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IStar Financial 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-4.1
  3. Ex-4.2
  4. Ex-4.3
  5. Ex-31.0
  6. Ex-32.0
  7. Ex-32.0

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

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

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

1114 Avenue of the Americas, 27th Floor

 

10036

New York, NY

 

(Zip code)

(Address of principal executive offices)

 

 

 

Registrant’s telephone number, including area code: (212) 930-9400


Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 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 x  No o

Indicate by check mark whether the registrant is a large accelerated filer, or a non-accelerated filer, see definition of “accelerated filer” and “large accelerated filer” in Rule 12-b-2 of the Exchange Act.

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of April 30, 2007 there were 128,166,685 shares of common stock, $0.001/par value per share of iStar Financial Inc., (“Common Stock”) outstanding.

 




iStar Financial Inc.
Index to Form 10-Q

 

 

 

Page

 

Part I.

 

Consolidated Financial Information

 

3

 

Item 1.

 

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets (unaudited) as of March 31, 2007 and December 31, 2006

 

3

 

 

 

Consolidated Statements of Operations (unaudited)—For each of the three months ended March 31, 2007 and 2006

 

4

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity (unaudited)—For the three months ended March 31, 2007

 

5

 

 

 

Consolidated Statements of Cash Flows (unaudited)—For each of the three months ended March 31, 2007 and 2006

 

6

 

 

 

Notes to Consolidated Financial Statements

 

7

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

 

Item 4.

 

Controls and Procedures

 

38

 

Part II.

 

Other Information

 

39

 

Item 1.

 

Legal Proceedings

 

39

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

Item 3.

 

Defaults Upon Senior Securities

 

39

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

39

 

Item 5.

 

Other Information

 

39

 

Item 6.

 

Exhibits

 

40

 

SIGNATURES

 

41

 

 

2




PART I.         CONSOLIDATED FINANCIAL INFORMATION

Item 1.              Financial Statements

iStar Financial Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(unaudited)

 

 

As of
March 31,

 

As of
December 31,

 

 

 

2007

 

2006

 

ASSETS

 

 

 

 

 

 

 

Loans and other lending investments, net

 

$

7,691,417

 

 

$

6,799,850

 

 

Corporate tenant lease assets, net

 

3,177,585

 

 

3,084,794

 

 

Other investments

 

444,649

 

 

407,617

 

 

Investments in joint ventures

 

366,453

 

 

382,030

 

 

Assets held for sale

 

24,124

 

 

9,398

 

 

Cash and cash equivalents

 

126,873

 

 

105,951

 

 

Restricted cash

 

28,631

 

 

28,986

 

 

Accrued interest and operating lease income receivable

 

81,703

 

 

72,954

 

 

Deferred operating lease income receivable

 

83,629

 

 

79,498

 

 

Deferred expenses and other assets

 

63,178

 

 

71,181

 

 

Goodwill

 

17,736

 

 

17,736

 

 

Total assets

 

$

12,105,978

 

 

$

11,059,995

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

180,809

 

 

$

200,957

 

 

Debt obligations

 

8,820,821

 

 

7,833,437

 

 

Total liabilities

 

9,001,630

 

 

8,034,394

 

 

Commitments and contingencies

 

 

 

 

 

Minority interest in consolidated entities

 

35,766

 

 

38,738

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Series D Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and outstanding at March 31, 2007 and December 31, 2006

 

4

 

 

4

 

 

Series E Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,600 shares issued and outstanding at March 31, 2007 and December 31, 2006

 

6

 

 

6

 

 

Series F Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and outstanding at March 31, 2007 and December 31, 2006

 

4

 

 

4

 

 

Series G Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 3,200 shares issued and outstanding at March 31, 2007 and December 31, 2006

 

3

 

 

3

 

 

Series I Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,000 shares issued and outstanding at March 31, 2007 and December 31, 2006

 

5

 

 

5

 

 

High Performance Units

 

9,800

 

 

9,800

 

 

Common Stock, $0.001 par value, 200,000 shares authorized, 126,708 and 126,565 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively

 

127

 

 

127

 

 

Options

 

1,682

 

 

1,696

 

 

Additional paid-in capital

 

3,466,129

 

 

3,464,229

 

 

Retained earnings (deficit)

 

(396,179

)

 

(479,695

)

 

Accumulated other comprehensive income (See Note 14)

 

13,273

 

 

16,956

 

 

Treasury stock (at cost)

 

(26,272

)

 

(26,272

)

 

Total shareholders’ equity

 

3,068,582

 

 

2,986,863

 

 

Total liabilities and shareholders’ equity

 

$

12,105,978

 

 

$

11,059,995

 

 

 

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

3




iStar Financial Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)

 

 

For the
Three Months Ended
March 31,

 

 

 

2007

 

2006

 

Revenue:

 

 

 

 

 

Interest income

 

$

180,860

 

$

126,048

 

Operating lease income

 

81,486

 

81,914

 

Other income

 

28,475

 

13,468

 

Total revenue

 

290,821

 

221,430

 

Costs and expenses:

 

 

 

 

 

Interest expense

 

128,539

 

93,533

 

Operating costs—corporate tenant lease assets

 

6,852

 

5,412

 

Depreciation and amortization

 

20,092

 

18,673

 

General and administrative

 

37,550

 

19,133

 

Provision for loan losses

 

5,000

 

1,000

 

Total costs and expenses

 

198,033

 

137,751

 

Income before equity in earnings from joint ventures, minority interest and other items

 

92,788

 

83,679

 

Equity in (loss) earnings from joint ventures

 

(1,351

)

286

 

Minority interest in consolidated entities

 

564

 

(248

)

Income from continuing operations

 

92,001

 

83,717

 

Income from discontinued operations

 

680

 

2,087

 

Gain from discontinued operations, net

 

1,415

 

2,182

 

Net income

 

94,096

 

87,986

 

Preferred dividend requirements

 

(10,580

)

(10,580

)

Net income allocable to common shareholders and HPU holders(1)

 

$

83,516

 

$

77,406

 

Per common share data(2):

 

 

 

 

 

Income from continuing operations per common share:

 

 

 

 

 

Basic

 

$

0.63

 

$

0.63

 

Diluted

 

$

0.62

 

$

0.62

 

Net income per common share:

 

 

 

 

 

Basic

 

$

0.64

 

$

0.67

 

Diluted

 

$

0.64

 

$

0.66

 

Weighted average number of common shares—basic

 

126,693

 

113,243

 

Weighted average number of common shares—diluted

 

127,867

 

114,357

 

Per HPU share data(2):

 

 

 

 

 

Income from continuing operations per HPU share:

 

 

 

 

 

Basic

 

$

118.93

 

$

119.27

 

Diluted

 

$

117.87

 

$

118.07

 

Net income per HPU share:

 

 

 

 

 

Basic

 

$

122.00

 

$

126.20

 

Diluted

 

$

120.93

 

$

125.00

 

Weighted average number of HPU shares—basic

 

15

 

15

 

Weighted average number of HPU shares—diluted

 

15

 

15

 

 

Explanatory Notes:


(1)    HPU holders are Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program (see Note 12).

(2)           See Note 13—Earnings Per Share for additional information.

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

4




iStar Financial Inc.
Consolidated Statement of Changes in Shareholders’ Equity
(In thousands)
(unaudited)

 

Series D
Preferred
Stock

 

Series E
Preferred
Stock

 

Series F
Preferred
Stock

 

Series G
Preferred
Stock

 

Series I
Preferred
Stock

 

HPU’s

 

Common
Stock at
Par

 

Options

 

Additional
Paid-In
Capital

 

Retained
Earnings
(Deficit)

 

Accumulated
Other
Comprehensive
Income

 

Treasury
Stock

 

 

 

Total

 

Balance at December 31, 2006

 

 

$

4

 

 

 

$

6

 

 

 

$

4

 

 

 

$

3

 

 

 

$

5

 

 

$

9,800

 

 

$

127

 

 

$

1,696

 

$

3,464,229

 

$

(479,695

)

 

$

16,956

 

 

$

(26,272

)

 

 

$

2,986,863

 

Exercise of options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14

)

312

 

 

 

 

 

 

 

 

298

 

Dividends declared—preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,580

)

 

 

 

 

 

 

(10,580

)

Issuance of stock—vested restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,233

 

 

 

 

 

 

 

 

1,233

 

Issuance of stock—DRIP/stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

355

 

 

 

 

 

 

 

 

355

 

Net income for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

94,096

 

 

 

 

 

 

 

94,096

 

Change in accumulated other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,683

)

 

 

 

 

(3,683

)

Balance at March 31, 2007

 

 

$

4

 

 

 

$

6

 

 

 

$

4

 

 

 

$

3

 

 

 

$

5

 

 

$

9,800

 

 

$

127

 

 

$

1,682

 

$

3,466,129

 

$

(396,179

)

 

$

13,273

 

 

$

(26,272

)

 

 

$

3,068,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

5




iStar Financial Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)

 

For the
Three Months Ended
March 31,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

94,096

 

$

87,986

 

Adjustments to reconcile net income to cash flows from operating activities:

 

 

 

 

 

Minority interest in consolidated entities

 

(564

)

248

 

Non-cash expense for stock-based compensation

 

4,652

 

1,326

 

Depreciation, depletion and amortization

 

21,977

 

21,300

 

Amortization of deferred financing costs

 

6,126

 

6,113

 

Amortization of discounts/premiums, deferred interest and costs on lending investments

 

(18,508

)

(17,272

)

Discounts, loan fees and deferred interest received

 

11,726

 

6,076

 

Equity in loss/(earnings) of unconsolidated entities

 

139

 

(286

)

Distributions from operations of unconsolidated entities

 

15,050

 

3,424

 

Deferred operating lease income receivable

 

(5,301

)

(3,286

)

Gain from discontinued operations, net

 

(1,415

)

(2,182

)

Provision for loan losses

 

5,000

 

1,000

 

Provision for deferred taxes

 

737

 

 

Other non-cash adjustments

 

(2,562

)

 

Changes in assets and liabilities:

 

 

 

 

 

Changes in accrued interest and operating lease income receivable

 

(8,652

)

(13,340

)

Changes in deferred expenses and other assets

 

3,053

 

(25,178

)

Changes in accounts payable, accrued expenses and other liabilities

 

(16,724

)

(17,286

)

Cash flows from operating activities

 

108,830

 

48,643

 

Cash flows from investing activities:

 

 

 

 

 

New investment originations

 

(1,031,564

)

(610,819

)

Add-on fundings under existing loan commitments

 

(350,276

)

(186,420

)

Net proceeds from sales of corporate tenant lease assets

 

34,844

 

9,043

 

Repayments of and principal collections on loans and other lending investments

 

314,927

 

474,168

 

Contributions to unconsolidated entities

 

(9,561

)

(3,158

)

Distributions from unconsolidated entities

 

7,474

 

822

 

Capital improvements for build-to-suit facilities

 

(15,996

)

(17,323

)

Capital improvement projects on corporate tenant lease assets

 

(1,217

)

(3,369

)

Other capital expenditures on corporate tenant lease assets

 

(863

)

(1,692

)

Other investing activities, net

 

220

 

 

Cash flows from investing activities

 

(1,052,012

)

(338,748

)

Cash flows from financing activities:

 

 

 

 

 

Borrowings under secured revolving credit facility

 

130,000

 

105,073

 

Repayments under secured revolving credit facility

 

(130,000

)

(105,073

)

Borrowings under unsecured revolving credit facilities

 

5,824,196

 

774,000

 

Repayments under unsecured revolving credit facilities

 

(5,641,000

)

(1,559,000

)

Borrowings under secured term loans

 

7,066

 

 

Repayments under secured term loans

 

(53,475

)

(17,056

)

Borrowings under unsecured notes

 

1,035,000

 

991,489

 

Repayments under unsecured notes

 

(200,000

)

 

Borrowings under foreign lines of credit

 

 

81,035

 

Contributions from minority interest partners

 

 

407

 

Distributions to minority interest partners

 

(319

)

