FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-55396
Prospectus Supplement
(to Prospectus dated February 28, 2001)
$350,000,000
[LOGO]
8 3/4% SENIOR NOTES DUE 2008
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We are offering $350,000,000 aggregate principal amount of our 8 3/4% Senior
Notes due 2008. The Notes will mature on August 15, 2008. We will pay interest
on the Notes on each February 15 and August 15, commencing February 15, 2002.
We may redeem the Notes prior to their maturity at a make-whole premium. In
addition, until August 15, 2004, we may redeem up to 35% of the aggregate
principal amount of the Notes with the proceeds from certain equity offerings at
the redemption price set forth in this prospectus supplement. If we undergo a
change of control, we may be required to purchase Notes from our holders.
The Notes are our unsecured senior obligations.
The Notes are not expected to be listed on any securities exchange or
included in any quotation system.
This prospectus supplement and the related prospectus include additional
information about the terms of the Notes, including optional redemption prices
and covenants.
SEE "RISK FACTORS," WHICH BEGINS ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT,
FOR A DISCUSSION OF CERTAIN OF THE RISKS YOU SHOULD CONSIDER BEFORE INVESTING IN
THE NOTES.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PER NOTE TOTAL
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Public Offering Price....................................... 100.000% $350,000,000
Underwriting Discounts and Commissions...................... 2.000% $ 7,000,000
Proceeds to Us (before unreimbursed expenses)............... 98.000% $343,000,000
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We expect that delivery of the Notes will be made in New York, New York on
or about August 16, 2001.
DEUTSCHE BANC ALEX. BROWN BEAR, STEARNS & CO. INC.
LEAD MANAGER CO-LEAD MANAGER
SOLE BOOK-RUNNING MANAGER
FLEET SECURITIES, INC. UBS WARBURG LLC
The date of this prospectus supplement is August 9, 2001.
FORWARD-LOOKING STATEMENTS
We make statements in this document and the documents we incorporate by
reference that are considered "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are usually identified by the use of words such as
"will," "anticipates," "believes," "estimates," "expects," "projects," "plans,"
"intends," "should" or similar expressions. We intend these forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995 and are
including this statement for purposes of complying with those safe harbor
provisions. These forward-looking statements reflect our current views about our
plans, strategies and prospects, which are based on the information currently
available to us and on assumptions we have made. Although we believe that our
plans, intentions and expectations as reflected in or suggested by those
forward-looking statements are reasonable, we can give no assurance that the
plans, intentions or expectations will be achieved. We have discussed in this
document some important risks, uncertainties and contingencies which could cause
our actual results, performance or achievements to be materially different from
the forward-looking statements we make in these documents.
We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. In
evaluating forward-looking statements, you should consider these risks and
uncertainties, together with the other risks described from time to time in our
reports and documents filed with the SEC, and you should not place undue
reliance on those statements.
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SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus supplement and accompanying
prospectus, as well as the documents incorporated by reference in them, before
making an investment decision. All references to "we" or "us" in this prospectus
supplement refer to iStar Financial Inc. and its consolidated subsidiaries,
unless the context indicates otherwise.
ISTAR FINANCIAL INC.
OVERVIEW
We are the largest publicly-traded finance company focused exclusively on
the commercial real estate industry. We provide structured financing to private
and corporate owners of high-quality real estate nationwide, including senior
and junior mortgage debt, corporate net lease financing and corporate mezzanine
and subordinated capital. Our objective is to generate consistent and attractive
returns on our invested capital by providing 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 creativity and service. Our ability to provide value-added
financial solutions has consistently enabled us to realize margins and returns
on capital that are more attractive than those earned by many other commercial
finance companies. As of June 30, 2001, our total assets and tangible book
equity were approximately $4.1 billion and $1.8 billion, respectively, and our
revenue and EBITDA for the 12 months ended June 30, 2001 were $486.4 million and
$439.0 million, respectively.
We began our business in 1993 through private investment funds formed to
take advantage of the lack of well-capitalized lenders capable of servicing the
needs of high-end customers in our markets. During our eight-year history, we
have structured or originated nearly $5 billion of financing commitments. We
have never realized a loss of principal or interest on any investment we have
funded.
Since becoming a public company in March 1998, we have also expanded our
platform by making a limited number of strategic corporate acquisitions, which
we financed primarily using our equity capital. In September 1998, we acquired
the loan origination and servicing business of Phoenix Home Life Insurance
Company. In December 1998, we acquired the structured finance portfolio of our
largest private competitor, an affiliate of Lazard Freres & Co. LLC. In
November 1999, we acquired TriNet Corporate Realty Trust, Inc., the then largest
publicly-traded company specializing in corporate tenant leasing for owners of
office and industrial facilities. In March 2000, we acquired American Corporate
Real Estate, Inc., a leading privately-held investment firm whose senior
management team had extensive experience in the corporate tenant leasing
industry. As a result of these corporate acquisitions, we have improved the
diversification of our product lines.
By capitalizing on our competitive strengths, we have delivered consistent
financial performance, developed a high-quality, diversified asset base and
established ourselves as a reliable provider of financial solutions for our
customers. We have consistently grown our adjusted earnings and have maintained
strong credit statistics in each quarter since June 1998, our first quarter as a
public company. Between that quarter and the quarter ended June 30, 2001, we
grew our adjusted earnings on a diluted basis from approximately $22.0 million
to $63.5 million.
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The graphs below show our quarterly adjusted earnings and our credit
statistics since our first full quarter as a public company.
QUARTERLY ADJUSTED EARNINGS(1)
(IN THOUSANDS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
JUN-98 $21,967
Sep-98 $23,298
Dec-98 $24,796
Mar-99 $25,983
Jun-99 $27,488
Sep-99 $28,876
Dec-99 $45,303
Mar-00 $54,399
Jun-00 $57,144
Sep-00 $58,909
Dec-00 $60,056
1-Mar $61,722
1-Jun $63,545
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(1) We generally define adjusted earnings to mean GAAP net income before
depreciation and amortization. For a further discussion of our adjusted
earnings, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Adjusted Earnings."
CREDIT STATISTICS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GAAP EBITDA/INTEREST GAAP EBITDA/FIXED CHARGES(1)
6/30/98 3.3x 3.3x
9/30/98 2.5x 2.5x
12/31/98 2.3x 2.2x
3/31/99 2.5x 2x
6/30/99 2.5x 2x
9/30/99 2.5x 2x
12/31/99 2.7x 2.1x
3/31/00 2.6x 2.1x
6/30/00 2.5x 2x
9/30/00 2.4x 2x
12/31/00 2.4x 2x
3/31/01 2.4x 2x
6/30/01 2.6x 2.1x
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(1) Fixed charges is defined as the sum of GAAP interest expense and preferred
stock dividends.
COMPETITIVE STRENGTHS
We believe the following competitive strengths distinguish our business
model from other commercial finance enterprises and contribute to our ability to
generate consistent returns on our invested capital.
CREATIVE CAPITAL SOLUTIONS
We target markets where customers require a knowledgeable provider of
capital who is capable of originating customized and flexible financial
products. We provide our customers with a level of service and creativity
generally unavailable from other lenders. We do not participate in
distribution-based commercial finance businesses, which are typically
characterized by intense price competition and lower profit margins, such as
conduit lending and mortgage-backed securities.
We believe that we have a reputation in the marketplace for delivering
unique financing solutions and a high level of service to our customers in a
reliable and credible fashion. Since beginning our business in 1993, we have
provided more than $1.6 billion in financing to customers who have sought our
expertise more than once.
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As a result of our focus, we have generated consistent and attractive
returns on our asset base. The graph below shows our returns on average book
assets, after interest expense, since June 1998, our first full quarter as a
public company.
RETURN ON AVERAGE BOOK ASSETS(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
6/30/98 7.2%
9/30/98 6.0%
12/31/98 5.3%
3/31/99 5.9%
6/30/99 6.0%
9/30/99 6.4%
12/31/99 6.5%
3/31/00 6.6%
6/30/00 6.7%
9/30/00 6.7%
12/31/00 6.8%
3/31/01 7.0%
6/30/01 7.2%
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(1) Return on average book assets is defined as the sum of annualized quarterly
adjusted earnings and preferred dividends divided by the average book value
of assets outstanding during the quarter.
ASSET QUALITY AND DIVERSIFICATION
Throughout our operating history, we have focused on maintaining
diversification of our asset base by product line, asset type, obligor, property
type and geographic region. Asset diversification is a key part of our risk
management strategy. The graphs below depict the diversification of our asset
base based upon the gross book values of our assets as of June 30, 2001.
ASSET TYPE DIVERSIFICATION PROPERTY TYPE DIVERSIFICATION GEOGRAPHIC DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
FIRST MORTGAGES 26%
Second Mortgages 8%
Corporate/Partnership/Other 22%
Corporate Tenant Leases 44%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INDUSTRIAL/R&D 10%
Resort/Entertainment 8%
Apartment/Residential 4%
Homebuilder/Land 1%
Retail 5%
Hotel 20%
Mixed Use 4%
Office 48%
Various 0.01%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
NORTH CENTRAL 2%
Central 7%
South 16%
Southwest 2%
West 31%
Northwest 5%
Southeast 9%
Mid-Atlantic 7%
Northeast 21%
Secured first mortgages and corporate tenant lease assets together comprise
approximately 70% of our asset base. The weighted average "first dollar" and
"last dollar" loan-to-value ratios on our loan assets were 31.8% and 71.4%,
respectively, as of June 30, 2001. "First dollar" and "last dollar"
loan-to-value ratios represent the average beginning and ending points of our
lending exposure in the aggregate capitalization of the underlying assets or
companies that we finance.
In addition, as of June 30, 2001, 52% of our corporate tenants had actual or
implied investment grade credit ratings. Our corporate tenants include leading
companies such as FedEx Corporation, Hilton Hotels Corporation, International
Business Machines Corporation, Nike, Inc., Verizon Communications, Inc. and
Wells Fargo Bank.
MATCH FUNDING DISCIPLINE
Our objective is to match fund our liabilities and assets with respect to
maturities and interest rates. This means that we seek to match the maturities
of our financial obligations with
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the maturities of our investments. Match funding allows us to reduce the risk of
having to refinance our liabilities prior to the maturities of our assets. In
addition, we match fund interest rates with like-kind debt (i.e., fixed-rate
assets are financed with fixed-rate debt, and floating-rate assets are financed
with floating-rate debt), through the use of hedges such as interest rate swaps,
or through a combination of these strategies. This allows us to reduce the
impact of changing interest rates on our earnings. Our objective is to limit
volatility from a 100 basis point move in short-term interest rates to no more
than 2.5% of annual adjusted earnings. As of June 30, 2001, a 100 basis point
change in short-term interest rates would have impacted our second quarter
adjusted earnings by approximately 1.4%.
SIGNIFICANT EQUITY BASE
We have approximately $1.8 billion of tangible book equity and a
debt-to-book equity ratio of 1.2x as of June 30, 2001. We believe that we are
one of the most strongly capitalized asset-based finance companies. Our
tax-advantaged structure as a real estate investment trust and our ability to
operate with less overhead, as a percentage of revenues, than many other
commercial finance companies enable us to generate higher returns on our
invested capital without excessive reliance on leverage.
EXPERIENCED MANAGEMENT
The ten members of our executive management team have an average of more
than 20 years of experience in the fields of real estate finance, private
investment, capital markets, transaction structuring, risk management and loan
servicing, providing us with significant expertise in the key disciplines
required for success in our business. We emphasize long-term, incentive-based
compensation, such as stock options and grants of restricted common stock,
rather than cash compensation, and none of our employees is compensated based on
the volume of investment originations. Our directors and employees directly own
approximately 7% of our outstanding common stock on a fully-diluted basis, which
had a market value of $176.5 million based upon the last reported sale price of
our common stock on August 8, 2001. Our executive management team is supported
by approximately 125 employees operating from six primary offices nationwide.
TAX-ADVANTAGED CORPORATE STRUCTURE
Because of our focus on commercial real estate finance, we are able to
qualify as a real estate investment trust, or "REIT," under the Internal Revenue
Code. Since we are taxed as a REIT, we do not pay corporate-level taxes in most
circumstances. This tax-advantaged structure enables us to produce higher
returns on our invested capital compared to taxable finance companies, while
utilizing significantly less leverage than most taxable finance companies. The
graphs below show our debt-to-book equity ratios and our returns on average
common book equity since our first full quarter as a public company.
DEBT-TO-BOOK EQUITY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
6/30/98 0.7X
9/30/98 1.3x
12/31/98 1.1x
3/31/99 1.2x
6/30/99 1.2x
9/30/99 1.1x
12/31/99 1.1x
3/31/00 1.1x
6/30/00 1.2x
9/30/00 1.2x
12/31/00 1.2x
3/31/01 1.2x
6/30/01 1.2x
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RETURN ON AVERAGE COMMON BOOK EQUITY(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
6/30/98 11.7%
9/30/98 12.3%
12/31/98 13.0%
3/31/99 13.6%
6/30/99 14.1%
9/30/99 14.7%
12/31/99 14.8%
3/31/00 15.1%
6/30/00 15.5%
9/30/00 16.1%
12/31/00 16.7%
3/31/01 17.3%
6/30/01 17.5%
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(1) Return on average common book equity is defined as annualized quarterly
adjusted earnings divided by the average common book value of equity
outstanding during the quarter.
OUR TARGET MARKETS AND PRODUCT LINES
We believe we are the largest dedicated participant in a $100-$150 billion
niche of the approximately $2.1 trillion commercial real estate market,
consisting of the $1.5 trillion commercial mortgage market and the $600 billion
single-user market for corporate office and industrial facilities. Our primary
product lines include structured finance, portfolio finance, corporate tenant
leasing, corporate finance and loan acquisition. Our real estate lending assets
consist of mortgages secured by real estate collateral, loans secured by equity
interests in real estate assets, and secured and unsecured loans to corporations
engaged in real estate or real estate-related businesses. Our corporate tenant
lease assets consist of office and industrial facilities that we typically
purchase from, and lease back to, a diversified group of creditworthy corporate
tenants as a form of financing for their businesses. Our leases are generally
long-term, and typically provide for all expenses at the facility to be paid by
the corporate tenant on a "triple net" basis. 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 graph below shows the composition of our asset base by product line,
based on the gross book value of our assets as of June 30, 2001.
PRODUCT LINE DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CORPORATE TENANT LEASING 44%
Loan Acquisition 9%
Corporate Finance 13%
Structured Finance 25%
Portfolio Finance 9%
INVESTMENT STRATEGY
Our investment strategy focuses on the origination of structured mortgage,
corporate and lease financings backed by high-quality commercial real estate
assets located in major U.S. metropolitan markets. Because we deliver the
intensive structuring expertise required by our customers, we are able to avoid
significant direct competition from other capital providers. We focus on
developing direct relationships with borrowers and corporate tenants, as opposed
to
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sourcing transactions through intermediaries, and offer our customers added
value in the form of specific lending expertise, flexibility, certainty and
post-closing support. We also take advantage of market anomalies in the real
estate financing markets when we believe credit is mispriced by other providers
of capital, such as the spread between lease yields and the yields on corporate
tenants' underlying credit obligations. In addition, we have developed a
disciplined process for screening potential investments prior to beginning our
formal underwriting and commitment process called the "Six Point
Methodology-SM-." We also have an intensive underwriting process in place for
all potential investments.
RISK MANAGEMENT
We have comprehensive, pro-active and hands-on risk management systems
centered around a fully-integrated risk management team of over 50
professionals, including dedicated expertise in asset management, corporate
credit, loan servicing, project management and engineering. We manage our risk
exposure by diversifying our asset base and using conservative assumptions
during our underwriting of potential investments. We utilize information
received from our risk management professionals on a real-time basis to monitor
the performance of our asset base and to quickly identify and address potential
credit issues. In addition, although we have not realized any losses of
principal or interest on our investments since our inception, we nonetheless
maintain and regularly evaluate financial reserves to protect against potential
future losses.
FINANCING STRATEGY
Our financing strategy revolves around three primary principles. First, we
maintain significantly lower leverage than other commercial finance companies
and a large tangible equity capital base. We target a consolidated debt-to-book
equity ratio of 1.5x to 2.0x, which is significantly lower than most other
commercial finance companies. Second, we maintain access to a broad array of
capital resources from a diverse group of lending sources, such as committed
secured and unsecured credit facilities, term loans, corporate bonds and our own
proprietary matched funding program, iStar Asset Receivables, or "STARs-SM-." In
doing so, we seek to insulate our business from potential fluctuations in the
availability of capital. Third, we seek to match fund our liabilities and assets
to minimize the risk that we have to refinance our liabilities prior to the
maturities of our assets, and to reduce the impact of changing interest rates on
our earnings.
RECENT DEVELOPMENTS
On July 23, 2001, we reported adjusted earnings for the quarter ended
June 30, 2001 of $63.5 million on a diluted basis, up from $57.1 million for the
quarter ended June 30, 2000. EBITDA for the second quarter 2001 increased to
$108.1 million from $105.1 million for the second quarter 2000. Adjusted
earnings and EBITDA for the 12 months ended June 30, 2001 were $244.2 million
and $439.0 million, respectively.
In the second quarter of 2001, we achieved returns on average book assets
and average common book equity of 7.2% and 17.5%, respectively, while total debt
remained at 1.2x book equity. Our EBITDA interest coverage ratio and fixed
charge coverage ratio (interest expense and preferred dividends) for the second
quarter 2001 improved to 2.6x and 2.1x, respectively, from 2.5x and 2.0x for the
second quarter 2000.
During the second quarter of 2001, we closed 11 new financing commitments
totaling $358.1 million. In addition, we funded $12.8 million under three
pre-existing commitments and received $304.0 million in principal repayments.
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During the second quarter of 2001, we extended the maturity of a
$350.0 million unsecured credit facility until May 2002, and we extended the
maturity of a $500.0 million secured credit facility until August 2003. Both
facilities were extended at their pre-existing terms. In addition, our
subsidiary repaid its $100.0 million aggregate principal amount of 7.30%
unsecured notes due May 2001.
Subsequent to the end of the second quarter 2001, we completed a
$300.0 million revolving credit facility with a group of leading financial
institutions. This new facility matures in 2004, including a one-year extension
at our option, and replaces two prior credit facilities maturing in 2002
(including the $350.0 million facility referenced above). For a further
discussion of this new facility, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
In January 2001, Moody's Investors Service, Inc. upgraded our corporate
senior unsecured rating to "Ba1" from "Ba2," and the credit ratings on our
perpetual preferred stock to "Ba3" from "B1," citing our successful investments,
our improved capital profile, and the improved match funding of our long-term
liabilities and long-term assets.
In addition, in April 2001, Standard & Poor's Ratings Services upgraded our
corporate senior unsecured credit rating to "BB+" from "BB," and the credit
ratings on our perpetual preferred stock to "B+" from "B," citing our "improving
track record as a real estate financing/investment concern, strong
capitalization and asset quality experience, favorable returns, and improving
funding flexibility."
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Our principal executive offices are located at 1114 Avenue of the Americas,
New York, New York 10036, and our telephone number is (212) 930-9400. Our
website is www.istarfinancial.com. Our six primary regional offices are located
in Atlanta, Boston, Dallas, Denver, Hartford and San Francisco. iStar Asset
Services, our loan servicing subsidiary, is located in Hartford, and iStar Real
Estate Services, our corporate facilities management division, is headquartered
in Atlanta.
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THE OFFERING
Issuer.................................... iStar Financial Inc.
Securities Offered........................ $350,000,000 principal amount of 8 3/4% Senior Notes due
2008.
Maturity.................................. August 15, 2008.
Interest Rate............................. 8 3/4% per year (calculated using a 360-day year).
Interest Payment Dates.................... Each February 15 and August 15, beginning on
February 15, 2002. Interest on the Notes being offered
by this prospectus supplement will accrue from
August 16, 2001.
Ranking................................... The Notes are our unsecured senior obligations and rank
PARI PASSU to our existing and future unsecured senior
indebtedness and, to the extent we incur subordinated
indebtedness in the future, senior to such indebtedness.
The Notes will be effectively subordinated to all
indebtedness of our subsidiaries. As of June 30, 2001,
giving pro forma effect to the issuance of the Notes and
the application of the net proceeds thereof, the
aggregate amount of outstanding indebtedness of our
subsidiaries would have been approximately $1.8 billion.
Optional Redemption....................... The Notes are redeemable prior to their maturity at a
make-whole premium. See "Description of Notes--Optional
Redemption."
Optional Redemption after Equity
Offerings............................... At any time (which may be more than once) on or before
August 15, 2004, we can choose to redeem up to a total
of 35% of the aggregate principal amount of Notes we
issue under the indenture for 108.75% of their face
amount plus accrued interest with money that we raise in
one or more equity offerings, as long as:
- we redeem the Notes within 60 days after
completing the equity offering; and
- at least 65% of the aggregate principal amount of
the Notes we issue under the indenture remain
outstanding.
Change of Control Offer................... If a change in control of our Company occurs, we must
give holders of the Notes the opportunity to sell us
their Notes at 101% of their face amount, plus accrued
interest.
Certain Indenture Provisions.............. The indenture governing the Notes contains covenants
limiting our and our subsidiaries' ability to:
- incur indebtedness;
- issue preferred stock of subsidiaries;
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- pay dividends or make other distributions;
- repurchase equity interests or subordinated
indebtedness;
- enter into transactions with affiliates;
- merge or consolidate with another person; or
- sell, lease or otherwise dispose of all or
substantially all of our assets.
These covenants are subject to a number of important
limitations and exceptions. See "Description of Notes--
Certain Covenants."
Use of Proceeds........................... We will use the net proceeds from the sale of the Notes
to repay outstanding indebtedness. See "Use of
Proceeds."
Risk Factors.............................. Investing in the Notes involves substantial risks. See
"Risk Factors" for a description of certain of the risks
you should consider before investing in the Notes.
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RISK FACTORS
This section describes some, but not all, of the risks of purchasing Notes
in the offering. You should carefully consider these risks, in addition to the
other information contained or incorporated by reference in this document,
before purchasing Notes. In connection with the forward-looking statements that
appear in this document, you should carefully review the factors discussed below
and the cautionary statements referred to in "Forward-Looking Statements."
RISKS RELATED TO THE OFFERING
WE HAVE OTHER INDEBTEDNESS
As of June 30, 2001, on a pro forma basis after giving effect to this
offering and the use of proceeds as described in "Use of Proceeds," our
outstanding debt will be approximately $2.2 billion. Our ability to make
scheduled payments of principal or interest on, or to refinance, our
indebtedness depends on our future performance, which, to a certain extent, is
subject to general economic, financial, competitive and other factors beyond our
control.
THE INDENTURE CONTAINS COVENANTS THAT RESTRICT OUR ACTIVITIES
The indenture contains covenants that place restrictions on our ability to,
among other things, incur additional indebtedness, to create liens or other
encumbrances, to make restricted payments, to sell or otherwise dispose of all
or substantially all of our assets, and to merge or consolidate with other
entities. Further, although our failure to comply with those covenants could
constitute an event of default under the indenture, which would result in the
acceleration of the Notes, the event of default under the indenture probably
would also result in the acceleration of debt under other instruments evidencing
indebtedness, because of cross-acceleration or cross-default provisions in those
instruments. The indenture does not contain covenants specifically designed to
protect holders of the Notes in case there is a material adverse change in our
financial position.
THE NOTES WILL BE STRUCTURALLY SUBORDINATED TO SUBSIDIARY DEBT
The Notes are not guaranteed by any of our subsidiaries. Our subsidiaries
hold a substantial portion of our assets. After giving pro forma effect to the
offering and the use of proceeds from it, our subsidiaries would have had
approximately $1.8 billion of indebtedness outstanding at June 30, 2001.
Creditors of a subsidiary are entitled to be paid what is due to them before
assets of the subsidiary become available for creditors of its parent. In
addition, if we were to become insolvent, the lenders on a new credit facility,
under which iStar Financial and one of its subsidiaries are co-borrowers, would
receive payments from the stock of the co-borrower subsidiary and our leasing
subsidiary that has been pledged as collateral under that facility before you
receive payments.
ABILITY TO REPURCHASE NOTES UPON CHANGE OF CONTROL MAY BE LIMITED
Upon a change of control, each holder of Notes will have the right to
require us to repurchase the holder's Notes. If there were a change of control,
but we did not have sufficient funds to pay the repurchase price for all of the
Notes which were tendered, that failure would constitute an event of default
under the indenture. Therefore, a change of control at a time when we could not
pay for Notes which were tendered as a result of the change of control could
result in holders of Notes receiving substantially less than the principal
amount of the Notes.
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AS A REIT, WE MUST DISTRIBUTE A PORTION OF OUR INCOME TO OUR STOCKHOLDERS
We must distribute at least 90% of our taxable net income to our
stockholders to maintain our REIT status. As a result, those earnings will not
be available to pay principal or interest on the Notes. Our taxable net income
has historically been lower than the cash flow generated by our business
activities, primarily because our taxable net income is reduced by non-cash
expenses, such as depreciation and amortization. As a result, our dividend
payout ratio as a percentage of free cash flow has generally been lower than our
payout ratio as a percentage of taxable net income. However, certain of our
credit facilities and the indenture governing the Notes permit us to distribute
up to 95% of our adjusted earnings. Our common stock dividends for the quarter
ended June 30, 2001 represented approximately 83% of our adjusted earnings for
that quarter.
THERE IS NO PUBLIC MARKET FOR THE NOTES
If the Notes are traded after their initial issuance, they may trade at a
discount from their initial offering price, depending upon prevailing interest
rates, the market for similar securities, our performance and certain other
factors. Historically, there has been substantial volatility in the prices of
corporate debt securities, and the price of the Notes is likely to be affected
by factors which affect the price of corporate debt securities generally. We do
not intend to apply for listing of the Notes on any securities exchange or for
inclusion of the Notes on any automated quotation system.
RISKS RELATED TO OUR BUSINESS
WE ARE SUBJECT TO REAL ESTATE LENDING RISKS
Our lending business is subject to risks, including the following:
1. Defaults by borrowers on non-recourse loans where underlying asset
values fall below the loan amount.
2. Costs and delays associated with the foreclosure process.
3. Borrower bankruptcies.
4. Possible unenforceability of loan terms, such as prepayment provisions.
5. Acts or omissions by owners or managers of the underlying assets.
6. Borrower defaults on debt senior to our loans, if any.
7. Where debt senior to our loans exists, the presence of intercreditor
arrangements limiting 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.
8. Lack of control over the underlying asset prior to a default.
9. The illiquidity of ownership interests in real estate following a
default.
The risks described above could impact our ability to realize on our
collateral or collect expected amounts on account of our assets. Where
applicable, these risks could also require us to expend funds in order to
protect our position to the extent we were a subordinated lender. For example,
we might determine that it is in our interest to expend funds to keep a borrower
current on its obligations to a more senior lender or to purchase a senior
lender's position. Bankruptcy and borrower litigation can significantly increase
the time needed for us to acquire
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underlying collateral in the event of a default, during which time the
collateral may decline in value.
WE ARE SUBJECT TO RISKS RELATING TO OUR CORPORATE TENANT LEASING BUSINESS
Our corporate tenant leasing business is subject to risks that expiring
leases will not be renewed on favorable terms, or at all. In addition, if a
corporate tenant defaults on a lease, a replacement corporate tenant may pay a
lease rate that is lower than the rate paid by the defaulting corporate tenant.
We may have to incur significant capital expenditures for improvements in order
to attract corporate tenants to vacant space, particularly in response to
competition from newer, more updated facilities. Finally, our corporate tenant
leasing business is subject to risks associated with the fact that ownership
interests in real property are relatively illiquid and that we may not always
have full management control over assets that we hold through joint ventures
with others.
OUR OWNERSHIP IS CONCENTRATED
Two of our stockholders, SOFI-IV SMT Holdings, L.L.C. and Starwood Mezzanine
Investors L.P., and their affiliates hold approximately 61.2% of our outstanding
common stock. These entities are under common control. Although a majority of
our directors are currently unaffiliated with these stockholders, as a result of
their ownership interests, these stockholders have the power to elect a majority
of the members of our board of directors and to approve most matters which are
presented to our stockholders for a vote.
WE ARE SUBJECT TO RISKS RELATING TO ASSET CONCENTRATION
As of June 30, 2001, the average size of our lending and leasing investments
was $22.1 million. No single investment represented more than 4.0% of our total
revenues for the fiscal quarter ended June 30, 2001. While our assets are
diversified by product line, asset type, property type, geographic location and
obligor, it is possible that if we suffer losses on a portion of our larger
assets, our financial performance could be adversely impacted. See "iStar
Financial Inc.--Competitive Strengths--Asset Quality and Diversification."
OUR BUSINESS STRATEGY DEPENDS, IN PART, ON LEVERAGE, WHICH MAY CREATE OTHER
RISKS
Our business strategy involves the growth of our asset base, which we intend
to finance in significant part through the use of leverage. We currently employ
both secured and unsecured borrowings. Our ability to obtain the leverage
necessary for the execution of our business plan will ultimately depend upon our
ability to maintain credit statistics which meet market underwriting standards,
which will vary according to lenders' assessments of our creditworthiness and
the terms of the borrowings.
Leverage creates an opportunity for increased net income, but at the same
time creates risks. For example, leveraging magnifies changes in our net worth.
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 are subject to agreements and debt instruments that restrict future
indebtedness and the payment of dividends, including indirect restrictions
(through, for example, covenants requiring the maintenance of specified levels
of net worth and earnings to debt service ratios) and direct restrictions. As a
result, in the event of a deterioration in our financial condition, these
agreements or debt instruments could restrict our ability to pay dividends and
incur indebtedness.
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WE FACE A RISK OF LIABILITY UNDER ENVIRONMENTAL LAWS
Under various 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.
ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS CAN ADVERSELY AFFECT OUR BUSINESS
Our success is dependent upon the general economic conditions in the
geographic areas in which a substantial number of our assets are located.
Adverse changes in national economic conditions or in the economic conditions of
the regions in which we conduct substantial business likely would have an
adverse effect on asset values, interest rates and, accordingly, our business.
QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE QUARTERLY
PERFORMANCE
Our quarterly operating results could fluctuate and, therefore, you should
not rely on past quarterly results to be indicative of our performance in future
quarters. Factors that could cause quarterly operating results to fluctuate
include, among others, variations in our investment origination volume,
variations in the timing of prepayments, the degree to which we encounter
competition in our markets and general economic conditions.
WE MAY BE SUBJECT TO ADVERSE CONSEQUENCES IF WE FAIL TO QUALIFY AS A REAL ESTATE
INVESTMENT TRUST
We intend to operate so as to qualify as a real estate investment trust for
federal income tax purposes. We have received an opinion of our legal counsel
that, based on certain assumptions and representations, our existing legal
organization and our actual and proposed method of operation described in this
prospectus supplement, as set forth in our organizational documents and as
represented by us to our counsel, enable us to satisfy the requirements for
qualification as a real estate investment trust under the Internal Revenue Code.
