gains of $91.5 million.

Results of Operations for the Year Ended December 31, 2008 compared to the Year Ended December 31, 2007

 
  For the Years Ended December 31,    
   
 
 
  2008   2007   $ Change   % Change  
 
  (in thousands)
   
   
 

Interest income

  $ 947,661   $ 998,008   $ (50,347 )   (5 )%

Operating lease income

    308,742     306,513     2,229     1 %

Other income

    97,851     99,938     (2,087 )   (2 )%
                     
 

Total revenue

    1,354,254     1,404,459     (50,205 )   (4 )%
                     

Interest expense

    666,706     629,260     37,446     6 %

Operating costs—corporate tenant lease assets

    23,059     27,915     (4,856 )   (17 )%

Depreciation and amortization

    94,726     83,690     11,036     13 %

General and administrative

    143,902     156,534     (12,632 )   (8 )%

Provision for loan losses

    1,029,322     185,000     844,322     >100 %

Impairment of other assets

    295,738     144,184     151,554     >100 %

Impairment of goodwill

    39,092         39,092     100 %

Other expense

    37,234     8,927     28,307     >100 %
                     
 

Total costs and expenses

    2,329,779     1,235,510     1,094,269     89 %
                     

Gain on early extinguishment of debt

    393,131     225     392,906     >100 %

Gain on sale of joint venture interest

    280,219         280,219     100 %

Earnings from equity method investments

    6,535     29,626     (23,091 )   (78 )%

Income from discontinued operations

    22,415     29,970     (7,555 )   (25 )%

Gain from discontinued operations

    91,458     7,832     83,626     >100 %
                   

Net income (loss)

  $ (181,767 ) $ 236,602   $ (418,369 )   >(100 )%
                   

        Revenue—We experienced a decline in interest income in 2008 as compared to 2007 primarily relating to increased non-performing loans, which was partially offset by the inclusion of a full year of interest income in 2008 from the loans acquired from Fremont, compared to only six months of income in 2007. At the end of 2008, the carrying value of performing loans declined 18% to $8.18 billion from $10.00 billion at the end of 2007, primarily as a result of assets moving to non-performing status. This was a result of the deterioration in the commercial real estate market and weakened economic conditions impacting our borrowers, who had difficulty servicing their debt and refinancing or selling their projects in order to repay their loans in a timely manner. Lower interest rates also contributed to the decline in interest income with an average one-month LIBOR of 2.68% in 2008 versus 5.25% in 2007.

        While other income was relatively flat year over year, certain one-time transactions in 2008 resulted in higher income offset by a decrease in other loan related income, such as prepayment penalties. In 2008 we recognized $44.2 million of income from the redemption of a participation interest in a lending investment and $12.0 million when we exchanged a cost method equity investment for a loan receivable.

        Operating lease income from our CTL assets has remained relatively consistent year over year.

        Costs and expenses—Total costs and expenses increased primarily due to significant provisions for loan losses and other asset impairment charges.

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        The increase in our provision for loan losses was primarily due to additional asset-specific reserves that were required as a result of the significant increase in non-performing loans during 2008. This significant increase, particularly in our residential land development and condominium construction portfolios, was driven by the weakening economy and the dislocation of the credit markets, which adversely impacted the ability of our borrowers to service their debt and refinance their loans at maturity.

        Impairment charges relating to certain of our securities and equity investments were $207.0 million in 2008 as compared to $144.2 million in 2007. These assets include available-for-sale and held-to-maturity investments that were determined to be other-than-temporarily impaired based on having trading prices below our carrying values. Other asset impairments in 2008, which did not occur in the prior year, included $55.6 million on OREO assets, $21.5 million on finite lived intangible assets (including assets acquired in the Fremont acquisition), and $11.6 million on CTL assets. OREO and CTL asset impairments were also caused by deteriorating sub-market conditions and lower than expected rents in surrounding areas. Deteriorating market conditions also led to the $39.1 million impairment charge to eliminate goodwill in our real estate lending reporting unit in 2008.

        Interest expense increased primarily due to higher average outstanding borrowings during 2008, partially offset by decreased interest rates on our borrowings. Our average outstanding debt balance increased to $12.83 billion in 2008 from $10.05 billion in 2007 through new bond issuances in 2007 and 2008, increased borrowings on our unsecured and secured revolving credit facilities as well as the new secured term loans. Higher borrowings were partially offset by lower average rates, which decreased to 5.02% in 2008 as compared to 5.85% in 2007, primarily as a result of lower LIBOR rates.

        In relation to our CTL portfolio, depreciation and amortization increased as a result of the acquisition and construction of new CTL assets in 2007 while operating costs-corporate tenant lease assets decreased primarily due to increased property expense recoveries from tenants leasing our properties.

        Other expense in 2008 included $12.8 million primarily related to ineffectiveness associated with our various derivative instruments. The remaining $9.3 million related to costs associated with OREO properties that we took title to through foreclosure or deed in lieu of foreclosure in 2008 and 2007.

        The decrease in General and administrative expenses is primarily due to lower payroll and employee related costs resulting from a reduction in headcount from 327 as of December 31, 2007 to 267 as of December 31, 2008.

        Gain on early extinguishment of debt—During the year ended December 31, 2008, we retired $900.7 million par value of our senior unsecured notes through open market repurchases at discounts to par, resulting in an aggregate net gain on early extinguishment of debt of approximately $393.1 million.

        Gain on sale of joint venture interest—In April 2008, we closed on the sale of our TimberStar Southwest joint venture for a gross sales price of $1.71 billion, including the assumption of debt. We received net proceeds of approximately $417.0 million for our interest in the venture and recorded a gain of $280.2 million.

        Earnings from equity method investments—During 2008, losses were recorded on several of our equity method investments due to volatility in the financial markets and deteriorating economic conditions. This was partially offset by the sale of our TimberStar Southwest joint venture, as described above. Our share of losses from this venture prior to the sale were $3.5 million for the year ended December 31, 2008 compared to losses of $14.5 million during the same period in 2007.

        Income from discontinued operations—For the years ended December 31, 2008 and 2007, operating results for CTL and TimberStar assets sold during the period through December 31, 2009 or assets held for sale at the end of 2009 are classified as discontinued operations. The decrease in income from discontinued operations is primarily due to the inclusion of more income in 2007 for CTL and TimberStar assets sold in 2007, 2008 and 2009.

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        Gain from discontinued operations—During the year ended December 31, 2008, we sold a portfolio of 32 CTL assets to one buyer and also seventeen CTL assets to different buyers for net aggregate proceeds of $424.1 million, and recognized gains of approximately $64.6 million. In addition, we also closed on the sale of our Maine Timber property for net proceeds of $152.7 million resulting in a gain of $27.0 million.

Adjusted Earnings

        We measure our performance using adjusted earnings in addition to net income. Adjusted earnings represent net income attributable to iStar Financial Inc. and allocable to common shareholders, HPU holders and Participating Security holders computed in accordance with GAAP, before depreciation, depletion, amortization, gain from discontinued operations, ineffectiveness on interest rate hedges, impairments of goodwill and intangible assets and extraordinary items. Adjustments for joint ventures reflect our share of adjusted earnings calculated on the same basis.