(560

)

Changes in restricted cash held in connection with debt obligations

 

355

 

(8,776

)

Payments for deferred financing costs/proceeds from hedge settlements, net

 

4,993

 

(2,564

)

Shares withheld for employee taxes on stock based compensation arrangements

 

(2,988

)

(427

)

Preferred dividends paid

 

(10,580

)

(10,580

)

HPUs issued

 

 

9

 

Proceeds from exercise of options and issuance of DRIP/Stock purchase shares

 

856

 

1,001

 

Cash flows from financing activities

 

964,104

 

248,978

 

Changes in cash and cash equivalents

 

20,922

 

(41,127

)

Cash and cash equivalents at beginning of period

 

105,951

 

115,370

 

Cash and cash equivalents at end of period

 

$

126,873

 

$

74,243

 

 

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

6




iStar Financial Inc.
Notes to Consolidated Financial Statements

Note 1—Business and Organization

Business—iStar Financial Inc. (the “Company”) is a leading publicly-traded finance company focused on the commercial real estate industry. The Company 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, corporate net lease financing and equity. The Company, which is taxed as a real estate investment trust (“REIT”), seeks to deliver strong dividends and superior risk-adjusted returns on equity to shareholders by providing innovative and value added financing solutions to its customers. 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 maturities 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 mezzanine 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 maturities generally ranging from three to ten years. As part of the lending business, the Company also acquires whole loans and loan participations which present attractive risk-reward opportunities.

The Company’s corporate tenant leasing business provides capital to corporations and other owners who control facilities leased primarily 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, and many of which provide for most expenses at the facility to be paid by the 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.

Organization—The Company began its business in 1993 through private investment funds formed to capitalize on inefficiencies in the real estate finance market. In March 1998, these funds contributed their assets to the Company’s predecessor in exchange for a controlling interest in that company. The Company later acquired its former external advisor in exchange for shares of the Company’s common stock (‘‘Common Stock’’) and converted its organizational form to a Maryland corporation. As part of the conversion to a Maryland corporation, the Company replaced its former dual class common share structure with a single class of Common Stock. The Company’s Common Stock began trading on the New York Stock Exchange on November 4, 1999. Prior to this date, the Company’s Common Stock was traded on the American Stock Exchange. 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 in 1999 of TriNet Corporate Realty Trust, Inc., the acquisition in 2005 of Falcon Financial Investment Trust and the acquisition in 2005 of a significant non-controlling interest in Oak Hill Advisors, L.P. and affiliates.

Note 2—Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. These unaudited Consolidated Financial Statements and related Notes should be read in conjunction with the

7




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

Note 2—Basis of Presentation (Continued)

Consolidated Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Consolidated Financial Statements include the accounts of the Company, its qualified REIT subsidiaries, its majority-owned and controlled partnerships and other entities that are consolidated under the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” an interpretation of ARB 51 (“FIN 46R”) (see Note 6). All significant intercompany balances and transactions have been eliminated in consolidation. Certain investments in joint ventures or other entities which the Company does not control are accounted for under the equity method (see Note 6 and Note 7).

In the opinion of management, the accompanying Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s consolidated financial position at March 31, 2007 and December 31, 2006 and the results of its operations and its cash flows for the three months ended March 31, 2007 and 2006, respectively, and its changes in shareholders’ equity for the three months ended March 31, 2007. Such operating results may not be indicative of the expected results for any other interim periods or the entire year.

As of March 31, 2007, the Company’s significant accounting policies, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, have not changed materially.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Certain prior year amounts have been reclassified in the Consolidated Financial Statements and the related notes to conform to the 2007 presentation.

Note 3—Recent Accounting Pronouncements

In February 2007, the FASB released Statement of Financial Accounting Standards No. 159 (“SFAS No. 159), “The Fair Value Option for Financial Assets and Liabilities Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities at fair value and is effective for the first fiscal year beginning after November 15, 2007. The Company will adopt SFAS No. 159 on January 1, 2008, as required, and management is still evaluating the impact on the Company’s Consolidated Financial Statements.

In September 2006, the FASB released Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 clarifies the exchange price notion in the fair value definition to mean the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). This statement also clarifies that market participant assumptions should include assumptions about risk, should include assumptions about the effect of a restriction on the sale or use of an asset and should reflect its nonperformance risk (the risk that the obligation will not be fulfilled). Nonperformance risk should include the reporting entity’s credit risk. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 157 on January 1, 2008, as required, and management is still evaluating the impact on the Company’s Consolidated Financial Statements.

8




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

Note 3—Recent Accounting Pronouncements (Continued)

In July 2006, the FASB released Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109.”  FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit is the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007, as required. As a result of the implementation of FIN 48, the Company did not have any unrecognized tax benefits or any additional tax liabilities as of January 1, 2007 or as of March 31, 2007. The Company’s policy is to recognize interest expense and penalties related to uncertain tax positions, if any, as income tax expense, which is included in “General and administrative” costs on the Company’s Consolidated Statements of Operations.

In March 2006, the FASB released Statement of Financial Accounting Standards No. 156 (“SFAS No. 156”), “Accounting for Servicing of Financial Assets.”  SFAS No. 156 was issued to simplify the accounting for servicing rights and to reduce the volatility that results from the use of different measurement attributes for servicing rights and the related financial instruments used to economically hedge risks associated  with those servicing rights. SFAS No. 156 modifies the accounting for servicing rights by:  (1) clarifying when a separate asset or servicing liability should be recognized; (2) requiring a separately recognized servicing asset or servicing liability to be measured at fair value; (3) allowing entities to subsequently measure servicing rights either at fair value or under the amortization method for each class of a separately recognized servicing asset or servicing liability; (4) permitting a one-time reclassification of available-for-sale securities to trading securities; and (5) requiring separate presentation of servicing assets and servicing liabilities subsequently measured at fair value. SFAS No. 156 is effective  in annual periods beginning after September 15, 2006. The Company adopted SFAS No. 156 on January 1, 2007, as required, and it did not have a significant impact on the Company’s Consolidated Financial Statements.