Investors should be aware, however, that opinions of counsel are not binding on
the Internal Revenue Service or any court. The real estate investment trust
qualification opinion only represents the view of our counsel based on their
review and analysis of existing law, which, as to certain issues, includes no
controlling precedent. Furthermore, both the validity of the opinion and our
qualification as a real estate investment trust will depend on our continuing
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. See "Federal
Income Tax Consequences."
If we were to fail to qualify as a real estate investment trust for any
taxable year, we would not be allowed a deduction for distributions to our
stockholders in computing our taxable income and would be subject to federal
income tax, including any applicable minimum tax, on
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our taxable income at regular corporate rates. Unless entitled to relief under
certain Internal Revenue Code provisions, we also would be disqualified from
treatment as a real estate investment trust for the four subsequent taxable
years following the year during which 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 the Board of Directors to revoke the real estate
investment trust election. See "Federal Income Tax Consequences."
Even if we qualify as a real estate investment trust for federal income tax
purposes, we may be subject to certain state and local taxes on our income and
property, and may be subject to certain federal taxes. See "Federal Income Tax
Consequences."
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USE OF PROCEEDS
We estimate that the net proceeds from the issuance of the Notes will be
approximately $342.0 million, after deducting underwriting discounts and
commissions and expenses of the offering. We intend to use the net proceeds to
repay borrowings outstanding under two secured revolving credit facilities. All
of this indebtedness was incurred during the past year for working capital
purposes. At June 30, 2001, the weighted average interest rate of the borrowings
we will repay was 5.93%, and the weighted average maturity was 3.6 years. The
amount being repaid under these credit facilities will be available for future
borrowings. An affiliate of Deutsche Banc Alex. Brown Inc. is a lender under one
of the credit facilities that is being partially repaid. See "Underwriting."
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CAPITALIZATION
The following table sets forth our capitalization at June 30, 2001 on an
actual basis and as adjusted to give effect to the issuance of the Notes and the
use of the net proceeds from the issuance to repay outstanding borrowings. See
"Use of Proceeds." This table should be read in conjunction with our
consolidated financial statements and the notes contained elsewhere in this
document.
AT JUNE 30, 2001
---------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(In thousands)
Long-term debt, including current maturities(2):
iStar Asset Receivables secured notes..................... $486,437 $486,437
Secured term loans, including premium of $379............. 443,212 443,212
Secured revolving credit facilities....................... 789,851 447,851
Unsecured revolving credit facilities..................... 159,000 159,000
Unsecured subsidiary notes, less discount of $17,091(3)... 257,909 257,909
8 3/4% Senior Notes due 2008.............................. -- 350,000
Other..................................................... 16,622 16,622
---------- ----------
Total long-term debt.................................... $2,153,031 $2,161,031
Shareholders' equity........................................ 1,831,125 1,831,125
---------- ----------
Total capitalization........................................ $3,984,156 $3,992,156
========== ==========
------------
(1) As adjusted only for the effects of the offering. Subsequent to June 30,
2001, we, and one of our subsidiaries, completed a $300.0 million revolving
credit facility which matures in 2004, including a one-year extension
option, which replaced two revolving credit facilities maturing in 2002.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" for a discussion of
our long-term debt, including a description of our new credit facility.
(3) The unsecured subsidiary notes include $125.0 million principal amount of
6.75% Dealer Remarketable Securities due 2003, $100.0 million principal
amount of 7.70% Notes due 2017 and $50.0 million principal amount of 7.95%
Notes due 2006.
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SELECTED FINANCIAL DATA
The following table sets forth our selected financial data on a consolidated
historical basis as of and for the six months ended June 30, 2001 and 2000, and
as of and for the years ended December 31, 2000, 1999 and 1998.
In November 1999, we completed a number of significant corporate
transactions which increased the size of our operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Operating results for the year ended December 31, 1999 reflect the effects of
these transactions subsequent to their consummation.
S-17
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------- ------------------------------------
2001 2000 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
OPERATING DATA:
Interest income........................................ $130,816 $126,947 $268,011 $209,848 $112,914
Operating lease income................................. 98,767 93,495 185,956 42,186 12,378
Other income........................................... 13,861 8,360 17,855 12,763 2,804
---------- ---------- ---------- ---------- ----------
Total revenue...................................... 243,444 228,802 471,822 264,797 128,096
---------- ---------- ---------- ---------- ----------
Interest expense....................................... 87,728 80,559 173,891 91,184 44,697
Operating costs-corporate tenant lease assets.......... 6,510 6,284 12,809 2,246 --
Depreciation and amortization.......................... 17,586 17,871 34,514 10,340 4,287
General and administrative............................. 12,600 14,711 25,706 6,269 2,583
Provision for possible credit losses................... 3,500 3,000 6,500 4,750 2,750
Stock option compensation expense...................... 2,060 1,134 2,864 412 5,985
Advisory fees.......................................... -- -- -- 16,193 7,837
Costs incurred in acquiring external advisor(1)........ -- -- -- 94,476 --
---------- ---------- ---------- ---------- ----------
Total expenses..................................... 129,984 123,559 256,284 225,870 68,139
---------- ---------- ---------- ---------- ----------
Income before minority interest........................ 113,460 105,243 215,538 38,927 59,957
Minority interest in consolidated entities............. (136) (82) (195) (41) (54)
Gain on sale of corporate tenant lease assets.......... 1,599 974 2,948 -- --
One-time effect of change in accounting principle...... (282) -- -- -- --
Extraordinary loss on early extinguishment of debt..... (1,037) (317) (705) -- --
---------- ---------- ---------- ---------- ----------
Net income............................................. $113,604 $105,818 $217,586 $38,886 $59,903
Preferred dividend requirements........................ (18,454) (18,454) (36,908) (23,843) (944)
---------- ---------- ---------- ---------- ----------
Net income allocable to common shareholders............ $95,150 $87,364 $180,678 $15,043 $58,959
========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Dividends on common shares............................. $104,087 $99,611 $205,477 $116,813 $60,343
Adjusted earnings allocable to common
shareholders(2)...................................... 125,267 111,779 230,688 127,798 66,615
Cash flows from:
Operating activities................................. 115,937 99,788 192,469 122,549 54,915
Investing activities................................. 10,604 (186,540) (176,652) (143,911) (1,271,309)
Financing activities................................. (122,992) 85,062 (27,473) 45,660 1,226,208
EBITDA................................................. 218,774 203,673 423,943 234,927 108,941
Ratio of EBITDA to interest expense.................... 2.5x 2.5x 2.4x 2.6x(3) 2.4x
Ratio of earnings to fixed charges(4).................. 2.3x 2.3x 2.2x 2.5x(3) 2.3x
Efficiency ratio(5).................................... 6.0% 6.9% 6.1% 8.6% 12.8%
Total debt to shareholders' equity(6).................. 1.2x 1.2x 1.2x 1.1x 1.1x
BALANCE SHEET DATA:
Loans and other lending investments, net............... $2,252,255 $2,253,339 $2,225,183 $2,003,506 $1,823,761
Real estate subject to operating leases, net........... 1,634,524 1,653,512 1,670,169 1,714,284 189,942
Total assets........................................... 4,053,350 4,041,269 4,034,775 3,813,552 2,059,616
Debt obligations....................................... 2,153,031 2,138,060 2,131,967 1,901,204 1,055,719
Minority interest in consolidated entities............. 2,649 2,565 6,224 2,565 --
Shareholders' equity................................... 1,831,125 1,842,883 1,787,885 1,801,343 970,728
------------
(1) This amount represents a non-recurring, non-cash charge of approximately
$94.5 million relating to the acquisition of our external advisor.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Adjusted Earnings."
(3) Excludes a non-recurring, non-cash charge of approximately $94.5 million
relating to the acquisition of our external advisor.
(4) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of income from continuing operations before income
taxes, extraordinary items and cumulative effect of changes in accounting
principles plus "fixed charges" and certain other adjustments. "Fixed
charges" consist of interest incurred on all indebtedness related to
continuing operations (including amortization of financing costs and
discounts/premiums), and the implied interest component of our rent
obligations in the years presented.
(5) Efficiency ratio reflects: (a) the sum of general administrative expense,
stock option compensation expense and, for the period prior to November 4,
1999, advisory fees; divided by (b) total revenue for the period.
(6) Total shareholders' equity is defined as the sum of the book value of
common equity and preferred equity.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We began our business in 1993 through private investment funds formed to
take advantage of the lack of well-capitalized lenders capable of servicing the
needs of high-end customers in our markets. In March 1998, our private
investment funds contributed their approximately $1.1 billion of assets to our
predecessor, Starwood Financial Trust, in exchange for a controlling interest in
that public company. In November 1999, we acquired our leasing subsidiary,
TriNet Corporate Realty Trust, Inc., which was then the largest publicly-traded
company specializing in the net leasing of corporate office and industrial
facilities. Concurrent with the acquisition of our leasing subsidiary, we also
acquired our external advisor in exchange for shares of our common stock and
converted our organizational form to a Maryland corporation. As part of the
conversion to a Maryland corporation, we replaced our dual-class common stock
structure with a single class of common stock. This single class of common stock
began trading on the New York Stock Exchange under the symbol "SFI" in
November 1999.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED JUNE 30, 2001 COMPARED TO THE THREE-MONTH PERIOD ENDED
JUNE 30, 2000
INTEREST INCOME. Interest income decreased to approximately $63.9 million
for the three months ended June 30, 2001 from approximately $66.9 million for
the same period in 2000. This decrease in interest income is primarily a result
of the decrease in average LIBOR rates on our variable-rate lending investments,
which was partially offset by the increase in the average balance of loans and
other lending investments.
OPERATING LEASE INCOME. Operating lease income increased to $49.2 million
for the three months ended June 30, 2001 from $47.2 million for the same period
in 2000. Of this increase, $1.3 million was attributable to new corporate tenant
lease investments and $3.6 million to additional operating lease income from
existing corporate tenant lease investments owned in both quarters. These
increases in operating lease income from assets owned were partially offset by a
$2.9 million decrease in operating lease income resulting from asset
dispositions made in 2000 and 2001.
OTHER INCOME. Other income for the three-month period ended June 30, 2001
is primarily comprised of approximately $8.5 million in realized gains and
prepayment penalties from the early repayment of senior mortgages, subordinate
mortgages and corporate/partnership loans. Other income was offset by
approximately $1.2 million in losses from iStar Operating. Other income for the
three-month period ended June 30, 2000 included a prepayment penalty of
approximately $2.1 million resulting from a partial repayment of a senior
mortgage.
INTEREST EXPENSE. Our interest expense decreased by $1.4 million for the
three months ended June 30, 2001 over the same period in the prior year. The
decrease was primarily due to lower average LIBOR rates on our outstanding
floating-rate debt obligations.
OPERATING COSTS-CORPORATE TENANT LEASE ASSETS. For the three months ended
June 30, 2001, operating costs associated with corporate tenant lease assets
increased by approximately $315,000 to approximately $3.3 million, from
$3.0 million for the same period in 2000. This increase is primarily due to an
increase in unreimbursed operating expenses associated with corporate tenant
lease assets.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
approximately $84,000 to $8.8 million for the three months ended June 30, 2001
over the same period in the
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prior year. This decrease is primarily the result of corporate tenant lease
dispositions in 2000 and 2001, partially offset by additional depreciation on
capital investments.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses during
the three months ended June 30, 2001 decreased by approximately $1.3 million to
$6.5 million compared to the same period in 2000.
PROVISION FOR POSSIBLE CREDIT LOSSES. Our charge for provision for possible
credit losses increased to $1.8 million from $1.5 million as a result of
expanded lending operations as well as additional seasoning of our existing
lending portfolio. We have not realized any actual losses on any of our loan
investments to date. However, we have considered it prudent to establish a
policy of providing reserves for potential losses in the current portfolio which
may occur in the future. Accordingly, since our first full quarter as a public
company (the quarter ended June 30, 1998), management has reflected quarterly
provisions for possible credit losses in its operating results.
STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense
increased by approximately $614,000 as a result of charges relating to grants of
stock options, including amortization of the deferred charge related to options
granted to employees of our former external advisor subsequent to such personnel
becoming our direct employees as of November 4, 1999.
GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS. On April 18, 2001, we
disposed of one corporate tenant lease asset for total proceeds of $4.5 million,
and recognized a gain of approximately $1.0 million. During the second quarter
of 2000, we disposed of three assets for total proceeds of $102.3 million, and
recognized gains of approximately $440,000.
SIX-MONTH PERIOD ENDED JUNE 30, 2001 COMPARED TO THE SIX-MONTH PERIOD ENDED
JUNE 30, 2000
INTEREST INCOME--Interest income increased to approximately $130.8 million
for the six months ended June 30, 2001 from approximately $126.9 million for the
same period in 2000. This increase in interest income is a result of a higher
average balance of loans and other lending investments.
OPERATING LEASE INCOME. Operating lease income increased to $98.8 million
for the six months ended June 30, 2001 from $93.5 million for the same period in
2000. Of this increase, $2.7 million was attributable to new corporate tenant
lease investments and $7.4 million to additional operating lease income from
existing corporate tenant lease investments owned in both quarters. In addition,
joint venture income contributed $1.8 million to the increase. These increases
in operating lease income from assets owned were partially offset by a
$6.7 million decrease in operating lease income resulting from asset
dispositions made in 2000 and 2001.
OTHER INCOME. Other income for six-month period ended June 30, 2001 is
primarily comprised of approximately $9.2 million in realized gains and
prepayment penalties from the early repayment of senior mortgages, subordinate
mortgages and corporate/partnership loans, $3.0 million in participation
payments and advisory fees of approximately $868,000. Other income was offset by
approximately $842,000 in losses from iStar Operating. Other income for the
six-month period ended June 30, 2000 included prepayment fees of approximately
$5.4 million resulting from the full or partial repayments of three loans and a
fee of $1.1 million resulting from the purchase of a sub-performing loan and
subsequent restructuring of such loan to fully-performing status.
INTEREST EXPENSE. Our interest expense increased by $7.2 million for the
six months ended June 30, 2001 over the same period in the prior year. The
increase was primarily due to higher average borrowings on our credit
facilities, other term loans and unsecured notes, in addition to
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the amortization of deferred financing costs on our credit facilities. This
increase was partially offset by the lower average LIBOR rates on our
floating-rate debt obligations.
OPERATING COSTS-CORPORATE TENANT LEASE ASSETS. For the six months ended
June 30, 2001, operating costs increased by approximately $226,000 to
$6.5 million, from $6.3 million for the same period in 2000. This increase is
primarily due to an increase in unreimbursed operating expenses associated with
corporate tenant lease assets. The increase is offset by a reduction of general
and administrative costs related to the facilities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
approximately $285,000 to $17.6 million for the six months ended June 30, 2001
over the same period in the prior year. This decrease is primarily the result of
corporate tenant lease dispositions in 2000 and 2001, partially offset by
additional depreciation on capital investments.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses during
the six months ended June 30, 2001 decreased by approximately $2.1 million to
$12.6 million compared to the same period in 2000.
PROVISION FOR POSSIBLE CREDIT LOSSES. Our charge for provision for possible
credit losses increased to $3.5 million from $3.0 million as a result of
expanded lending operations as well as additional seasoning of our existing
lending portfolio. We have not realized any actual losses on any of our loan
investments to date. However, we have considered it prudent to establish a
policy of providing reserves for potential losses in the current portfolio which
may occur in the future. Accordingly, since our first full quarter as a public
company (the quarter ended June 30, 1998), management has reflected quarterly
provisions for possible credit losses in its operating results.
STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense
increased by approximately $926,000 as a result of charges relating to grants of
stock options, including amortization of the deferred charge related to options
granted to employees of our former external advisor subsequent to such personnel
becoming our direct employees as of November 4, 1999.
GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS. During the six months ended
June 30, 2001, we disposed of two corporate tenant lease assets for total
proceeds of $8.4 million, and recognized gains of approximately $1.6 million.
During the first six months of 2000, we disposed of five assets for total
proceeds of $148.3 million, and recognized gains of approximately $973,000.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. During the six months
ended June 30, 2001, we repaid a secured term loan which had an original
maturity date of December 2004. In connection with this early repayment, we
incurred certain prepayment penalties, which resulted in an extraordinary loss
on early extinguishment of debt of approximately $1.0 million during the first
quarter of 2001. During the first quarter of 2000, certain of the proceeds from
an asset disposition were used to partially repay $8.1 million of a secured term
loan. In connection with this partial paydown, we incurred certain prepayment
penalties, which resulted in an extraordinary loss on early extinguishment of
debt of $317,000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
INTEREST INCOME. Interest income increased to approximately $268.0 million
for the year ended December 31, 2000 from approximately $209.8 million for the
same period in 1999. This increase is a result of the interest generated by
$721.2 million of newly-originated loan investments during fiscal 2000 and an
additional $56.0 million funded under existing loan commitments. The increase
was partially offset by a reduction in interest earned as a result of
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principal repayments of approximately $584.5 million made to us on our loan
investments during the year ended December 31, 2000. In addition, the increase
was in part due to higher average interest rates on our variable-rate loans and
other lending investments.
OPERATING LEASE INCOME. Operating lease income increased to approximately
$186.0 million for the year ended December 31, 2000 from approximately
$42.2 million for the same period in 1999. Approximately $134.2 million of this
increase is attributable to operating lease income generated from corporate
tenant lease assets acquired in the acquisition of our leasing subsidiary, which
were included in operations for the entire year in fiscal 2000 as compared to
only approximately two months in fiscal 1999. In addition, approximately
$5.4 million resulted from income generated by $128.4 million of new corporate
tenant lease investments.
OTHER INCOME. Included in other income for fiscal year 2000 are prepayment
fees of approximately $7.9 million resulting from the full or partial repayments
of several loans, recognition of $2.1 million in connection with loan
defeasances, a forbearance fee of $1.1 million resulting from the purchase of a
sub-performing loan and subsequent restructuring of such loan to fully
performing status, a prepayment penalty of approximately $1.2 million resulting
from the refinancing of a senior mortgage and corporate loan, and approximately
$1.4 million resulting from the repayment of a senior loan held at a discount
upon the conversion of such loan to a corporate tenant lease holding pursuant to
a purchase option granted to us in connection with our original investment in
the asset.
INTEREST EXPENSE. Our interest expense increased by $82.7 million for the
year ended December 31, 2000 over the same period in the prior year.
Approximately $44.1 million of this increase is attributable to interest expense
incurred by our leasing subsidiary subsequent to its acquisition, which was
included in operations for the entire year in fiscal 2000 as compared to only
approximately two months in 1999. In addition, the increase was in part due to
higher average aggregate borrowings under our credit facilities, other term
loans and secured notes, the proceeds of which were used to fund additional
investments. The increase was also attributable to higher average interest rates
on our variable-rate debt obligations.
OPERATING COSTS-CORPORATE TENANT LEASE ASSETS. For the year ended
December 31, 2000, operating costs associated with corporate tenant lease assets
increased by approximately $10.6 million to approximately $12.8 million, net of
recoveries from corporate tenants. Such operating costs represent unreimbursed
operating expenses associated with corporate tenant lease assets. This increase
is primarily attributable to operating costs generated from corporate tenant
lease assets acquired in the acquisition of our leasing subsidiary, which were
included in operations for the entire year in fiscal 2000 as compared to only
approximately two months in 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
approximately $24.2 million to $34.5 million for the year ended December 31,
2000 over the same period in the prior year. Approximately $24.0 million of this
increase is attributable to depreciation and amortization relating to the
corporate tenant lease assets acquired in the acquisition of our leasing
subsidiary, which were included in operations for the entire year in fiscal 2000
as compared to only approximately two months in 1999.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses during
the year ended December 31, 2000 increased by approximately $19.4 million to
$25.7 million compared to the same period in 1999. These increases were
generally the result of the increased scope of our operations associated with
the acquisition of our leasing subsidiary and the direct overhead costs
associated with our former external advisor, which impacted operations for the
entire year in fiscal 2000 as compared to only approximately two months in 1999.
S-22
PROVISION FOR POSSIBLE CREDIT LOSSES. Our charge for provision for possible
credit losses increased to $6.5 million from $4.8 million as a result of
expanded lending operations as well as additional seasoning of our existing
lending portfolio.
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense
increased by approximately $2.5 million as a result of charges relating to
grants of stock options to our employees, including amortization of the deferred
charge related to options granted to employees of our former external advisor
subsequent to such personnel becoming our direct employees as of November 4,
1999.
ADVISORY FEES. There were no advisory fees during the year ended
December 31, 2000 because, as a result of our acquisition of our external
advisor, we became internally-managed. No further advisory fees will be
incurred.
COSTS INCURRED IN ACQUIRING EXTERNAL ADVISOR. Included in fiscal 1999 costs
and expenses is a non-recurring, non-cash charge of approximately $94.5 million
relating to the acquisition of our external advisor.
GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS. During the year ended 2000,
we disposed of 14 corporate tenant lease assets, including six assets held in
joint venture partnerships, for a total of $256.7 million in proceeds, and
recognized total gains of $2.9 million.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. Certain of the proceeds
from an asset disposition were used to partially repay $8.1 million of a
mortgage loan. In connection with this partial paydown, we incurred prepayment
penalties, which resulted in an extraordinary loss of $317,000 during the first
quarter of 2000. Additionally, proceeds from a joint venture asset disposition
were used to repay $16.4 million of the third-party debt of the joint venture.
In connection with this paydown, the venture incurred certain prepayment
penalties, which resulted in an extraordinary loss of $388,000 during the third
quarter of 2000. There were no comparable early extinguishments of debt during
the year ended December 31, 1999, including by our leasing subsidiary subsequent
to its acquisition on November 4, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
INTEREST INCOME. During fiscal year 1999, interest income increased by
approximately $96.9 million over interest income for fiscal year 1998. This
increase is a result of the interest generated by the loans and other
investments contributed in the 1998 recapitalization, as well as approximately
$663.4 million of loans and other lending investments newly-originated or
acquired by us during 1999 and an additional $46.4 million funded under existing
commitments. The increase was partially offset by principal repayments of
approximately $561.9 million made to us during fiscal year 1999.
OPERATING LEASE INCOME. Operating lease income increased by $29.8 million
from fiscal year 1998 to fiscal year 1999 due to approximately $26.8 million in
operating lease income generated from corporate tenant lease assets acquired in
the acquisition of our leasing subsidiary.
OTHER INCOME. Included in other income for fiscal year 1999 is a fee
associated with the repayment of a construction loan of approximately
$1.9 million, yield maintenance payments of approximately $8.1 million resulting
from the repayment of three loans, and approximately $1.0 million in additional
revenue from certain cash flow participation features on five of our loan
investments.
S-23
INTEREST EXPENSE. Our interest expense increased by $46.5 million as a
result of higher average borrowings by us on our credit facilities and other
term loans, the proceeds of which were used to fund additional loan origination
and acquisition activities. The increase was also attributable to higher average
interest rates on our variable-rate debt obligations. Further, interest expense
includes interest incurred by our leasing subsidiary subsequent to its
acquisition.
OPERATING COSTS-CORPORATE TENANT LEASE ASSETS. These operating costs
represent unreimbursed operating expenses incurred by our leasing subsidiary
subsequent to its acquisition.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased as a
result of a full year's depreciation on our pre-existing corporate tenant
leasing portfolio, as well as depreciation on our leasing subsidiary's corporate
tenant lease assets subsequent to its acquisition.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased by
approximately $3.7 million as a result of the direct overhead costs associated
with our former external advisor, as well as additional administrative expenses
associated with our leasing subsidiary subsequent to its acquisition.
PROVISION FOR POSSIBLE CREDIT LOSSES. Our charge for provision for possible
credit losses increased by approximately $2.0 million as a result of expanded
lending operations as well as additional seasoning of our existing lending
portfolio.
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense
declined by approximately $5.6 million as a result of the non-recurring charge
relating to the original grant of stock options to our former external advisor
in fiscal 1998 concurrently with the merger of our private business into a
public company in March 1998.
ADVISORY FEES. Advisory fees increased by approximately $8.4 million as a
result of fees being incurred from June 16, 1998 through year end in the prior
year and through November 4, 1999 in fiscal 1999, as well as a result of our
expanded operations. As a result of the acquisition of our external advisor, we
became internally-managed. No further advisory fees will be incurred.
COSTS INCURRED IN ACQUIRING EXTERNAL ADVISOR. Included in fiscal 1999 costs
and expenses is a non-recurring, non-cash charge of approximately $94.5 million
relating to the acquisition of our external advisor.
LIQUIDITY AND CAPITAL RESOURCES
We require capital to fund our investment activities and operating expenses.
We have significant access to capital resources to fund our existing business
plan, which includes the expansion of our real estate lending and corporate
tenant leasing businesses. Our capital sources include cash flow from
operations, borrowings under lines of credit, additional term borrowings,
long-term financing secured by our assets, unsecured financing and the issuance
of common, convertible and/or preferred equity securities. Further, we may
acquire other businesses or assets using our capital stock, cash or a
combination of the two.
The distribution requirements under the REIT provisions of the Internal
Revenue Code limit our ability to retain earnings and thereby replenish capital
committed to our operations. However, we believe that our significant capital
resources and access to financing will provide us with financial flexibility and
market responsiveness at levels sufficient to meet current and anticipated
capital requirements, including expected new lending and leasing transactions.
We believe that our existing sources of funds will be adequate for purposes
of meeting our short- and long-term liquidity needs. Our ability to meet
long-term (i.e., beyond one year)
S-24
liquidity requirements is subject to the renewal of our credit lines and/or
obtaining other sources of financing, including issuing additional debt or
equity from time to time. Any decision by our lenders and investors to enter
into such transactions with us will depend upon a number of factors, such as
compliance with the terms of our existing credit arrangements, our financial
performance, 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 such capital commitments and
the relative attractiveness of alternative investment or lending opportunities.
In July 2001, we completed a $300.0 million revolving credit facility with a
group of leading financial institutions. The new facility has an initial
maturity of July 2003, with a one-year extension at our option and another
one-year extension at the lenders' option, and replaces two prior credit
facilities maturing in 2002. The facility bears interest at LIBOR+2.125% (based
on our current credit ratings).
The table below reflects our debt obligations under various arrangements
with financial institutions as of June 30, 2001. All of our indebtedness shown
below which has not subsequently been repaid is non-recourse to iStar Financial,
the parent company, except for the
S-25
$60.0 million term loan due January 2004 and the $16.6 million of "Other debt
obligations," which are fully recourse to the parent company.
CARRYING
MAXIMUM VALUE AS OF
AMOUNT JUNE 30, SCHEDULED MATURITY
AVAILABLE 2001 STATED INTEREST RATES DATE
----------- ------------ --------------------------- --------------------
(IN THOUSANDS, UNAUDITED)
SECURED REVOLVING CREDIT FACILITIES:
Line of credit......................... $700,000 $194,100 LIBOR + 1.75%-2.25% March 2005(1)
Line of credit......................... 700,000 514,503 LIBOR + 1.40%-2.15% January 2005(1)
Line of credit......................... 500,000 81,248 LIBOR + 1.50%-1.75% August 2003(1)
UNSECURED REVOLVING CREDIT FACILITIES:
Line of credit......................... 350,000 153,000 LIBOR + 1.55% May 2002(2)
Line of credit......................... 100,000 6,000 LIBOR + 2.25% January 2002(2)
---------- ----------
Total revolving credit facilities...... $2,350,000 $948,851
==========
SECURED TERM LOANS:
Secured by real estate under operating leases....... $149,113 7.44% March 2009
Secured by corporate lending investments............ 60,000 LIBOR + 2.50% January 2004(3)
Secured by real estate under operating leases....... 40,720 Fixed: 6.00%-11.38% Various through 2011
Secured by real estate under operating leases....... 193,000 LIBOR + 1.85% July 2006
----------
Total principal of term loans....................... 442,833
Add: debt premiums.................................. 379
----------
Total secured term loans............................ 443,212
iStar Asset Receivables secured notes:
Class A............................................. 105,216 LIBOR + 0.30% August 2003(4)
Class B............................................. 94,055 LIBOR + 0.50% October 2003(4)
Class C............................................. 105,813 LIBOR + 1.00% January 2004(4)
Class D............................................. 52,906 LIBOR + 1.45% June 2004(4)
Class E............................................. 123,447 LIBOR + 2.75% January 2005(4)
Class F............................................. 5,000 LIBOR + 3.15% January 2005(4)
----------
Total iStar Asset Receivables secured notes......... 486,437
UNSECURED NOTES(5):
6.75% Dealer Remarketable Securities(6)............. 125,000 6.75% March 2013
7.70% Notes......................................... 100,000 7.70% July 2017
7.95% Notes......................................... 50,000 7.95% May 2006
----------
Total principal of unsecured notes.................. 275,000
Less: debt discount(7).............................. (17,091)
----------
Total unsecured notes............................... 257,909
OTHER DEBT OBLIGATIONS:............................... 16,622 Various Various
----------
TOTAL DEBT OBLIGATIONS:............................... $2,153,031
==========
------------
(1) Includes a one-year "term-out" extension at our option.
(2) Subsequent to June 30, 2001, we replaced both of these facilities with a
new $300.0 million revolving credit facility bearing interest at
LIBOR+2.125% (based on our current credit ratings). The new facility has an
initial maturity of July 2003 with a one-year extension at our option and
another one-year extension at the lenders' option.
(3) Includes a one-year extension at our option.
(4) Principal payments on these bonds are a function of the principal
repayments on loan assets which collateralize these obligations. The dates
indicated above represent the expected date on which the final payment would
occur for such class based on the assumptions that the loans which
collateralize the obligations are not voluntarily prepaid, the loans are
paid on their effective maturity dates and no extensions of the effective
maturity dates of any of the loans are granted. The final maturity date for
the underlying indenture on classes A, B, C, D, E and F is September 25,
2022.
(5) The notes are callable by us at any time for an amount equal to the total
of principal outstanding, accrued interest and the applicable make-whole
prepayment premium.
(6) Subject to mandatory tender on March 1, 2003, to either the dealer or our
leasing subsidiary. The initial coupon of 6.75% applies to first five-year
term through the mandatory tender date. If tendered to the dealer, the notes
must be remarketed. The rates reset upon remarketing.
(7) These obligations were assumed as part of our acquisition of our leasing
subsidiary. As part of the accounting for the purchase, these fixed-rate
obligations were considered to have stated interest rates which were below
the then
S-26
prevailing market rates at which our leasing subsidiary could issue new debt
obligations and, accordingly, we ascribed a market discount to each
obligation. Such discounts will be amortized as an adjustment to interest
expense using the effective interest method over the related term of the
obligations. As adjusted, the effective annual interest rates on these
obligations were 8.81%, 9.51% and 9.04%, for the 6.75% Dealer Remarketable
Securities, 7.70% Notes and 7.95% Notes, respectively.