        We believe that adjusted earnings is a helpful measure to consider, in addition to net income, because this measure helps us to evaluate how our commercial real estate finance business is performing compared to other commercial finance companies, without the effects of certain GAAP adjustments that are not necessarily indicative of current operating performance.

        The most significant GAAP adjustments that we exclude in determining adjusted earnings are depreciation, depletion, amortization and impairments of goodwill and intangible assets, which are typically non-cash charges. We do not exclude non-cash impairment charges on tangible assets or provisions for loan loss reserves. As a commercial finance company that focuses on real estate lending and corporate tenant leasing, we record significant depreciation on our real estate assets, and amortization of deferred financing costs associated with our borrowings. Depreciation, depletion and amortization do not affect our daily operations, but they do impact financial results under GAAP. Adjusted earnings is not an alternative or substitute for net income in accordance with GAAP as a measure of our performance. Rather, we believe that adjusted earnings is an additional measure that helps us analyze how our business is performing. Adjusted earnings should not be viewed as an alternative measure of either our operating liquidity or funds available for our cash needs or for distribution to our shareholders. In addition, we may not calculate adjusted earnings in the same manner as other companies that use a similarly titled measure.

 
  For the Years Ended December 31,  
 
  2009   2008   2007  
 
  (In thousands)
 

Adjusted earnings:

                   
 

Net income (loss)

  $ (769,847 ) $ (181,767 ) $ 236,602  
 

Add: Depreciation, depletion and amortization

    98,238     102,745     99,427  
 

Add: Joint venture income

            92  
 

Add: Joint venture depreciation, depletion and amortization

    17,990     14,466     40,826  
 

Add: Amortization of deferred financing costs

    (5,487 )   50,222     29,907  
 

Add: Impairment of goodwill and intangible assets

    4,186     60,618      
 

Less: Hedge ineffectiveness, net

        7,427     (239 )
 

Less: Gain from discontinued operations

    (12,426 )   (91,458 )   (7,832 )
 

Less: Gain on sale of joint venture interest

        (280,219 )   (1,572 )
 

Less: Net loss attributable to noncontrolling interests

    1,071     991     816  
 

Less: Preferred dividend requirement

    (42,320 )   (42,320 )   (42,320 )
               

Adjusted diluted earnings (loss) attributable to iStar Financial, Inc. and allocable to common shareholders and HPU holders(1)

  $ (708,595 ) $ (359,295 ) $ 355,707  
               

Weighted average diluted common shares outstanding

    100,071     131,153     127,542  

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Explanatory Notes:


(1)
HPU holders are current or former Company employees who purchased high performance common stock units under our High Performance Unit Program. Participating Security holders are Company employees and directors who hold unvested restricted stock units and common stock equivalents granted under our Long Term Incentive Plan. For the years ended December 31, 2009, 2008 and 2007, adjusted diluted earnings (loss) attributable to iStar Financial Inc. and allocable to common shareholders, HPU holders and Participating Security holders includes $(19,748), $(7,661) and $7,666, respectively, of adjusted earnings (loss) allocable to HPU holders.

(2)
For the years ended December 31, 2008 and 2007, amounts exclude $2,393 and $3,545, respectively, of dividends paid to Participating Security holders.

Risk Management

        Loan Credit Statistics—The table below summarizes our non-performing loans and details the reserve for loan losses associated with our loans:

 
  As of December 31,  
 
  2009   2008  

Non-performing loans

             

Carrying value

  $ 3,910,922   $ 3,108,798  

Participated portion

    298,333     349,359  
           

Managed Loan Value(1)

  $ 4,209,255   $ 3,458,157  

As a percentage of Managed Loan Value of total loans(2)

    45.3 %   27.5 %

Watch list loans

             

Carrying value

  $ 697,138   $ 1,026,446  

Participated portion

    20,561     238,450  
           

Managed Loan Value(1)

  $ 717,699   $ 1,264,896  

As a percentage of Managed Loan Value of total loans(2)

    7.7 %   10.1 %

Reserve for loan losses

  $ 1,417,949   $ 976,788  

As a percentage of Managed Loan Value of total loans(2)

    15.3 %   7.8 %

As a percentage of Managed Loan Value of non-performing loans

    33.7 %   28.2 %

Other real estate owned

             

Carrying value

  $ 839,141   $ 242,505  

Real estate held for investment, net

             

Carrying value

  $ 422,664   $  

Explanatory Notes:


(1)
Managed Loan Value of a loan is computed by adding our carrying value of the loan and the participation interest sold on the Fremont CRE portfolio. The participation receives 70% of all loan principal payments including principal that we have funded. Therefore we are in the first loss position and we believe that presentation of the Managed Loan Value is more relevant than a presentation of our carrying value when discussing our risk of loss on the loans in the Fremont CRE Portfolio.

(2)
Managed Loan Value of total loans was $9,289,975 and $12,584,723 as of December 31, 2009 and 2008, respectively.

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        As of December 31, 2009, non-performing loans and OREO and REHI assets had the following collateral and property types ($ in thousands):

Collateral/Property Type
  Non-
performing
Loans
  OREO &
REHI
  Total   % of
Total
 

Land

  $ 1,218,108   $ 402,252   $ 1,620,360     31.3 %

Condo:

                         
 

Construction—Completed

    848,439     487,718     1,336,157     25.8 %
 

Construction—In Progress

    210,165         210,165     4.1 %
 

Conversion

    74,664     114,400     189,064     3.7 %

Mixed Use/Mixed Collateral

    348,491     19,761     368,252     7.1 %

Entertainment/Leisure

    267,399         267,399     5.2 %

Retail

    243,915     41,587     285,502     5.5 %

Multifamily

    238,089     86,936     325,025     6.3 %

Hotel

    234,005     83,300     317,305     6.1 %

Office

    107,554     7,384     114,938     2.2 %

Corporate—Real Estate

    61,754         61,754     1.2 %

Industrial/R&D

    52,817         52,817     1.0 %

Other

    5,522     18,467     23,989     0.5 %
                   

Gross carrying value

  $ 3,910,922   $ 1,261,805   $ 5,172,727     100.0 %
                   

        Non-Performing Loans—We designate loans as non-performing at such time as: (1) the loan becomes 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt. As of December 31, 2009, we had non-performing loans with an aggregate carrying value of $3.91 billion and an aggregate Managed Loan Value of $4.21 billion, or 45.3% of the Managed Loan Value of total loans. Our non-performing loans increased during 2009, particularly in our residential land development and condominium construction portfolios, due to the weakened economy and the continued disruption in the credit markets, which adversely impacted the ability of many of our borrowers to service their debt and refinance our loans at maturity. Due to the continued deterioration of the commercial real estate market, the process of estimating collateral values and reserves will continue to require significant judgment on the part of management, which is inherently uncertain and subject to change. Management currently believes there is adequate collateral and reserves to support the carrying values of the loans.

        Watch List Assets—We conduct a quarterly credit review, resulting in an individual risk rating being assigned to each asset in our portfolio. This review is designed to enable management to evaluate and manage asset-specific credit issues and identify credit trends on a portfolio-wide basis. As of December 31, 2009, we had assets on the watch list, (excluding non-performing loans), with an aggregate carrying value of $697.1 million and an aggregate Managed Loan Value of $717.7 million, or 7.7% of total Managed Loan Value.