In February 2006, the FASB released Statement of Financial Accounting Standards No. 155 (“SFAS No. 155”), “Accounting for Certain Hybrid Financial Instruments.”  The key provisions of SFAS No. 155 include: (1) a fair value measurement option for certain hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation; (2) clarification that only the simplest separations of interest payments and principal payments qualify for the exception afforded to interest-only strips (IOs) and principal-only strips (POs) from derivative accounting under paragraph 14 of Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), “Accounting for Derivative Instruments and Hedging Activities,” (thereby narrowing such exception); (3) a requirement that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or whether they are hybrid instruments that contain embedded derivatives requiring bifurcation; (4) clarification that concentrations of credit risk in the form of subordination are not embedded derivatives; and (5) elimination of the prohibition on a qualifying special-purpose entity (QSPE) holding passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. SFAS No. 155 is effective for annual periods beginning after September 15, 2006. The Company adopted SFAS No. 155 on January 1, 2007, as required, and it did not have a significant impact on the Company’s Consolidated Financial Statements.

9




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

Note 4—Loans and Other Lending Investments

The following is a summary description of the Company’s loans and other lending investments ($ in thousands)(1):

 

 

 

 

# of

 

Principal

 

Carrying Value as of

 

Effective

 

 

 

 

 

 

 

 

 

 

 

Underlying

 

Borrowers

 

Balances

 

March 31,

 

December 31,

 

Maturity

 

Contractual Interest

 

Contractual Interest

 

Principal

 

Participation

 

Type of Investment

 

 

 

Property Type

 

In Class

 

Outstanding

 

2007

 

2006

 

Dates

 

Payment Rates(2)

 

Accrual Rates(2)

 

Amortization(3)

 

Features(4)

 

Senior Mortgages(5)(7)

 

Office/Residential/
Retail/Industrial,
R&D/Mixed
Use/Hotel/
Entertainment,
Leisure/Other

 

 

139

 

 

 

$

4,688,217

 

 

$

4,648,298

 

 

$

3,999,093

 

 

2007 to 2026

 

Fixed: 6.5% to 30%
Variable: LIBOR + 1.6% to LIBOR + 7%

 

Fixed: 6.5% to 30%
Variable: LIBOR + 1.6% to LIBOR + 7%

 

 

Yes

 

 

 

No

 

 

Subordinate Mortgages(6)(7)

 

Office/Residential/
Retail/Mixed
Use/Hotel/
Entertainment,
Leisure/Other

 

 

24

 

 

 

701,123

 

 

694,797

 

 

615,031

 

 

2007 to 2017

 

Fixed: 5% to 10.5%
Variable: LIBOR + 1.49%
to LIBOR +7.75%

 

Fixed: 7.32% to 25%
Variable: LIBOR + 1.49%
to LIBOR + 10%

 

 

Yes

 

 

 

No

 

 

Corporate/ Partnership Loans(6)(7)

 

Office/Residential/
Retail/Industrial,
R&D/Mixed
Use/Hotel/
Entertainment,
Leisure/Other

 

 

40

 

 

 

1,586,063

 

 

1,572,602





 

 

1,347,249





 

 

2007 to 2046

 

Fixed: 7.62% to 17.5%
Variable: LIBOR + 0.6%
to LIBOR +7%

 

Fixed: 7.62% to 17.5%
Variable: LIBOR + 0.6%
to LIBOR + 14%

 

 

Yes

 

 

 

No

 

 

Total Loans

 

 

 

 

 

 

 

 

 

 

 

6,915,697

 

 

5,961,373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

(57,201

)

 

(52,201

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Loans, net

 

 

 

 

 

 

 

 

 

 

 

6,858,496

 

 

5,909,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Lending Investments—Securities(6)(7)(8)

 

Residential/Retail/
Industrial, R&D/
Entertainment,
Leisure/Other

 

 

9

 

 

 

859,154

 

 

832,921


 

 

 

890,678


 

 

 

2007 to 2023

 

Fixed: 6% to 9.25%
Variable: LIBOR + 1.4%
to LIBOR + 5.63%

 

Fixed: 6% to 17.00%
Variable: LIBOR + 1.4%
to LIBOR + 5.63%

 

 

Yes

 

 

 

No

 

 

Total Loans and Other Lending Investments, net

 

 

 

 

 

 

 

 

 

 

 

$

7,691,417

 

 

$

6,799,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Explanatory Notes:


(1)                Details (other than carrying values) are for loans outstanding as of March 31, 2007.

(2)                Substantially all variable-rate loans are based on 30-day LIBOR and reprice monthly. The 30-day LIBOR on March 31, 2007 was 5.32%. As of March 31, 2007, nine loans with a combined carrying value of $243.1 million have a stated accrual rate that exceeds the stated pay rate.

(3)                Certain loans require fixed payments of principal resulting in partial principal amortization over the term of the loan with the remaining principal due at maturity.

(4)                Under some of the loans, the Company may receive additional payments representing additional interest from participation in available cash flow from operations of the underlying real estate collateral.

(5)                Includes one loan with a carrying value of $47.1 million which the Company has ceased accruing the contractual exit fees as of January 1, 2006.

(6)                As of March 31, 2007, five loans with a combined carrying value of $134.3 million have stated accrual rates of up to 25%, however, no interest is due until their scheduled maturities ranging from 2009 to 2046.

(7)                As of March 31, 2007, includes foreign denominated loans with combined carrying values of approximately £160.6 million, 245.8 million, CAD 22.2 million and SEK 239.5 million. Amounts in table have been converted to U.S. dollars based on exchange rates in effect at March 31, 2007.

(8)                Included in Other Lending Investments are $245.0 million of securities which mature in less than one year, $250.3 million that mature in one to five years and $332.2 million that mature in five to ten years.

10




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

Note 4—Loans and Other Lending Investments (Continued)

During the three months ended March 31, 2007 and 2006, respectively, the Company and its affiliated ventures originated or acquired an aggregate of approximately $1.00 billion and $590.2 million in loans and other lending investments, funded $350.3 million and $186.4 million under existing loan commitments, and received principal repayments of $314.9 million and $474.2 million.