At June 30, 2001, we had pay-fixed interest rate swaps with a total notional
amount of $325.0 million and a fair value (liability) of ($12.8) million. Our
pay-fixed interest rate swaps have rates ranging from 5.58% to 7.06%, and have
maturities ranging from June 2003 to December 2004. Interest rate swaps allow us
to effectively fix the rate on a portion of our outstanding floating-rate debt.
At June 30, 2001, we also had interest rate caps with a net notional amount of
$110.0 million and a fair value of $399,875. Our interest rate caps have strike
prices ranging from 7.75% to 10.00%, and have maturities ranging from
December 2004 to May 2007. Interest rate caps enable us to limit our exposure to
rising interest rates.
On May 17, 2000, we closed the inaugural offering under our proprietary
matched funding program, STARs, Series 2000-1. In the initial transaction, one
of our wholly-owned subsidiaries issued $896.5 million of investment grade bonds
secured by the subsidiary's assets, which had an aggregate outstanding principal
balance of approximately $1.2 billion at inception. Principal payments received
on the assets will be utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funds the maturity of the
underlying assets financed under the program. We initially purchased the
class F bonds at a par value of $38.2 million, which we financed with a
$27.8 million repurchase agreement maturing in May 2001 (this repurchase
agreement was repaid in April, 2001). On July 17, 2000, we sold, at par,
$5.0 million of the class F bonds to an institutional investor. For accounting
purposes, these transactions were treated as secured financings.
Moody's Investors Service, Inc., Fitch Inc. and Standard & Poor's Ratings
Services have each upgraded the ratings of the STARs(SM) bonds. The STARs(SM)
Class B bonds were upgraded to "Aaa," "AAA" and "AAA" from "Aa2," "AA" and "AA"
by Moody's, Fitch and Standard & Poor's, respectively. The STARs(SM) Class C
bonds were upgraded to "Aa3" and "AA-" from "A2" and "A+" by Moody's and Fitch,
respectively. In addition, Fitch also upgraded the STARs(SM) Class D, E and F
bonds by one notch to "A+," "BBB+" and "BBB," respectively.
In January, 2001, Moody's upgraded our corporate senior unsecured credit
rating to "Ba1" from "Ba2," and the credit ratings on our perpetual preferred
stock to "Ba3" from "B1." In addition, in April, 2001, Standard & Poor's
upgraded our corporate senior unsecured credit rating to "BB+" from "BB," and
the credit ratings on our perpetual preferred stock to "B+" from "B."
On July 2, 2001, we declared a regular quarterly cash dividend of $0.6125
per common share for the quarter ended June 30, 2001. The second quarter 2001
dividend, which was paid on July 30, 2001 to holders of record as of July 16,
2001, represented approximately 83.3% of basic adjusted earnings per share for
the second quarter.
STOCK REPURCHASE PROGRAM: The Board of Directors approved, and we have
implemented, a stock repurchase program under which we are authorized to
repurchase up to 5.0 million shares of our common stock from time to time,
primarily using proceeds from the disposition of assets and excess cash flow
from operations, but also using borrowings under our credit facilities if we
determine that it is advantageous to do so. As of both June 30, 2001 and
December 31, 2000, we had repurchased approximately 2.3 million shares at an
aggregate cost of approximately $40.7 million.
ADJUSTED EARNINGS
Adjusted earnings represents net income computed in accordance with GAAP,
before gains (losses) on sales of corporate tenant lease assets, extraordinary
items and cumulative effect, plus
S-27
depreciation and amortization, less preferred stock dividends, and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect
adjusted earnings on the same basis.
We believe that to facilitate a clear understanding of our historical
operating results, our adjusted earnings should be examined in conjunction with
net income as shown in our consolidated statements of operations. Adjusted
earnings should not be considered as an alternative to net GAAP income as an
indicator of our performance, or to cash flows from operating activities, as
determined in accordance with GAAP, as a measure of our liquidity, nor is it
indicative of funds available to fund our cash needs.
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
--------------------- ---------------------
2001 2000 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
Adjusted earnings:
Net income..................................... $113,604 $105,818 $217,586 $38,886
Add: Depreciation.............................. 17,586 17,871 34,514 11,016
Add: Allocated share of joint venture
depreciation................................. 1,905 1,442 3,662 365
Add: Amortization of deferred financing
costs........................................ 10,432 5,288 13,140 6,121
Add: Costs incurred in acquiring external
advisor...................................... -- -- -- 94,476
Less: Preferred dividends...................... (18,454) (18,454) (36,908) (23,843)
Less: Net income allocable to class B
shares(1).................................... -- -- -- (826)
Add: Cumulative effect of change in accounting
principle(2)................................. 282 -- -- --
Less: Gain on sale of corporate tenant lease
assets....................................... (1,599) (974) (2,948) --
Add: Extraordinary loss -- early extinguishment
of debt...................................... 1,037 317 705 --
-------- -------- -------- --------
Adjusted earnings allocable to common
shareholders:
Basic.......................................... $124,793 $111,308 $229,751 $126,195
======== ======== ======== ========
Diluted........................................ $125,267 $111,779 $230,688 $127,798
======== ======== ======== ========
------------
(1) For the year ended December 31, 1999, net income allocable to class B
shares represents 1% of net income. On November 4, 1999, the class B shares
were exchanged for common stock in connection with the acquisition of our
leasing subsidiary and related transactions. As a result, we now have a
single class of common stock outstanding.
(2) Represents one-time effect of adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Investments and Hedging
Activities" as of January 1, 2001.
S-28
ISTAR FINANCIAL INC.
OVERVIEW
We are the largest publicly-traded finance company focused exclusively on
the commercial real estate industry. We provide structured financing to private
and corporate owners of high-quality real estate nationwide, including senior
and junior mortgage debt, corporate net lease financing and corporate mezzanine
and subordinated capital. Our objective is to generate consistent and attractive
returns on our invested capital by providing 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 creativity and service. Our ability to provide value-added
financial solutions has consistently enabled us to realize margins and returns
on capital that are more attractive than those earned by many other commercial
real estate finance companies.
We began our business in 1993 through private investment funds formed to
take advantage of the lack of well-capitalized lenders capable of servicing the
needs of high-end customers in our markets. During our eight-year history, we
have structured or originated nearly $5 billion of financing commitments. We
have never realized a loss of principal or interest on any investment we have
funded.
Since becoming a public company in March 1998, we have also expanded our
platform by making a limited number of strategic corporate acquisitions, which
we financed primarily using our equity capital. In September 1998, we acquired
the loan origination and servicing business of Phoenix Home Life Insurance
Company. In December 1998, we acquired the structured finance portfolio of our
largest private competitor, an affiliate of Lazard Freres & Co. In
November 1999, we acquired TriNet Corporate Realty Trust, Inc., the then largest
publicly-traded company specializing in corporate tenant leasing for owners of
office and industrial facilities. In March 2000, we acquired American Corporate
Real Estate, Inc., a leading privately-held investment firm whose senior
management team had extensive experience in the corporate tenant leasing
industry. As a result of these corporate acquisitions, we have improved the
diversification among our product lines.
By capitalizing on our competitive strengths, we have delivered consistent
financial performance, developed a high-quality, diversified asset base and
established ourselves as a reliable provider of financing solutions for our
customers. Our disciplined approach to our business has enabled us to adapt to
adverse economic and real estate market conditions while consistently delivering
attractive risk-adjusted returns on our invested capital. We have consistently
grown our adjusted earnings and have maintained strong credit statistics in each
quarter since June 1998, our first quarter as a public company. Between that
quarter and the quarter ended June 30, 2001, we grew our adjusted earnings from
approximately $22.0 million to $63.5 million. The graphs below show our
quarterly adjusted earnings and our credit statistics since our first full
quarter as a public company.
QUARTERLY ADJUSTED EARNINGS
(IN THOUSANDS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
JUN-98 $21,967
Sep-98 $23,298
Dec-98 $24,796
Mar-99 $25,983
Jun-99 $27,488
Sep-99 $28,876
Dec-99 $45,303
Mar-00 $54,399
Jun-00 $57,144
Sep-00 $58,909
Dec-00 $60,056
1-Mar $61,722
1-Jun $63,545
S-29
CREDIT STATISTICS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GAAP EBITDA/INTEREST GAAP EBITDA/FIXED CHARGES(1)
6/30/98 3.3x 3.3x
9/30/98 2.5x 2.5x
12/31/98 2.3x 2.2x
3/31/99 2.5x 2x
6/30/99 2.5x 2x
9/30/99 2.5x 2x
12/31/99 2.7x 2.1x
3/31/00 2.6x 2.1x
6/30/00 2.5x 2x
9/30/00 2.4x 2x
12/31/00 2.4x 2x
3/31/01 2.4x 2x
6/30/01 2.6x 2.1x
COMPETITIVE STRENGTHS
We believe the following competitive strengths distinguish our business
model from other commercial finance enterprises and contribute to our ability to
generate consistent returns on our invested capital.
CREATIVE CAPITAL SOLUTIONS
We target markets where customers require a knowledgeable provider of
capital who is capable of originating customized and flexible financial
products. We provide our customers with a level of service and creativity
generally unavailable from other lenders. We do not participate in
distribution-based commercial finance businesses, which are typically
characterized by intense price competition and lower profit margins, such as
conduit lending and mortgage-backed securities.
We believe that we have a reputation in the marketplace for delivering
unique financing solutions and a high level of service to our customers in a
reliable and credible fashion. Since beginning our business in 1993, we have
provided more than $1.6 billion in financing to customers who have sought our
expertise more than once.
As a result of our focus, we have generated consistent and attractive
returns on our asset base. The graph below shows our return on average book
assets, after interest expenses, since June 1998, our first full quarter as a
public company.
RETURN ON AVERAGE BOOK ASSETS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
6/30/98 7.2%
9/30/98 6.0%
12/31/98 5.3%
3/31/99 5.9%
6/30/99 6.0%
9/30/99 6.4%
12/31/99 6.5%
3/31/00 6.6%
6/30/00 6.7%
9/30/00 6.7%
12/31/00 6.8%
3/31/01 7.0%
6/30/01 7.2%
ASSET QUALITY AND DIVERSIFICATION
Throughout our operating history, we have focused on maintaining
diversification of our asset base by product line, asset type, obligor, property
type and geographic region. Asset diversification is a key part of our risk
management strategy. Our borrower and corporate tenant base includes more than
170 customers in a wide range of industries, and our assets are backed by over
580 underlying properties of varying types located throughout the U.S. The
graphs
S-30
below depict the diversification of our asset base, based upon the gross book
values of our assets as of June 30, 2001.
ASSET TYPE DIVERSIFICATION PROPERTY TYPE DIVERSIFICATION GEOGRAPHIC DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
FIRST MORTGAGES 26%
Second Mortgages 8%
Corporate/Partnership/Other 22%
Corporate Tenant Leases 44%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INDUSTRIAL/R&D 10%
Resort/Entertainment 8%
Apartment/Residential 4%
Homebuilder/Land 1%
Retail 5%
Hotel 20%
Mixed Use 4%
Office 48%
Various 0.01%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
NORTH CENTRAL 2%
Central 7%
South 16%
Southwest 2%
West 31%
Northwest 5%
Southeast 9%
Mid-Atlantic 7%
Northeast 21%
The table below reflects the diversification of our asset base as
represented by our 25 largest assets. The table shows the percentage these
assets represent of the total carrying value of our assets as of June 30, 2001,
and the percentage these assets represent of our total revenues for the three
months ended June 30, 2001.
TOP 25 ASSETS
--------------------
% ASSETS % REVENUE
-------- ---------
PROPERTY TYPE
Office...................................................... 18% 15%
Hotel....................................................... 15% 11%
Mixed Use................................................... 3% 2%
Retail...................................................... 5% 4%
Residential................................................. 4% 5%
Other....................................................... 6% 5%
ASSET TYPE
First Mortgages............................................. 21% 15%
Second Mortgages............................................ 5% 4%
Corporate Tenant Leases..................................... 12% 11%
Corporate/Partnership Loans................................. 12% 12%
GEOGRAPHIC REGION
West........................................................ 15% 12%
South....................................................... 11% 12%
Northeast................................................... 9% 7%
Southeast................................................... 3% 3%
Mid-Atlantic................................................ 2% 2%
Northwest................................................... 4% 3%
Other....................................................... 5% 4%
Secured first mortgages and corporate tenant lease assets together comprise
approximately 70% of our asset base. The weighted average "first dollar" and
"last dollar" loan-to-value ratios on our loan assets were 31.8% and 71.4%,
respectively, as of June 30, 2001. "First dollar" and "last dollar"
loan-to-value ratios represent the average beginning and ending points of our
lending exposure in the aggregate capitalization of the underlying assets or
companies that we finance.
In addition, as of June 30, 2001, 52% of our corporate tenants had actual or
implied investment grade credit ratings. Our corporate tenants include leading
companies such as Federal Express, Hilton Hotels, IBM, Nike, Verizon and Wells
Fargo Bank.
S-31
We employ an in-depth review process and grading system to monitor the
credit quality of our asset base over time. We assign to each asset a risk
rating ranging from "one," which indicates superior credit quality, to "five,"
which indicates inferior credit quality. Each newly-originated asset is
typically assigned an initial rating of "three," or average. Based upon our
second quarter 2001 review, the weighted average risk rating of our loan assets
and corporate tenant lease assets was 2.68 and 2.79, respectively.
MATCH FUNDING DISCIPLINE
Our objective is to match fund our liabilities and assets with respect to
maturities and interest rates. This means that we seek to match the maturities
of our financial obligations with the maturities of our investments. Match
funding allows us to reduce the risk of having to refinance our liabilities
prior to the maturities of our assets. In addition, we match fund interest rates
with like-kind debt (i.e., fixed-rate assets are financed with fixed-rate debt,
and floating-rate assets are financed with floating-rate debt), through the use
of hedges such as interest rate swaps, or through a combination of these
strategies. This allows us to reduce the impact of changing interest rates on
our earnings.
Our objective is to limit volatility from a 100 basis point move in
short-term interest rates to no more than 2.5% of annual adjusted earnings. As
of June 30, 2001, a 100 basis point change in short-term interest rates would
have impacted our second quarter adjusted earnings by approximately 1.4%.
SIGNIFICANT EQUITY BASE
We have approximately $1.8 billion of tangible book equity and a
debt-to-book equity ratio of 1.2x as of June 30, 2001. We believe that we are
one of the most strongly capitalized asset-based finance companies. Our business
model is premised on maintaining significantly lower leverage than other
traditional commercial finance companies. We target a maximum consolidated
debt-to-book equity ratio of 1.5x to 2.0x. We believe that operating within this
targeted range enables us to maintain a well-balanced, conservative and flexible
capital structure. In addition, our tax-advantaged structure as a REIT and our
ability to operate with less overhead, as a percentage of revenues, than many
other commercial finance companies enable us to generate higher returns on our
invested capital without excessive reliance on leverage.
EXPERIENCED MANAGEMENT
The ten members of our executive management team have an average of more
than 20 years of experience in the fields of real estate finance, private
investment, capital markets, transaction structuring, risk management and loan
servicing, providing us with significant expertise in the key disciplines
required for success in our business. Our culture is also highly-focused toward
on-going asset risk management. We emphasize long-term, incentive-based
compensation, such as stock options and grants of restricted common stock,
rather than cash compensation, and none of our employees is compensated based on
the volume of investment originations. Our directors and employees directly own
approximately 7% of our outstanding common stock on a fully-diluted basis, which
had a market value of $176.5 million based upon the last reported sales price of
our common stock on August 8, 2001. Our executive management team is supported
by approximately 125 employees operating from six primary offices nationwide.
TAX-ADVANTAGED CORPORATE STRUCTURE
Because of our focus on commercial real estate finance, we are able to
qualify as a REIT under the Internal Revenue Code. Since we are taxed as a REIT,
we do not pay corporate-level taxes in most circumstances. This tax-advantaged
structure enables us to produce higher returns on our invested capital compared
to taxable finance companies while utilizing significantly less leverage
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than most taxable finance companies. The graphs below show our debt-to-book
equity ratios and our returns on average common book equity since our first full
quarter as a public company.
DEBT-TO-BOOK EQUITY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
6/30/98 0.7X
9/30/98 1.3x
12/31/98 1.1x
3/31/99 1.2x
6/30/99 1.2x
9/30/99 1.1x
12/31/99 1.1x
3/31/00 1.1x
6/30/00 1.2x
9/30/00 1.2x
12/31/00 1.2x
3/31/01 1.2x
6/30/01 1.2x
RETURN ON AVERAGE COMMON BOOK EQUITY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
6/30/98 11.7%
9/30/98 12.3%
12/31/98 13.0%
3/31/99 13.6%
6/30/99 14.1%
9/30/99 14.7%
12/31/99 14.8%
3/31/00 15.1%
6/30/00 15.5%
9/30/00 16.1%
12/31/00 16.7%
3/31/01 17.3%
6/30/01 17.5%
ASSET BASE
The table below sets forth certain financial characteristics of our asset
base as of June 30, 2001.
FINANCIAL CHARACTERISTICS OF OUR ASSET BASE
LOANS LEASES
------------- --------------
($ in millions)
Gross Carrying Value........................................ $2,274 $1,698
Total Financing Commitments................................. $2,401 Not applicable
Number of Investments....................................... 61 116
Number of Underlying Properties............................. 426 161
Average Asset Size per Investment........................... $37.3 $14.6
Average Asset Size per Property............................. $5.3 $10.5
Weighted Average Maturity/Lease Term........................ 4.1 years 8.6 years
Average First Dollar Loan-to-Value(1)....................... 31.8% Not applicable
Average Last Dollar Loan-to-Value(2)........................ 71.4% Not applicable
Percentage Investment Grade Credits(3)...................... Not available 52%
------------
(1) "Average First Dollar Loan-to-Value" means the weighted average beginning
point of our lending exposure in the aggregate capitalization of the
underlying properties or companies we finance.
(2) "Average Last Dollar Loan-to-Value" means the weighted average ending point
of our lending exposure in the aggregate capitalization of the underlying
properties or companies we finance.
(3) Includes customers with implied investment grade ratings such as Accenture,
Alcatel USA, Cisco Systems and Volkswagen of America.
OUR TARGET MARKETS AND PRODUCT LINES
We believe we are the largest dedicated participant in a $100-$150 billion
niche of the approximately $2.1 trillion commercial real estate market,
consisting of the $1.5 trillion commercial mortgage market and the $600 billion
single-user market for corporate office and industrial facilities. Our primary
product lines include structured finance, portfolio finance, corporate tenant
leasing, corporate finance and loan acquisition. Our real estate lending assets
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consist of mortgages secured by real estate collateral, loans secured by equity
interests in real estate assets, and secured and unsecured loans to corporations
engaged in real estate or real estate-related businesses. Our corporate tenant
lease assets consist of office and industrial facilities that we typically
purchase from, and lease-back to, a diversified group of creditworthy corporate
tenants as a form of financing for their businesses. Our leases are generally
long-term, and typically provide for all expenses at the facility to be paid by
the corporate tenant on a "triple net" basis. 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 graph below shows the composition of our asset base by product line,
based on the gross book value of our assets as of June 30, 2001.
PRODUCT LINE DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CORPORATE TENANT LEASING 44%
Loan Acquisition 9%
Corporate Finance 13%
Structured Finance 25%
Portfolio Finance 9%
STRUCTURED FINANCE
We provide custom-tailored senior and subordinated loans ranging in size
from $20 million to $100 million to borrowers controlling institutional-quality
real estate. These loans are collateralized by single assets that are
strategically positioned within their respective market. Structured finance
loans may be either fixed- or floating-rate and are structured to meet the
specific financing needs of the borrowers, including financing related to the
acquisition, refinancing, repositioning or construction of large, high-quality
real estate. We offer borrowers a wide range of structured finance options,
including first mortgages, second mortgages, partnership loans, participating
debt and interim/bridge facilities.
PORTFOLIO FINANCE
We provide funding to regional and national borrowers who own a
geographically diverse portfolio of properties. Loans are cross-collateralized
to give borrowers the benefit of all available collateral and underwritten to
recognize the inherent diversification provided by multiple assets. Property
types generally include multifamily, suburban office, all-suite, extended stay
and limited service hotels. We structure loan terms to meet the specific
requirements of the borrower. These loans typically range in size from
$25 million to $150 million.
CORPORATE TENANT LEASING
We provide capital to corporate owners of office and industrial facilities.
Net leased facilities are generally subject to long-term leases to creditworthy
corporate tenants, and typically provide for all property expenses to be paid by
the tenant on a triple-net lease basis. Corporate tenant lease transactions
typically range in size from $20 million to $200 million.
We pursue the origination of corporate tenant lease transactions by
structuring purchase/ leasebacks and by acquiring facilities subject to existing
long-term net leases. In a purchase/ leaseback transaction, we purchase the
property from the corporate tenant and lease it back to the tenant on a
triple-net basis. The purchase/leaseback structure allows the corporate customer
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to reinvest the proceeds from the sale of its facilities into its core business,
while we capitalize on our structured financing expertise.
Our corporate tenant lease investments primarily represent a diversified
portfolio of strategic office and industrial facilities subject to net lease
agreements with creditworthy corporate tenants. The corporate tenant lease
investments we target generally involve: (1) high-quality, general-purpose real
estate with residual values that represent a discount to current market values
and replacement costs; and (2) corporate tenants that are established companies
with stable core businesses or market leaders in growing industries with
investment-grade credit strength or appropriate credit enhancements if corporate
credit strength is not sufficient.
Since acquiring our leasing subsidiary in November 1999, we have increased
the weighted average lease term of our corporate tenant lease assets from 5.6 to
8.6 years. During that time we have also executed over 7.2 million square feet
of new and renewal leases in 86 total transactions with a weighted average lease
term of 9.9 years. Throughout this leasing activity, we have emphasized early
lease renewals. Of the 2.4 million square feet of leases renewed since
June 1999, approximately 1.1 million square feet (44%) represented early
renewals where there were more than 12 months left on the primary lease term. As
of June 30, 2001, our corporate tenant lease portfolio was 96.7% leased.
As of June 30, 2001, we had more than 170 corporate customers operating in
more than ten major industry sectors, including aerospace, energy, financial
services, healthcare, hospitality, technology, manufacturing and
telecommunications. These customers include well-recognized national and
international companies, such as Accenture, FedEx Corporation, Hilton Hotels
Corporation, International Business Machines Corporation, Nike, Inc., Nokia
Corporation, Verizon Communications Inc., Volkswagen of America and Wells Fargo
Bank.
The table below summarizes our corporate tenant lease assets as of June 30,
2001.
% ANNUALIZED
OPERATING LEASE
INDUSTRY BY SIC CODE % SQUARE FEET PAYMENTS SIGNIFICANT CUSTOMERS
------------------------------------- ------------- --------------- --------------------------------------
Technology........................... 24.2% 30.1% IBM, Cisco, Mitsubishi Electronics,
Hewlett-Packard, Unisys, Microsoft.
Telecommunications................... 10.7% 18.1% Nokia, Verizon, Avaya, Alcatel
Networks, Nortel Networks, AT&T
Wireless.
Transportation Services.............. 2.7% 8.8% Federal Express, ABX Logistics (USA).
Energy & Utilities................... 7.2% 6.6% Entergy Services, Exxon-Mobil, Bay
State Gas.
Hospitality.......................... 6.6% 6.4% Hilton Hotels.
Food & Related Services.............. 8.3% 6.1% Caterair, Ralphs Grocery Co., Unified,
Western Grocers, Welch Foods.
Financial Services................... 6.4% 5.7% Wellpoint Health Networks, Arbella
Capital Corp., Blue Cross & Blue
Shield, Wells Fargo Bank.
Manufacturing........................ 13.4% 4.4% Nike, adidas America, Inc., Mast
Industries.
Automotive, Aerospace & Defense...... 6.9% 4.0% Volkswagen of America, Unison
Industries, Honeywell, TRW Space
Communications.
Professional Services................ 2.8% 3.1% Accenture, PricewaterhouseCoopers,
Parsons Infrastructure & Technology,
The Mitre Corp.
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% ANNUALIZED
OPERATING LEASE
INDUSTRY BY SIC CODE % SQUARE FEET PAYMENTS SIGNIFICANT CUSTOMERS
------------------------------------- ------------- --------------- --------------------------------------
Other Industry Sectors............... 2.0% 1.9% Central Parking System, Modern
Graphics Arts, Universal Technical
Institute.
Healthcare........................... 2.5% 2.2% Avitar, Fresenius USA, Haemonetics
Corp.
Government Services.................. 0.8% 1.4% Massachusetts Lottery, State of CA
Dept. of Transportation.
Consumer Goods....................... 5.5% 1.2% Sears Logistics, Rex Stores Corp.,
Dunham's Athleisure, Lever Brothers.
----- -----
Total................................ 100.0% 100.0%
===== =====
The table below illustrates our corporate tenant lease expirations as of
June 30, 2001.
LEASE EXPIRATIONS
% of Total
Annualized Annualized
Expiring Operating Expiring
Number of Lease Revenues Operating Lease
Year of Lease Expiration Leases Expiring ($ in thousands) Revenues
------------------------ --------------- ------------------ ---------------
2001........................................... 6 $2,627 1.2%
2002........................................... 28 11,143 5.1%
2003........................................... 20 15,276 7.0%
2004........................................... 27 24,276 11.1%
2005........................................... 16 13,984 6.4%
2006........................................... 27 27,547 12.6%
2007........................................... 15 18,562 8.5%
2008........................................... 6 7,086 3.2%
2009........................................... 11 13,703 6.3%
2010........................................... 5 7,268 3.3%
2011 and thereafter............................ 24 77,380 35.3%
--- -------- ------
Total.......................................... 185 $218,852 100.0%
=== ======== ======
CORPORATE FINANCE
We provide senior and subordinated capital to corporations engaged in real
estate or real estate-related businesses. Financing may be either secured or
unsecured and typically ranges in size from $20 million to $150 million. These
corporate loans are typically backed by real estate collateral and/or corporate
guaranty.
LOAN ACQUISITION
We acquire whole loans and loan participations which we believe present
attractive risk-reward opportunities. These loans are generally acquired at a
discount to the principal balance outstanding and may be acquired with financing
provided by the seller. We restructure many of these loans on favorable terms.
In other cases, we negotiate a payoff at a price above our basis in the loan.
Loan acquisitions typically range from $5 million to $100 million and are
collateralized by a variety of property types.
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OUR STRATEGY
Our objective is to generate consistent and attractive returns on our
invested capital by providing innovative and value-added financing solutions to
our customers. We believe we have established a market leadership position for
highly structured mortgage, corporate and mezzanine financing backed by
high-quality commercial real estate nationwide. We deliver customized financial
products to sophisticated real estate borrowers and corporate customers who
require a high level of creativity and service. Our ability to provide
value-added financial solutions has consistently enabled us to realize margins
and returns on capital that are more attractive than those earned by many other
commercial real estate lenders.
INVESTMENT STRATEGY
In order to accomplish our objective, we have implemented the following
investment strategy:
- We focus on the origination of structured mortgage, corporate and lease
financings backed by high-quality commercial real estate assets located in
major U.S. metropolitan markets.
- We offer sophisticated borrowers and corporate customers added value in
the form of specific lending expertise, flexibility, certainty and
post-closing support.
- We seek to develop direct relationships with borrowers and corporate
tenants as opposed to sourcing transactions through intermediaries.
- We avoid businesses in which there is significant direct competition from
other providers of capital.
- We take advantage of market anomalies in the real estate financing markets
when we believe credit is mispriced by other providers of capital, such as
the spread between lease yields and the yields on corporate tenants'
underlying credit obligations.
- We stress test potential investments for adverse economic and real estate
market conditions.
We source our investment transactions from our existing relationships with
real estate owners, through other direct relationships within the real estate
and corporate finance communities, and from other capital providers and advisors
who refer customers to us. We also utilize information obtained from our risk
management group to generate leads on potential investment opportunities. We
have completed over $1.6 billion of financing transactions with borrowers who
have sought our expertise more than once.
We discuss and analyze investment opportunities during regular weekly
meetings which are attended by all of our investment professionals, as well as
representatives from our legal, risk management and capital markets areas. We
have developed a process for screening potential investments called the Six
Point Methodology-SM-. The Six Point Methodology-SM- reflects the six
fundamental criteria by which we evaluate an investment opportunity prior to
beginning our formal underwriting and commitment process.
THE SIX POINT METHODOLOGY-SM-
- First, we evaluate the source of the opportunity. We prefer opportunities
where we have a direct relationship with the customer or an intermediary
who has worked with us before, because we believe that such relationships
enable us to add more value to a transaction.
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- Second, we evaluate the quality of the collateral or corporate credit, as
well as its market or industry dynamics.
- Third, we evaluate the equity or corporate sponsor, including factors such
as its reputation, financial strength and commitment to the collateral.
- Fourth, we determine whether we can implement an appropriate legal and
financial structure for the transaction given its risk profile, including
our ability to control the collateral under various circumstances.
- Fifth, we perform an alternative investment test. If we believe that we
can earn a better risk-adjusted return in a comparable asset class or
different part of the customer's capital structure, then the proposed
investment will score poorly in this category.
- Sixth, we evaluate the liquidity of the investment and our ability to
match fund the asset. A security that is too highly structured is less
desirable because it may limit our ability to obtain appropriately priced
financing for the asset, or to sell it if we ever so desire.
We have an intensive underwriting process in place for all potential
investments. This process provides for comprehensive feedback and review by all
the disciplines within our Company, including investments, credit, risk
management, legal/structuring and capital markets. Participation is encouraged
from all professionals throughout the entire origination process, from the
initial consideration of the opportunity, through the Six Point Methodology-SM-
and into the preparation and distribution of a comprehensive memorandum for our
internal and Board of Directors investment committees.
Commitments of less than $30 million require the unanimous consent of our
internal investment committee, consisting of senior management representatives
from each of our key disciplines. For commitments between $30 million and
$50 million, the further approval of our Board of Directors' investment
committee is also required. All commitments of $50 million or more must be
approved by our full Board of Directors.
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The following flow chart illustrates our formal investment origination
process, beginning with the identification of an investment opportunity through
the closing and on-going servicing of the asset:
[LOGO]
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RISK MANAGEMENT
In addition to mitigating risk through the careful underwriting and
structuring of our investments, we further pro-actively manage risk by:
(1) generating, analyzing and distributing information on-line to all our
employees about our collateral and our customers on a continuous, real-time
basis; (2) holding weekly Company-wide meetings to identify and address risk
management issues; (3) applying a comprehensive risk rating process;
(4) establishing loan loss reserves and asset impairment procedures; and
(5) managing our assets and liabilities through match funding. We believe these
risk management measures enable us to effectively manage our asset base and
minimize our risk of loss. More than 50 of our approximately 135 employees are
dedicated to our risk management platform.