        Reserve for Loan Losses—During the year ended December 31, 2009, the reserve for loan losses increased $441.2 million, which was the result of $1.26 billion of provisioning for loan losses reduced by $814.2 million of charge-offs. The reserve is increased through the provision for loan losses, which reduces income in the period recorded and the reserve is reduced through charge-offs.

        The reserve for loan losses includes an asset-specific component and a formula-based component. An asset-specific reserve is established for an impaired loan when the estimated fair value of the loan's collateral less costs to sell is lower than the carrying value of the loan. As of December 31, 2009, we had

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asset-specific reserves of $1.24 billion or 29.5% of non-performing loans compared to asset-specific reserves of $799.6 million or 23.1% of non-performing loans at December 31, 2008. The increase in asset-specific reserves during the year ended December 31, 2009 was primarily due to the increase in non-performing loans as previously discussed. The increase was also due to additional reserves required for existing non-performing loans further impacted by the continued deterioration in the commercial real estate market.

        The formula-based general reserve is derived from estimated probabilities of principal loss and loss given default severities assigned to the portfolio during our quarterly internal risk rating assessment. Probabilities of principal loss and severity factors are based on industry and/or internal experience and may be adjusted for significant factors that, based on our judgment, impact the collectability of the loans as of the balance sheet date. The general reserve was $174.9 million or 3.4% of performing loans as of December 31, 2009 compared to $177.2 million or 1.9% of performing loans at December 31, 2008.

        Real Estate Held for Investment, net and Other Real Estate Owned—During the year ended December 31, 2009, we received title to properties in full or partial satisfaction of non-performing mortgage loans with a carrying value of $1.88 billion, for which the properties had served as collateral, and recorded charge-offs totaling $573.6 million related to these loans. Of this total, we recorded properties with a carrying value of $399.6 million to REHI and $904.2 million to OREO based on our strategy to either hold the properties over a longer period or to market them for sale. During the year ended December 31, 2009, we sold OREO assets for net proceeds of $270.6 million and recorded impairment charges totaling $78.6 million due to changing market conditions, which were included in "Impairment of other assets" on our Consolidated Statements of Operations.

        Tenant Credit Characteristics—As of December 31, 2009, our CTL assets had 95 different tenants, of which 66% were public companies and 34% were private companies. In addition, 36% of the tenants were rated investment grade by one or more national rating agencies, 35% were rated non-investment grade and the remaining tenants were not rated.

Liquidity and Capital Resources

        For the upcoming year, we will require significant capital to repay $586.8 million of our 2010 debt maturities and to fund our investment activities and operating expenses, including approximately $430.0 million of unfunded commitments primarily associated with our construction loan portfolio. However, the timing of funding these commitments and the amounts of the individual fundings are largely dependent on construction projects meeting certain milestones, and therefore they are difficult to predict with certainty. In addition, under the terms of our First Priority Credit Agreement, (as discussed below), if we do not pay down the outstanding balance of that loan by $500 million by September 30, 2010, payments of principal and net sale proceeds received by us in respect of assets constituting collateral for our obligations under this agreement must be applied toward the mandatory prepayment of the loan and commitment reductions under the agreement.

        Our capital sources in today's financing environment include repayments from our loan assets, asset sales, financings secured by our assets, cash flow from operations and potential joint ventures. From a liquidity perspective, we expect to continue to experience significant uncertainty with respect to our sources of funds. Historically we have also issued unsecured corporate debt, convertible debt and preferred and common equity; however, current market conditions have effectively eliminated our access to these sources of capital in the near term.

        In March 2009, we obtained additional financing and consummated a restructuring of our existing unsecured revolving credit facilities by entering into new secured credit facilities (the "Secured Credit Facilities Transaction"). In connection with this transaction, we entered into a $1.00 billion First Priority Credit Agreement maturing in June 2012 that is secured by a pool of collateral consisting of loan assets, corporate tenant lease assets, securities and other assets. We also entered into a $1.70 billion Second

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Priority Credit Agreement maturing in June 2011 and a $950.0 million Second Priority Credit Agreement maturing in June 2012 with the same lenders participating in the First Priority Credit Agreement, who have a second lien on the same collateral pool. Refer to the Credit Facilities Restructuring section below for further details on these transactions.

        In May 2009, we completed a series of private offers through which $1.01 billion aggregate principal amount of our senior unsecured notes of various series were exchanged for $634.8 million aggregate principal amount of new second-lien senior secured notes issued by us and guaranteed by certain of our subsidiaries. The new second lien notes have a second lien on the same collateral pool as the First and Second Priority Credit Agreements described above. Concurrent with the exchange offer, we repurchased for cash $12.5 million par value of our outstanding senior floating rate notes due September 2009 pursuant to a cash tender offer.

        During 2009, we received gross principal repayments from borrowers of $1.85 billion and $1.06 billion in proceeds from strategic asset sales. We funded $1.22 billion of loan commitments during the year and repaid outstanding debt of $1.32 billion partially offset by new borrowings of $1.00 billion. We also repurchased $1.31 billion par value of senior unsecured notes resulting in the recognition of $439.4 million in net gains on the early extinguishment of debt during the year. To date, we have been able to partially mitigate the impact of increased expenses associated with our loan loss reserves on some of our financial covenants through the recognition of gains associated with the discounted extinguishment of debt. We may from time to time seek to retire or repurchase additional outstanding debt through cash purchases and/or exchanges, which may take the form of open market purchases, privately negotiated transactions or otherwise, however, there can be no assurance that the Company's efforts in this regard can be successful.

        As of December 31, 2009, we had $224.6 million of unrestricted cash. We will need additional liquidity over the coming year to supplement loan repayments and cash generated from operations in order to meet our debt maturities and funding obligations. We actively manage our liquidity and continually work on initiatives to address both our debt covenants compliance and our liquidity needs. We expect proceeds from asset sales to supplement loan repayments and intend to continue to analyze additional asset sales, secured financing alternatives and other strategic transactions in order to maintain adequate liquidity. During the first quarter of 2010, we began exploring a sale or other transaction involving a portfolio of 34 corporate tenant leased assets totaling approximately 12 million square feet and representing approximately 40% of the Company's total corporate tenant leased net operating income. The portfolio is encumbered by secured, non-recourse term debt that matures in April 2011. Any decision by us to sell or otherwise dispose of some or all of the portfolio will be based primarily on the pricing terms offered by interested parties. There can be no assurance that any transaction involving all or part of the portfolio will be consummated. Under the terms of our credit agreements, we can issue a total of up to $1.00 billion of second priority secured notes in exchange or refinancing transactions involving our unsecured notes. After giving effect to the private exchange offers in May 2009, described above, we can issue up to $365.2 million of new notes in exchange or refinancing transactions. Our liquidity plan is dynamic and we expect to monitor the markets and adjust our plan as market conditions change. There is a risk that we will not be able to meet all of our funding and debt service obligations or maintain compliance with our debt covenants. Management's failure to successfully implement our liquidity plan could have a material adverse effect on our financial position and covenant compliance, results of operations and cash flows.

        Compliance with our debt covenants will also impact our ability to obtain additional debt and equity financing. In addition, any decision by our lenders and investors to provide us with additional financing may depend upon a number of other factors, such as our compliance with the terms of existing credit arrangements, our financial performance, our credit ratings, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders' and investors' resources and policies concerning the terms under which they make capital commitments and the relative attractiveness of alternative investment or lending opportunities.