As of March 31, 2007, the Company had 86 loans with unfunded commitments. The total unfunded commitment amount was approximately $3.09 billion, of which $16.6 million was discretionary and $3.07 billion was non-discretionary.

The Company has reflected provisions for loan losses of approximately $5.0 million and $1.0 million in its results of operations during the three months ended March 31, 2007 and 2006, respectively. These provisions represent increases in loan loss reserves based on management’s evaluation of general market conditions, the Company’s internal risk management policies and credit risk ratings system, industry loss experience, the likelihood of delinquencies or defaults, the credit quality of the underlying collateral and changes in the size of the loan portfolio.

During the year ended December 31, 2006, the Company recorded total charge-offs of $8.7 million, related to three separate loans. In March 2007, under a consensual agreement with the borrower, the Company took title to a building that served as the sole collateral for a senior mortgage loan. The Company intends to hold the asset for use and has recorded the fair value of the building in “Corporate tenant lease assets, net” on the Company’s Consolidated Balance Sheet (see Note 5 for further detail). The Company determined that the fair value of the building and other net assets received approximated the net carrying value of the loan and no gain or loss was recorded as a result of the transaction. In addition, the Company determined that a portion of the fair value of the building was attributable to intangible assets that were separately recorded in “Other investments,” on the Company’s Consolidated Balance Sheet (see Note 7 for further detail).

Changes in the Company’s reserve for loan losses were as follows (in thousands):

Reserve for loan losses, December 31, 2005

 

$

46,876

 

Additional provision for loan losses

 

14,000

 

Charge-offs

 

(8,675

)

Reserve for loan losses, December 31, 2006

 

52,201

 

Additional provision for loan losses

 

5,000

 

Reserve for loan losses, March 31, 2007

 

$

57,201

 

 

Note 5—Corporate Tenant Lease Assets

During the three months ended March 31, 2007 and 2006, respectively, the Company acquired an aggregate of approximately $20.1 million and $10.7 million in CTL assets and disposed of CTL assets for net proceeds of approximately $34.8 million and $9.0 million. In addition, in March 2007, the Company received title to a building with a fair value of $156.8 million that served as collateral for a senior mortgage loan. The Company allocated $120.4 million of this fair value to CTL assets and the remainder was allocated to CTL intangibles (see Note 4 and Note 7 for further discussion). As of March 31, 2007 and December 31, 2006, the Company had unamortized intangible assets related to CTL purchases of approximately $76.0 million and $41.4 million, respectively, and included these in “Other investments” on the Company’s Consolidated Balance Sheets.

11




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

Note 5—Corporate Tenant Lease Assets (Continued)

The Company’s investments in CTL assets, at cost, were as follows (in thousands):

 

 

As of
March 31,
2007

 

As of
December 31,
2006

 

Facilities and improvements

 

$

2,772,038

 

 

$

2,670,424

 

 

Land and land improvements

 

766,221

 

 

762,530

 

 

Less: accumulated depreciation

 

(360,674

)

 

(348,160

)

 

Corporate tenant lease assets, net

 

$

3,177,585

 

 

$

3,084,794

 

 

 

Under certain leases, the Company receives reimbursements from customers for certain facility operating expenses including common area costs, insurance and real estate taxes. Customer expense reimbursements for the three months ended March 31, 2007 and 2006 were approximately $7.0 million and $6.7 million, respectively, and are included as a reduction of “Operating costs—corporate tenant lease assets” on the Company’s Consolidated Statements of Operations.

The Company is subject to expansion option agreements with three existing customers which could require the Company to fund and to construct up to 171,000 square feet of additional adjacent space on which the Company would receive additional operating lease income under the terms of the option agreements. In addition, upon exercise of such expansion option agreements, the corporate customers would be required to simultaneously extend their existing lease terms for additional periods ranging from six to ten years.

As of March 31, 2007, the Company had $52.3 million of unfunded commitments, of which $0.3 million was discretionary and $52.1 million was non-discretionary related to eight CTL investments. These commitments generally fall into two categories: (1) pre-approved capital improvement projects; and (2) new or additional construction costs. Upon completion of the improvements or construction, the Company will receive additional operating lease income from the customers. In addition, the Company has $24.2 million of non-discretionary unfunded commitments related to 19 existing customers in the form of tenant improvements which were negotiated between the Company and the customers at the commencement of the leases.

As of March 31, 2007, there were four CTL assets with an aggregate book value of $24.1 million classified as “Assets held for sale” on the Company’s Consolidated Balance Sheet. One facility with a book value of $15.4 million sold on April 6, 2007 for net proceeds of approximately $17.6 million and realized a gain of approximately $2.2 million.

On March 30, 2007, the Company sold one CTL asset for net proceeds of approximately $15.0 million and realized a gain of approximately $0.5 million. On February 1, 2007, the Company sold one CTL asset for net proceeds of approximately $19.9 million and realized a gain of approximately $0.9 million. On March 6, 2006, the Company sold two CTL assets for net proceeds of approximately $9.0 million and realized a gain of approximately $2.2 million.

The Company capitalized interest on build-to-suit CTL assets of approximately $0.6 million and $0.3 million for the three months ended March 31, 2007 and 2006, respectively.

Note 6—Joint Ventures and Minority Interest

Investments in unconsolidated joint ventures—Income or loss generated from the Company’s joint venture investments is included in “Equity in (loss) earnings from joint ventures” on the Company’s Consolidated Statements of Operations.

12




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

Note 6—Joint Ventures and Minority Interest (Continued)

At March 31, 2007, the Company had a 50% investment in Corporate Technology Centre Associates, LLC (“CTC”), whose external member is Corporate Technology Centre Partners, LLC. The Company’s investment in this joint venture at March 31, 2007 was $4.6 million. The Company accounts for this investment under the equity method because the Company’s joint venture partner has certain participating rights that give it shared control over the joint venture.