COLLATERAL AND CUSTOMER MONITORING
We have comprehensive real-time risk management systems that enable us to
pro-actively monitor the performance of our asset base and to quickly identify
and address potential issues with any of our assets. Risk management
information, which is generated from numerous collateral-level controls,
extensive customer reporting requirements and on-site asset monitoring programs,
is accessible to all our employees nationwide via computer.
Our comprehensive risk management systems require the active participation
of each of our senior professionals and other employees within our regional
office infrastructure. Every employee nationwide has access, via our computer
network, to various risk management reports which provide real-time information
regarding the performance of our asset base. These reports, which are
continually updated as new customer information is received, are based on
information that is: (1) required to be provided by our customers;
(2) generated by our risk management professionals; and (3) obtained from the
public domain. Examples of risk management reports include daily payment
reports, monthly covenant reviews, monthly reserve balance reports, monthly
budget-versus-actual analyses of collateral and corporate customer performance,
leasing activity reports and quarterly risk ratings reviews. This process
ensures that risk management issues are quickly identified and that decisions
are based on the most current information available.
iStar Asset Services, or "iSAS," our rated loan servicing subsidiary, and
iStar Real Estate Services, or "iRES," our corporate tenant lease asset
management division, are critical to our asset and customer monitoring efforts.
Together, they are principally responsible for managing our asset base,
including monitoring our customers' compliance with their respective loan and
leasing agreements, collecting customer payments, and efficiently analyzing and
distributing customer performance information throughout our Company on a
real-time basis. iSAS and iRES provide daily information on the performance and
condition of our asset base. iSAS is currently rated "above average" by
Standard & Poor's and is "approved" by Fitch as a master servicer. In addition
to servicing our asset base, iSAS also provides loan servicing to third-party
institutional owners of loan portfolios.
Our loan customers are required to comply with periodic covenant tests, and
typically must submit extensive collateral performance information such as
monthly operating statements and operating budgets. We also may require
customers to deposit cash into escrow accounts to cover major capital
expenditures, such as expected re-tenanting costs, and we typically require
approval rights over major decisions impacting collateral cash flows. In many
cases, collateral cash receipts must be deposited into lock-box bank accounts
that we control. We then distribute the net cash, after our debt service, to our
customers.
We furnish on-site asset management services for most of our corporate
customers, providing us with daily information regarding the condition of our
assets. In addition, we have a
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formal annual inspection program that ensures that our corporate tenant lease
customers are complying with their lease terms. Customer lease payments are
deposited directly into lock-box accounts managed by our treasury group, and
corporate customers are required to submit financial statements on a regular
basis to our corporate credit professionals. In addition, our risk management
group monitors the wire services for important news on our customers, including
press releases, earnings announcements, credit ratings changes, research reports
relating to our corporate customers and local market conditions, and distributes
this information via email to all of our employees. All new corporate tenant
leases must be approved by our Chief Operating Officer who evaluates, with the
assistance of our credit professionals, the creditworthiness and appropriate
security, if any, required by us.
WEEKLY RISK MANAGEMENT MEETINGS
We hold weekly Company-wide meetings to identify current issues, and conduct
monthly meetings to review actual collateral performance compared to our
customers' budgets. During the weekly meetings, our regional offices connect via
videoconference with our headquarters and asset-specific issues are reviewed in
detail. At such meetings, we develop an action plan to resolve any issues which
arise. We also conduct systematic, asset-specific reviews of both our loan and
corporate tenant lease assets on a quarterly basis, as discussed below.
RISK RATING PROCESS
We have a comprehensive risk rating process that enables us to evaluate,
monitor and pro-actively manage asset-specific credit issues and identify credit
trends on a portfolio-wide basis. We conduct a detailed credit review of each
asset on a quarterly basis, and we assign individual risk ratings to each asset
ranging from "one" to "five." Attendance is mandatory for all of our
professionals, including those in our regional offices. A "one" indicates
superior credit quality, a "two" signifies better than average credit quality, a
"three" serves as an average rating, a "four" indicates that management time and
attention is required for the asset, and a "five" denotes a problem asset with
potential principal risk to us. In addition to the ratings system, we maintain a
"watch list" of assets which are generally rated "four," but which require
highly pro-active asset management to preserve their current ratings. Each
newly-originated asset is typically assigned an initial rating of "three," or
average.
Risk ratings provide a common language and uniform framework by which we can
discuss and evaluate risk and relative levels of risk across our asset base.
This is our primary early warning system and provides us with a means of
identifying assets that warrant a greater degree of monitoring and senior
management attention. In addition, this process provides a useful forum to
identify assets or markets that may offer opportunities for new business.
Lastly, the risk ratings process serves as a basis for determining our quarterly
loan loss provision and evaluating the adequacy of our reserves.
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Based upon our second quarter 2001 review, the weighted average risk rating
of our loan assets and corporate tenant lease assets was 2.68 and 2.79,
respectively.
WEIGHTED AVERAGE LOAN ASSET RISK RATINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DEC-98 2.7
Mar-99 2.6
Jun-99 2.6
Sep-99 2.6
Dec-99 2.5
Mar-00 2.6
Jun-00 2.6
Sep-00 2.6
Dec-00 2.5
Mar-01 2.5
Jun-01 2.7
1=LOWEST RISK 5=HIGHEST RISK
We consider several primary variables in determining which rating to assign
to an asset. For our loans, the seven primary risk attributes are:
- Trailing and projected collateral operating performance and debt service
coverage ratios.
- Current and estimated loan-to-value ratios.
- Local and regional economic and real estate market trends.
- Loan structure.
- Collateral condition, location and marketability.
- Borrower's source of repayment funds or ability to refinance or sell the
collateral.
- Borrower financial strength, quality of sponsorship and capital commitment
to the collateral.
For our corporate tenant leases, the five primary risk attributes are:
- Corporate tenant credit and industry dynamics.
- Remaining lease term.
- Property condition, location and marketability.
- Local and regional economic and real estate market trends.
- Our book basis in the asset.
CREDIT LOSS RESERVE POLICY AND ASSET IMPAIRMENT PROCEDURES
Our policy for establishing loan loss reserves and our asset impairment
procedures are consistent with established accounting standards. As of June 30,
2001, we had not experienced a loss of principal or interest on any asset, and
do not currently believe that the book value of any of our assets is impaired.
Our reserve levels reflect our judgment of loss potential and are evaluated
based upon the quarterly risk rating review process. The overall factors in this
evaluation include:
- General economic conditions.
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- General loss trends in the industry, including comprehensive, long-term
data on commercial mortgage delinquencies and loss severities tracked by
the American Council of Life Insurers.
- The size, diversity and geographic concentration of our asset base.
At June 30, 2001, loan loss reserves and accumulated depreciation on
corporate tenant lease assets collectively represented 205 basis points of the
book value of owned receivables, which includes loans and corporate tenant lease
assets.
ASSET/LIABILITY MANAGEMENT
Our policy is to match fund our liabilities and assets with respect to
maturities and interest rates. This means that we seek to match the maturities
of our financial obligations with the maturities of our investments. Match
funding allows us to reduce the risk of having to refinance our liabilities
prior to the maturity of our assets. In addition, we match fund interest rates
with like-kind debt (i.e., fixed-rate assets are financed with fixed-rate debt,
and floating-rate assets are financed with floating-rate debt), through the use
of hedges such as interest rate swaps, or through a combination of these
strategies. This allows us to reduce the impact of changing interest rates on
our earnings. Our objective is to limit volatility from a 100 basis point move
in short-term interest rates to no more than 2.5% of annual adjusted earnings.
As of June 30, 2001, a 100 basis point change in short-term interest rates would
have impacted our second quarter adjusted earnings by 1.4%.
FINANCING STRATEGY
Our financing strategy revolves around three primary principles that are key
to our business model:
- Maintain significantly lower leverage than other commercial finance
companies and a large tangible equity capital base.
- Develop a deep and broad array of capital sources from a diversified group
of debt and equity providers in order to insulate our business from
potential fluctuations in the availability of capital.
- Match fund our liabilities and assets to minimize the risk that we have to
refinance our liabilities prior to the maturities of our assets and to
reduce the impact of changing interest rates on our earnings.
LOWER LEVERAGE AND A LARGE TANGIBLE EQUITY CAPITAL BASE.
Our business model is premised on operating at significantly lower leverage
and maintaining a larger tangible equity capital base than many other commercial
finance companies. At June 30, 2001, our consolidated debt-to-book equity ratio
was 1.2x. We target a maximum consolidated debt-to-book equity ratio of 1.5x to
2.0x, and believe that this is the appropriate leverage level for our business
model. In addition, our $1.8 billion tangible book equity capital base enables
us to minimize the risk that our creditors will suffer losses in adverse market
conditions.
ACCESS TO A DEEP AND BROAD ARRAY OF RELIABLE CAPITAL SOURCES.
We seek to develop a deep and broad array of reliable debt and equity
capital sources to fund our business. Accordingly, we maintain a diverse range
of short- and long-term financing sources from both the secured and unsecured
lending and capital markets. We also believe that our track record as a private
and public company and our investor base, comprised of leading
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institutional investors and high net worth individuals, will enable us to
continue to access the public and private equity capital markets.
As of June 30, 2001, we had $1.9 billion of committed total capacity under
our secured credit facilities. We primarily use our secured facilities to
initially fund our investments prior to seeking match funded, long-term
financing sources. Our secured facilities bear interest rates ranging from LIBOR
plus 1.40% to LIBOR plus 2.25%, and have final maturities, including extension
options, ranging from August 2003 to March 2005.
At June 30, 2001, we maintained unsecured lending relationships with 13
leading commercial banks and had $450.0 million of committed total capacity
under our unsecured facilities. We primarily use our unsecured facilities for
working capital purposes. We also had $275.0 million of long-term corporate
unsecured debt outstanding.
MATCH FUNDING
We primarily execute our match funding strategy through our own proprietary
matched funding program, iStar Asset Receivables or "STARs-SM-," as well as
through term lending relationships with approximately 12 large financial
institutions. Using STARs-SM-, we can access the securitized debt markets by
issuing investment-grade rated securities collateralized by pools of our
structured finance and corporate tenant lease assets. The STARs-SM- bond
maturities match the maturities of the underlying collateral, thereby
eliminating refinancing risk. We continue to service the assets in the
collateral pool through our loan servicing subsidiary, iStar Asset Services.
Because STARs-SM- is an on-balance sheet financing program, we recognize no gain
on sale in our financial statements when utilizing this vehicle.
We completed our first STARs-SM- transaction in May 2000, and issued
approximately $900 million of investment-grade rated bonds backed by
approximately $1.2 billion of collateral. Since that time, Fitch, Moody's and
Standard & Poor's have upgraded by one notch from their initial ratings each
class of investment grade bonds rated by them, except for the Class A bonds,
which initially received the maximum ratings from each rating agency and
continue to bear such ratings.
We believe that the STARs-SM- program provides us significantly more
flexibility in managing our collateral and match funding our liabilities and
assets than other securitization structures, and that the strong performance of
our initial STARs-SM- transaction should positively impact future debt issuances
under this program. In addition, we view the securitized debt markets as a very
reliable source of debt capital, even when macroeconomic conditions make other
lending markets unavailable or unattractive.
We also use term debt to match fund our investments, and we maintain term
lending relationships with approximately 12 major commercial banks and insurance
companies. As part of these term lending relationships, we have developed an
innovative debt facility with a commercial bank that match funds certain of our
corporate finance investments. We believe that the STARs-SM- program and our
relationships with various term lenders provide us with a reliable,
cost-effective and diverse source of capital for match funding our liabilities
and assets.
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MANAGEMENT
The following table sets forth the names and the positions of our senior
officers:
NAME TITLE
---- --------------------------------------------------------
Jay Sugarman.............................. Chairman and Chief Executive Officer
Spencer B. Haber.......................... President, Chief Financial Officer and Director
H. Cabot Lodge, III....................... Executive Vice President--Investments and Director
Jeffrey R. Digel.......................... Executive Vice President--Investments
R. Michael Dorsch, III.................... Executive Vice President--Investments
Barclay G. Jones, III..................... Executive Vice President--Investments
Nina B. Matis............................. Executive Vice President and General Counsel
Timothy J. O'Connor....................... Executive Vice President and Chief Operating Officer
Diane Olmstead............................ Executive Vice President--Investments
Barbara Rubin............................. President--iStar Asset Services, Inc.
Steven R. Blomquist....................... Senior Vice President--Investments
Jeffrey N. Brown.......................... Senior Vice President--Asset Management
Roger M. Cozzi............................ Senior Vice President--Investments
Chase S. Curtis, Jr....................... Senior Vice President--Credit
Geoffrey M. Dugan......................... Senior Vice President--Human Resources and Assistant
General Counsel
Andrew C. Richardson...................... Senior Vice President--Capital Markets
Steven B. Sinnett......................... Senior Vice President--Project Finance
Elizabeth B. Smith........................ Senior Vice President--Asset Management
SENIOR MANAGEMENT
JAY SUGARMAN is Chairman of the Board and Chief Executive Officer of iStar
Financial. Mr. Sugarman has served as a director of iStar Financial (and its
predecessor) since 1996 and Chief Executive Officer since 1997. Under
Mr. Sugarman's leadership, iStar Financial has become a leading provider of
structured financial solutions to high-end private and corporate owners of real
estate in the United States. Previously, Mr. Sugarman was president of Starwood
Mezzanine Investors, L.P., a private investment partnership specializing in
structured real estate finance. Prior to forming Starwood Mezzanine,
Mr. Sugarman managed diversified investment funds on behalf of the Burden
family, a branch of the Vanderbilt family, and the Ziff family. While in that
position, he was jointly responsible for the formation of Starwood Capital
Group, L.L.C., a large private investment fund, and the formation of HBK
Investments, one of the nation's largest convertible arbitrage trading
operations. He received his undergraduate degree SUMMA CUM LAUDE from Princeton
University, where he was nominated for valedictorian and received the Paul
Volcker Award in Economics, and his M.B.A. with high distinction from Harvard
Business School, graduating as a Baker Scholar and recipient of the school's
academic prizes for both finance and
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marketing. Mr. Sugarman is a director of WCI Communities, Inc., a residential
developer in South Florida, and a member of the Board of Directors of NAREIT.
SPENCER B. HABER is President, Chief Financial Officer and a director of
iStar Financial. Mr. Haber has served as a director of iStar Financial (and its
predecessor) since June 1999, its Chief Financial Officer since 1998 and its
President since June 2001. Mr. Haber maintains primary responsibility for all of
iStar Financial's capital-raising initiatives and external communications.
Mr. Haber also sits on iStar Financial's internal and Board Investment
Committees and oversees all finance, hedging, treasury and accounting functions.
Prior to joining iStar Financial, Mr. Haber was a senior vice president in
Lehman Brothers' global real estate group and was responsible for that firm's
real estate mergers and acquisitions business. In addition to his M&A role,
Mr. Haber maintained primary client coverage responsibilities in raising equity
and debt capital for a wide range of public and private companies, participating
in more than $10 billion of transactions. Before Lehman Brothers, Mr. Haber was
a member of Salomon Brothers' real estate investment banking unit. At Salomon
Brothers, Mr. Haber participated in that firm's principal and advisory real
estate activities. Prior to Salomon Brothers, Mr. Haber worked for MIG Capital
Management, a joint venture of MIG Companies, a domestic real estate pension
fund advisor, and Charterhouse Inc., a British merchant bank. Mr. Haber holds a
B.S. degree in economics SUMMA CUM LAUDE and an M.B.A. from the Wharton School,
where he graduated a Palmer Scholar. He is a member of the National Association
of Real Estate Investment Trusts and the Urban Land Institute. Mr. Haber also
sits on the board of directors of Capital Thinking Inc., an application services
provider to financial institutions.
H. CABOT LODGE, III has served as a director and an Executive Vice
President--Investments of iStar Financial since March 2000 and oversees iStar
Financial's corporate tenant lease investment activity. Prior to joining iStar
Financial, Mr. Lodge was a founder and principal of ACRE Partners LLC, a
privately held firm focused on providing public and private corporations with
highly structured, value-added financing for their corporate real estate
facilities. Mr. Lodge served as chairman of Superconducting Core
Technologies, Inc., a wireless communications company from 1995 to 1997, and
prior to that was managing director and co-head of investments for W.P. Carey &
Co., Inc. from 1983 to 1995. Mr. Lodge is a director of Meristar Hospitality
Corporation, High Voltage Engineering Corporation and TelAmerica Media, Inc.
Mr. Lodge graduated with honors from Harvard College and received his M.B.A.
from Harvard Business School.
JEFFREY R. DIGEL has served as an Executive Vice President--Investments of
iStar Financial since March 2000 and is co-head of our internal Investment
Committee. Prior to that, he was Senior Vice President--Investments since
May 1998. Mr. Digel is responsible for the origination of new structured
financing transactions, focusing on iStar Financial's financial institution and
loan correspondent relationships. Previously, Mr. Digel was a vice
president-mortgage finance at Aetna Life Insurance Company responsible for
commercial mortgage securitizations, management of Aetna's mortgage
correspondent network, management of a $750 million real estate equity portfolio
for Aetna's pension clients and origination of new equity investments. Prior to
joining Aetna, Mr. Digel was a member of Hart Advisors, responsible for the
development and supervision of the portfolio, asset management and client
communications functions for Hart's real estate pension advisory business. In
addition, Mr. Digel is a member of the Mortgage Bankers Association and the
International Council of Shopping Centers. Mr. Digel received a B.A. degree from
Middlebury College and an M.M. from Northwestern University.
R. MICHAEL DORSCH, III has served as an Executive Vice
President--Investments of iStar Financial since March 2000, focusing on our
corporate tenant leasing business. Prior to joining iStar Financial, Mr. Dorsch
was a principal of ACRE Partners LLC, a privately held firm focused on providing
public and private corporations with highly-structured, value-added financing
solutions for their corporate real estate facilities. Mr. Dorsch was a founder
and managing partner of
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Corporate Realty Capital, a Boston-based real estate investment bank from 1990
to 1997. CRC was formed as an affiliate of Corporate Property Investors and
focused on originating, structuring and financing net lease transactions. Prior
to the formation of CRC, Mr. Dorsch was a partner in a Boston-based real estate
development, ownership and management concern. From 1984 to 1986, Mr. Dorsch was
a vice president of Winthrop Financial Associates, private real estate
syndication, where he structured and placed equity interests in transactions
capitalized at over $1 billion. Mr. Dorsch graduated with a Sc.B. in Mechanical
Engineering from Brown University and earned honors while receiving an M.B.A.
from Harvard Business School.
BARCLAY G. JONES, III has served as an Executive Vice President--Investments
of iStar Financial since March 2000, focusing on our corporate tenant leasing
business. Prior to joining iStar Financial, Mr. Jones was a principal of ACRE
Partners LLC, a privately held firm focused on providing public and private
corporations with highly-structured, value-added financing solutions for their
corporate real estate facilities. Prior to that, Mr. Jones served in a variety
of capacities, including vice chairman and chief acquisitions officer, for W.P.
Carey & Co., Inc. from 1982 to 1998. During that period, Mr. Jones was
responsible for originating in excess of $2 billion of sale-leaseback financings
and over $1 billion of mortgage placements. During his tenure at W.P. Carey, the
firm grew from fewer than ten employees to over 70, and from approximately
$100 million in assets to over $2.5 billion. Mr. Jones holds a B.S. degree in
economics from the Wharton School.
NINA B. MATIS has served as General Counsel of iStar Financial (and its
predecessor) since 1996 and Executive Vice President since November 1999.
Ms. Matis is responsible for legal, tax, structuring and regulatory aspects of
iStar Financial's operations and investment and financing transactions. From
1984 through 1987, Ms. Matis was an adjunct professor at Northwestern University
School of Law where she taught real estate transactions. Ms. Matis is a director
for Burnham Pacific, Inc. and a member of the American College of Real Estate
Lawyers, Ely Chapter of Lambda Alpha International, the Chicago Finance
Exchange, the Urban Land Institute, REFF, the Chicago Real Estate Executive
Women, The Chicago Network and The Economic Club of Chicago, and she is listed
in both The Best Lawyers of America and Sterling's Who's Who. Ms. Matis received
a B.A. degree, with honors, from Smith College and a J.D. degree from New York
University School of Law.
TIMOTHY J. O'CONNOR has served as Chief Operating Officer of iStar Financial
(and its predecessor) since March 1998 and Executive Vice President since
March 2000. Mr. O'Connor is responsible for developing and managing iStar
Financial's risk management and due diligence operations, participating in the
evaluation and approval of new investments and coordinating iStar Financial's
information systems. Previously, Mr. O'Connor was a vice president of Morgan
Stanley & Co. responsible for the performance of more than $2 billion of assets
acquired by the Morgan Stanley Real Estate Funds. Prior to joining Morgan
Stanley, Mr. O'Connor was a vice president of Greystone Realty Corporation
involved in the firm's acquisition and asset management operations. Previously,
Mr. O'Connor was employed by Exxon Co. USA in its real estate and engineering
group. Mr. O'Connor is a member of the International Council of Shopping
Centers, the Institute of Real Estate Management and the Buildings Owners and
Managers Association, and is a former vice president of the New York
City/Fairfield County chapter of the National Association of Industrial and
Office Parks. Mr. O'Connor received a B.S. degree from the United States
Military Academy at West Point and an M.B.A. from the Wharton School.
DIANE OLMSTEAD has served as an Executive Vice President--Investments of
iStar Financial in our San Francisco office since September 2000, and is
responsible for the origination of new financing transactions. Prior to joining
us, Ms. Olmstead was executive vice president of institutional ventures for
Redbricks.com, an Internet start-up focused on the commercial real
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estate market. Previously, Ms. Olmstead was a partner at Arthur Andersen where
she founded and ran the real estate capital markets (RECM) group for the western
region. The RECM group executed private equity and debt placements, portfolio
and company sales, REIT IPO advisory and M&A transactions in excess of
$4.7 billion. Ms. Olmstead is a graduate of SUNY at Buffalo with a B.A. in
English. She is a member of Urban Land Institute and National Association of
Industrial and Office Park Owners, Fisher Center For Real Estate and Urban
Economics Policy Advisory Board, Lambda Alpha and Mortgage Bankers Association.
BARBARA RUBIN has served as President of iStar Asset Services, Inc., our
Hartford-based loan asset management and servicing operation, since
September 1998 and as Senior Vice President of iStar Financial since
January 1999. She has more than 20 years of real estate investment experience,
including loan and real estate equity origination, portfolio management, loan
servicing, and capital markets activities. Prior to joining iStar Financial,
Ms. Rubin was president and chief operating officer of Phoenix Realty
Securities, Inc., a real estate advisory operation which managed portfolios of
real estate securities (including mortgage loan investments and real estate
equity securities). She is currently Chair of the Connecticut Health and
Education Facilities Authority, a member of the Board of Governors of the
Mortgage Bankers Association and a member of the Board of Commercial Mortgage
Securities Association. Ms. Rubin received a B.A. from Williams College and an
M.B.A. from the University of Connecticut.
STEVEN R. BLOMQUIST has served as Senior Vice President--Investments of
iStar Financial since September 1998. Mr. Blomquist is responsible for the
origination and acquisition of new financings with borrowers in the Phoenix Home
Life-serviced mortgage loan portfolio and related loan correspondents. He also
shares responsibility in managing several of iStar Financial's relationships
with financial institutions and other loan correspondents. Mr. Blomquist has
over 16 years of loan origination and investment management experience.
Previously, Mr. Blomquist was executive vice president and chief investment
officer of Phoenix Realty Securities, a Phoenix Home Life subsidiary
specializing in providing real estate securities investment advisory services.
Mr. Blomquist directed the origination of over $1.5 billion of mortgage loans
and maintains strong correspondent and borrower relations. Prior to his current
position, Mr. Blomquist was responsible for the debt and equity management of a
$750 million Phoenix Home Life portfolio in the Western United States.
Mr. Blomquist is a member of the Mortgage Bankers Association, the Urban Land
Institute and the International Council of Shopping Centers. He received both
his bachelors degree and an M.B.A. from the University of Connecticut.
JEFFREY N. BROWN has served as Senior Vice President--Asset Management of
iStar Financial since October 2000. Prior to that, he was Vice President--Asset
Management since November 1999. Previously, he served as a vice president at
TriNet. Mr. Brown is responsible for our East Region corporate tenant lease
assets, including lease negotiations, corporate-level customer relations, lease
compliance, portfolio-level analysis and reporting and market research
activities. Mr. Brown's prior professional experience includes director of
property management for Insignia Commercial Group (San Francisco), regional
director (West Coast) with PM Realty Group and various project/property
management positions with Eastover Corporation. Mr. Brown holds a B.S. degree
from Millsaps College, Jackson, Mississippi.
ROGER M. COZZI has served as Senior Vice President--Investments of iStar
Financial (and its predecessor) since January 1999. Prior to that he was Vice
President--Investments since 1997. Mr. Cozzi is responsible for the origination,
structuring and underwriting of new financing transactions at iStar Financial.
Previously, Mr. Cozzi was an assistant vice president at Starwood Capital Group
directly involved with the origination of Starwood Capital's debt investments in
Starwood Mezzanine Investors and Starwood Opportunity Fund IV. Prior to joining
Starwood Capital, Mr. Cozzi worked at Goldman Sachs & Co. in its real estate
department and mutual fund
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industry resource group. Mr. Cozzi received a B.S. degree, MAGNA CUM LAUDE, from
the Wharton School.
CHASE S. CURTIS, JR. has served as a Senior Vice President--Credit of iStar
Financial since June 2001, and is responsible for coordinating the initial and
on-going underwriting of corporate credit, with a particular emphasis on
corporate tenant risk assessment. He joined iStar Financial from Bank of America
following a 16-year career in credit risk management and structured corporate
finance. Immediately prior to joining iStar Financial, he was senior vice
president and chief credit officer of Bank of America Commercial Finance
responsible for its credit approvals, risk policy and risk process controls.
Prior to that, he spent three years in Hong Kong as an executive credit risk
review officer overseeing portfolio and transactional risk assessments across
Asia. Mr. Curtis holds an M.S. from the University of Arizona and he received a
B.S. degree (with high honors) from Bates College. He is a Chartered Financial
Analyst.
GEOFFREY M. DUGAN has served as Senior Vice President of iStar Financial
since January 2001, and as Assistant General Counsel and Assistant Secretary
since November 1999. Previously, he served as vice president, administration and
general counsel of TriNet, and in that capacity was responsible for corporate
and securities laws compliance matters, corporate governance matters, and legal
issues associated with administrative, human resources and employee benefit
functions, including the oversight of outside legal counsel that we engage.
Prior to joining us, Mr. Dugan was in private law practice for over 20 years,
where his practice emphasized corporate finance, securities and commercial
transactions for real estate investment trusts and other business entities.
Mr. Dugan received a J.D. from Georgetown University Law Center and a B.A. from
Harvard College. Mr. Dugan is a Member of the New York Bar and the State Bar of
California.
ANDREW C. RICHARDSON has served as Senior Vice President--Capital Markets
since March 2000. He joined iStar Financial from Salomon Smith Barney, where he
was a vice president in the global real estate and lodging investment banking
group, providing merger and acquisition advisory services and raising debt and
equity capital for public and private real estate companies. Mr. Richardson's
experience at Salomon Smith Barney also included working in its mergers and
acquisitions group, advising clients in a wide range of industries. Prior to
joining Salomon Smith Barney, Mr. Richardson worked for Ernst & Young and was a
certified public accountant. Mr. Richardson holds an M.B.A. from the University
of Chicago, and a B.B.A. in accountancy from the University of Notre Dame.
STEVEN B. SINNETT has served as Senior Vice President--Project Finance of
iStar Financial since January 2001, and prior to that served as Vice President
and Controller since November 1999. Mr. Sinnett is responsible for project
finance activities for iStar Financial and its subsidiaries. He previously
served as vice president, controller of TriNet, and in that capacity was
responsible for planning and executing all aspects of financial reporting,
accounting and information technology activities. Prior to joining TriNet, he
was associated with AMB Institutional Realty Advisors Inc., Meridian Point
Properties, Inc. (a real estate investment trust) and its predecessor, and the
accounting firm of Arthur Young & Co. Mr. Sinnett received a Masters of
Professional Accounting from Georgia State University and a B.S. from the
University of Florida. Mr. Sinnett is a certified public accountant in the State
of California.
ELIZABETH B. SMITH has served as Senior Vice President--Asset Management of
iStar Financial since August 1999. Ms. Smith manages our Dallas office and is
directly responsible for our Central Region corporate tenant lease assets. Prior
to joining iStar Financial, Ms. Smith was a vice president for MBL Life
Assurance Corporation, managing the rehabilitation and disposition of a
$3 billion debt and equity portfolio located throughout the United States.
Previously, Ms. Smith worked at J.E. Robert Companies, Inc., and for Sunbelt
Savings, FSB, specializing in
S-49
debt and equity portfolio management. Ms. Smith holds a B.B.A. degree from the
University of Mississippi in Oxford, Mississippi.
NON-EMPLOYEE DIRECTORS
The following table sets forth the names and current affiliations of our
non-employee directors:
NAME AFFILIATION
------------------------------------------ --------------------------------------------------------
Willis Andersen, Jr....................... Real estate industry consultant
Jeffrey G. Dishner........................ Starwood Capital Group, L.L.C.--Senior Managing Director
Andrew L. Farkas.......................... Insignia Financial Group, Inc.--Chairman and Chief
Executive Officer
Madison F. Grose.......................... Starwood Capital Group, L.L.C.--Senior Managing Director
and Co-General Counsel
Robert W. Holman, Jr...................... Pebble Beach Institute--Managing Director
Robin Josephs............................. Ropasada, LLC--Managing Director
Merrick R. Kleeman........................ Starwood Capital Group, L.L.C.--Senior Managing Director
William M. Matthes........................ Behrman Capital--Managing Partner
John G. McDonald.......................... Stanford University--IBJ Professor of Finance in the
Graduate School of Business
Michael G. Medzigian...................... Lazard Freres Real Estate Investors L.L.C.--President
and Chief Executive Officer
Stephen B. Oresman........................ Saltash, Ltd.--Owner and President
George R. Puskar.......................... Lend Lease Real Estate Investments--Former Chairman of
the Board
Barry S. Sternlicht....................... Starwood Capital Group, L.L.C.--Founder, General
Manager, President and Chief Executive Officer
Starwood Hotels & Resorts Worldwide, Inc.--Chairman and
Chief Executive Officer
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DESCRIPTION OF NOTES
The Company will issue the Notes under an indenture between itself and State
Street Bank and Trust Company, N.A., as Trustee (the "Trustee"), and a
supplemental indenture between itself and the Trustee (together, the
"Indenture"). The following is a summary of the material provisions of the
Indenture. It does not include all of the provisions of the Indenture. The
following description of the particular terms of the Notes supplements the
description in the accompanying prospectus of the general terms and provisions
of our debt securities. To the extent that the following description of Notes is
inconsistent with that general description in the prospectus, the following
description replaces that in the prospectus. We urge you to read the Indenture
because it defines your rights. The terms of the Notes include those stated in
the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"). A copy of the form of Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. You can find definitions of certain capitalized terms used
in this description under "--Certain Definitions." For purposes of this section,
references to the "Company" or "our" include only iStar Financial Inc. and not
its Subsidiaries.