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        The following table outlines the contractual obligations related to our long-term debt agreements and operating lease obligations as of December 31, 2009. We have no other long-term liabilities that would constitute a contractual obligation.

 
  Principal And Interest Payments Due By Period  
 
  Total   Less Than
1 Year
  2-3
Years(1)
  4-5
Years
  6-10
Years
  After 10
Years
 
 
  (In thousands)
 

Long-Term Debt Obligations:

                                     

Unsecured notes

  $ 3,478,885   $ 553,294   $ 1,208,311   $ 1,250,390   $ 466,890   $  

Secured notes

    634,801         155,253     479,548          

Convertible notes

    787,750         787,750              

Unsecured revolving credit facilities

    748,601         748,601              

Secured term loans(2)

    3,999,342     33,478     3,703,921     55,941     21,520     184,482  

Secured revolving credit facility

    959,426         959,426              

Trust preferred

    100,000                     100,000  
                           
 

Total principal maturities

    10,708,805     586,772     7,563,262     1,785,879     488,410     284,482  

Interest Payable(3)

    1,414,140     442,681     567,621     237,571     126,207     40,060  

Operating Lease Obligations

    47,279     6,095     11,097     8,744     17,987     3,356  
                           
 

Total(4)

  $ 12,170,224   $ 1,035,548   $ 8,141,980   $ 2,032,194   $ 632,604   $ 327,898  
                           

Explanatory Notes:


(1)
Future long-term debt obligations due during the years ended December 31, 2011 and 2012 are $4.02 billion and $3.54 billion, respectively.

(2)
As further discussed in Debt Covenants below, if we do not pay down the outstanding balance of our $1.00 billion First Priority Credit Agreement by $500 million by September 30, 2010, payments of principal and net sale proceeds received by us in respect of assets constituting collateral for our obligation under this agreement must be applied towards the mandatory prepayment of the loan and commitment reductions under the agreement. This amount has been included in years 2-3 based on its contractual maturity.

(3)
All variable-rate debt assumes a 30-day LIBOR rate of 0.23% (the 30-day LIBOR rate at December 31, 2009).

(4)
See "Off-Balance Sheet Transactions" below, for a discussion of certain unfunded commitments related to our lending and CTL business.

        Credit Facilities Restructuring—In March 2009, we entered into a $1.00 billion First Priority Credit Agreement with participating members of our existing bank lending group. The First Priority Credit Agreement will mature in June 2012. Borrowings bear interest at the rate of LIBOR + 2.50% per year, subject to adjustment based upon our corporate credit ratings (see Ratings Triggers below) and are collateralized by a first-priority lien on a pool of collateral consisting of loans, debt securities, corporate tenant lease assets and other assets pledged under the First and Second Priority Credit Agreements and the Second Priority Secured Exchange Notes (see below). As of December 31, 2009, the First Priority Credit Agreement was fully drawn with $1.00 billion of secured term loans outstanding.

        We also restructured our two unsecured revolving credit facilities by entering into two Second Priority Credit Agreements, with $1.70 billion maturing in 2011 and $950.0 million maturing in 2012, with the same lenders participating in the First Priority Credit Agreement. Such lenders' commitments under the Company's unsecured facilities have been terminated and replaced by their commitments under the Second Priority Credit Agreements. Under these agreements, the participating lenders have a second

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priority lien on the same collateral pool securing the First Priority Credit Agreement and the Second Priority Secured Exchange Notes (see Unsecured/Secured Notes Exchange below). As of December 31, 2009, outstanding borrowings under the Second Priority Credit Agreements include $625.2 million and $334.2 million of revolving loans due in June 2011 and June 2012, respectively, as well as $1.06 billion and $621.2 million of term loans due in June 2011 and June 2012, respectively. Borrowings bear interest at the rate of LIBOR + 1.50% per year, subject to adjustment based upon our corporate credit ratings (see Ratings Triggers below). As of December 31, 2009 there was approximately $2.1 million that was immediately available to draw under the Second Priority Credit Agreement.

        At December 31, 2009, the total carrying value of assets pledged as collateral under the First and Second Priority Credit Agreements and the Second Priority Secured Exchange Notes was $5.73 billion.

        Concurrently, we entered into amendments to our $2.22 billion and $1.20 billion unsecured revolving credit facilities. As of December 31, 2009, after giving effect to the amendments, outstanding balances on the unsecured credit facilities were $504.3 million, which will expire in June 2011, and $244.3 million, which will expire in June 2012. The amendments eliminated certain covenants and events of default. The unsecured revolving credit facilities may not be repaid prior to maturity while the First and Second Priority Credit Agreements remain outstanding. These facilities remain unsecured and no changes were made to the pricing terms of these facilities in connection with these amendments.

        Unsecured/Secured Notes Exchange—In May 2009, we completed a series of private offers in which we issued $155.3 million aggregate principal amount of our 8.0% second priority senior secured guaranteed notes due 2011 ("2011 Notes") and $479.5 million aggregate principal amounts of our 10.0% second priority senior secured guaranteed notes due 2014 ("2014 Notes" and together with the 2011 Notes, the "Second Priority Secured Exchange Notes") in exchange for $1.01 billion aggregate principal amount of our senior unsecured notes of various series. The Second Priority Secured Exchange Notes are collateralized by a second priority lien on the same pool of collateral pledged under the First and Second Priority Credit Agreements. In conjunction with the exchange, we also purchased $12.5 million par value of our outstanding senior floating rate notes due September 2009 in a cash tender offer. As a result of the secured note exchange, we recorded a gain on early extinguishment of debt of $107.9 million at the time of the transaction as well as a deferred gain of $262.7 million, reflected as a premium on the new secured notes which will be amortized to interest expense over the terms of the secured notes.

        Note Repurchases—During the year ended December 31, 2009, we repurchased, through open market and private transactions, $1.31 billion par value of our senior unsecured notes with various maturities ranging from January 2009 to March 2017. In connection with these repurchases, we recorded an aggregate net gain on early extinguishment of debt of $439.4 million for the year ended December 31, 2009.

        Debt Covenants—Our ability to borrow under our secured credit facilities depends on maintaining compliance with various covenants, including a minimum tangible net worth covenant and specified financial ratios, such as fixed charge coverage, unencumbered assets to unsecured indebtedness, eligible collateral coverage and leverage. Our recent financial results have put pressure on our ability to maintain compliance with certain of the debt covenants in our secured bank credit facilities. In particular, our tangible net worth at December 31, 2009 was approximately $1.7 billion, which is not significantly above the financial covenant minimum requirement in our secured credit facilities of $1.5 billion. We intend to operate our business in order to remain in compliance with the covenants in our debt instruments; however, there can be no assurance that we will be able to do so. Further loan loss reserves and impairment charges will adversely impact our tangible net worth. All of these covenants on our facilities are maintenance covenants and, if breached could result in an acceleration of our facilities if a waiver or modification is not agreed upon with the requisite percentage of the unsecured lending group and lenders on our other facilities. Our secured credit facilities also impose limitations on repayments, repurchases, refinancings and optional redemptions of our existing unsecured notes or secured exchange notes issued pursuant to our exchange offer, as well as limitations on repurchases of our Common Stock. For so long as

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we maintain our qualification as a REIT, the 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 publicly held debt securities also contain covenants that include fixed charge coverage and unencumbered assets to unsecured indebtedness ratios and our secured debt securities have an eligible collateral coverage requirement. The fixed charge coverage ratio in our publicly held securities is an incurrence test. If we do not meet the fixed charge coverage ratio, our ability to incur additional indebtedness will be restricted. The unencumbered assets to unsecured indebtedness covenant and the eligible collateral coverage covenant are maintenance covenants and, if breached and not cured within applicable cure periods, could result in acceleration of our publicly held debt unless a waiver or modification is agreed upon with the requisite percentage of the bondholders. Based on our unsecured credit ratings at December 31, 2009, the financial covenants in our publicly held debt securities, including the fixed charge coverage ratio and maintenance of unencumbered assets to unsecured indebtedness ratio, are operative.