In addition, the Company has 47.5% investments in Oak Hill Advisors, L.P. and Oak Hill Credit Alpha MGP, 48.1% investments in OHSF GP Partners II LLC and OHSF GP Partners, LLC, and a 45.5% investment in Oak Hill Credit Opportunities MGP, LLC (collectively, “Oak Hill”). The Company’s carrying value in these ventures at March 31, 2007 was $189.9 million. The Company has determined that all of these entities are variable interest entities and that an external member is the primary beneficiary. As such, the Company accounts for these ventures under the equity method. Upon acquisition of the interests in Oak Hill there was a difference between the Company’s book value of the equity investments and the underlying equity in the net assets of Oak Hill of approximately $200.2 million. The Company allocated this value to identifiable intangible assets of approximately $81.8 million and goodwill of $118.4 million. As of March 31, 2007, the unamortized balance related to intangible assets for these investments was approximately $63.0 million.

In addition, the Company, through its majority owned subsidiary TimberStar Operating Partnership, L.P. (“TimberStar”), has a 46.7% investment in TimberStar Southwest Holdco LLC (“TimberStar Southwest”). The Company’s investment in this joint venture at March 31, 2007 was $172.0 million. The joint venture’s carrying value for the timberlands owned at March 31, 2007 was $1.11 billion. The joint venture had total assets of $1.98 billion and total liabilities of $1.61 billion as of March 31, 2007 and a net loss of $9.4 million for the period ended March 31, 2007. Included in the liabilities is $1.60 billion of debt that is non-recourse to the Company. The Company accounts for this investment under the equity method because the Company’s joint venture partners have certain participating rights giving them shared control over the venture.

On March 7, 2007, the Company guaranteed two 0.5 million deferred payments on behalf of a European partnership venture. The maximum potential exposure under these guarantees was 1.1 million as of March 31, 2007. On April 20, 2007, the Company closed on a commitment to invest in a European fund that will own the partnership that received the guarantees. The funding of a portion of the commitment to this fund has provided enough liquidity to relieve the guarantees of the deferred payments. A liability related to these guarantees was not recorded.

Minority Interest—Income or loss allocable to external partners in consolidated entities is included in “Minority interest in consolidated entities” on the Company’s Consolidated Statements of Operations.

As of March 31, 2007, the Company consolidates eight entities in which it either holds a majority interest or where it is a primary beneficiary under FIN 46R, and records the minority interest of the external partner(s) in “Minority interest in consolidated entities” on the Company’s Consolidated Balance Sheets.

13




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

Note 7—Other Investments

Other investments consist of the following items (in thousands):

 

 

As of
March 31,
2007

 

As of
December 31,
2006

 

Strategic investments

 

$

221,180

 

 

$

213,348

 

 

Timber and timberlands, net of accumulated depletion

 

145,048

 

 

146,910

 

 

CTL intangibles, net of accumulated amortization

 

76,002

 

 

41,358

 

 

Marketable securities

 

2,419

 

 

6,001

 

 

Other investments

 

$

444,649

 

 

$

407,617

 

 

 

In March 2007, the Company received title to a building that served as collateral for a senior mortgage loan and recorded CTL intangibles of approximately $36.4 million related to this building (see Note 4 for further detail).

As of March 31, 2007, the Company has $221.2 million invested in 28 separate real estate related funds or other strategic investment opportunities within niche markets. Of these 28 investments, 15 or $143.1 million are accounted for under the cost method. The remaining 13 investments, totaling $78.1 million are accounted for under the equity method. As of March 31, 2007, the Company had $53.4 million of non-discretionary unfunded commitments related to nine strategic investments.

Note 8—Other Assets and Other Liabilities

Deferred expenses and other assets consist of the following items (in thousands):

 

 

As of
March 31,

 

As of
December 31,

 

 

 

2007

 

2006

 

Deferred financing fees, net

 

 

$

13,130

 

 

 

$

14,217

 

 

Leasing costs, net

 

 

14,106

 

 

 

13,294

 

 

Intangible assets, net

 

 

10,165

 

 

 

10,673

 

 

Derivative assets

 

 

3,357

 

 

 

9,333

 

 

Other assets

 

 

22,420

 

 

 

23,664

 

 

Deferred expenses and other assets

 

 

$

63,178

 

 

 

$

71,181

 

 

 

Accounts payable, accrued expenses and other liabilities consist of the following items (in thousands):

 

 

As of
March 31,

 

As of
December 31,

 

 

 

2007

 

2006

 

Accrued interest payable

 

$

85,842

 

 

$

84,954

 

 

Accrued expenses

 

22,216

 

 

39,420

 

 

Security deposits from customers

 

23,598

 

 

23,581

 

 

Derivative liabilities

 

18,782

 

 

23,286

 

 

Other liabilities

 

30,371

 

 

29,716

 

 

Accounts payable, accrued expenses and other liabilities

 

$

180,809

 

 

$

200,957

 

 

 

14




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

Note 9—Debt Obligations

As of March 31, 2007 and December 31, 2006, the Company has debt obligations under various arrangements with financial institutions as follows (in thousands):

 

 

Maximum

 

Carrying Value as of

 

Stated

 

Scheduled

 

 

 

Amount

 

March 31,

 

December 31,

 

Interest

 

Maturity

 

 

 

Available

 

2007

 

2006

 

Rates(1)

 

Date(1)

 

Secured revolving credit facility:

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

 

$

500,000

 

$

 

 

$

 

 

LIBOR + 1%—2%(2)

 

January 2009(3)

 

Unsecured revolving credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit(4)

 

2,200,000

 

1,112,229

 

 

923,068

 

 

LIBOR + 0.525%(5)

 

June 2011

 

Total revolving credit facilities

 

$

2,700,000

 

1,112,229

 

 

923,068

 

 

 

 

 

 

Secured term loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by CTL asset

 

 

 

126,411

 

 

127,648

 

 

7.44%

 

April 2009

 

Secured by CTL assets

 

 

 

138,752

 

 

141,978

 

 

6.8%—8.8%

 

Various through 2026

 

Secured by investments in corporate bonds and commercial mortgage backed securities

 

 

 

186,042

 

 

227,768

 

 

LIBOR + 0.22%—0.65%

 

August 2007

 

Secured by CTL asset

 

 

 

58,414

 