The Notes will be unsecured obligations of the Company, ranking PARI PASSU
in right of payment with all other senior unsecured obligations of the Company.
The Company will issue the Notes in fully registered form in denominations
of $1,000 and integral multiples thereof. The Trustee will initially act as
Paying Agent and Registrar for the Notes. The Notes may be presented for
registration or transfer and exchange at the offices of the Registrar. The
Company may change any Paying Agent and Registrar without notice to holders of
the Notes (the "Holders"). The Company will pay principal (and premium, if any)
on the Notes at the Trustee's corporate office in New York, New York. At the
Company's option, interest may be paid at the Trustee's corporate trust office
or by check mailed to the registered address of Holders.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $500.0 million, of
which $350.0 million is being issued in this offering. The Notes will mature on
August 15, 2008. Interest on the Notes will accrue at the rate of 8 3/4% per
annum and will be payable semiannually in cash on each February 15 and
August 15, commencing on February 15, 2002, to the persons who are registered
Holders at the close of business on the February 1 and August 1 immediately
preceding the applicable interest payment date. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from and including the date of issuance.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. At any time on or prior to August 15, 2008, the Notes
may be redeemed or purchased in whole but not in part at the Company's option at
a price equal to 100% of the principal amount thereof plus the Applicable
Premium as of, and accrued but unpaid interest, if any, to, the date of
redemption or purchase (the "Redemption Date") (subject to the right of Holders
of record on the relevant record date to receive interest due on the relevant
interest payment date). Such redemption or purchase may be made upon notice
mailed by first-class mail to each Holder's registered address, not less than 30
nor more than 60 days prior to the Redemption Date.
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"APPLICABLE PREMIUM" means, with respect to a Note at any Redemption Date,
the greater of: (1) 1.0% of the principal amount of such Note; and (2) the
excess of (a) the present value at such Redemption Date of (i) the principal
amount of such Note on August 15, 2008 plus (ii) all required remaining
scheduled interest payments due on such Note through August 15, 2008, computed
using a discount rate equal to the Treasury Rate plus 50 basis points; over
(b) the principal amount of such Note on such Redemption Date. Calculation of
the Applicable Premium will be made by the Company or on behalf of the Company
by such Person as the Company shall designate; provided, however, that such
calculation shall not be a duty or obligation of the Trustee.
"TREASURY RATE" means, with respect to a Redemption Date, the yield to
maturity at the time of computation of United States Treasury securities with a
constant maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15(519) that has become publicly available at least two
Business Days prior to such Redemption Date (or, if such Statistical Release is
no longer published, any publicly available source of similar market data)) most
nearly equal to the period from such Redemption Date to August 15, 2008;
provided, however, that if the period from such Redemption Date to August 15,
2008 is not equal to the constant maturity of the United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall be
obtained by linear interpolation (calculated to the nearest one-twelfth of a
year) from the weekly average yields of United States Treasury securities for
which such yields are given, except that if the period from such Redemption Date
to August 15, 2008 is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of one
year shall be used.
OPTIONAL REDEMPTION UPON EQUITY OFFERINGS. At any time, or from time to
time, on or prior to August 15, 2004, the Company may, at its option, use the
net cash proceeds of one or more Equity Offerings (as defined below) to redeem
up to 35% of the principal amount of the Notes issued under the Indenture at a
redemption price of 108.75% of the principal amount thereof plus accrued and
unpaid interest thereon, if any, to the date of redemption; provided that:
(1) at least 65% of the principal amount of Notes issued under the
Indenture remains outstanding immediately after any such redemption; and
(2) the Company makes such redemption not more than 60 days after the
consummation of any such Equity Offering.
"Equity Offering" means an underwritten public offering of Qualified Capital
Stock of the Company pursuant to a registration statement filed with the
Commission in accordance with the Securities Act or a private placement of
Qualified Capital Stock of the Company generating gross proceeds of at least
$25.0 million.
SELECTION AND NOTICE OF REDEMPTION
In the event that the Company chooses to redeem less than all of the Notes,
selection of the Notes for redemption will be made by the Trustee either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed; or
(2) on a PRO RATA basis, by lot or by such method as the Trustee shall
deem fair and appropriate.
No Notes of a principal amount of $1,000 or less shall be redeemed in part.
If a partial redemption is made with the proceeds of an Equity Offering, the
Trustee will select the Notes only on a PRO RATA basis or on as nearly a PRO
RATA basis as is practicable (subject to DTC
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procedures). Notice of redemption will be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. On and after the redemption date,
interest will cease to accrue on Notes or portions thereof called for redemption
as long as the Company has deposited with the Paying Agent funds in satisfaction
of the applicable redemption price.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder will have the right
to require that the Company purchase all or a portion of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer"), at a
purchase price equal to 101% of the principal amount thereof plus accrued
interest to the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 60 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have a Note purchased pursuant to a Change of
Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, we cannot assure you that the Company
will have available funds sufficient to pay the Change of Control purchase price
for all the Notes that might be delivered by Holders seeking to accept the
Change of Control Offer. In the event the Company is required to purchase
outstanding Notes pursuant to a Change of Control Offer, the Company expects
that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, we cannot assure you
that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Subsidiaries to incur additional Indebtedness, to grant liens on its
property and to make Restricted Payments may also make more difficult or
discourage a takeover of the Company, whether favored or opposed by the
management of the Company. Consummation of any such transaction in certain
circumstances may require redemption or repurchase of the Notes, and we cannot
assure you that the Company or the acquiring party will have sufficient
financial resources to effect such redemption or repurchase. Such restrictions
and the restrictions on transactions with Affiliates may, in certain
circumstances, make more difficult or discourage any leveraged buyout of the
Company or any of its Subsidiaries by the management of the Company. While such
restrictions cover a wide variety of arrangements that have traditionally been
used to effect highly leveraged transactions, the Indenture may not afford the
Holders protection in all circumstances from the adverse aspects of a highly
leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities
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laws and regulations and shall not be deemed to have breached its obligations
under the "Change of Control" provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants; provided
that the Indenture will provide that the "Limitation on Liens," "Limitation on
Restricted Payments," "Limitation on Dividend and Other Payment Restrictions
Affecting Subsidiaries," "Limitation on Preferred Stock of Subsidiaries,"
"Limitation of Guarantees by Subsidiaries," "Conduct of Business" and
"Limitations on Transactions with Affiliates" covenants will not be applicable
in the event, and only for so long as, the Notes are rated Investment Grade and
no Default or Event of Default has occurred and is continuing.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of its Subsidiaries to, directly or indirectly, create,
incur, assume, guarantee, become liable, contingently or otherwise, with respect
to, or otherwise become responsible for payment of (collectively, "incur") any
Indebtedness (including, without limitation, Acquired Indebtedness) other than
Permitted Indebtedness.
Notwithstanding the forgoing, if no Default or Event of Default shall have
occurred and be continuing at the time of or as a consequence of the incurrence
of any such Indebtedness, the Company or any of its Subsidiaries may incur
Indebtedness (including, without limitation, Acquired Indebtedness), in each
case if on the date of the incurrence of such Indebtedness, after giving effect
to the incurrence thereof:
- the Consolidated Fixed Charge Coverage Ratio of the Company is greater
than 1.50 to 1.0;
- the ratio of the aggregate amount of Indebtedness outstanding on a
consolidated basis to our Consolidated Net Worth is less than 5.0 to 1.0;
and
- the ratio of the aggregate amount of Senior Recourse Indebtedness
outstanding on a consolidated basis to the sum of: (1) our Consolidated
Net Worth; and (2) the aggregate amount of the Subordinated Indebtedness
outstanding on a consolidated basis is less than 2.75 to 1.0; provided,
however, that the aggregate principal amount of such Subordinated
Indebtedness is not in excess of our Consolidated Net Worth.
Notwithstanding the foregoing, the Company will not permit TriNet Corporate
Realty Trust, Inc. ("TriNet") or any of its Subsidiaries to incur Indebtedness
(as defined in the indenture governing TriNet's outstanding publicly-held debt
securities on the Issue Date) if, immediately after giving effect to the
incurrence of such Indebtedness and the application of the proceeds thereof, the
aggregate principal amount of all outstanding Indebtedness of TriNet and its
Subsidiaries on a consolidated basis determined in accordance with GAAP is
greater than 55% of the sum of (without duplication): (1) the Total Assets (as
defined in the indenture governing TriNet's outstanding publicly-held debt
securities on the Issue Date) of TriNet and its Subsidiaries as of the end of
the calendar quarter covered in TriNet's Annual Report on Form 10-K or Quarterly
Report on Form 10-Q, as the case may be, most recently filed with the Commission
(or, if such filing is not permitted under the Exchange Act, with the Trustee)
prior to the incurrence of such additional Indebtedness; and (2) the purchase
price of any real estate assets or mortgages receivable acquired, and the amount
of any securities offering proceeds received (to the extent that such proceeds
were not used to acquire real estate assets or mortgages receivable or used to
reduce Indebtedness), by TriNet or any Subsidiary of TriNet since the end of
such calendar quarter, including those proceeds obtained in connection with the
incurrence of such additional Indebtedness. The above limitation shall terminate
immediately upon TriNet ceasing to exist as a Subsidiary of the Company as a
result of a merger or consolidation of
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TriNet with the Company or the sale, transfer, disposition or distribution of
all or substantially all of TriNet's assets to the Company.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of its Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in Qualified Capital Stock of the
Company) on or in respect of shares of the Company's Capital Stock to
holders of such Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any warrants, rights or options to purchase
or acquire shares of any class of such Capital Stock; or
(3) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any scheduled
final maturity, scheduled repayment or scheduled sinking fund payment, any
Indebtedness of the Company that is subordinate or junior in right of
payment to the Notes
if at the time of such action (each, a "Restricted Payment") or immediately
after giving effect thereto,
(i) a Default or an Event of Default shall have occurred and be continuing;
or
(ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; or
(iii) the aggregate amount of Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purposes, if other than in cash, being the fair
market value of such property as determined in good faith by the Board
of Directors of the Company) shall exceed the sum of:
(w) 95% of the cumulative Consolidated Adjusted Earnings (or if
cumulative Consolidated Adjusted Earnings shall be a loss, minus 100% of
such loss) of the Company earned subsequent to June 30, 2001 and on or
prior to the date the Restricted Payment occurs (the "Reference Date")
(treating such period as a single accounting period); plus
(x) 100% of the aggregate net cash proceeds received by the Company
from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company; plus
(y) without duplication of any amounts included in
clause (iii)(x) above, 100% of the aggregate net cash proceeds of any
equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (iii)(x) and
(y), any net cash proceeds from an Equity Offering to the extent used to
redeem the Notes in compliance with the provisions set forth under
"Redemption--Optional Redemption Upon Equity Offerings").
The foregoing provisions do not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of such dividend if the dividend would have been permitted on the
date of declaration;
(2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of Capital Stock of the Company,
either (i) solely in exchange for shares of
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Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company;
(3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes either (i) solely in
exchange for shares of Qualified Capital Stock of the Company, or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of (a) shares of Qualified Capital
Stock of the Company or (b) Refinancing Indebtedness;
(4) so long as no Default or Event of Default shall have occurred and be
continuing, repurchases by the Company of Common Stock of the Company from
employees of the Company or any of its Subsidiaries or their authorized
representatives upon the death, disability or termination of employment of such
employees, in an aggregate amount not to exceed $500,000 in any calendar year;
(5) the declaration or payment by the Company of any dividend or
distribution that is necessary to maintain its status as a REIT under the Code
if:
(a) the Consolidated Fixed Charge Coverage Ratio of the Company is
greater than 2.0 to 1.0; and
(b) no Default or Event of Default shall have occurred and be
continuing;
(6) the payment of any dividend on Preferred Stock of the Company; and
(7) Restricted Payments in an amount not to exceed $75.0 million.
In determining the aggregate amount of Restricted Payments made subsequent
to the Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2) (ii), 3 (ii) (a), (4),
(5) and (7) shall be included in such calculation.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary of the Company to:
(1) pay dividends or make any other distributions on or in respect of
its Capital Stock;
(2) make loans or advances or to pay any Indebtedness or other
obligation owed to the Company or any other Subsidiary of the Company; or
(3) transfer any of its property or assets to the Company or any other
Subsidiary of the Company,
except for such encumbrances or restrictions existing under or by reason of:
(a) applicable law;
(b) the Indenture;
(c) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Subsidiary of the Company;
(d) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person or the
properties or assets of the Person so acquired;
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(e) agreements existing on the Issue Date to the extent and in the
manner such agreements are in effect on the Issue Date;
(f) provisions of any agreement governing Indebtedness incurred in
accordance with the Indenture that impose such encumbrances or
restrictions upon the occurrence of a default or failure to meet
financial covenants or conditions under the agreement;
(g) restrictions on the transfer of assets (other than cash) held in
a Subsidiary of the Company imposed under any agreement governing
Indebtedness incurred in accordance with the Indenture;
(h) provisions of any agreement governing Indebtedness incurred in
accordance with the Indenture that require a Subsidiary to service its
debt obligations before making dividends, distributions or advancements
in respect of its Capital Stock;
(i) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (b), (d) or (e) above; provided, however, that the
provisions relating to such encumbrance or restriction contained in any
such Indebtedness are not materially less favorable to the Company in any
material respect as determined by the Board of Directors of the Company
in their reasonable and good faith judgment than the provisions relating
to such encumbrance or restriction contained in agreements referred to in
such clause (b), (d) or (e).
LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES. The Company will not permit
any of its Subsidiaries to issue any Preferred Stock (other than to the Company
or to a Wholly Owned Subsidiary of the Company) or permit any Person (other than
the Company or a Wholly Owned Subsidiary of the Company) to own any Preferred
Stock of any Subsidiary of the Company, other than Preferred Stock outstanding
on the Issue Date of Subsidiaries formed to facilitate maintaining the Company's
REIT status.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or permit
or suffer to exist any Liens of any kind on the assets of the Company securing
Indebtedness of the Company unless:
(1) in the case of Liens securing Indebtedness of the Company that is
expressly subordinate or junior in right of payment to the Notes, the Notes
are secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens; and
(2) in all other cases, the Notes are equally and ratably secured
except for:
(a) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date;
(b) Liens securing the Notes;
(c) Liens securing Refinancing Indebtedness that is incurred to
Refinance any Indebtedness that has been secured by a Lien permitted
under the Indenture and that has been incurred in accordance with the
provisions of the Indenture; provided, however, that such Liens: (i) are
no less favorable to the Holders than the Liens in respect of the
Indebtedness being Refinanced; and (ii) do not extend to or cover any
property or assets of the Company not securing the Indebtedness so
Refinanced; and
(d) Permitted Liens.
MAINTENANCE OF TOTAL UNENCUMBERED ASSETS. The Company and its Subsidiaries
will maintain Total Unencumbered Assets of not less than 125% of the aggregate
outstanding
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principal amount of the Unsecured Indebtedness of the Company and its
Subsidiaries, in each case on a consolidated basis.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Subsidiary of the Company to sell, assign, transfer, lease,
convey or otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Company's
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless:
(1) either:
(a) the Company shall be the surviving or continuing corporation; or
(b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and of the Company's
Subsidiaries substantially as an entirety (the "Surviving Entity"):
(i) shall be a corporation organized and validly existing under
the laws of the United States or any State thereof or the
District of Columbia; and
(ii) shall expressly assume, by supplemental indenture (in form
and substance satisfactory to the Trustee), executed and
delivered to the Trustee, the due and punctual payment of
the principal of, and premium, if any, and interest on all
of the Notes and the performance of every covenant of the
Notes and the Indenture on the part of the Company to be
performed or observed;
(2) immediately after giving effect to such transaction and the
assumption contemplated by clause (1)(b)(ii) above (including giving effect
to any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company
or such Surviving Entity, as the case may be: (a) shall have a Consolidated
Net Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; and (b) shall be able to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the "--Limitation on Incurrence of Additional Indebtedness"
covenant; provided, however, that this clause (2) shall not apply in the
event of a transaction between the Company and TriNet;
(3) immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (1)(b)(ii) above
(including, without limitation, giving effect to any Indebtedness and
Acquired Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default or
Event of Default shall have occurred or be continuing; and
(4) the Company or the Surviving Entity shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required
in connection with such transaction, such supplemental indenture comply with
the applicable provisions of the Indenture and that all conditions precedent
in the Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Subsidiaries of the
Company the Capital Stock of which constitutes all or
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substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into or
permit to exist any transaction or series of related transactions (including,
without limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with, or for the benefit of, any of its Affiliates
(each an "Affiliate Transaction"), other than: (1) Affiliate Transactions
permitted as described below; and (2) Affiliate Transactions on terms that are
no less favorable than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis from a Person that
is not an Affiliate of the Company or such Subsidiary.
All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $5.0 million
shall be approved by the Board of Directors of the Company or such Subsidiary,
as the case may be, such approval to be evidenced by a Board Resolution stating
that such Board of Directors has determined that such transaction complies with
the foregoing provisions. If the Company or any Subsidiary of the Company enters
into an Affiliate Transaction (or a series of related Affiliate Transactions
related to a common plan) that involves an aggregate fair market value of more
than $10.0 million, the Company or such Subsidiary, as the case may be, shall,
prior to the consummation thereof, obtain a favorable opinion as to the fairness
of such transaction or series of related transactions to the Company or the
relevant Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Trustee.
The restrictions set forth in the first paragraph of this covenant shall not
apply to:
(1) reasonable fees and compensation paid to and indemnity provided on
behalf of, officers, directors, employees or consultants of the Company or
any Subsidiary of the Company as determined in good faith by the Company's
Board of Directors or senior management;
(2) transactions exclusively between or among the Company and any of
its Subsidiaries or exclusively between or among such Subsidiaries in the
ordinary course of business, provided such transactions are not otherwise
prohibited by the Indenture;
(3) transactions between the Company or one of its Subsidiaries and any
Person in which the Company or one of its Subsidiaries has made an
Investment in the ordinary course of the Company's real estate lending
business and such Person is an Affiliate solely because of such Investment;
(4) transactions between the Company or one of its Subsidiaries and any
Person in which the Company or one of its Subsidiaries holds an interest as
a joint venture partner and such Person is an Affiliate solely because of
such interest;
(5) any agreement as in effect as of the Issue Date or any amendment
thereto or any transaction contemplated thereby (including pursuant to any
amendment thereto) in any
S-59
replacement agreement thereto so long as any such amendment or replacement
agreement is not more disadvantageous to the Holders in any material respect
than the original agreement as in effect on the Issue Date; and
(6) Restricted Payments permitted by the Indenture.
LIMITATION OF GUARANTEES BY SUBSIDIARIES. The Company will not permit any
of its Subsidiaries, directly or indirectly, by way of the pledge of any
intercompany note or otherwise, to assume, guarantee or in any other manner
become liable with respect to any Indebtedness of the Company, unless, in any
such case:
(1) such Subsidiary executes and delivers a supplemental indenture to
the Indenture, providing a guarantee of payment of the Notes by such
Subsidiary; and
(2) if such assumption, guarantee or other liability of such Subsidiary
is provided in respect of Indebtedness that is expressly subordinated to the
Notes, the guarantee or other instrument provided by such Subsidiary in
respect of such subordinated Indebtedness shall be subordinated to the
Guarantee pursuant to subordination provisions no less favorable to the
Holders of the Notes than those contained in the Indenture.
Notwithstanding the foregoing, any such Guarantee by a Subsidiary of the
Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required on
the part of the Trustee or any Holder, upon:
(1) the unconditional release of such Subsidiary from its liability in
respect of the Indebtedness in connection with which such Guarantee was
executed and delivered pursuant to the preceding paragraph; or
(2) any sale or other disposition (by merger or otherwise) to any
Person that is not a Subsidiary of the Company of all of the Company's
Capital Stock in, or all or substantially all of the assets of, such
Subsidiary; provided that: (a) such sale or disposition of such Capital
Stock or assets is otherwise in compliance with the terms of the Indenture;
and (b) such assumption, guarantee or other liability of such Subsidiary has
been released by the holders of the other Indebtedness so guaranteed.
CONDUCT OF BUSINESS. The Company and its Subsidiaries will engage primarily
in the financing and real-estate related businesses contemplated by
Article III(b) of the Company's Amended and Restated Charter as in effect on the
Issue Date and other activities related to or arising out of those activities.
REPORTS TO HOLDERS. Whether or not required by the rules and regulations of
the Commission, so long as any Notes are outstanding, the Company will furnish
the Holders of Notes:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations
of the Company and its consolidated Subsidiaries (showing in reasonable
detail, either on the face of the financial statements or in the footnotes
thereto and in Management's Discussion and Analysis of Financial Condition
and Results of Operations, the financial condition and results of operations
of the Company and its Subsidiaries separate from the financial condition
and results of operations of the Unrestricted Subsidiaries of the Company,
if any) and, with respect to the annual information only, a report thereon
by the Company's certified independent accounts; and
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(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations.
In addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability within the time periods specified in
the Commission's rules and regulations (unless the Commission will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company has agreed that,
for so long as any Notes remain outstanding, it will furnish to the Holders and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(1) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;
(2) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer);
(3) a default in the observance or performance of any other covenant or
agreement contained in the Indenture and such default continues for a period
of 30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes
(except in the case of a default with respect to the "Merger, Consolidation
and Sale of Assets" covenant, which will constitute an Event of Default with
such notice requirement but without such passage of time requirement);
(4) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness (other than Non-Recourse Indebtedness) of the Company or
any Subsidiary of the Company, or the acceleration of the final stated
maturity of any such Indebtedness (which acceleration is not rescinded,
annulled or otherwise cured within 20 days of receipt by the Company or such
Subsidiary of notice of any such acceleration) if the aggregate principal
amount of such Indebtedness, together with the principal amount of any other
such Indebtedness in default for failure to pay principal at final maturity
or which has been accelerated, aggregates $20.0 million or more at any time;
(5) one or more judgments in an aggregate amount in excess of
$20.0 million shall have been rendered against the Company or any of its
Subsidiaries and such judgments remain undischarged, unpaid or unstayed for
a period of 60 days after such judgment or judgments become final and
non-appealable (other than any judgments as to which, and only to the
extent, a reputable insurance company has acknowledged coverage of such
judgments in writing); or
(6) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in
clause (6) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee
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specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice"), and the same shall become immediately
due and payable.
If an Event of Default specified in clause (6) above with respect to the
Company occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration;
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid;
(4) if the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances; and
(5) in the event of the cure or waiver of an Event of Default of the
type described in clause (6) of the description above of Events of Default,
the Trustee shall have received an officers' certificate and an opinion of
counsel that such Event of Default has been cured or waived. No such
rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that
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the Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for:
(1) the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the Notes when such payments
are due;
(2) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost
or stolen Notes and the maintenance of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the Trustee and
the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest
on the Notes on the stated date for payment thereof or on the applicable
redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that:
(a) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling; or
(b) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders
will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit;
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(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture or any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(6) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others;
(7) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with;
(8) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that, assuming no intervening bankruptcy of the
Company between the date of deposit and the 91st day following the date of
deposit and that no Holder is an insider of the Company, after the 91st day
following the date of deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; and
(9) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by
clause (2) above with respect to a Legal Defeasance need not be delivered if all
Notes not theretofore delivered to the Trustee for cancellation (1) have become
due and payable or (2) will become due an payable on the maturity date within
one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when:
(1) either:
(a) all the Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Notes that have been replaced or paid and Notes
for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee
for cancellation; or
(b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit
together with irrevocable instructions from the Company directing the
Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be;
(2) the Company has paid all other sums payable under the Indenture by
the Company; and
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(3) the Company has delivered to the Trustee an officers' certificate
and an opinion of counsel stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have
been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
in the opinion of the Trustee, adversely affect the rights of any of the Holders
in any material respect. In formulating its opinion on such matters, the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other modifications and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding Notes issued under the
Indenture, except that, without the consent of each Holder affected thereby, no
amendment may:
(1) reduce the amount of Notes whose Holders must consent to an
amendment;
(2) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any Notes;
(3) reduce the principal of or change or have the effect of changing
the fixed maturity of any Notes, or change the date on which any Notes may
be subject to redemption or reduce the redemption price therefor;
(4) make any Notes payable in money other than that stated in the
Notes;
(5) make any change in provisions of the Indenture protecting the right
of each Holder to receive payment of principal of and interest on such Note
on or after the due date thereof or to bring suit to enforce such payment,
or permitting Holders of a majority in principal amount of Notes to waive
Defaults or Events of Default;
(6) after the Company's obligation to purchase Notes arises thereunder,
amend, change or modify in any material respect the obligation of the
Company to make and consummate a Change of Control Offer in the event of a
Change of Control or make and consummate a Net Proceeds Offer with respect
to any Asset Sale that has been consummated or, after such Change of Control
has occurred or such Asset Sale has been consummated, modify any of the
provisions or definitions with respect thereto; or
(7) modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the Notes in a manner
which adversely affects the Holders.
GOVERNING LAW
The Indenture will provide that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
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The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Subsidiary of the
Company or at the time it merges or consolidates with the Company or any of its
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and in each case whether or not incurred by such Person in connection
with, or in anticipation or contemplation of, such Person becoming a Subsidiary
of the Company or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"ASSET ACQUISITION" means: (1) an Investment by the Company or any
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Subsidiary of the Company or any Subsidiary of the Company, or
shall be merged with or into the Company or any Subsidiary of the Company; or
(2) the acquisition by the Company or any Subsidiary of the Company of the
assets of any Person (other than a Subsidiary of the Company) that constitute
all or substantially all of the assets of such Person or comprises any division
or line of business of such Person or any other properties or assets of such
Person other than in the ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by us or any of our
Subsidiaries (including any sale and leaseback transaction) to any Person other
than us or our Wholly Owned Subsidiaries of:
(1) any Capital Stock of any of our Subsidiaries; or
(2) any of our or our Subsidiaries' other property or assets other than
sales of loan-related assets made in the ordinary course of the Company's
real estate lending business and other asset sales made in the ordinary
course of the Company's business.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
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"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means:
(1) with respect to any Person that is a corporation, any and all
shares, interests, participations or other equivalents (however designated
and whether or not voting) of corporate stock, including each class of
Common Stock and Preferred Stock of such Person; and
(2) with respect to any Person that is not a corporation, any and all
partnership, membership or other equity interests of such Person.
"CASH EQUIVALENTS" means:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's");
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized under
the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than
$250.0 million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4) above;
and
(6) investments in money market funds that invest substantially all
their assets in securities of the types described in clauses (1) through
(5) above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets
of the Company to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of the
Indenture) other than to the Permitted Holders;
(2) the approval by the holders of Capital Stock of the Company of any
plan or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the provisions of the Indenture);
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(3) any Person or Group (other than the Permitted Holders) shall become
the owner, directly or indirectly, beneficially or of record, of shares
representing more than 50% of the aggregate ordinary voting power
represented by the issued and outstanding Capital Stock of the Company;
provided, however, that no Change of Control shall be deemed to have
occurred as a result of the sale or transfer by the Permitted Holders of
shares of Capital Stock of the Company representing more than 50% of the
aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company to a Person or Group, whether in one
transaction or a series of related transactions, that has an investment
grade senior unsecured credit rating from both of Moody's and S&P and the
Company's senior unsecured ratings from Moody's and S&P are the same or
better immediately following such sale or transfer as before such sale or
transfer; or
(4) the replacement of a majority of the Board of Directors of the
Company over a two-year period from the directors who constituted the Board
of Directors of the Company at the beginning of such period, and such
replacement shall not have been approved by a vote of at least a majority of
the Board of Directors of the Company then still in office who either were
members of such Board of Directors at the beginning of such period or whose
election as a member of such Board of Directors was previously so approved.
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"CONSOLIDATED ADJUSTED EARNINGS" with respect to any Person, for any period,
means the Consolidated Net Income, less dividend payments on Preferred Stock,
plus depreciation and amortization (including the Company's share of joint
venture depreciation and amortization).
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced thereby:
(a) all income taxes of such Person and its Subsidiaries paid or
accrued in accordance with GAAP for such period (other than income taxes
attributable to extraordinary gains or losses and direct impairment
charges or the reversal of such charges on the Company's assets);
(b) Consolidated Interest Expense; and
(c) depreciation and amortization;
all as determined on a consolidated basis for such Person and its
Subsidiaries in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio for which financial statements are available (the "Transaction
Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated
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EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect
on a pro forma basis for the period of such calculation to:
(1) the incurrence or repayment of any Indebtedness of such Person or
any of its Subsidiaries (and the application of the proceeds thereof) giving
rise to the need to make such calculation and any incurrence or repayment of
other Indebtedness (and the application of the proceeds thereof), other than
the incurrence or repayment of Indebtedness in the ordinary course of
business for working capital purposes pursuant to working capital
facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may be
(and the application of the proceeds thereof), occurred on the first day of
the Four Quarter Period; and
(2) any asset sales or other dispositions or any asset originations,
asset purchases, Investments and Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Subsidiaries (including
any Person who becomes a Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired Indebtedness and
also including any Consolidated EBITDA (including any pro forma expense and
cost reductions calculated on a basis consistent with Regulation S-X under
the Exchange Act) attributable to the assets which are originated or
purchased, the Investments that are made and the assets that are the subject
of the Asset Acquisition or asset sale or other disposition during the Four
Quarter Period) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such asset sale or other disposition or asset
origination, asset purchase, Investment or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness)
occurred on the first day of the Four Quarter Period. If such Person or any
of its Subsidiaries directly or indirectly guarantees Indebtedness of a
third Person, the preceding sentence shall give effect to the incurrence of
such guaranteed Indebtedness as if such Person or any Subsidiary of such
Person had directly incurred or otherwise assumed such guaranteed
Indebtedness.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense; plus
(2) the amount of all dividend payments on any series of Preferred
Stock of such Person and, to the extent permitted under the Indenture, its
Subsidiaries (other than dividends paid in Qualified Capital Stock) paid,
accrued or scheduled to be paid or accrued during such period.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of such Person and its
Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP, including without limitation: (a) any amortization of
debt discount; (b) the net costs under Interest Swap Obligations; (c) all
capitalized interest; and (d) the interest portion of any deferred payment
obligation; and
(2) to the extent not already included in clause (1), the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to
be paid or accrued by such Person and its Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
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"CONSOLIDATED NET INCOME" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Subsidiaries before
the payment of dividends on Preferred Stock for such period on a consolidated
basis, determined in accordance with GAAP; provided that there shall be excluded
therefrom:
(1) after-tax gains and losses from Asset Sales or abandonments or
reserves relating thereto (including gains and losses from the sale of
corporate tenant lease assets);
(2) after-tax items classified as extraordinary gains or losses and
direct impairment charges or the reversal of such charges on the Company's
assets;
(3) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Subsidiary of the
referent Person or is merged or consolidated with the referent Person or any
Subsidiary of the referent Person;
(4) the net income (but not loss) of any Subsidiary of the referent
Person to the extent that the declaration of dividends or similar
distributions by that Subsidiary of that income is restricted by a contract,
operation of law or otherwise, except for such restrictions permitted by
clauses (f), (g) and (h) of the "Limitation on Dividend and Other Payment
Restrictions Affecting Subsidiaries" covenant, whether such permitted
restrictions exist on the Issue Date or are created thereafter;
(5) the net income or loss of any other Person, other than a
Consolidated Subsidiary of the referent Person, except:
(a) to the extent (in the case of net income) of cash dividends or
distributions paid to the referent Person, or to a Wholly Owned
Subsidiary of the referent Person (other than a Subsidiary described in
clause (4) above), by such other Person; or
(b) that the referent Person's share of any net income or loss of
such other Person under the equity method of accounting for Affiliates
shall not be excluded;
(6) any restoration to income of any contingency reserve of an
extraordinary, nonrecurring or unusual nature, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued
at any time following the Issue Date;
(7) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued); and
(8) in the case of a successor to the referent Person by consolidation
or merger or as a transferee of the referent Person's assets, any earnings
of the successor corporation prior to such consolidation, merger or transfer
of assets.