        Our secured credit facilities and our public debt securities contain cross default provisions that would allow the lenders and the bondholders 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. In addition, our secured credit facilities, unsecured credit facilities and the indentures governing our public debt securities provide that the lenders and bondholders may declare an event of default and accelerate our indebtedness to them if there is a non payment default under our other recourse indebtedness in excess of specified thresholds and, if the holders of the other indebtedness are permitted to accelerate, in the case of the secured credit facilities, or accelerate, in the case of our unsecured credit facilities and the bond indentures, the other recourse indebtedness.

        The First and Second Priority Credit Agreements and the indentures governing the Second Priority Secured Exchange Notes contain a number of covenants, including that we maintain collateral coverage of at least 1.3x the aggregate borrowings and letters of credit outstanding under the First Priority Credit Agreement, the Second Priority Credit Agreements and the Second Priority Secured Exchange Notes. Under certain circumstances, the First and Second Priority Credit Agreements require that payments of principal and net sale proceeds received by us in respect of assets constituting collateral for our obligations under these agreements be applied toward the mandatory prepayment of loans and commitment reductions under them. We would be required to make such prepayments (i) during any time that the ratio of our EBITDA to fixed charges, as defined under the agreements, is less than 1.25 to 1.00, (ii) if, after receiving a payment of principal or net sale proceeds in respect of collateral, the Company has insufficient eligible assets available to pledge as replacement collateral or (iii) if, and for so long as, the aggregate principal amount of loans outstanding under the First Priority Credit Agreement exceeds $500 million at any time on or after September 30, 2010, or zero at any time on or after March 31, 2011.

        We believe we are in full compliance with all the covenants in our debt instruments as of December 31, 2009.

        Ratings Triggers—Our First and Second Priority Secured Credit Agreements and unsecured credit agreements bear interest at LIBOR based rates plus an applicable margin which varies between the Credit Agreements and is determined based on our corporate credit ratings. Our ability to borrow under our credit facilities is not dependent on the level of our credit ratings. Based on our current credit ratings, further downgrades in our credit ratings will have no effect on our borrowing rates under these facilities.

        Off-Balance Sheet Transactions—We are not dependent on the use of any off-balance sheet financing arrangements for liquidity.

        Unfunded commitments—We generally fund construction and development loans and build outs of CTL space over a period of time if and when the borrowers and tenants meet established milestones and

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other performance criteria. We refer to these arrangements as Performance-Based Commitments. In addition, we sometimes establish a maximum amount of additional funding which we will make available to a borrower or tenant for an expansion or addition to a project if we approve of the expansion or addition in our sole discretion. We refer to these arrangements as Discretionary Fundings. Finally, we have committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments. As of December 31, 2009, the maximum amounts of the fundings we may make under each category, assuming all performance hurdles and milestones are met under Performance-Based Commitments, that we approve all Discretionary Fundings and that 100% of our capital committed to Strategic Investments is drawn down are as follows (in thousands):

 
  Loans   CTL   Total  

Performance-Based Commitments

  $ 616,400   $ 13,074   $ 629,474  

Discretionary Fundings

    137,685         137,685  

Strategic Investments

    N/A     N/A     73,139  
               
 

Total

  $ 754,085   $ 13,074   $ 840,298  
               

        Transactions with Related Parties—We have substantial investments in non-controlling interests of Oak Hill Advisors, L.P., Oak Hill Credit Alpha MGP, OHSF GP Partners II, LLC, Oak Hill Credit Opportunities MGP, LLC, OHSF GP Partners (Investors), LLC, OHA Finance MGP, LLC, OHA Capital Solutions MGP, LLC, OHA Strategic Credit GenPar, LLC, OHA Leveraged Loan Portfolio GenPar, LLC, OHA Structured Products MGP, LLC, Oakhill Credit Opp Fund, LP and Oak Hill Credit Partners II, Limited (see Note 7 to the Company's Notes to Consolidated Financial Statements). In relation to our investment in these entities, we appointed to our Board of Directors a member that holds a substantial investment in these same nine entities. As of December 31, 2009, the carrying value in these ventures was $181.1 million. We recorded equity in earnings from these investments of $22.7 million for the year ended December 31, 2009. We have also invested directly in six funds managed by Oak Hill Advisors, L.P., which have a cumulative carrying value of $0.6 million as of December 31, 2009 and for which we recorded income of $0.2 million for the year ended December 31, 2009. In addition, we have paid $0.1 million to certain of these entities representing management fees as well as advisory service related fees in conjunction with our debt repurchase transactions.

        Stock Repurchase Program—On March 13, 2009, our Board of Directors authorized the repurchase of up to $50 million of Common Stock from time to time in open market and privately negotiated purchases, including pursuant to one or more trading plans. During the year ended December 31, 2009, we repurchased 11.8 million shares of our outstanding Common Stock for approximately $29.9 million, at an average cost of $2.54 per share, and the repurchases were recorded at cost. As of December 31, 2009, we had $21.5 million of Common Stock available to repurchase under the authorized stock repurchase programs.

Critical Accounting Estimates

        The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on historical corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment.

        During 2009, management reviewed and evaluated these critical accounting estimates and believes they are appropriate. Our significant accounting policies are described in Note 3 to our Consolidated

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Financial Statements. The following is a summary of accounting policies that require more significant management estimates and judgments:

        Reserve for loan losses—The reserve for loan losses is a valuation allowance that reflects management's estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The reserve is increased through the "Provision for loan losses" on our Consolidated Statements of Operations and is decreased by charge-offs when losses are confirmed through the receipt of assets such as cash in a pre-foreclosure sale or via ownership control of the underlying collateral in full satisfaction of the loan upon foreclosure or when significant collection efforts have ceased. The reserve for loan losses includes a general, formula-based component and an asset-specific component.

        The general, formula-based reserve component covers performing loans and provisions for loan losses are recorded when (i) available information as of each balance sheet date indicates that it is probable a loss has occurred in the portfolio and (ii) the amount of the loss can be reasonably estimated. Required reserve balances for the performing loan portfolio are derived from estimated probabilities of principal loss and loss given default severities. Estimated probabilities of principal loss and loss severities are assigned to each loan in the portfolio during our quarterly internal risk rating assessment. Probabilities of principal loss and severity factors are based on industry and/or internal experience and may be adjusted for significant factors that, based on our judgment, impact the collectability of the loans as of the balance sheet date.

