iStar Financial is a real estate investment trust focused on commercial real estate. The company provides secured and unsecured loans, debt, and lease financing to commercial real estate owners. iStar focuses on the top tier of the commercial real estate market and doesn't borrow money to make investments, which means iStar is less risky than its competitors, which depend on borrowing to acquire properties - which inflates either profits or losses depending on whether investments go well.
iStar's capital structure subjects it to interest rate risk, since an overall drop in interest rates will translate into lower revenues from the loans iStar makes to real estate owners. As a REIT, the company faces competition from almost 300 other such vehicles throughout the United States, as well as investment and commercial banks and asset managers.
iStar's lending business accounts for 50% of the company's portfolio; long-term debt, which has longer maturities, accounts for 13%. The leasing business, which provides capital to customers leasing to credit-worthy tenants, makes up 32% of assets. Risk of default on these obligations is minimized by investing only in properties with long-term leases that are used as headquarters or distribution facilities. Both loans and lease financing can range from $20-$150 million.
In 2009, SFI incurred a net loss of $769.8 million on revenues of $893.3 million. This represents a 323.5% increase in net loss and a 34.0% decrease in total revenues from 2008, when the company lost $181.8 million on $1.35 billion in revenues.
SFI has two reportable business segments:
* iStar Depends on Leverage, Subjecting it to Volatile Interest Rates and Credit Markets: To maintain its REIT structure, iStar must pay out at least 90% of earnings to shareholders (100% to completely avoid taxation.)  As a result, the company must continuously issue debt, subjecting it to two risks: higher interest rates in expansionary periods and difficulty securing funding during periods of tight credit. iStar attempts to manage the first risk by matching variable interest rate assets with similar liabilities. So if, for instance, the company must pay a variable rate on a certain portion of its debt, it will make a similar amount of loans that bring in variable payments. iStar depends on its credit rating to ensure financing even when liquidity in the capital markets is low.
* The Fremont Portfolio Acquisition Increases Exposure to the Condominium Market: A large part of Fremont's real estate portfolio, in which iStar acquired a 30% interest, consists of loans for the construction of condominiums. Current credit conditions have made it substantially harder to obtain a single-family residential mortgage. If families cannot get mortgages, they will not purchase condominium units. This means that the construction companies borrowing from iStar and Fremont won't be able to repay their loans.
iStar's most direct competition includes other REITs, which manage portfolios of a variety of real estate assets and compete for the same capital from investors seeking exposure to the real estate sector. Some of these include:
iStar differentiates itself from competitors by focusing exclusively on the top 5-10% of the commercial real estate market. Because the company is an on-balance sheet lender, unlike many other REITs, it can offer a high level of flexibility when arranging financing for customers. iStar is also more conservative than many of its competitors, employing less leverage.