"CONSOLIDATED NET WORTH" of any Person means the consolidated stockholders'
equity of such Person, as of the end of the last completed fiscal quarter ending
on or prior to the date of the transaction giving rise to the need to calculate
Consolidated Net Worth determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person and interests in such Person's Consolidated Subsidiaries
not owned, directly or indirectly, by such Person.
"CONSOLIDATED SUBSIDIARY" means, with respect to any Person, a Subsidiary of
such Person, the financial statements of which are consolidated with the
financial statements of such Person in accordance with GAAP.
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"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Subsidiary of the Company against fluctuations in currency
values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock that,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable at the option of the holder thereof), or upon the
happening of any event (other than an event which would constitute a Change of
Control), matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof (except, in each case, upon the occurrence of a Change of Control) on or
prior to the final maturity date of the Notes.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"EXISTING CREDIT AGREEMENTS" mean: (1) the Credit Agreement dated as of
July 26, 2001, between the Company, the lenders party thereto in their
capacities as lenders thereunder and Bank of America, N.A., as agent; (2) the
Amended and Restated Credit Agreement dated as of December 28, 2000 between SFI
II, Inc. and Greenwich Capital Markets, Inc., as lender; (3) the credit facility
between Deutsche Bank AG, New York Branch, and iStar DB Seller LLC, dated as of
January 11, 2001; and (4) the credit facility, dated as of August 12, 1998,
between Lehman Brothers Holdings, Inc. and SFT Whole Loan A, Inc., in each case,
together with the related documents thereto (including, without limitation, any
security documents), in each case as such agreements may be amended (including
any amendment and restatement thereof), supplemented or otherwise modified from
time to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided that such increase in borrowings is
permitted by the "Limitation on Incurrence of Additional Indebtedness" covenant
above) or adding Subsidiaries of the Company as additional borrowers or
guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"GUARANTOR" means: each of the Company's Subsidiaries that in the future
executes a supplemental indenture in which such Subsidiary agrees to be bound by
the terms of the Indenture as a Guarantor; provided that any Person constituting
a Guarantor as described above shall cease to constitute a Guarantor when its
respective Guarantee is released in accordance with the terms of the Indenture.
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"INDEBTEDNESS" means with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding trade
accounts payable and other accrued liabilities arising in the ordinary
course of business that are not overdue by 90 days or more or are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted);
(5) all Obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause (8)
below;
(7) all Obligations of any other Person of the type referred to in
clauses (1) through (6) above which are secured by any lien on any property
or asset of such Person, the amount of such Obligation being deemed to be
the lesser of the fair market value of such property or asset and the amount
of the Obligation so secured;
(8) all Obligations under currency agreements and interest swap
agreements of such Person; and
(9) all Disqualified Capital Stock issued by such Person with the
amount of Indebtedness represented by such Disqualified Capital Stock being
equal to the greater of its voluntary or involuntary liquidation preference
and its maximum fixed repurchase price, but excluding accrued dividends, if
any.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the issuer of such Disqualified Capital
Stock.
"INDEPENDENT FINANCIAL ADVISOR" means a firm: (1) that does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company; and (2) that, in the judgment of the
Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee), or
corporate tenant lease to or
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capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences or Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by us and
our Subsidiaries on commercially reasonable terms in accordance with our or our
Subsidiaries' normal trade practices, as the case may be.
"INVESTMENT GRADE" means a rating of the Notes by both S&P and Moody's, each
such rating being one of such agency's four highest generic rating categories
that signifies investment grade (i.e. BBB- (or the equivalent) or higher by S&P
and Baa3 (or the equivalent) or higher by Moody's); provided, in each case, such
ratings are publicly available; provided, further, that in the event Moody's or
S&P is no longer in existence for purposes of determining whether the Notes are
rated "Investment Grade," such organization may be replaced by a nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) designated by the Company, notice of which shall be given to the
Trustee.
"ISSUE DATE" means August 16, 2001.
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"NON-RECOURSE INDEBTEDNESS" means any of our or any of our Subsidiaries'
Indebtedness that is:
(1) specifically advanced to finance the acquisition of investment
assets and secured only by the assets to which such Indebtedness relates
without recourse to the Company or any of its Subsidiaries (other than
subject to such customary carve-out matters for which the Company or its
Subsidiaries acts as a guarantor in connection with such Indebtedness, such
as fraud, misappropriation and misapplication, unless, until and for so long
as a claim for payment or performance has been made thereunder (which has
not been satisfied) at which time the obligations with respect to any such
customary carve-out shall not be considered Non-Recourse Indebtedness, to
the extent that such claim is a liability of the Company for GAAP purposes);
(2) advanced to any of our Subsidiaries or group of our Subsidiaries
formed for the sole purpose of acquiring or holding investment assets
against, which a loan is obtained that is made without recourse to, and with
no cross-collateralization against our or any of the Company's Subsidiaries'
other assets (other than subject to such customary carve-out matters for
which the Company or its Subsidiaries acts as a guarantor in connection with
such Indebtedness, such as fraud, misappropriation and misapplication,
unless, until and for so long as a claim for payment or performance has been
made thereunder (which has not been satisfied) at which time the obligations
with respect to any such customary carve-out shall not be considered
Non-Recourse Indebtedness, to the extent that such claim is a liability of
the Company for GAAP purposes) and upon complete or partial liquidation of
which the loan must be correspondingly completely or partially repaid, as
the case may be; or
(3) specifically advanced to finance the acquisition of real property
and secured by only the real property to which such Indebtedness relates
without recourse to the Company or any of its Subsidiaries (other than
subject to such customary carve-out matters for which the Company or its
Subsidiaries acts as a guarantor in connection with such Indebtedness, such
as fraud, misappropriation and misapplication, unless, until and for so long
as a claim for payment or performance has been made thereunder (which has
not been satisfied) at
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which time the obligations with respect to any such customary carve-out
shall not be considered Non-Recourse Indebtedness, to the extent that such
claim is a liability of the Company for GAAP purposes).
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnification, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"PERMITTED HOLDER(S)" means Starwood Mezzanine Investors, L.P., SOFI-IV SMT
Holdings, L.L.C., Starwood Capital Group, L.L.C. and each of their respective
Affiliates.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(1) Indebtedness under the Notes issued in this offering;
(2) Indebtedness incurred pursuant to the Existing Credit Agreements in
an aggregate principal amount at any time outstanding not to exceed the
maximum amount available under each Existing Credit Facility as in effect on
the Issue Date reduced by any required permanent repayments (which are
accompanied by a corresponding permanent commitment reduction) thereunder;
(3) other Indebtedness of the Company and its Subsidiaries outstanding
on the Issue Date reduced by the amount of any scheduled amortization
payments or mandatory prepayments when actually paid or permanent reductions
thereon;
(4) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Subsidiaries and Interest Swap Obligations of any
Subsidiary of the Company covering Indebtedness of such Subsidiary;
provided, however, that such Interest Swap Obligations are entered into to
protect the Company and its Subsidiaries from fluctuations in interest rates
on Indebtedness incurred in accordance with the Indenture to the extent the
notional principal amount of such Interest Swap Obligation does not exceed
the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;
(5) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(6) Indebtedness of a Subsidiary of the Company to the Company or to a
Wholly Owned Subsidiary of the Company for so long as such Indebtedness is
held by the Company or a Wholly Owned Subsidiary of the Company;
(7) Indebtedness of the Company to a Wholly Owned Subsidiary of the
Company for so long as such Indebtedness is held by a Wholly Owned
Subsidiary of the Company, in each case subject to no Lien; provided that:
(a) any Indebtedness of the Company to any Wholly Owned Subsidiary of the
Company is unsecured and subordinated, pursuant to a written agreement, to
the Company's obligations under the Indenture and the Notes; and (b) if as
of any date any Person other than a Wholly Owned Subsidiary of the Company
owns or holds any such Indebtedness or any Person holds a Lien in respect of
such Indebtedness, such date shall be deemed the incurrence of Indebtedness
not constituting Permitted Indebtedness by the Company;
(8) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts)
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drawn against insufficient funds in the ordinary course of business;
provided, however, that such Indebtedness is extinguished within two
business days of incurrence;
(9) Indebtedness of the Company or any of its Subsidiaries represented
by letters of credit for the account of the Company or such Subsidiary, as
the case may be, in order to provide security for workers' compensation
claims, payment obligations in connection with self-insurance or similar
requirements in the ordinary course of business;
(10) Refinancing Indebtedness; and
(11) additional Indebtedness of the Company and its Subsidiaries in an
aggregate principal amount not to exceed $15.0 million at any one time
outstanding (which amount may, but need not, be incurred in whole or in part
under the Existing Credit Agreements).
For purposes of determining compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the categories of Permitted Indebtedness
described in clauses (1) through (11) above or is entitled to be incurred
pursuant to the second paragraph of such covenant, the Company shall, in its
sole discretion, classify (or later reclassify) such item of Indebtedness in any
manner that complies with this covenant. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms, and the
payment of dividends on Disqualified Capital Stock in the form of additional
shares of the same class of Disqualified Capital Stock will not be deemed to be
an incurrence of Indebtedness or an issuance of Disqualified Capital Stock for
purposes of the "Limitations on Incurrence of Additional Indebtedness" covenant.
"PERMITTED LIENS" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims
either: (a) not delinquent; or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Subsidiaries shall have set
aside on its books such reserves as may be required pursuant to GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(3) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(4) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(5) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of its Subsidiaries;
S-75
(6) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(7) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(8) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(9) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Subsidiaries, including rights of offset and set-off;
(10) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture; and
(11) Liens securing Indebtedness under Currency Agreements.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"REFINANCE" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Subsidiary of the Company of Indebtedness incurred in accordance with the
"Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clauses (2), (4), (5), (6), (7), (8), (9) or (11) of the definition
of Permitted Indebtedness), in each case that does not:
(1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing
(plus the amount of any premium required to be paid under the terms of the
instrument governing such Indebtedness and plus the amount of reasonable
expenses incurred by the Company in connection with such Refinancing); or
(2) create Indebtedness with: (a) a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Indebtedness
being Refinanced; or (b) a final maturity earlier than the final maturity of
the Indebtedness being Refinanced; provided that (i) if such Indebtedness
being Refinanced is Indebtedness of the Company, then such Refinancing
Indebtedness shall be Indebtedness solely of the Company, and (ii) if such
Indebtedness being Refinanced is subordinate or junior to the Notes, then
such Refinancing Indebtedness shall be subordinate to the Notes at least to
the same extent and in the same manner as the Indebtedness being Refinanced.
"REIT" means Real Estate Investment Trust.
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"SECURED INDEBTEDNESS" means any Indebtedness secured by a Lien upon the
property of the Company or any of its Subsidiaries.
"SENIOR RECOURSE INDEBTEDNESS" means all Indebtedness of the Company and its
Subsidiaries (other than Indebtedness that is Non-Recourse Indebtedness and
other than Subordinated Indebtedness).
"SIGNIFICANT SUBSIDIARY," with respect to any Person, means any Subsidiary
of such Person that satisfies the criteria for a "significant subsidiary" set
forth in Rule 1.02(w) of Regulation S-X under the Exchange Act.
"SUBORDINATED INDEBTEDNESS" means all of our and our Subsidiaries'
Indebtedness that expressly provides that such Indebtedness shall be
subordinated in right of payment to any other Indebtedness and matures or is
mandatorily redeemable pursuant to a sinking fund obligation or otherwise, or is
redeemable at the sole option of the holder thereof (except, in each case, upon
the occurrence of a Change of Control) on or after the final maturity date of
the Notes.
"SUBSIDIARY," with respect to any Person, means:
(1) any corporation of which the outstanding Capital Stock having at
least a majority of the votes entitled to be cast in the election of
directors under ordinary circumstances shall at the time be owned, directly
or indirectly, by such Person; or
(2) any other Person of which at least a majority of the voting
interest under ordinary circumstances is at the time, directly or
indirectly, owned by such Person.
"TOTAL UNENCUMBERED ASSETS" as of any date means the sum of:
(1) those Undepreciated Real Estate Assets not securing any portion of
Secured Indebtedness; and
(2) all other assets (but excluding intangibles and accounts
receivable) of the Company and its Subsidiaries not securing any portion of
Secured Indebtedness determined on a consolidated basis in accordance with
GAAP.
"UNDEPRECIATED REAL ESTATE ASSETS" means, as of any date, the cost (being
the original cost to the Company or any of Subsidiaries plus capital
improvements) of real estate assets of the Company and its Subsidiaries on such
date, before depreciation and amortization of such real estate assets,
determined on a consolidated basis in accordance with GAAP.
"UNSECURED INDEBTEDNESS" means any Indebtedness of the Company or any of its
Subsidiaries that is not Secured Indebtedness.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing: (1) the then outstanding
aggregate principal amount of such Indebtedness into; (2) the sum of the total
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED SUBSIDIARY" of any Person means any Subsidiary of such Person
of which all the outstanding voting securities (other than in the case of a
foreign Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable law) are
owned by such Person or any Wholly Owned Subsidiary of such Person.
S-77
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain United States federal
income tax consequences expected to result from the purchase, ownership and
disposition of the Notes by holders who acquire the Notes on original issue for
cash and who hold the Notes as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code. This summary is
based upon current provisions of the Code, applicable Treasury regulations,
judicial authority and administrative rulings and practice, any of which may be
altered with retroactive effect thereby changing the Federal income tax
consequences discussed below. There can be no assurance that the Internal
Revenue Service (the "IRS") will not take a contrary view, and no ruling from
the IRS has been or will be sought.
The United States federal income tax treatment of a holder of Notes may vary
depending upon such holders particular situation. Certain holders (including,
but not limited to, certain financial institutions, partnerships or other
passthrough entities, insurance companies, broker-dealers, expatriates and
persons holding the Notes as part of a "straddle," "hedge" or "conversion
transaction") may be subject to special rules not discussed below.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR
TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS.
As used herein, the term "U.S. Holder" means a beneficial owner of Notes
that is for United States federal income tax purposes:
- a citizen or resident of the United States;
- a corporation created or organized in or under the laws of the United
States or of any political subdivision thereof;
- an estate whose income is subject to United States federal income tax
regardless of its source;
- a trust, if both: (1) a court within the United States is able to exercise
primary supervision over the administration of the trust; and (2) one or
more United States persons have the authority to control all substantial
decisions of the trust; or
- certain trusts in existence on August 20, 1996, and treated as United
States persons prior to such date, that elect to continue to be treated as
United States persons.
As used herein, the term "Non-U.S. Holder" means a beneficial owner of Notes
that is, for United States federal tax purposes, either a nonresident alien or a
corporation, estate or trust that is not a U.S. Holder.
U.S. HOLDERS
PAYMENTS OF INTEREST. In general, interest on a Note will be taxable to a
U.S. Holder as ordinary income at the time it accrues or is received, in
accordance with the U.S. Holder's regular method of accounting for United States
federal income tax purposes.
S-78
SALE, RETIREMENT OR OTHER TAXABLE DISPOSITION. In general, a U.S. Holder of
a Note will recognize gain or loss upon the sale, retirement or other taxable
disposition of such Note in an amount equal to the difference between:
- the amount of cash and the fair market value of property received in
exchange therefor (except to the extent attributable to the payment of
accrued interest not previously taken into income, which generally will be
taxable to a U.S. Holder as ordinary income); and
- the U.S. Holder's adjusted tax basis in such Note.
A U.S. Holder's tax basis in a Note generally will be equal to the price
paid for such Note. Capital gain recognized by a non-corporate U.S. Holder from
the sale of a capital asset that has been held for more than 12 months generally
will be subject to tax at a rate not to exceed 20%, whereas capital gain
recognized by a non-corporate U.S. Holder from the sale of a capital asset held
for 12 months or less generally will be subject to tax at ordinary income tax
rates. Capital gain recognized by a corporate U.S. Holder will be subject to tax
at the ordinary income tax rates applicable to corporations regardless of the
corporation's holding period.
NON-U.S. HOLDERS
A Non-U.S. Holder will not be subject to United States federal income or
withholding tax on payments of principal, premium (if any) or interest
(including original issue discount, if any) on a Note if such payments are not
effectively connected with the conduct of a U.S. trade or business, unless such
Non-U.S. Holder owns directly, or by attribution, 10% or more of the total
combined voting power of all classes of our stock entitled to vote or is a
controlled foreign corporation related to us, in which case such interest will
be subject to a 30% withholding tax (unless reduced or eliminated by an
applicable treaty). To qualify for the exemption from taxation (or the
elimination or reduction of the applicable withholding tax under a treaty), the
last United States payor in the chain of payment prior to payment to a Non-U.S.
Holder (the "Withholding Agent") must have received, before payment, a statement
that:
- is signed by the Non-U.S. Holder under penalties of perjury;
- certifies that the Non-U.S. Holder is not a U.S. Holder; and
- provides the name and address of the Non-U.S. Holder.
The statement may be made on an IRS Form W-8BEN or a substantially similar
form, and the Non-U.S. Holder must inform the Withholding Agent of any change in
the information on the statement within 30 days of such change. If a Note is
held through a securities clearing organization or certain other financial
institutions, the beneficial owner of the Note must provide the above statement
to such organization or institution and the organization or institution must
provide to the Withholding Agent a certificate stating that such organization or
institution has been provided with a valid IRS Form W-8BEN (or substantially
similar form).
In addition, a Non-U.S. Holder generally will not be subject to Federal
income or withholding tax on any amount which constitutes gain upon retirement
or disposition of a Note, unless the gain is effectively connected with the
conduct of a trade or business in the United States by the Non-U.S. Holder or,
in the case of a Non-U.S. Holder who is an individual, the Non-U.S. Holder is
present in the United States for 183 days or more in the taxable year of the
sale and certain other conditions are met. Certain other exceptions may be
applicable, and a Non-U.S. Holder should consult its tax advisor in this regard.
If interest and other payments received by a Non-U.S. Holder with respect to
the Notes (including proceeds from a sale, retirement or other disposition of
the Notes) are effectively connected with the conduct by the Non-U.S. Holder of
a trade or business within the United States (or the Non-U.S. Holder is
otherwise subject to United States federal income taxation on a
S-79
net basis with respect to such holder's ownership of the Notes), such Non-U.S.
Holder will generally be subject to the rules described above for a U.S. Holder
(subject to any modification provided under an applicable income tax treaty).
Such Non-U.S. Holder may also be subject to the "branch profits tax" if such
holder is a corporation.
A Note will not be includable in the estate of a Non-U.S. Holder who is an
individual unless the individual owns directly, or by attribution, 10% or more
of the total combined voting power of all classes of our stock entitled to vote
or, at the time of such individual's death, payments in respect of the Note
would have been effectively connected with the conduct by such individual of a
trade or business in the United States.
BACKUP WITHHOLDING
Certain non-corporate U.S. Holders may be subject to backup withholding on
payments of principal and interest on, and the proceeds of the disposition of,
the Notes, if the U.S. Holder:
- fails to furnish on a properly completed IRS Form W-9 (or substantially
similar form) its taxpayer identification number ("TIN"), which, for an
individual, would be his or her Social Security number;
- furnishes an incorrect TIN;
- is notified by the IRS that it has failed to report payments of interest
or dividends; or
- under certain circumstances, fails to certify, under penalty of perjury,
that it has furnished a correct TIN and has not been notified by the IRS
that it is subject to backup withholding tax for failure to report
interest or dividend payments.
In addition, such payments of principal, interest and disposition proceeds
to U.S. Holders will generally be subject to information reporting. U.S. Holders
should consult their tax advisors regarding their qualification for exemption
from backup withholding and the procedure for obtaining such an exemption, if
applicable.
We must report annually to the IRS and to each Non-U.S. Holder any interest
on the Notes that is subject to withholding or that is exempt from U.S.
withholding tax pursuant to a tax treaty or the "portfolio interest" exemption.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities of the
country in which the Non-U.S. Holder resides.
Backup withholding and other information reporting generally will not apply
to payments of interest made to a Non-U.S. Holder of a Note who provides a
properly completed IRS Form W-8BEN (or a substantially similar form) or
otherwise establishes an exemption from backup withholding. Payments of
principal or the proceeds of a disposition of the Notes by or through a United
States office of a broker generally will be subject to backup withholding and
information reporting unless the Non-U.S. Holder certifies its status as a
Non-U.S. Holder under penalties of perjury (and certain other conditions are
met) or otherwise establishes an exemption. Payments of principal or the
proceeds of a disposition of the Notes by or through a foreign office of a
United States broker or foreign broker with certain relationships to the United
States generally will be subject to information reporting (but not backup
withholding) unless the broker has documentary evidence in its records that the
holder is not a U.S. person and certain other conditions are met or the holder
otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's Federal income tax liability provided the required
information is furnished to the IRS.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
among the Underwriters, the Underwriters named below have agreed to purchase
from us, severally and not jointly, the following respective principal amounts
of Notes offered by this prospectus supplement at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
prospectus supplement:
PRINCIPAL AMOUNT OF
UNDERWRITER NOTES
----------- -------------------
Deutsche Banc Alex. Brown Inc............................. $175,000,000
Bear, Stearns & Co. Inc................................... 122,500,000
Fleet Securities, Inc..................................... 26,250,000
UBS Warburg LLC........................................... 26,250,000
------------
Total................................................. $350,000,000
============
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent.
We have been advised by the Underwriters that the Underwriters propose to
offer the Notes to the public at the public offering price set forth on the
cover page of this prospectus supplement and to certain dealers at such price
less a concession not in excess of 0.25% of the principal amount of the Notes.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of 0.10% of the principal amount of the Notes to certain other dealers.
After commencement of the offering, the offering price and other selling terms
may be changed by the Underwriters.
The Notes are not listed on any securities exchange. The Underwriters have
advised us that they will act as market-makers for the Notes. However, the
Underwriters are not obligated to do so and may discontinue any market-making at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the Notes.
We have agreed to indemnify the Underwriters and certain controlling persons
against certain liabilities, including liabilities under the Securities Act.
The Underwriters have advised us that, pursuant to Regulation M under the
Securities Exchange Act of 1934, as amended, certain persons participating in
the offering may engage in transactions, including overallotment, stabilizing
bids, syndicate covering transactions or the imposition of penalty bids, which
may have the effect of stabilizing or maintaining the market price of the Notes
at a level above that which might otherwise prevail in the open market.
Overallotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. A stabilizing bid is a bid for the purchase
of Notes on behalf of the Underwriters for the purpose of fixing or maintaining
the price of the Notes. A syndicate covering transaction is the bid for or the
purchase of Notes on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the offering. A penalty bid is
an arrangement permitting the Underwriters to reclaim the selling concession
otherwise accruing to a syndicate member in connection with the offering if the
Notes originally sold by such syndicate member are purchased in a syndicate
covering transaction and therefore have not been effectively placed by such
syndicate member. The Underwriters are not obligated to engage in these
activities and, if commenced, any of the activities may be discontinued at any
time.
The Underwriters have advised us that they do not intend to confirm sales to
any account over which any of them exercises discretionary authority.
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The Underwriters and their predecessors and affiliates have from time to
time provided, and expect to continue to provide, financial and advisory
services to us for customary fees. Affiliates of each of the Underwriters are
also lenders to us. An affiliate of Deutsche Banc Alex. Brown Inc. is a lender
under one of the credit facilities that is being partially repaid from the
proceeds of this offering and will receive a substantial portion of the net
proceeds.
It is expected that delivery of the Notes will be made against payment
therefor on or about August 16, 2001, which is the fifth business day following
the date of this prospectus supplement. We refer to this settlement cycle as
"T+5." Purchasers of Notes should be aware that the ability to settle secondary
market trades of the Notes effected on the date of pricing and the succeeding
business days may be affected by the T+5 settlement.
LEGAL MATTERS
The legality of the Notes offered by this prospectus supplement and the
accompanying prospectus will be passed upon for us by Clifford Chance Rogers &
Wells LLP, New York, New York, and for the Underwriters by Cahill Gordon &
Reindel, New York, New York. Clifford Chance Rogers & Wells LLP will rely upon
the opinion of Ballard Spahr Andrews & Ingersoll, LLP with respect to matters of
Maryland law.
EXPERTS
The financial statements as of December 31, 2000 and 1999 and for each of
the three years in the period ended December 31, 2000, included in this
prospectus supplement, have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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FINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
UNAUDITED QUARTERLY FINANCIAL STATEMENTS:
Consolidated Balance Sheets of the Company as of June 30,
2001 and December 31, 2000................................ F-2
Consolidated Statements of Operations of the Company for the
three months and six months ended June 30, 2001 and
2000...................................................... F-3
Consolidated Statement of Changes in Shareholders' Equity of
the Company for the six months ended June 30, 2001........ F-4
Consolidated Statements of Cash Flows of the Company for the
three months and six months ended June 30, 2001 and
2000...................................................... F-5
Notes to Consolidated Financial Statements of the Company... F-6
AUDITED ANNUAL FINANCIAL STATEMENTS:
Report of Independent Accountants........................... F-31
Consolidated Balance Sheets of the Company as of December
31, 2000 and December 31, 1999............................ F-32
Consolidated Statements of Operations of the Company for the
years ended December 31, 2000, 1999 and 1998.............. F-33
Consolidated Statements of Changes in Shareholders' Equity
of the Company for the years ended December 31, 2000, 1999
and 1998.................................................. F-34
Consolidated Statements of Cash Flows of the Company for the
years ended December 31, 2000, 1999 and 1998.............. F-35
Notes to Consolidated Financial Statements of Company....... F-36
F-1
ISTAR FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
AS OF AS OF
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
ASSETS
Loans and other lending investments, net.................... $2,252,255 $2,225,183
Real estate subject to operating leases, net................ 1,634,524 1,670,169
Cash and cash equivalents................................... 26,301 22,752
Restricted cash............................................. 27,800 20,441
Marketable securities....................................... 41 41
Accrued interest and operating lease income receivable...... 17,353 20,167
Deferred operating lease income receivable.................. 15,220 10,236
Deferred expenses and other assets.......................... 77,135 62,224
Investment in iStar Operating............................... 2,721 3,562
---------- ----------
Total assets.............................................. $4,053,350 $4,034,775
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities.... $ 61,320 $ 52,038
Dividends payable........................................... 5,225 56,661
Debt obligations............................................ 2,153,031 2,131,967
---------- ----------
Total liabilities......................................... 2,219,576 2,240,666
---------- ----------
Commitments and contingencies............................... -- --
Minority interest in consolidated entities.................. 2,649 6,224
Shareholders' equity:
Series A Preferred Stock, $0.001 par value, liquidation
preference $50.00 per share, 4,400 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively.............................................. 4 4
Series B Preferred Stock, $0.001 par value, liquidation
preference $25.00 per share, 2,000 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively.............................................. 2 2
Series C Preferred Stock, $0.001 par value, liquidation
preference $25.00 per share, 1,300 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively.............................................. 1 1
Series D Preferred Stock, $0.001 par value, liquidation
preference $25.00 per share, 4,000 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively.............................................. 4 4
Common Stock, $0.001 par value, 200,000 shares authorized,
86,288 and 85,726 shares issued and outstanding at June
30, 2001 and December 31, 2000, respectively.............. 86 85
Warrants and options........................................ 20,953 16,943
Additional paid in capital.................................. 1,977,645 1,966,396
Retained earnings (deficit)................................. (112,290) (154,789)
Accumulated other comprehensive income (losses) (See Note
12)....................................................... (14,539) (20)
Treasury stock (at cost).................................... (40,741) (40,741)
---------- ----------
Total shareholders' equity................................ 1,831,125 1,787,885
---------- ----------
Total liabilities and shareholders' equity................ $4,053,350 $4,034,775
========== ==========
The accompanying notes are an integral part of the financial statements.