        The asset-specific reserve component relates to reserves for losses on impaired loans. We consider a loan to be impaired when, based upon current information and events, we believe that it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement. A reserve is established when the present value of payments expected to be received, observable market prices, or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) of an impaired loan is lower than the carrying value of that loan. A loan is also considered impaired if its terms are modified in a troubled debt restructuring ("TDR"). A TDR occurs when the Company grants a concession to a borrower in financial difficulty by modifying the original terms of the loan. Each of our non-performing loans ("NPL's") and TDR loans are considered impaired and are evaluated individually to determine required asset-specific reserves.

        The provision for loan losses for the years ended December 31, 2009, 2008 and 2007 were $1.26 billion, $1.03 billion and $185.0 million, respectively. The increase in the provision for loan losses was primarily due to increased asset specific reserves required as a result of the increase in impaired loans. The total reserve for loan losses at December 31, 2009 and 2008, included asset specific reserves of $1.24 billion and $799.6 million, respectively, and general reserves of $174.9 million and $177.2 million, respectively.

        Impairment of available-for-sale and held-to-maturity debt securities—For held-to-maturity and available-for-sale debt securities held in "Loans and other lending investments," management evaluates whether the asset is other-than-temporarily impaired when the fair market value is below carrying value. We consider debt securities other-than-temporarily impaired if (1) we have the intent to sell the security, (2) it is more likely than not that we will be required to sell the security before recovery, or (3) we do not expect to recover the entire amortized cost basis of the security. If it is determined that an other-than-temporary impairment exists, the portion related to credit losses, where we do not expect to recover our entire amortized cost basis, will be recognized as an "Impairment of other assets" on the our Consolidated Statements of Operations. If we do not intend to sell the security and it is more likely than not that we will be required to sell the security, but the security has suffered a credit loss, the impairment charge will be separated. The credit loss component of the impairment will be recorded as an "Impairment of other assets" on our Consolidated Statements of Operations, and the remainder will be recorded in "Accumulated other comprehensive income" on our Consolidated Balance Sheets.

        During the years ended December 31, 2009, 2008 and 2007, we determined that unrealized credit related losses on certain held-to-maturity and available-for-sale debt securities were other-than-temporary

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and recorded impairment charges totaling $11.7 million, $120.0 million and $134.9 million, respectively, in "Impairment of other assets" on the Consolidated Statements of Operations. There are no other-than-temporary impairments recorded in "Accumulated other comprehensive income" on our Consolidated Balance Sheet as of December 31, 2009.

        Other real estate owned—OREO consists of properties acquired through foreclosure or by deed-in-lieu of foreclosure in full or partial satisfaction of non-performing loans that we intend to market for sale in the near term. OREO is recorded at the estimated fair value less costs to sell. The excess of the carrying value of the loan over the fair value of the property less estimated costs to sell is charged-off against the reserve for loan losses when title to the property is obtained. Significant property improvements may be capitalized to the extent that the carrying value of the property does not exceed the estimated fair value less costs to sell. The gain or loss on final disposition of an OREO is recorded in "Impairment of other assets" on our Consolidated Statements of Operations, and is considered income (loss) from continuing operations as it represents the final stage of our loan collection process.

        We review the recoverability of an OREO asset's carrying value when events or circumstances indicate a potential impairment of a property's value. If impairment exists a loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property less cost to sell. These impairments are recorded in "Impairment of other assets" on the Consolidated Statements of Operations.

        During the years ended December 31, 2009, 2008 and 2007, we received titles to properties in satisfaction of senior mortgage loans with cumulative carrying values of $1.88 billion, $419.1 million and $152.4 million, respectively, for which those properties had served as collateral, and recorded charge-offs totaling $573.6 million, $102.4 million and $23.2 million, respectively, related to these loans. Subsequent to taking title to the properties, we determined certain OREO assets were impaired due to changing market conditions, and recorded impairment charges of $78.6 million and $55.6 million during the year ended December 31, 2009 and 2008.

        Real estate held for investment, net—REHI consists of properties acquired through foreclosure or through deed-in-lieu of foreclosure in full or partial satisfaction of non-performing loans that management intends to hold, operate or develop for a period of at least twelve months. REHI assets are initially recorded at their estimated fair value. The excess of the carrying value of the loan over the fair value of the property is charged-off against the reserve for loan losses when title to the property is obtained. Upon acquisition, tangible and intangible assets and liabilities acquired are recorded at their estimated fair values. We consider REHI assets to be long-lived and periodically review them for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment of REHI assets is measured in the same manner as long-lived assets as described below.

        Long-lived assets impairment test—CTL assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less costs to sell and are included in "Assets held for sale" on our Consolidated Balance Sheets. The difference between the estimated fair value less costs to sell and the carrying value will be recorded as an impairment charge and included in "Income from discontinued operations" on the Consolidated Statements of Operations. Once the asset is classified as held for sale, depreciation expense is no longer recorded and historical operating results are reclassified to "Income from discontinued operations" on the Consolidated Statements of Operations.

        We periodically review long-lived assets to be held and used for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. A held for use long-lived asset's value is impaired only if management's estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the asset (taking into account the anticipated holding period of the asset) is less than the carrying value. Such estimate of cash flows considers factors such as expected future operating income, trends and prospects, as well as the effects of

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demand, competition and other economic factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the asset and reflected as an adjustment to the basis of the asset. Impairments of CTL and REHI assets are recorded in "Impairment of other assets," on our Consolidated Statements of Operations.

        During the years ended December 31, 2009 and 2008, we recorded impairment charges of $19.4 million and $11.6 million, respectively, due to changes in market conditions.

        Identified intangible assets and goodwill—We record intangible assets acquired at their estimated fair values separate and apart from goodwill. We determine whether such intangible assets have finite or indefinite lives. As of December 31, 2009, all such acquired intangible assets have finite lives. We amortize finite lived intangible assets based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the business acquired. We review finite lived intangible assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If we determine the carrying value of an intangible asset is not recoverable we will record an impairment charge to the extent its carrying value exceeds its estimated fair value. Impairments of intangibles are recorded in "Impairment of other assets" on our Consolidated Statements of Operations.

        The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is done at a level of reporting referred to as a reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.

        Due to an overall deterioration in conditions within the commercial real estate market, we recorded impairment charges of $4.2 million during 2009 and $39.1 million during 2008 to write-off the goodwill allocated to the CTL and Real Estate Lending reporting segments, respectively. These charges were recorded in "Impairment of goodwill" on our Consolidated Statements of Operations.

        During the year ended December 31, 2008, we also recorded non-cash charges of $21.5 million to reduce the carrying value of certain intangible assets related to the Fremont CRE acquisition and other acquisitions, based on their revised estimated fair values. These charges were recorded in "Impairment of other assets" on our Consolidated Statements of Operations.

        Consolidation—Variable Interest Entities—We invest in many entities in which we either own a minority interest or may have a majority interest, but do not have voting control of the entity. We must evaluate these types of interests to determine if the entity is a variable interest entity ("VIE"), and if we are the primary beneficiary. There is a significant amount of judgment required to determine if an entity is considered a VIE and if we are the primary beneficiary, we first perform a qualitative analysis, which requires certain subjective decisions regarding our assessment, including, but not limited to, the nature and structure of the entity, the variability of the economic interests that the entity passes along to its interest holders, the rights of the parties and the purpose of the arrangement. An iterative quantitative analysis is required if our qualitative analysis proves inconclusive as to whether the entity is a VIE or we are the primary beneficiary and consolidation is required.