 

58,634

 

 

6.41%

 

January 2013

 

Total secured term loans

 

 

 

509,619

 

 

556,028

 

 

 

 

 

 

Debt premium

 

 

 

5,949

 

 

6,088

 

 

 

 

 

 

Total secured term loans

 

 

 

515,568

 

 

562,116

 

 

 

 

 

 

Unsecured notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR + 0.34% Senior Notes

 

 

 

500,000

 

 

500,000

 

 

LIBOR + 0.34%

 

September 2009

 

LIBOR + 0.35% Senior Notes(6)

 

 

 

500,000

 

 

 

 

LIBOR + 0.35%

 

March 2010

 

LIBOR + 0.39% Senior Notes

 

 

 

400,000

 

 

400,000

 

 

LIBOR + 0.39%

 

March 2008

 

LIBOR + 0.55% Senior Notes

 

 

 

225,000

 

 

225,000

 

 

LIBOR + 0.55%

 

March 2009

 

LIBOR + 1.25% Senior Notes

 

 

 

 

 

200,000

 

 

LIBOR + 1.25%

 

March 2007

 

4.875% Senior Notes

 

 

 

350,000

 

 

350,000

 

 

4.875%

 

January 2009

 

5.125% Senior Notes

 

 

 

250,000

 

 

250,000

 

 

5.125%

 

April 2011

 

5.15% Senior Notes

 

 

 

700,000

 

 

700,000

 

 

5.15%

 

March 2012

 

5.375% Senior Notes

 

 

 

250,000

 

 

250,000

 

 

5.375%

 

April 2010

 

5.5% Senior Notes(6)

 

 

 

300,000

 

 

 

 

5.5%

 

June 2012

 

5.65% Senior Notes

 

 

 

500,000

 

 

500,000

 

 

5.65%

 

September 2011

 

5.7% Senior Notes

 

 

 

367,022

 

 

367,022

 

 

5.7%

 

March 2014

 

5.8% Senior Notes

 

 

 

250,000

 

 

250,000

 

 

5.8%

 

March 2011

 

5.85% Senior Notes(6)

 

 

 

250,000

 

 

 

 

5.85%

 

March 2017

 

5.875% Senior Notes

 

 

 

500,000

 

 

500,000

 

 

5.875%

 

March 2016

 

5.95% Senior Notes

 

 

 

889,669

 

 

889,669

 

 

5.95%

 

October 2013

 

6% Senior Notes

 

 

 

350,000

 

 

350,000

 

 

6%

 

December 2010

 

6.05% Senior Notes

 

 

 

250,000

 

 

250,000

 

 

6.05%

 

April 2015

 

6.5% Senior Notes

 

 

 

150,000

 

 

150,000

 

 

6.5%

 

December 2013

 

7% Senior Notes

 

 

 

185,000

 

 

185,000

 

 

7%

 

March 2008

 

8.75% Notes

 

 

 

50,331

 

 

50,331

 

 

8.75%

 

August 2008

 

Total unsecured notes

 

 

 

7,217,022

 

 

6,367,022

 

 

 

 

 

 

Debt discount

 

 

 

(103,228

)

 

(93,636

)

 

 

 

 

 

Fair value adjustment to hedged items (see Note 11)

 

 

 

(18,782

)

 

(23,137

)

 

 

 

 

 

Total unsecured notes

 

 

 

7,095,012

 

 

6,250,249

 

 

 

 

 

 

Other debt obligations

 

 

 

100,000

 

 

100,000

 

 

LIBOR + 1.5%

 

October 2035

 

Debt discount

 

 

 

(1,988

)

 

(1,996

)

 

 

 

 

 

Total other debt obligations

 

 

 

98,012

 

 

98,004

 

 

 

 

 

 

Total debt obligations

 

 

 

$

8,820,821

 

 

$

7,833,437

 

 

 

 

 

 

 

Explanatory Notes:


(1)    All interest rates and maturity dates are for debt outstanding as of March 31, 2007. Some variable-rate debt obligations are based on 30-day LIBOR and reprice monthly. Foreign variable-rate debt obligations are based on 30-day UK LIBOR for British pound borrowing, 30-day EURIBOR for euro borrowing and 30-day Canadian LIBOR for Canadian dollar borrowing. The 30-day LIBOR rate on March 31, 2007 was 5.32%. The 30-day UK LIBOR, EURIBOR and Canadian LIBOR rates on March 31, 2007 were 5.47%, 3.86% and 4.26%, respectively. Other variable-rate debt obligations are based on 90-day LIBOR and reprice every three months. The 90-day LIBOR rate on March 31, 2007 was 5.35%.

(2)             This facility has an unused commitment fee of 0.25% on any undrawn amounts.

15




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

Note 9—Debt Obligations (Continued)

(3)             Maturity date reflects one-year “term-out” extension at the Company’s option.

(4)             As of March 31, 2007, the line of credit included foreign borrowings of £125.5 million, 292.0 million, and CAD 23.5 million. Amounts in the table have been converted to U.S. dollars based on exchange rates in effect at March 31, 2007.

(5)             This facility has an annual commitment fee of 0.125%.

(6)    On March 9, 2007, the Company issued $300 million of 5.5% Senior Notes due 2012, $250 million of 5.85% Senior Notes due 2017 and $500 million of three-month LIBOR + 0.35% Senior Notes due 2010.

The Company’s primary source of short-term funds is a $2.20 billion unsecured revolving credit facility. Under the facility the Company is required to meet certain financial covenants. As of March 31, 2007, there is approximately $1.04 billion available to draw under the facility. In addition, the Company has one secured revolving credit facility for which availability is based on percentage borrowing base calculations.

The Company’s debt obligations contain covenants that are both financial and non-financial in nature. Significant financial covenants include limitations on the Company’s ability to incur indebtedness beyond specified levels and a requirement to maintain specified ratios of unsecured indebtedness compared to unencumbered assets. As a result of the upgrades of the Company’s senior unsecured debt ratings by S&P, Moody’s and Fitch in January and February 2006, the financial covenants in some series of the Company’s publicly held debt securities are not operative.