F-2
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUE:
Interest income................................ $ 63,903 $ 66,864 $130,816 $126,947
Operating lease income......................... 49,244 47,223 98,767 93,495
Other income................................... 7,678 3,827 13,861 8,360
-------- -------- -------- --------
Total revenue................................ 120,825 117,914 243,444 228,802
-------- -------- -------- --------
COSTS AND EXPENSES:
Interest expense............................... 41,368 42,770 87,728 80,559
Operating costs-corporate tenant lease
assets....................................... 3,274 2,959 6,510 6,284
Depreciation and amortization.................. 8,778 8,862 17,586 17,871
General and administrative..................... 6,498 7,808 12,600 14,711
Provision for possible credit losses........... 1,750 1,500 3,500 3,000
Stock-based compensation expense............... 1,200 586 2,060 1,134
-------- -------- -------- --------
Total costs and expenses..................... 62,868 64,485 129,984 123,559
-------- -------- -------- --------
Net income before minority interest, gain on sale
of corporate tenant lease assets, extraordinary
loss and cumulative effect of change in
accounting principle........................... 57,957 53,429 113,460 105,243
Minority interest in consolidated entities....... (41) (41) (136) (82)
Gain on sale of corporate tenant lease assets.... 1,044 441 1,599 974
-------- -------- -------- --------
Net income before extraordinary loss and
cumulative effect of change in accounting
principle...................................... 58,960 53,829 114,923 106,135
Extraordinary loss on early extinguishment of
debt........................................... -- -- (1,037) (317)
Cumulative effect of change in accounting
principle
(See Note 3)................................... -- -- (282) --
-------- -------- -------- --------
Net income....................................... 58,960 53,829 113,604 105,818
Preferred dividend requirements.................. (9,227) (9,227) (18,454) (18,454)
-------- -------- -------- --------
Net income allocable to common shareholders...... $ 49,733 $ 44,602 $ 95,150 $ 87,364
======== ======== ======== ========
Basic earnings per common share.................. $ 0.58 $ 0.52 $ 1.11 $ 1.03
======== ======== ======== ========
Diluted earnings per common share................ $ 0.56 $ 0.52 $ 1.09 $ 1.02
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-3
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)
(UNAUDITED)
SERIES A SERIES B SERIES C SERIES D COMMON WARRANTS ADDITIONAL RETAINED
PREFERRED PREFERRED PREFERRED PREFERRED STOCK AND PAID-IN EARNING
STOCK STOCK STOCK STOCK AT PAR OPTIONS CAPITAL (DEFICIT)
--------- --------- --------- --------- --------- --------- ---------- ---------
Balance at December 31, 2000....... $ 4 $ 2 $ 1 $ 4 $ 85 $16,943 $1,966,396 $(154,789)
Exercise of options................ -- -- -- -- 1 -- 8,428 --
Dividends declared-preferred
stock............................ -- -- -- -- -- -- 166 (18,454)
Dividends declared-common stock.... -- -- -- -- -- -- -- (52,651)
Restricted stock units issued to
employees in lieu of cash
bonuses.......................... -- -- -- -- -- -- 1,478 --
Restricted stock units granted to
employees........................ -- -- -- -- -- -- 1,021 --
Options granted to employees....... -- -- -- -- -- 4,010 -- --
Issuance of stock under DRIP plan.. -- -- -- -- -- -- 156 --
Cumulative effect of change in
accounting principle............. -- -- -- -- -- -- -- --
Change in accumulated other
comprehensive income............. -- -- -- -- -- -- -- --
Net income for the period.......... -- -- -- -- -- -- -- 113,604
---- ---- ---- ---- ---- ------- ---------- ---------
Balance at June 30, 2001........... $ 4 $ 2 $ 1 $ 4 $ 86 $20,953 $1,977,645 $(112,290)
==== ==== ==== ==== ==== ======= ========== =========
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY TOTAL
INCOME STOCK EQUITY
--------------- --------- ----------
Balance at December 31, 2000....... $ (20) $(40,741) $1,787,885
Exercise of options................ -- -- 8,429
Dividends declared-preferred
stock............................ -- -- (18,288)
Dividends declared-common stock.... -- -- (52,651)
Restricted stock units issued to
employees in lieu of cash
bonuses.......................... -- -- 1,478
Restricted stock units granted to
employees........................ -- -- 1,021
Options granted to employees....... -- -- 4,010
Issuance of stock under DRIP plan.. -- -- 156
Cumulative effect of change in
accounting principle............. (9,445) -- (9,445)
Change in accumulated other
comprehensive income............. (5,074) -- (5,074)
Net income for the period.......... -- -- 113,604
-------- -------- ----------
Balance at June 30, 2001........... $(14,539) $(40,741) $1,831,125
======== ======== ==========
The accompanying notes are an integral part of the financial statements.
F-4
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2001 2000* 2001 2000*
--------- --------- --------- ---------
Cash flows from operating activities:
Net income.................................................. $ 58,960 $ 53,829 $ 113,604 $ 105,818
Adjustments to reconcile net income to cash flows provided
by operating activities:
Minority interest......................................... 41 41 136 82
Non-cash expense for options issued....................... 1,200 586 2,060 1,134
Depreciation and amortization............................. 13,488 11,846 27,797 22,980
Amortization of discounts/premiums, deferred interest and
costs on lending investments............................ (14,429) (4,683) (19,301) (11,750)
Equity in earnings of unconsolidated joint ventures and
subsidiaries............................................ (887) (2,087) (3,689) (2,411)
Distributions from operating joint ventures............... 1,818 1,426 2,916 2,378
Deferred operating lease income adjustments............... (2,407) (2,249) (4,983) (4,531)
Realized (gains) losses on sales of securities............ -- -- -- 229
Gain on sale of corporate tenant lease assets............. (1,044) (441) (1,599) (974)
Extraordinary loss on early extinguishment of debt........ -- -- 1,037 317
Cumulative effect of change in accounting principle....... -- -- 282 --
Provision for possible credit losses...................... 1,750 1,500 3,500 3,000
Changes in assets and liabilities:
(Increase) decrease in accrued interest and operating
lease income receivable............................... 1,786 (768) 3,152 (2,181)
Increase in deferred expenses and other assets.......... (5,384) (6,526) (6,230) (9,967)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities........................ (150) 421 (2,745) (4,336)
--------- --------- --------- ---------
Cash flows provided by operating activities............... 54,742 52,895 115,937 99,788
--------- --------- --------- ---------
Cash flows from investing activities:
New investment originations............................... (300,182) (231,248) (543,471) (443,173)
Principal fundings on existing loan commitments........... (13,327) (21,267) (24,442) (37,809)
Net proceeds from sale of corporate tenant lease assets... 4,079 100,974 7,834 146,265
Repayments of and principal collections from loans and
other lending investments............................... 309,588 41,429 556,980 163,232
Investments in and advances to unconsolidated joint
ventures................................................ (169) (11,305) (488) (11,973)
Distributions from unconsolidated joint ventures.......... -- -- 24,265 --
Capital expenditures for build-to-suit activities......... (4,772) -- (6,419) --
Capital improvement projects on real estate subject to
operating leases........................................ (2,083) -- (2,083) --
Other capital expenditures on real estate subject to
operating leases........................................ (813) (1,224) (1,572) (3,082)
--------- --------- --------- ---------
Cash flows provided by (used in) investing activities..... (7,679) (122,641) 10,604 (186,540)
--------- --------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
facilities.............................................. 141,893 (562,304) 183,052 (497,127)
Borrowings under term loans............................... 193,000 60,000 210,040 90,000
Repayments under term loans............................... (78,883) (230,629) (116,215) (240,355)
Repayments under unsecured notes.......................... (100,000) -- (100,000) --
Borrowings under repurchase agreements.................... -- 27,981 367 27,981
Repayments under repurchase agreements.................... (24,683) (2,273) (56,008) (2,392)
Repayments under bond offerings........................... (99,908) 857,015 (101,897) 857,015
Common dividends paid..................................... (52,651) (51,170) (104,087) (99,611)
Preferred dividends paid.................................. (9,145) (9,144) (18,288) (18,288)
Increase in restricted cash held in connection with debt
obligations............................................. (14,575) (4,882) (7,358) (5,943)
Distributions to minority interest in consolidated
entities................................................ (41) (41) (3,711) (82)
Extraordinary loss on early extinguishment of debt........ -- -- (1,037) (317)
Payments for deferred financing costs..................... (5,032) (23,858) (16,459) (25,771)
Increase in loan costs.................................... -- (25) -- (131)
Proceeds from exercise of options and issuance of DRIP
shares.................................................. 6,962 83 8,609 83
--------- --------- --------- ---------
Cash flows provided by (used in) financing activities..... (43,063) 60,753 (122,992) 85,062
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents............ 4,000 (8,993) 3,549 (1,690)
Cash and cash equivalents at beginning of period............ 22,301 41,711 22,752 34,408
--------- --------- --------- ---------
Cash and cash equivalents at end of period.................. $ 26,301 $ 32,718 $ 26,301 $ 32,718
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of amounts
capitalized............................................. $ 38,147 $ 34,595 $ 80,970 $ 71,445
========= ========= ========= =========
-------------
* RECLASSIFED TO CONFORM TO 2001 PRESENTATION.
The accompanying notes are an integral part of the financial statements
F-5
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS
ORGANIZATION--iStar Financial Inc. (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
approximately $1.1 billion of assets to the Company's predecessor, Starwood
Financial Trust, in exchange for a controlling interest in that company
(collectively, the "Recapitalization Transactions"). Since that time, the
Company has grown by originating new lending and leasing transactions, as well
as through corporate acquisitions. Specifically, in September 1998, the Company
acquired the loan origination and servicing business of a major insurance
company, and in December 1998, the Company acquired the mortgage and mezzanine
loan portfolio of its largest private competitor. Additionally, in
November 1999, the Company acquired TriNet Corporate Realty Trust, Inc.
("TriNet" or the "Leasing Subsidiary"), which was then the largest publicly
traded company specializing in the net leasing of corporate office and
industrial facilities (the "TriNet Acquisition"). The TriNet Acquisition was
structured as a stock-for-stock merger of TriNet with a subsidiary of the
Company. Concurrent with the TriNet Acquisition, the Company also acquired its
external advisor (the "Advisor Transaction") in exchange for shares of common
stock of the Company ("Common Stock") and converted its organizational form to a
Maryland corporation (the "Incorporation Merger"). As part of the conversion to
a Maryland corporation, the Company replaced its 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 under the symbol "SFI" in November 1999.
During 1993 through 1997, the Company did not qualify as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). However, pursuant to a closing agreement with the Internal Revenue
Service (the "IRS") obtained in March 1998, the Company was eligible and elected
to be taxed as a REIT for the taxable year beginning January 1, 1998.
BUSINESS--The Company is the leading publicly traded finance company focused
on the commercial real estate industry. The Company provides structured
financing to private and corporate owners of real estate nationwide, including
senior and junior mortgage debt, corporate mezzanine and subordinated capital,
and corporate net lease financing. The Company seeks to deliver superior
risk-adjusted returns on equity for shareholders by providing innovative and
value-added financing solutions to its customers.
The Company has implemented its investment strategy by: (1) focusing on the
origination of large, highly structured mortgage, corporate and lease financings
where customers require flexible financial solutions, and avoiding commodity
businesses in which there is significant direct competition from other providers
of capital; (2) developing direct relationships with borrowers and corporate
tenants as opposed to sourcing transactions through intermediaries; (3) adding
value beyond simply providing capital by offering borrowers and corporate
tenants specific lending expertise, flexibility, certainty and continuing
relationships beyond the closing of a particular financing transaction; and
(4) 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 tenants'
underlying credit obligations.
F-6
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND BUSINESS (CONTINUED)
The Company intends to continue to emphasize a mix of portfolio financing
transactions to create built-in diversification and single-asset financings for
properties with strong, long-term competitive market positions.
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,
Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles ("GAAP"). The Consolidated Financial Statements
include the accounts of the Company, its qualified REIT subsidiaries, and its
majority-owned and controlled partnerships. Certain third-party mortgage
servicing operations are conducted through iStar Operating, Inc. ("iStar
Operating"), a taxable corporation which is not consolidated with the Company
for financial reporting or income tax purposes. The Company owns all of the
non-voting preferred stock and a 95% economic interest in iStar Operating, which
is accounted for under the equity method for financial reporting purposes. The
Company does not own any of the outstanding voting stock of iStar Operating. In
addition, the Company has an investment in TriNet Management Operating
Company, Inc. ("TMOC"), a taxable noncontrolled subsidiary of the Company, which
is also accounted for under the equity method. Further, certain other
investments in partnerships or joint ventures which the Company does not control
are also accounted for under the equity method. All significant intercompany
balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying Consolidated Financial
Statements contain all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the Company's consolidated financial
position at June 30, 2001 and December 31, 2000 and the results of its
operations, changes in shareholders' equity and its cash flows for the three-
and six-month periods ended June 30, 2001 and 2000, respectively. Such operating
results are not necessarily indicative of the results that may be expected for
any other interim periods or the entire year.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LOANS AND OTHER LENDING INVESTMENTS, NET--As described in Note 4, "Loans and
Other Lending Investments," includes the following investments: senior
mortgages, subordinate mortgages, corporate/partnership loans/unsecured notes,
loan participations and other lending or similar investments. In general,
management considers its investments in this category as held-to-maturity and,
accordingly, reflects such items at amortized historical cost.
REAL ESTATE SUBJECT TO OPERATING LEASES AND DEPRECIATION--Real estate
subject to operating leases is generally recorded at cost. Certain improvements
and replacements are capitalized when they extend the useful life, increase
capacity or improve the efficiency of the asset. Repairs and maintenance items
are expensed as incurred. The Company capitalizes interest costs incurred during
the land development or construction period on qualified development projects,
including investments in joint ventures accounted for under the equity method.
Depreciation is computed using the straight line method of cost recovery over
estimated useful lives of 40.0 years for buildings, five years for furniture and
equipment, the shorter of the remaining
F-7
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
lease term or expected life for tenant improvements, and the remaining life of
the building for building improvements.
Real estate assets to be disposed of are reported at the lower of their
carrying amount or fair value less costs to sell. The Company also periodically
reviews long-lived assets to be held and used for an impairment in value
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. In management's opinion, real estate assets
to be held and used are not carried at amounts in excess of their estimated
recoverable amounts.
CAPITALIZED INTEREST--The Company capitalizes interest costs incurred during
the land development or construction period on qualified development projects,
including investments in joint ventures accounted for under the equity method.
Interest capitalized was approximately $487,000 and $338,000 during the
six-month periods ended June 31, 2001 and 2000, respectively, and was
approximately $286,000 and $0 during the three-month periods ended June 31, 2001
and 2000, respectively.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash held in
banks or invested in money market funds with original maturity terms of less
than 90 days.
RESTRICTED CASH--Restricted cash represents amounts required to be
maintained in escrow under certain of the Company's debt obligations.
MARKETABLE SECURITIES--From time to time, the Company invests excess working
capital in short-term marketable securities such as those issued by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC").
Although the Company generally intends to hold such investments for investment
purposes, it may, from time to time, sell any of its investments in these
securities as part of its management of liquidity. Accordingly, the Company
considers such investments as "available-for-sale" and reflects such investments
at fair market value with changes in fair market value reflected as a component
of shareholders' equity.
REPURCHASE AGREEMENTS--The Company may enter into sales of securities or
loans under agreements to repurchase the same security or loan. The amounts
borrowed under repurchase agreements are carried on the balance sheet as part of
debt obligations at the amount advanced plus accrued interest. Interest incurred
on the repurchase agreements is reported as interest expense.
REVENUE RECOGNITION--The Company's revenue recognition policies are as
follows:
LOANS AND OTHER LENDING INVESTMENTS: The Company generally intends to hold
all of its loans and other lending investments to maturity. Accordingly, it
reflects all of these investments at amortized cost less allowance for loan
losses, acquisition premiums or discounts, deferred loan fees and undisbursed
loan funds. On occasion, the Company may acquire loans at either premiums or
discounts based on the credit characteristics of such loans. These premiums or
discounts are recognized as yield adjustments over the lives of the related
loans. If loans that were acquired at a premium or discount are prepaid, the
Company immediately recognizes the unamortized premium or discount as a decrease
or increase in the prepayment gain or loss, respectively. Loan origination or
exit fees, as well as direct loan origination costs, are also
F-8
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
deferred and recognized over the lives of the related loans as a yield
adjustment. Interest income is recognized using the effective interest method
applied on a loan-by-loan basis.
Certain of the Company's loans provide for accrual of interest at specified
rates which differ from current payment terms. Interest is recognized on such
loans at the accrual rate subject to management's determination that accrued
interest and outstanding principal are ultimately collectible, based on the
underlying collateral and operations of the borrower.
Prepayment penalties or yield maintenance payments from borrowers are
recognized as additional income when received. Certain of the Company's loan
investments provide for additional interest based on the borrower's operating
cash flow or appreciation of the underlying collateral. Such amounts are
considered contingent interest and are reflected as income only upon certainty
of collection.
LEASING INVESTMENTS: Operating lease revenue is recognized on the
straight-line method of accounting from the later of the date of the origination
of the lease or the date of acquisition of the facility subject to existing
leases. Accordingly, contractual lease payment increases are recognized evenly
over the term of the lease. The cumulative difference between lease revenue
recognized under this method and contractual lease payment terms is recorded as
a deferred operating lease income receivable on the balance sheet.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's accounting policies
require that an allowance for estimated credit losses be maintained at a level
that management, based upon an evaluation of known and inherent risks in the
portfolio, considers adequate to provide for possible credit losses. Specific
valuation allowances are established for impaired loans in the amount by which
the carrying value, before allowance for estimated losses, exceeds the fair
value of collateral less disposition costs on an individual loan basis.
Management considers a loan to be impaired when, based upon current information
and events, it believes that it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
on a timely basis. Management measures these impaired loans at the fair value of
the loans' underlying collateral less estimated disposition costs. Impaired
loans may be left on accrual status during the period the Company is pursuing
repayment of the loan; however, these loans are placed on non-accrual status at
such time as either: (1) the loans become 90 days delinquent; or (2) management
determines the borrower is incapable of, or has ceased efforts toward, curing
the cause of the impairment. While on non-accrual status, interest income is
recognized only upon actual receipt. Impairment losses are recognized as direct
write-downs of the related loan with a corresponding charge to the provision for
possible credit losses. Charge-offs occur when loans, or a portion thereof, are
considered uncollectible and of such little value that further pursuit of
collection is not warranted. Management also provides a portfolio reserve based
upon its periodic evaluation and analysis of the portfolio, historical and
industry loss experience, economic conditions and trends, collateral values and
quality, and other relevant factors.
INCOME TAXES--The Company intends to operate in a manner consistent with and
to elect to be treated as a REIT. As a REIT, the Company is subject to federal
income taxation at corporate rates on its REIT taxable income; however, the
Company is allowed a deduction for the amount of dividends paid to its
shareholders, thereby subjecting the distributed net income of the
F-9
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company to taxation at the shareholder level only. iStar Operating and TMOC are
not consolidated for federal income tax purposes and are taxed as corporations.
For financial reporting purposes, current and deferred taxes are provided for in
the portion of earnings recognized by the Company with respect to its interest
in iStar Operating and TMOC.
EARNINGS (LOSS) PER COMMON SHARES--In accordance with the Statement of
Financial Accounting Standards No. 128 ("FASB No. 128"), the Company presents
both basic and diluted earnings per share ("EPS"). Basic earnings per share
("Basic EPS") excludes dilution and is computed by dividing net income available
to common shareholders by the weighted average number of shares outstanding for
the period. Diluted earnings per share ("Diluted EPS") reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock, where such exercise or conversion
would result in a lower earnings per share amount.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles 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.
CHANGE IN ACCOUNTING PRINCIPLE--In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). On June 23, 1999, the FASB voted to
defer the effectiveness of SFAS No. 133 for one year. SFAS No. 133 is now
effective for fiscal years beginning after June 15, 2000, but earlier
application is permitted as of the beginning of any fiscal quarter subsequent to
June 15, 1998. SFAS No. 133 establishes accounting and reporting standards for
derivative financial instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as:
(1) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment; (2) a hedge of the exposure to
variable cash flows of a forecasted transaction; or (3) in certain
circumstances, a hedge of a foreign currency exposure. The Company adopted this
pronouncement, as amended by Statement of Financial Accounting Standards
No. 137 "Accounting for Derivative Instruments and Hedging Activities--deferral
of the Effective Date of FASB Statement No. 133" and Statement of Financial
Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities--an Amendment of FASB Statement No. 133," on
January 1, 2001. Because the Company has primarily used derivatives as cash flow
hedges of interest rate risk only, the adoption of SFAS No. 133 did not have a
material financial impact on the financial position and results of operations of
the Company. However, should the Company change its current use of such
derivatives (see Note 8), the adoption of SFAS No. 133 could have a more
significant effect on the Company prospectively.
Upon adoption, the Company recognized a charge to net income of
approximately $282,000 and an additional charge of $9.4 million to other
comprehensive income, representing the cumulative effect of the change in
accounting principle.
F-10
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER NEW ACCOUNTING STANDARDS--In December 1999, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." In June 2000, the SEC
staff amended SAB 101 to provide registrants with additional time to implement
SAB 101. The Company adopted SAB 101, as required, in the fourth quarter of
fiscal 2000. The adoption of SAB 101 did not have a material financial impact on
the financial position or the results of operations of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
was required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The initial adoption of FIN 44 by the Company did
not have a material impact on its consolidated financial position or results of
operations.
F-11
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) (unaudited):
CARRYING VALUE AS OF
# OF ORIGINAL PRINCIPAL ---------------------------
TYPE OF UNDERLYING PROPERTY BORROWERS COMMITMENT BALANCES JUNE 30, DECEMBER 31,
INVESTMENT TYPE IN CLASS(1) AMOUNT(1) OUTSTANDING(1) 2001 2000
--------------------- ------------------- ----------- ------------ -------------- ----------- -------------
Senior Mortgages Office/Hotel/Mixed 16 $1,135,143 $1,032,868 $1,016,547 $1,210,992
Use/Apartment/
Retail/Resort/
Entertainment
Subordinated Office/Hotel/Mixed 13 405,120 352,690 349,563 325,558
Mortgages Use
Corporate Loans/ Office/Hotel/ 19 610,046 587,922 557,759 398,978
Partnership Residential/
Loans/Unsecured Entertainment
Notes
Loan Participations Office/Retail 3 127,497 111,364 111,232 111,251
Other Lending Resort/Office/Mixed N/A N/A N/A 234,654 192,404
Investments Use/Residential/
Industrial
---------- ----------
Gross Carrying Value $2,269,755 $2,239,183
Provision for
Possible Credit
Losses (17,500) (14,000)
---------- ----------
Total, Net $2,252,255 $2,225,183
========== ==========
EFFECTIVE
TYPE OF MATURITY CONTRACTUAL INTEREST CONTRACTUAL INTEREST PRINCIPAL PARTICIPATION
INVESTMENT DATES PAYMENT RATES(2) ACCRUAL RATES(2) AMORTIZATION FEATURES
--------------------- -------------- ------------------------ ------------------------ ------------ -------------
Senior Mortgages 2001 to 2019 Fixed: 6.13% to 14.25% Fixed: 6.13% to 18.25% Yes(3) No
Variable: LIBOR + 1.50% Variable: LIBOR + 1.50%
to 4.50% to 4.50%
Subordinated 2002 to 2011 Fixed: 7.00% to 15.25% Fixed: 7.32% to 17.00% Yes(3) Yes (4)
Mortgages Variable: LIBOR + 5.80% Variable: LIBOR + 5.80%
Corporate Loans/ 2001 to 2011 Fixed: 6.13% to 15.00% Fixed: 6.13% to 17.50% Yes Yes (4)
Partnership Variable: LIBOR + 2.78% Variable: LIBOR + 2.78%
Loans/Unsecured to 7.50% to 7.50%
Notes
Loan Participations 2003 to 2005 Fixed: 10.00% to 13.60% Fixed: 13.60% to 14.00% No Yes (4)
Variable: LIBOR + 4.50% Variable: LIBOR + 4.50%
Other Lending 2002 to 2013 Fixed: 6.75% to 12.75% Fixed: 6.75% to 12.75% No Yes (4)
Investments Variable: LIBOR + 7.56% Variable: LIBOR + 7.56%
to 9.36% to 9.36%
Gross Carrying Value
Provision for
Possible Credit
Losses
Total, Net
EXPLANATORY NOTES:
----------------
(1) Amounts and details are for loans outstanding as of June 30, 2001.
(2) Substantially all variable-rate loans are based on 30-day LIBOR and reprice
monthly. The 30-day LIBOR rate on June 30, 2001 was 3.86%.
(3) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity. In addition, one of the loans permits additional
annual prepayments of principal of up to $1.3 million without penalty at the
borrower's option.
(4) Under some of these loans, the lender receives additional payments
representing additional interest from participation in available cash flow
from operations of the property and the proceeds, in excess of a base
amount, arising from a sale or refinancing of the property.
F-12
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the six-month periods ended June 30, 2001 and 2000, respectively, the
Company and its affiliated ventures originated or acquired an aggregate of
approximately $543.5 million and $443.2 million in loans and other lending
investments, funded $24.4 million and $37.8 million under existing loan
commitments, and received principal repayments of $557.0 million and
$163.2 million.
As of June 30, 2001, the Company had nine loans with unfunded commitments.
The total unfunded commitment amount was approximately $127.4 million, of which
$53.4 million was discretionary (i.e., at the Company's option) and
$74.0 million was non-discretionary.
The Company's loans and other lending investments are predominantly pledged
as collateral under either the iStar Asset Receivables secured notes, the
secured revolving facilities or secured term loans (see Note 6).
The Company has reflected provisions for possible credit losses of
approximately $1.8 million and $1.5 million in its results of operations during
the three months ended June 30, 2001 and 2000, respectively, and $3.5 million
and $3.0 million during the six months ended June 30, 2001 and 2000,
respectively. These provisions represent portfolio 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, and the underlying
collateral. No direct impairment reserves on specific loans were considered
necessary. Management may transfer reserves between general and specific
reserves as considered necessary.
NOTE 5--REAL ESTATE SUBJECT TO OPERATING LEASES
The Company's investments in real estate subject to operating leases, at
cost, were as follows (in thousands) (unaudited):
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
Buildings and improvements.................................. $1,299,223 $1,294,572
Land and land improvements.................................. 343,458 344,490
Less: accumulated depreciation.............................. (63,740) (46,975)
---------- ----------
1,578,941 1,592,087
Investments in unconsolidated joint ventures................ 55,583 78,082
---------- ----------
Real estate subject to operating leases, net.............. $1,634,524 $1,670,169
========== ==========
Under certain leases, the Company receives additional participating lease
payments to the extent gross revenues of the tenant exceed a base amount. The
Company earned no such additional participating lease payments in the three- and
six-month periods ended June 31, 2001 and 2000, respectively. In addition, the
Company also receives reimbursements from tenants for certain facility operating
expenses.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES--At June 30,
2001, the Company had investments in five joint ventures: (1) TriNet Sunnyvale
Partners L.P. ("Sunnyvale"), whose external partners are John D. O'Donnell,
Trustee, John W. Hopkins, and Donald S. Grant; (2) Corporate Technology
Associates LLC ("CTC I"), whose external member is Corporate Technology Centre
Partners LLC; (3) Sierra Land Ventures ("Sierra"), whose external joint venture
F-13
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
partner is Sierra-LC Land, Ltd.; (4) TriNet Milpitas Associates, LLC
("Milpitas"), whose external member is The Prudential Insurance Company of
America; and (5) ACRE Simon, L.L.C. ("ACRE"), whose external partner is William
E. Simon & Sons Realty Investments, L.L.C. These ventures were formed for the
purpose of operating, acquiring and in certain cases, developing corporate
tenant lease facilities. At June 30, 2001, all facilities held by CTC II and
TN-CP had been sold. The Company previously had an equity investment in CTC II,
which was sold for approximately $66.0 million in September 2000. In connection
with this sale, the note receivable from the venture was modified to mature on
December 31, 2001. The note receivable and related accrued interest are included
in Loans and Other Lending Investments at June 30, 2001 and December 31, 2000.
At June 30, 2001, the ventures comprised 23 net leased facilities.
Additionally, 17.7 acres of land are held for sale. The Company's combined
investment in these joint ventures at June 30, 2001 was $55.6 million. The joint
ventures' purchase price for the 23 facilities owned at June 30, 2001 was
$344.5 million. The purchase price of the land held for sale was $6.8 million.
In the aggregate, the joint ventures had total assets of $383.6 million and
total liabilities of $280.7 million as of June 30, 2001, and net income of
$4.4 million and $8.0 million for the three and six months ended June 30, 2001.
The Company accounts for these investments under the equity method because the
Company's joint venture partners have certain participating rights which limit
the Company's control. The Company's investments in and advances to
unconsolidated joint ventures, its percentage ownership interests, its
respective income and the Company's pro rata share of its ventures' third-party
debt as of June 30, 2001 are presented below (in thousands) (unaudited):
PRO RATA
JOINT SHARE OF
UNCONSOLIDATED OWNERSHIP EQUITY VENTURE THIRD-PARTY
JOINT VENTURE % INVESTMENT INCOME DEBT
------------------------------------------------------------ --------- ---------- -------- -----------
Operating:
Sunnyvale................................................. 44.7% $12,208 $ 218 $ 10,728
CTC I..................................................... 50.0% 10,226 2,051 60,838
Milpitas.................................................. 50.0% 24,398 2,021 40,385
ACRE Simon................................................ 20.0% 4,972 92 6,675
Development:
Sierra.................................................... 50.0% 3,779 148 724
------- ------ --------
Total................................................. $55,583 $4,530 $119,350
======= ====== ========
Effective September 29, 2000, iStar Sunnyvale Partners, LP (the entity which
is controlled by Sunnyvale) entered into an interest rate cap agreement with
Bear Stearns Financial Products, limiting the venture's exposure to interest
rate movements on its $24.0 million LIBOR-based mortgage loan to an interest
rate cap of 9.0% through November 9, 2003.
Currently, the limited partners of Sunnyvale have the option to convert
their partnership interest into cash; however, the Company may elect to deliver
297,728 shares of Common Stock in lieu of cash. Additionally, commencing in
February 2002, subject to acceleration under certain circumstances, the venture
interest held by the external member of Milpitas may be converted into 984,476
shares of Common Stock.
Income generated from the above joint venture investments is included in
Operating Lease Income in the Consolidated Statements of Operations.
F-14
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DEBT OBLIGATIONS
As of June 30, 2001 and December 31, 2000, the Company has debt obligations
under various arrangements with financial institutions as follows (in thousands)
(unaudited):
CARRYING VALUE AS OF
MAXIMUM ----------------------------- STATED SCHEDULED
AMOUNT JUNE 30, DECEMBER 31, INTEREST MATURITY
AVAILABLE 2001 2000 RATES DATE
---------- ------------- ------------- -------------------------- -----------------------
SECURED REVOLVING CREDIT
FACILITIES:
Line of credit............ $ 700,000 $ 194,100 $ 284,371 LIBOR + 1.75% - 2.25% March 2005 (1)
Line of credit............ 700,000 514,503 -- LIBOR + 1.40% - 2.15% January 2005 (1)
Line of credit............ 500,000 81,248 307,978 LIBOR + 1.50% - 1.75% August 2003 (1)
UNSECURED REVOLVING CREDIT
FACILITIES:
Line of credit............ 350,000 153,000 173,450 LIBOR + 1.55% May 2002 (2)
Line of credit............ 100,000 6,000 -- LIBOR + 2.25% January 2003 (2)
---------- ---------- ----------
Total revolving credit $2,350,000 948,851 765,799
facilities..............
==========
SECURED TERM LOANS:
Secured by real estate under operating 149,113 150,678 7.44% March 2009
leases..............................
Secured by corporate lending 60,000 60,000 LIBOR + 2.50% June 2004 (3)
investments.........................
Secured by real estate under operating -- 77,860 LIBOR + 1.38% June 2001
leases..............................
Secured by real estate under operating 40,720 60,471 Fixed: 6.00%-11.38% Various through 2011
leases..............................
Secured by real estate under operating 193,000 -- LIBOR + 1.85% (4) July 2006 (4)
leases..............................