        Fair value of assets and liabilities—The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial and nonfinancial assets and liabilities that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in

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secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.

        See Note 16 of the Notes to Consolidated Financial Statements for a complete discussion on our use of fair valuation of financial and non-financial assets and financial liabilities and the related measurement techniques.

New Accounting Standards

        For a discussion of the impact of new accounting pronouncements on our financial condition or results of operations, see Note 3 to the Notes to the Consolidated Financial Statements.

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Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Market Risks

        Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. In pursuing our business plan, the primary market risk to which we are exposed is interest rate risk. Consistent with our liability management objectives, we have implemented an interest rate risk management policy based on match funding, with the objective that variable-rate assets be primarily financed by variable-rate liabilities and fixed-rate assets be primarily financed by fixed-rate liabilities. We also seek to match fund our foreign denominated assets with foreign denominated debt so that changes in foreign currency exchange rates will have a minimal impact on earnings.

        Our operating results will depend in part on the difference between the interest and related income earned on our assets and the interest expense incurred in connection with our interest-bearing liabilities. Competition from other providers of real estate financing may lead to a decrease in the interest rate earned on our interest-bearing assets, which we may not be able to offset by obtaining lower interest costs on our borrowings. Changes in the general level of interest rates prevailing in the financial markets may affect the spread between our interest-earning assets and interest-bearing liabilities. Any significant compression of the spreads between interest-earning assets and interest-bearing liabilities could have a material adverse effect on us. In addition, an increase in interest rates could, among other things, reduce the value of our interest-bearing assets and our ability to realize gains from the sale of such assets, and a decrease in interest rates could reduce the average life of our interest-earning assets if borrowers refinance our loans.

        Approximately 10.3% of our loan investments are subject to prepayment protection in the form of lock-outs, yield maintenance provisions or other prepayment premiums which provide substantial yield protection to us. Those assets generally not subject to prepayment penalties include: (1) variable-rate loans based on LIBOR, originated or acquired at par, which would not result in any gain or loss upon repayment; and (2) discount loans and loan participations acquired at discounts to face values, which would result in gains upon repayment. Further, while we generally seek to enter into loan investments which provide for substantial prepayment protection, in the event of declining interest rates, we could receive such prepayments and may not be able to reinvest such proceeds at favorable returns. Such prepayments could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.

Interest Rate Risks

        In the event of a significant rising interest rate environment or further economic downturn, defaults could increase and cause additional credit losses to us which adversely affect our liquidity and operating results. Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.

        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. As fully discussed in Note 12 of the Company's Notes to Consolidated Financial Statements, we seek to employ match funding-based financing and hedging strategies to limit the effects of changes in interest rates on our operations, including engaging in interest rate caps, swaps and other interest rate-related derivative contracts. These strategies are specifically designed to reduce our exposure, on specific transactions or on a portfolio basis, to changes in cash flows as a result of interest rate movements in the market. We do not enter into derivative contracts for speculative purposes or as a hedge against changes in our credit risk or the credit risk of our borrowers.

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        While a REIT may utilize derivative instruments to hedge interest rate risk on its liabilities incurred to acquire or carry real estate assets without generating non-qualifying income, use of derivatives for other purposes will generate non-qualified income for REIT income test purposes. This includes hedging asset-related risks such as credit, foreign exchange and prepayment or interest rate exposure on our loan assets. As a result our ability to hedge these types of risks is limited.

        There can be no assurance that our profitability will not be adversely affected during any period as a result of changing interest rates. In addition, hedging transactions using derivative instruments involve certain additional risks such as counterparty credit risk, legal enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. With regard to loss of basis in a hedging contract, indices upon which contracts are based may be more or less variable than the indices upon which the hedged assets or liabilities are based, thereby making the hedge less effective. The counterparties to these contractual arrangements are major financial institutions with which we and our affiliates may also have other financial relationships. We are potentially exposed to credit loss in the event of non-performance by these counterparties. However, because of their high credit ratings, we do not anticipate that any of the counterparties will fail to meet their obligations. There can be no assurance that we will be able to adequately protect against the foregoing risks and that we will ultimately realize an economic benefit from any hedging contract we enter into which exceeds the related costs incurred in connection with engaging in such hedges.

        The following table quantifies the potential changes in net investment income should interest rates increase by 100 or 200 basis points and decrease by 10 basis points, assuming no change in the shape of the yield curve (i.e., relative interest rates). Net investment income is calculated as revenue from loans and other lending investments and operating leases and earnings from equity method investments, less interest expense, operating costs on CTL assets and gain on early extinguishment of debt, for the year ended December 31, 2009. The base interest rate scenario assumes the one-month LIBOR rate of 0.23% as of December 31, 2009. Actual results could differ significantly from those estimated in the table.


Estimated Percentage Change In

Change in Interest Rates
  Net Investment Income(1)  

-10 Basis Points(1)

    0.49 %

Base Interest Rate

    %

+100 Basis Points

    (4.86 )%

+200 Basis Points

    (9.67 )%

Explanatory Notes:


(1)
We have a net floating rate debt exposure resulting in an increase in net investment income when rates decrease and vice versa. In addition, interest rate floors on certain of our loan assets further increase net investment income as rates decrease and vice versa. As of December 31, 2009, $1.87 billion of our floating rate loans have a weighted average interest rate floor of 3.86%.

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Item 8.    Financial Statements and Supplemental Data

Index to Financial Statements

        All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

        Financial statements of 24 unconsolidated entities accounted for under the equity method have been omitted because the Company's proportionate share of the income from continuing operations before income taxes is less than 20% of the respective consolidated amount and the investments in and advances to each company are less than 20% of consolidated total assets.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of iStar Financial Inc.:

        In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of iStar Financial Inc. and its subsidiaries (collectively, the "Company") at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        As discussed in Note 3 to the Consolidated Financial Statements, the Company changed the manner in which it accounts for convertible debt instruments that may be settled in cash upon conversion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/  PricewaterhouseCoopers LLP
New York, New York
February 26, 2010

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iStar Financial Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

 
  As of December 31,  
 
  2009   2008  

ASSETS

             

Loans and other lending investments, net

  $ 7,661,562   $ 10,586,644  

Corporate tenant lease assets, net

    2,885,896     3,044,811  

Other investments

    433,130     447,318  

Real estate held for investment, net

    422,664      

Other real estate owned

    839,141     242,505  

Assets held for sale

    17,282      

Cash and cash equivalents

    224,632     496,537  

Restricted cash

    39,654     155,965  

Accrued interest and operating lease income receivable, net

    54,780     87,151  

Deferred operating lease income receivable

    122,628     116,793  

Deferred expenses and other assets, net

    109,206     119,024  
           
 

Total assets

  $ 12,810,575   $ 15,296,748  
           

LIABILITIES AND EQUITY

             

Liabilities:

             

Accounts payable, accrued expenses and other liabilities

  $ 252,110   $ 354,492  

Debt obligations, net

    10,894,903     12,486,404  
           
 

Total liabilities

    11,147,013     12,840,896  
           

Commitments and contingencies

   
   
 