On January 9, 2007, in connection with a consent solicitation of the holders of the respective notes, the Company amended certain covenants in its 7% Senior Notes due 2008, 4.875% Senior Notes due 2009, 6% Senior Notes due 2010, 5.125% Senior Notes due 2011, 6.5% Senior Notes due 2013, and 5.7% Senior Notes due 2014 (collectively, the “Notes”).  Holders of approximately 95.43% of the aggregate principal amount of the Notes consented to the solicitation.  The purpose of the amendments was to conform most of the covenants to the covenants contained in the indentures governing the senior notes issued by the Company since it achieved an investment grade rating from S&P, Moody’s and Fitch.  In connection with the consent solicitation the Company paid an aggregate fee of $6.5 million to the consenting note holders, which will be amortized into expense over the remaining term of the Notes.  In addition, the Company incurred advisory and professional fees aggregating $2.4 million, which were recorded as expense and included in “General and administrative” on the Company’s Consolidated Statement of Operations for the three months ended March 31, 2007.

Significant non-financial covenants include a requirement in some series of its publicly-held debt securities that the Company offer to repurchase those securities at a premium if the Company undergoes a change of control. As of March 31, 2007, the Company believes it is in compliance with all financial and non-financial covenants on its debt obligations.

Capital Markets Activity—During the three months ended March 31, 2007, the Company issued $300 million and $250 million aggregate principal amounts of fixed-rate Senior Notes bearing interest at annual rates of 5.5% and 5.85% and maturing in 2012 and 2017, respectively, and $500 million of variable-rate Senior Notes bearing interest at three-month LIBOR + 0.35% maturing in 2010. The Company primarily used the proceeds from the issuance of these securities to repay outstanding indebtedness under its unsecured revolving credit facility. In connection with this issuance, the Company settled forward starting interest rate swap agreements with notional amounts totaling $200 million and ten-year terms matching that of the $250 million Senior Notes due in 2017. The Company also entered into interest rate swap agreements to swap the fixed interest rate on the $300 million Senior Notes due in 2012 for a variable interest rate (see Note 11 for further detail). In addition, the Company’s $200 million of LIBOR + 1.25% Senior Notes matured in March 2007.

16




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

Note 9—Debt Obligations (Continued)

As of March 31, 2007, future scheduled maturities of outstanding long-term debt obligations are as follows (in thousands)(1):

2007 (remaining nine months)

 

$

186,042

 

2008

 

635,331

 

2009

 

1,218,018

 

2010

 

1,105,622

 

2011

 

2,143,499

 

2012

 

1,000,000

 

Thereafter

 

2,650,358

 

Total principal maturities

 

8,938,870

 

Unamortized debt discounts/premiums, net

 

(99,267

)

Fair value adjustment to hedged items (see Note 11)

 

(18,782

)

Total debt obligations

 

$

8,820,821

 

 

Explanatory Note:


(1)             Assumes exercise of extensions to the extent such extensions are at the Company’s option.

Note 10—Shareholders’ Equity

DRIP/Stock Purchase Plan—During the three months ended March 31, 2007 and 2006, the Company issued a total of approximately 7,400 and 12,700 shares of its Common Stock, respectively, through the dividend reinvestment and direct stock purchase plans. Net proceeds during the three months ended March 31, 2007 and 2006 were approximately $0.4 million and $0.5 million, respectively. There are approximately 2.2 million shares available for issuance under the plan as of March 31, 2007.

Stock Repurchase Program—The Company has not repurchased any shares under the stock repurchase program since November 2000.

Note 11—Risk Management and Derivatives

Risk management—In the normal course of its on-going business operations, the Company encounters economic risk. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different points in time and potentially at different bases, than its interest-earning assets. Credit risk is the risk of default on the Company’s lending investments that results from a property’s, borrower’s or corporate tenant’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of loans and other lending investments due to changes in interest rates or other market factors, including the rate of prepayments of principal and the value of the collateral underlying loans, the valuation of CTL facilities held by the Company and changes in foreign currency exchange rates.

Use of derivative financial instruments—Interest rate swaps used as cash flow hedges involve the receipt of a future benchmark rate in exchange for a benchmark rate established when the swap is entered into on an agreed upon notional amount. As of March 31, 2007, such derivatives were used to hedge

17




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

Note 11—Risk Management and Derivatives (Continued)

$250 million of forecasted issuances of debt. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions in 2008.

Interest rate swaps used as a fair value hedge involve the receipt of fixed-rate amounts in exchange for variable rate payments over the life of the agreement without exchange of the underlying principal amount. At March 31, 2007, such derivatives were used to hedge the change in fair value associated with $1.25 billion of existing fixed-rate debt. The effect of these hedges is reflected on the Company’s balance sheet as a $18.8 million adjustment to the hedged items.

As of March 31, 2007, no derivatives were designated as hedges of net investments in foreign operations. Additionally, derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements, foreign exchange rate movements, and other identified risks, but do not meet the strict hedge accounting requirements of SFAS No. 133.

The following table represents the notional principal amounts and fair values of interest rate swaps by class (in thousands):

 

 

Notional
Amount
as of
March 31,
2007

 

Notional
Amount
as of
December 31,
2006

 

Fair Value
as of
March 31,
2007

 

Fair Value
as of
December 31,
2006

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward-starting interest rate swaps

 

$

250,000

 

 

$

450,000

 

 

$

3,315

 

 

$

9,180

 

 

Fair value hedges

 

1,250,000

 

 

950,000

 

 

(18,782

)

 

(23,137

)

 

Total interest rate swaps

 

$

1,500,000

 

 

$

1,400,000

 

 

$

(15,467

)

 

$

(13,957

)

 

 

The following table presents the maturity, notional amount, and weighted average interest rates expected to be received or paid on USD interest rate swaps at March 31, 2007 ($ in thousands)(1):

 

 

Fixed to Floating-Rate

Maturity for Years Ending December 31,

 

 

 

Notional
Amount

 

Receive
Rate

 

Pay
Rate

2007(remaining nine months)

 

$

 

 

 

 

 

2008

 

                —