Redeemable noncontrolling interests

    7,444     9,190  

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  

High Performance Units

    9,800     9,800  

Common Stock, $0.001 par value, 200,000 shares authorized, 137,868 issued and 94,216 outstanding at December 31, 2009 and 137,352 issued and 105,457 outstanding at December 31, 2008

    138     137  

Additional paid-in capital

    3,791,972     3,768,772  

Retained earnings (deficit)

    (2,051,376 )   (1,240,280 )

Accumulated other comprehensive income (see Note 15)

    6,145     1,707  

Treasury stock, at cost, $0.001 par value, 43,652 shares at December 31, 2009 and 31,895 shares at December 31, 2008

    (151,016 )   (121,159 )
           
 

Total iStar Financial Inc. shareholders' equity

    1,605,685     2,418,999  

Noncontrolling interests

    50,433     27,663  
           
 

Total equity

    1,656,118     2,446,662  
           
 

Total liabilities and equity

  $ 12,810,575   $ 15,296,748  
           

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

55


Table of Contents


iStar Financial Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

 
  For the Years Ended December 31,  
 
  2009   2008   2007  

Revenue:

                   
 

Interest income

  $ 557,809   $ 947,661   $ 998,008  
 

Operating lease income

    305,007     308,742     306,513  
 

Other income

    30,468     97,851     99,938  
               
   

Total revenue

    893,284     1,354,254     1,404,459  
               

Costs and expenses:

                   
 

Interest expense

    481,116     666,706     629,260  
 

Operating costs—corporate tenant lease assets

    23,467     23,059     27,915  
 

Depreciation and amortization

    97,869     94,726     83,690  
 

General and administrative

    127,044     143,902     156,534  
 

Provision for loan losses

    1,255,357     1,029,322     185,000  
 

Impairment of other assets

    122,699     295,738     144,184  
 

Impairment of goodwill

    4,186     39,092      
 

Other expense

    104,795     37,234     8,927  
               
   

Total costs and expenses

    2,216,533     2,329,779     1,235,510  
               

Income (loss) before earnings from equity method investments and other items

    (1,323,249 )   (975,525 )   168,949  
 

Gain on early extinguishment of debt

    547,349     393,131     225  
 

Gain on sale of joint venture interest

        280,219      
 

Earnings from equity method investments

    5,298     6,535     29,626  
               

Income (loss) from continuing operations

    (770,602 )   (295,640 )   198,800  
 

Income (loss) from discontinued operations

    (11,671 )   22,415     29,970  
 

Gain from discontinued operations

    12,426     91,458     7,832  
               

Net income (loss)

    (769,847 )   (181,767 )   236,602  
 

Net loss attributable to noncontrolling interests

    1,071     991     816  
 

Gain on sale of joint venture interest attributable to noncontrolling interests

        (18,560 )    
 

Gain from discontinued operations attributable to noncontrolling interests

        (3,689 )    
               

Net income (loss) attributable to iStar Financial Inc. 

    (768,776 )   (203,025 )   237,418  
 

Preferred dividends

    (42,320 )   (42,320 )   (42,320 )
               

Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders, HPU holders and Participating Security holders(1)(2)(3)

  $ (811,096 ) $ (245,345 ) $ 195,098  
               

Per common share data(3):

                   
 

Income (loss) attributable to iStar Financial Inc. from continuing operations:

                   
   

Basic

  $ (7.89 ) $ (2.68 ) $ 1.19  
   

Diluted

  $ (7.89 ) $ (2.68 ) $ 1.18  
 

Net income (loss) attributable to iStar Financial Inc.:

                   
   

Basic

  $ (7.88 ) $ (1.85 ) $ 1.48  
   

Diluted

  $ (7.88 ) $ (1.85 ) $ 1.47  
 

Weighted average number of common shares—basic

    100,071     131,153     126,801  
 

Weighted average number of common shares—diluted

    100,071     131,153     127,542  

Per HPU share data(1)(3):

                   
 

Income (loss) attributable to iStar Financial Inc. from continuing operations:

                   
   

Basic

  $ (1,503.13 ) $ (505.47 ) $ 224.40  
   

Diluted

  $ (1,503.13 ) $ (505.47 ) $ 223.27  
 

Net income (loss) attributable to iStar Financial Inc.:

                   
   

Basic

  $ (1,501.73 ) $ (349.87 ) $ 279.53  
   

Diluted

  $ (1,501.73 ) $ (349.87 ) $ 278.07  
 

Weighted average number of HPU shares—basic and diluted

    15     15     15  

Explanatory Notes:


(1)
HPU holders are current and former Company employees who purchased high performance common stock units under the Company's High Performance Unit Program (see Note 11).

(2)
Participating Security holders are Company employees and directors who hold unvested restricted stock units and common stock equivalents granted under the Company's Long Term Incentive Plans (see Notes 13 and 14).

(3)
See Note 14 for amounts attributable to iStar Financial Inc. for income (loss) from continuing operations and further details on the calculation of earnings per share.

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

56


iStar Financial Inc.

Consolidated Statements of Changes in Equity

For the Years Ended December 31, 2009, 2008 and 2007

(In thousands)

 
  iStar Financial Inc. Shareholders' Equity    
   
 
 
  Preferred
Stock(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, 2006

  $ 22   $ 9,800   $ 127   $ 3,465,925   $ (479,695 ) $ 16,956   $ (26,272 ) $ 29,509   $ 3,016,372  

Exercise of options

                2,888                     2,888  

Net proceeds from equity offering

            8     217,926                     217,934  

Dividends declared—preferred

                    (42,320 )               (42,320 )

Dividends declared—common

                    (459,253 )               (459,253 )

Dividends declared—HPU

                    (10,130 )               (10,130 )

Repurchase of stock

                            (30,947 )       (30,947 )

Restricted stock unit amortization, net of shares withheld

                11,116                     11,116  

Issuance of stock—DRIP/stock purchase plan

                2,518                     2,518  

Redemption of HPU's

                1,105                     1,105  

Net income for the period(2)

                    237,418             (948 )   236,470  

Contributions from noncontrolling interests

                                17,688     17,688  

Distributions to noncontrolling interests

                                (3,704 )   (3,704 )

Sale/purchase of certain noncontrolling interests

                                (6,370 )   (6,370 )

Adoption of ASC 470-20-65-1 (see Notes 3 and 9)

                38,054                     38,054  

Change in accumulated other comprehensive income (loss)

                        (19,251 )           (19,251 )
                                       

Balance at December 31, 2007

  $ 22   $ 9,800   $ 135   $ 3,739,532   $ (753,980 ) $ (2,295 ) $ (57,219 ) $ 36,175   $ 2,972,170  
                                       

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

57


iStar Financial Inc.

Consolidated Statements of Changes in Equity (Continued)

For the Years Ended December 31, 2009, 2008 and 2007

(In thousands)

 
  iStar Financial Inc. Shareholders' Equity    
   
 
 
  Preferred
Stock(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, 2007

  $ 22   $ 9,800   $ 135   $ 3,739,532   $ (753,980 ) $ (2,295 ) $ (57,219 ) $ 36,175   $ 2,972,170  

Exercise of options

                5,868                       5,868  

Dividends declared—preferred

                    (42,320 )               (42,320 )

Dividends declared—common

                    (236,052 )