---------- ----------
Total term loans...................... 442,833 349,009
Debt premiums......................... 379 51
---------- ----------
Total secured term loans.............. 443,212 349,060
iStar Asset Receivables secured notes:
Class A............................... 105,216 207,114 LIBOR + 0.30% August 2003 (5)
Class B............................... 94,055 94,055 LIBOR + 0.50% October 2003 (5)
Class C............................... 105,813 105,813 LIBOR + 1.00% January 2004 (5)
Class D............................... 52,906 52,906 LIBOR + 1.45% June 2004 (5)
Class E............................... 123,447 123,447 LIBOR + 2.75% January 2005 (5)
Class F............................... 5,000 5,000 LIBOR + 3.15% January 2005 (5)
---------- ----------
Total iStar Asset Receivables secured 486,437 588,335
notes...............................
UNSECURED NOTES (6):
6.75% Dealer Remarketable Securities 125,000 125,000 6.75% March 2013
(7).................................
7.30% Notes........................... -- 100,000 7.30% May 2001
7.70% Notes........................... 100,000 100,000 7.70% July 2017
7.95% Notes........................... 50,000 50,000 7.95% May 2006
---------- ----------
Total unsecured notes................. 275,000 375,000
Less: debt discount (8)............... (17,091) (18,490)
---------- ----------
Total unsecured notes................. 257,909 356,510
OTHER DEBT OBLIGATIONS.................... 16,622 72,263 Various Various
---------- ----------
TOTAL DEBT OBLIGATIONS.................... $2,153,031 $2,131,967
========== ==========
F-15
EXPLANATORY NOTES:
------------
(1) Maturity date reflects a one-year "term-out" extension at the Company's
option.
(2) Subsequent to June 30, 2001, the Company replaced both of these facilities
with a new $300.0 million revolving credit facility bearing interest at
LIBOR + 2.125%. The new facility has an initial maturity of July 2003 with a
one-year extension at the Company's option and another one-year extension at
the lenders' option.
(3) Maturity date reflects a one-year extension at the Company's option.
(4) On June 14, 2001, the Company closed $193.0 million of financing secured by
15 corporate tenant lease assets. The three-year floating-rate loan bears
interest at LIBOR plus 1.85% (not to exceed 10.00%) and has two one-year
extensions at the Company's option (maturity date reflects extensions).
(5) Principal payments on these bonds are a function of the principal repayments
on loan assets which collateralize these obligations. The dates indicated
above represent the expected date on which the final payment would occur for
such class based on the assumptions that the loans which collateralize the
obligations are not voluntarily prepaid, the loans are paid on their
effective maturity dates and no extensions of the effective maturity dates
of any of the loans are granted. The final maturity date for the underlying
indenture on classes A, B, C, D, E and F is September 25, 2022.
(6) The notes are callable by the Company at any time for an amount equal to the
total of principal outstanding, accrued interest and the applicable
make-whole prepayment premium.
(7) Subject to mandatory tender on March 1, 2003, to either the dealer or the
Leasing Subsidiary. The initial coupon of 6.75% applies to first five-year
term through the mandatory tender date. If tendered to the dealer, the notes
must be remarketed. The rates reset upon remarketing.
(8) These obligations were assumed as part of the TriNet Acquisition. As part of
the accounting for the purchase, these fixed rate obligations were
considered to have stated interest rates which were below the then
prevailing market rates at which the Leasing Subsidiary could issue new debt
obligations and, accordingly, the Company ascribed a market discount to each
obligation. Such discounts will be amortized as an adjustment to interest
expense using the effective interest method over the related term of the
obligations. As adjusted, the effective annual interest rates on these
obligations were 8.81%, 8.75%, 9.51% and 9.04%, for the 6.75% Dealer
Remarketable Securities, 7.30% Notes, 7.70% Notes and 7.95% Notes,
respectively.
F-16
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DEBT OBLIGATIONS (CONTINUED)
Availability of amounts under the secured revolving credit facilities are
based on percentage borrowing base calculations. Certain of the Leasing
Subsidiary's debt obligations contain financial covenants pertaining to the
subsidiary.
On January 31, 2000, the Company closed a new unsecured revolving credit
facility. The facility is led by a major commercial bank, which committed
$50.0 million of the facility amount. On July 7, 2000, the Company increased the
facility amount to $100.0 million through syndication. The new facility has a
two-year primary term and a one-year extension, at the Company's option, and
bears interest at LIBOR plus 2.25%.
On February 4, 2000, the Company extended the term of its existing
$500.0 million secured credit facility. The Company extended the original
August 2000 maturity date to August 2002, through a one-year extension to the
facility's draw period and an additional one-year "term out" period during which
outstanding principal amortizes 25% per quarter. In connection with the
extension, the Company and the facility lender also expanded the range of assets
that the lender would accept as collateral under the facility. In exchange for
the extension and expansion, the Company agreed to increase the facility's
interest rate from LIBOR plus 1.25% to 1.50%, to a revised rate of LIBOR plus
1.50% to 1.75%, depending upon certain conditions.
On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, iStar Asset Receivables ("STARs"),
Series 2000-1. In the initial transaction, a wholly-owned subsidiary of the
Company issued $896.5 million of investment grade bonds secured by the
subsidiary's assets, which had an aggregate outstanding principal balance of
approximately $1.2 billion at inception. Principal payments received on the
assets will be utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funds the maturity of the
underlying assets financed under the program. The Company initially purchased
the class F bonds at a par value of $38.2 million, which the Company financed
with a $27.8 million repurchase agreement maturing in May 2001 (this repurchase
agreement was repaid in April 2001). On July 17, 2000, the Company sold, at par,
$5.0 million of the class F bonds to an institutional investor. For accounting
purposes, these transactions were treated as secured financings.
On June 20, 2000, the Company closed a $60.0 million term loan secured by a
corporate lending investment it originated in the first quarter of 2000. The new
loan replaced a $30.0 million interim facility, and effectively match funds the
expected weighted average maturity of the underlying corporate loan asset. The
loan has a three-year primary term and a one-year extension, at the Company's
option, and bears interest at LIBOR plus 2.50%.
On December 28, 2000, the Company expanded its existing $675.0 million
secured warehouse facility to $700.0 million. The Company extended the original
March 2001 maturity date to March 2005, including a one-year "term-out"
extension option to the facility's maturity during which the interest rate
spread will increase 0.25%, no additional draws under the facility will be
permitted, and the outstanding principal must amortize 25% per quarter. In
connection with the extension, the Company and the facility lender also
increased the range of collateral eligible for inclusion in the facility. Also
in connection with the extension, the Company agreed to increase the facility's
interest rate from LIBOR plus 1.50% to a revised rate of LIBOR plus 1.75% to
2.25%, depending upon certain conditions.
F-17
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DEBT OBLIGATIONS (CONTINUED)
On January 11, 2001, the Company closed a new $700.0 million secured
revolving credit facility which is led by a major commercial bank. The new
facility has a three-year primary term and one-year "term-out" extension option,
and bears interest at LIBOR plus 1.40% to 2.15%, depending upon the collateral
contributed to the borrowing base. The new facility accepts a broad range of
structured finance assets and has a final maturity of January 2005. In addition,
on February 22, 2001, the Company extended the maturity of its $350.0 million
unsecured revolving credit facility to May 2002.
On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured
notes. These notes were senior unsecured obligations of the Company and ranked
equally with the Company's other senior unsecured and unsubordinated
indebtedness.
On June 14, 2001, the Company closed $193.0 million of financing secured by
15 corporate tenant lease assets. The three-year floating-rate loan bears
interest at LIBOR plus 1.85% (not to exceed 10.00%) and has two one-year
extensions at the Company's option. The Company used these proceeds to repay a
$77.8 million secured term loan maturing in June 2001 and to pay down a portion
of its revolving credit facilities. In addition, the Company extended the final
maturity of its $500.0 million secured revolving credit facility to August 12,
2003.
On July 27, 2001, the Company completed a $300.0 million revolving credit
facility with a group of leading financial institutions. The new facility has an
initial maturity of July 2003, with a one-year extension at the Company's option
and another one-year extension at the lenders' option. The new facility replaces
two prior credit facilities maturing in 2002 and 2003, and bears interest at
LIBOR + 2.125%.
During the six-month period ended June 30, 2001, the Company incurred an
extraordinary loss of approximately $1.0 million as a result of the early
retirement of certain secured debt obligations of its Leasing Subsidiary.
As of June 30, 2001, future expected/scheduled maturities of outstanding
long-term debt obligations are as follows (in thousands) (unaudited) (1):
2001 (remaining six months)................................. $ 16,622
2002........................................................ 167,807
2003........................................................ 286,520
2004........................................................ 218,719
2005........................................................ 840,675
Thereafter.................................................. 639,400
----------
Total principal maturities.................................. 2,169,743
Net unamortized debt discounts.............................. (16,712)
----------
Total debt obligations...................................... $2,153,031
==========
EXPLANATORY NOTE:
------------
(1) Assumes exercise of extensions to the extent such extensions are at the
Company's option.
F-18
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--SHAREHOLDERS' EQUITY
As described in Note 1, the Company consummated a series of transactions on
November 4, 1999 in which its class A and class B shares were exchanged into a
single class of Common Stock. The Company's charter now provides for the
issuance of up to 200.0 million shares of Common Stock, par value $0.001 per
share, and 30.0 million shares of preferred stock. As part of these
transactions, the Company adopted articles supplementary creating four series of
preferred stock designated as 9.5% Series A Cumulative Redeemable Preferred
Stock, consisting of 4.4 million shares, 9.375% Series B Cumulative Redeemable
Preferred Stock, consisting of 2.3 million shares, 9.20% Series C Cumulative
Redeemable Preferred Stock, consisting of approximately 1.5 million shares, and
8.0% Series D Cumulative Redeemable Preferred Stock, consisting of 4.6 million
shares. The Series B, C and D Cumulative Redeemable Preferred Stock were issued
in the TriNet Acquisition in exchange for similar issuances of TriNet stock then
outstanding. The Series A, B, C and D Cumulative Redeemable Preferred Stock are
redeemable without premium at the option of the Company at their respective
liquidation preferences beginning on December 15, 2003, June 15, 2001,
August 15, 2001 and October 8, 2002, respectively.
STOCK REPURCHASE PROGRAM: The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets and excess cash
flow from operations, but also using borrowings under its credit facilities if
the Company determines that it is advantageous to do so. As of both June 30,
2001 and December 31, 2000, the Company had repurchased approximately
2.3 million shares at an aggregate cost of approximately $40.7 million.
NOTE 8--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
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 speeds, or different bases, than its
interest-earning assets. Credit risk is the risk of default on the Company's
loan assets that results from a property's, borrower's or tenant's inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of loans 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 and the valuation of corporate tenant lease
facilities held by the Company.
USE OF DERIVATIVE FINANCIAL INSTRUMENTS--The Company's use of derivative
financial instruments is primarily limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposure. The
principal objective of such arrangements is to minimize the risks and/or costs
associated with the Company's operating and financial structure as well as to
hedge specific anticipated transactions. The counterparties to these contractual
arrangements are major financial institutions with which the Company and its
affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of nonperformance by these
counterparties. However, because of their high credit ratings, the Company does
not anticipate that any of the counterparties will fail to meet their
obligations.
F-19
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
In connection with the TriNet Acquisition, the Company acquired LIBOR
interest rate caps currently struck at 7.75%, and 7.75% in notional amounts of
$75.0 million and $35.0 million, respectively, which both expire in
December 2004. In June 2001, an interest rate cap acquired in the TriNet
Acquisition, with a notional amount of $75.0 million, matured. In connection
with the closing of STARs, Series 2000-1 in May 2000, the Company entered into a
LIBOR interest rate cap struck at 10.00% in the notional amount of
$312.0 million, and simultaneously sold a LIBOR interest rate cap with the same
terms. Since these instruments do not reduce the Company's net interest rate
risk exposure, they do not qualify as hedges and changes in their respective
values are charged to earnings. As the significant terms of these arrangements
are substantially the same, the effects of a revaluation of these two
instruments are expected to substantially offset one another. In January 2001,
March 2001 and June 2001 three interest rate caps with notional amounts of
$40.4 million, $300.0 million and $38.3 million respectively, matured. At
June 30, 2001 and December 31, 2000, the net fair value of the Company's
interest rate caps were $0.4 million and $0.4 million, respectively.
The Company has entered into LIBOR interest rate swaps struck at 7.055% and
7.058%, both with notional amounts of $125.0 million that expire in June 2003.
These swaps effectively fix the interest rate on a portion of the Company's
floating-rate term loan obligations. In connection with the TriNet Acquisition,
the Company acquired an interest rate swap which, together with certain existing
interest rate cap agreements, effectively fix the interest rate on
$75.0 million of the Leasing Subsidiary's LIBOR-based borrowings at 5.58% plus
the applicable margin through December 1, 2004. Management expects that it will
have aggregate LIBOR-based borrowings at the Leasing Subsidiary in excess of the
notional amount for the duration of the swap. The actual borrowing cost to the
Company with respect to indebtedness covered by the swap will depend upon the
applicable margin over LIBOR for such indebtedness, which will be determined by
the terms of the relevant debt instruments. In January 2001 and June 2000,
interest rate swaps with notional amounts of approximately $92.0 million and
$112.0 million, respectively, matured. At June 30, 2001 and December 31, 2000,
the fair value (liability) of the Company's interest rate swaps was ($12.8)
million and ($7.7) million, respectively.
During the year ended December 31, 1999, the Company settled an aggregate
notional amount of approximately $63.0 million that was outstanding under
certain hedging agreements which the Company had entered into in order to hedge
the potential effects of interest rate movements on anticipated fixed-rate
borrowings. The settlement of such agreements resulted in a receipt of
approximately $0.6 million which had been deferred pending completion of the
planned fixed-rate financing transaction. Subsequently, the transaction was
modified and was actually consummated as a variable-rate financing transaction.
As a result, the previously deferred receipt no longer qualified for hedge
accounting treatment and the $0.6 million was recognized as a gain included in
other income in the consolidated statement of operations for the year ended
December 31, 2000 in connection with the closing of STARs, Series 2000-1 in
May 2000.
During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented forecasted transactions for which the Company had
previously entered into U.S. Treasury-based hedging transactions. The
F-20
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
net $3.4 million cost of the settlement of such hedges has been deferred and is
being amortized as an increase to the effective financing cost of the new term
loan over its effective ten-year term.
CREDIT RISK CONCENTRATIONS--Concentrations of credit risks arise when a
number of borrowers or customers related to the Company's investments are
engaged in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their ability to meet
contractual obligations, including those to the Company, to be similarly
affected by changes in economic conditions. The Company regularly monitors
various segments of its portfolio to assess potential concentrations of credit
risks. Management believes the current credit risk portfolio is reasonably well
diversified and does not contain any unusual concentration of credit risks.
Substantially all of the Company's real estate subject to operating leases
(including those held by joint ventures) and loans and other lending
investments, are collateralized by facilities located in the United States, with
significant concentrations (i.e., greater than 10.0%) as of June 30, 2001 in
California (24.9%), Texas (14.1%) and New York (11.3%). As of June 30, 2001, the
Company's investments also contain significant concentrations in the following
asset/ collateral types: office (47.9%) and hotel/resorts (20.1%).
The Company underwrites the credit of prospective borrowers and customers
and often requires them to provide some form of credit support such as corporate
guarantees or letters of credit. Although the Company's loans and other lending
investments and corporate customer lease assets are geographically diverse and
the borrowers and customers operate in a variety of industries, to the extent
the Company has a significant concentration of interest or operating lease
revenues from any single borrower or customer, the inability of that borrower or
customer to make its payment could have an adverse effect on the Company.
NOTE 9--INCOME TAXES
Although originally formed to qualify as a REIT under the Code for the
purpose of making and acquiring various types of mortgage and other loans,
during 1993 through 1997, the Company failed to qualify as a REIT. As confirmed
by a closing agreement with the IRS obtained in March 1998, the Company was
eligible, elected to be taxed as a REIT and qualified for REIT status for the
tax years commencing on January 1, 1998. The Company did not incur any material
tax liabilities as a result of its operations during such years.
NOTE 10--STOCK OPTION PLANS AND EMPLOYEE BENEFITS
The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to
provide incentive compensation for officers, other key employees and directors
of the Company. The Plan provides for awards of stock options and shares of
restricted stock and other performance awards. The maximum number of shares of
Common Stock available for awards under the Plan is 9.0% of the outstanding
shares of Common Stock, calculated on a fully diluted basis, from time to time;
provided that the number of shares of Common Stock reserved for grants of
options designated as incentive stock options is 5.0 million, subject to certain
antidilution provisions in the Plan. All awards under the Plan, other than
automatic awards to non-employee directors, are at the discretion of the Board
or a committee of the Board. At June 30, 2001, a
F-21
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
total of approximately 7.9 million shares of Common Stock were available for
awards under the Plan, of which options to purchase approximately 6.0 million
shares of Common Stock were outstanding and approximately 650,000 shares of
restricted stock were outstanding.
Concurrently with the Recapitalization Transactions, the Company issued
approximately 2.5 million (as adjusted) fully vested and immediately exercisable
options to purchase class A shares at $14.72 per share (as adjusted) to the
external advisor with a term of ten years. The external advisor granted a
portion of these options to its employees and the remainder were allocated to an
affiliate. Upon consummation of the Advisor Transaction, these individuals
became employees of the Company. In general, the grants to these employees
provided for scheduled vesting over a predefined service period of three to five
years and, under certain conditions, provide for accelerated vesting. These
options expire on March 15, 2008.
In connection with the TriNet Acquisition, outstanding options to purchase
TriNet stock under TriNet's stock option plans were converted into options to
purchase shares of Common Stock on substantially the same terms, except that
both the exercise price and number of shares issuable upon exercise of the
TriNet options were adjusted to give effect to the merger exchange ratio of 1.15
shares of Common Stock for each share of TriNet common stock. In addition,
options held by the former directors of TriNet and certain executive officers
became fully vested as a result of the transaction.
Also, as a result of the TriNet Acquisition, TriNet terminated its dividend
equivalent rights program. The program called for immediate vesting and cash
redemption of all dividend equivalent rights upon a change of control of 50.0%
or more of the voting common stock of TriNet. Concurrent with the TriNet
Acquisition, all dividend equivalent rights were vested and amounts due to
former TriNet employees of approximately $8.3 million were paid by the Company.
Such payments were included as part of the purchase price paid by the Company to
acquire TriNet for financial reporting purposes.
Changes in options outstanding during the six months ended June 30, 2001 are
as follows:
NUMBER OF SHARES
------------------------------------ AVERAGE
NON-EMPLOYEE STRIKE
EMPLOYEES DIRECTORS OTHER PRICE
--------- ------------ --------- --------
OPTIONS OUTSTANDING, DECEMBER 31, 2000
(UNAUDITED).................................. 3,535,572 226,379 961,163 $18.97
Granted in 2001.............................. 1,618,400 -- 100,000 $19.81
Exercised in 2001............................ (425,494) (10,000) -- $18.09
Forfeited in 2001............................ (51,122) -- -- $28.13
--------- ------- ---------
OPTIONS OUTSTANDING, JUNE 30, 2001
(UNAUDITED).................................. 4,677,356 216,379 1,061,163
========= ======= =========
F-22
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 2001 (unaudited):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE CURRENTLY EXERCISE
EXERCISE PRICE RANGE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------------- ----------- ----------- -------- ----------- --------
$14.72 - $15.00 1,809,792 6.71 $14.73 1,261,530 $14.72
$16.69 - $16.88 1,107,939 8.52 $16.86 370,282 $16.88
$17.38 - $17.56 690,000 8.72 $17.39 223,335 $17.38
$19.50 - $19.75 1,695,400 9.62 $19.69 2,083 $19.54
$20.63 - $21.44 108,050 2.48 $21.12 100,050 $21.13
$22.44 - $22.45 20,000 9.26 $22.44 -- $ --
$23.32 - $23.64 72,335 2.88 $23.57 52,850 $23.55
$24.13 - $24.71 127,500 4.28 $24.28 126,500 $24.27
$25.10 - $26.09 21,700 5.15 $26.04 20,700 $26.09
$26.30 - $26.85 110,100 3.05 $26.75 108,100 $26.74
$27.00 25,000 9.99 $27.00 -- $ --
$28.26 - $28.54 55,613 3.29 $28.37 55,613 $28.37
$30.33 96,025 3.40 $30.33 85,967 $30.33
$33.15 - $33.70 10,350 1.47 $33.39 8,913 $33.43
$55.39 5,094 7.92 $55.39 3,396 $55.39
--------- ----- ------ --------- ------
5,954,898 7.78 $18.06 2,419,319 $17.89
========= ===== ====== ========= ======
EXPLANATORY NOTE:
------------
(1) Includes approximately 764,000 options which were granted, on a fully
exercisable basis, in connection with the Recapitalization Transactions to
Starwood Capital Group, and were subsequently regranted by that entity to
its employees subject to vesting requirements. As a result of those vesting
requirements, less than 2,000 of these options are currently exercisable by
the beneficial owners. In the event that these employees forfeit such
options, they revert to Starwood Capital Group, who may regrant them at its
discretion.
The Company has elected to use the intrinsic method for accounting for
options issued to employees or directors, as allowed under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS No. 123") and, accordingly, recognizes no compensation charge in
connection with these options to the extent that the options exercise price
equals or exceeds the quoted price of the Company's common shares at the date of
grant or measurement date. In connection with the Advisor Transaction, as part
of the computation of the one-time charge to earnings, the Company calculated a
deferred compensation charge of approximately $5.1 million. This deferred charge
represents the difference of the closing sales price of the shares of Common
Stock on the date of the Advisor Transaction of $20.25 over the strike price of
the options of $14.72 per share (as adjusted) for the unvested portion of the
options granted to former employees of the Advisor who are now employees of the
Company. This deferred charge will be amortized over the related remaining
vesting terms to the individual employees as additional compensation expense.
F-23
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
In connection with the original grant of options in March 1998 to its
external advisor, the Company utilized the option value method as required by
SFAS No. 123. An independent financial advisory firm estimated the value of
these options at date of grant to be approximately $2.40 per share using a
Black-Scholes valuation model. In the absence of comparable historical market
information for the Company, the advisory firm utilized assumptions consistent
with activity of a comparable peer group of companies, including an estimated
option life of five years, a 27.5% volatility rate and an estimated annual
dividend rate of 8.5%. The resulting charge to earnings was calculated as the
number of options allocated to the Advisor multiplied by the estimated value at
consummation. A charge of approximately $6.0 million was reflected in the
Company's first quarter 1998 financial results for this original grant.
Future charges may be taken to the extent of additional option grants, which
are at the discretion of the Board of Directors.
During the six-month period ended June 30, 2001, the Company granted 94,859
restricted shares to employees in lieu of cash bonuses for the year ended
December 31, 2000 at the employees' election. These restricted shares were
immediately vested on the date of grant and are not transferable for a period of
one year following vesting. In addition, during the three months ended June 30,
2001, the Company entered into a three-year employment agreement with an
executive in connection with his appointment as president of the Company. Under
the agreement, in lieu of salary and bonus, the Company granted the executive
500,000 unvested restricted shares. The vesting of these shares is a function of
the total rate of return (dividends and price appreciation) on the Company's
Common Stock, although none of the shares vest (regardless of the total return
to shareholders) if the executive voluntarily terminates his employment without
good reason prior to September 30, 2002. Until shares under the agreement are
otherwise vested or forfeited, the executive will receive dividends on the share
grant during the term of the agreement if and when the Company declares and pays
dividends on its Common Stock. None of these restricted shares were vested at
June 30, 2001.
During the three months ended June 30, 2001, the Company also entered into a
new three-year employment agreement with its chief executive officer. As part of
this agreement, the Company confirmed a prior grant of 750,000 stock options
made to the executive on March 2, 2001. The options will vest in equal
installments of 250,000 shares in each January beginning with January 2002. The
Company also granted the executive 2,000,000 unvested phantom shares, each of
which represents one share of the Company's Common Stock. These shares will vest
in installments on a contingent basis if the average closing price of the
Company's Common Stock achieves certain levels ($25.00 to $37.00 per share) over
specified periods of time. Shares that have contingently vested generally will
not become fully vested until the end of the three-year term of the agreement,
except upon certain termination or change of control events. Further, if the
stock price drops below certain specified levels for the 60-day average before
such date, they would also not fully vest and be forfeited. The executive will
receive dividends on shares that have contingently or fully vested and have not
been forfeited under the terms of the agreement, if and when the Company
declares and pays dividends on its Common Stock.
During the year ended December 31, 2000, the Company granted 143,646
restricted shares to employees. Of this total, 74,996 restricted shares were
granted in lieu of cash bonuses at the
F-24
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
employees' election, were immediately vested on the date of grant, and were not
transferable for a period of one year following vesting. An additional 68,650 of
such restricted shares vest over periods ranging from one to three years
following the date of grant and are transferable upon vesting.
Effective November 4, 1999, the Company implemented a savings and retirement
plan (the "401 (k) Plan"), which is a voluntary, defined contribution plan. All
employees are eligible to participate in the 401 (k) Plan following completion
of six months of continuous service with the Company. Each participant may
contribute on a pretax basis between 2% and 15% of such participant's
compensation. At the discretion of the Board of Directors, the Company may make
matching contributions on the participant's behalf up to 50% of the first 10% of
the participant's annual contribution. The Company made contributions of
approximately $65,000 and $45,000 to the 401(k) Plan for the three-month periods
ended June 30, 2001 and 2000, respectively and approximately $178,000 and
$175,000 to the 401(k) Plan for the six-month periods ended June 30, 2001 and
2000, respectively.
NOTE 11--EARNINGS PER SHARE
Prior to November 4, 1999, Basic EPS was computed based on the income
allocable to class A shares (net income reduced by accrued dividends on
preferred shares and by 1% allocated to class B shares), divided by the weighted
average number of class A shares outstanding during the period. Diluted EPS was
based on the net earnings allocable to class A shares plus dividends on class B
shares which were convertible into class A shares, divided by the weighted
average number of class A shares and dilutive potential class A shares that were
outstanding during the period. Dilutive potential class A shares included the
class B shares, which were convertible into class A shares at a rate of 49
class B shares for one class A share, and potentially dilutive options to
purchase class A shares issued to the Advisor and the Company's directors and
warrants to acquire class A shares.
As described in Note 1, in the Incorporation Merger, the class B shares were
converted into shares of Common Stock on a 49-for-one basis (the same ratio at
which class B shares were previously convertible into class A shares), and the
class A shares were converted into shares of Common Stock on a one-for-one
basis. As a result, the Company no longer has multiple classes of common shares.
Basic and diluted earnings per share are based upon the following weighted
F-25
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--EARNINGS PER SHARE (CONTINUED)
average shares outstanding during the three- and six-month periods ended
June 30, 2001 and 2000, respectively (in thousands):
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED)
Weighted average common shares outstanding for
basic earnings per common share.................. 86,081 85,281 85,958 85,184
Add: effect of assumed shares issued under treasury
stock method for stock options and restricted
shares........................................... 1,871 709 1,568 541
Add: effect of contingent shares................... 115 -- 58 --
Add: effect of joint venture shares................ 75 -- -- --
------ ------ ------ ------
Weighted average common shares outstanding for
diluted earnings per common share................ 88,142 85,990 87,584 85,725
====== ====== ====== ======
NOTE 12--COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective for fiscal
years beginning after December 15, 1997. The statement changes the reporting of
certain items currently reported as changes in the shareholders' equity section
of the balance sheet and establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all components of comprehensive
income shall be reported in the financial statements in the period in which they
are recognized. Furthermore, a total amount for comprehensive income shall be
displayed in the financial statements. The Company has adopted this standard
effective January 1, 1998. Total comprehensive income was $80.6 million and
$87.1 million for the six-month periods ended June 30, 2001 and 2000,
respectively, and $51.0 million and $44.6 million for the three-month period
ended June 2001 and 2000, respectively. The primary component of comprehensive
income other than net income was the adoption of SFAS No. 133.
For the three and six months ended June 30, 2001, the change in fair market
value of the Company's interest rate swaps was $1.3 million and $(5.1) million
and was recorded in other
F-26
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--COMPREHENSIVE INCOME (CONTINUED)
comprehensive income. The reconciliation to other comprehensive income is as
follows (in thousands) (unaudited):
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income........................................... $49,733 $44,602 $95,150 $87,364
Other comprehensive income (loss):
Unrealized gains (losses) on securities for the
period........................................... -- -- -- (229)
Cumulative effect of change in accounting principle
(SFAS No. 133) on other comprehensive income..... -- -- (9,445) --
Unrealized derivative gains (losses) on cash flow
hedges........................................... 1,280 -- (5,074) --
------- ------- ------- -------
Comprehensive income................................. $51,013 $44,602 $80,631 $87,135
======= ======= ======= =======
NOTE 13--DIVIDENDS
In order to maintain its election to qualify as a REIT, the Company must
distribute, at a minimum, an amount equal to 90% of its taxable income and must
distribute 100% of its taxable income to avoid paying corporate federal income
taxes. The distribution rate was modified to 95% from 90% by the REIT
Modernization Act beginning in fiscal 2001. The Company anticipates it will
distribute all of its taxable income to its shareholders. Because taxable income
differs from cash flow from operations due to non-cash revenues or expenses, in
certain circumstances, the Company may be required to borrow to make sufficient
dividend payments to meet this anticipated dividend threshold.
On November 4, 1999, the class A shares were converted into shares of Common
Stock on a one-for-one basis. In November 1999, the Company declared and paid a
dividend of a total of one million shares of Common Stock pro rata to all
holders of record of Common Stock as of the close of business on November 3,
1999. For the year ended December 31, 2000, total dividends declared by the
Company aggregated $205.5 million, or $2.40 per common share. Total common
dividends declared by the Company aggregated $52.6 million or $0.6125 per share
of Common Stock for the three-and six-months ended June 30, 2001. This dividend,
paid on April 2, 2001, was applicable to the three-month period ended March 31,
2001 and payable to shareholders of record on April 16, 2001. On July 2, 2001,
the Company declared a dividend of approximately $53.2 million, or $0.6125 per
share of Common Stock, applicable to the second quarter and payable to
shareholders of record on July 16, 2001. The Company also declared dividends
aggregating $10.4 million, $2.4 million, $1.4 million and $4.0 million,
respectively, on its Series A, B, C and D preferred stock, respectively, for the
six-month period ended June 30, 2001 and $5.2 million, $1.2 million,
$0.7 million and $2.0 million, respectively, on its Series A, B, C and D
preferred stock, respectively, for the three-month period ended June 30, 2001.
There are no divided arrearages on any of the preferred shares currently
outstanding.
The Series A preferred stock has a liquidation preference of $50.00 per
share and carries an initial dividend yield of 9.50% per annum. The dividend
rate on the preferred shares will increase
F-27
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--DIVIDENDS (CONTINUED)
to 9.75% on December 15, 2005, to 10.00% on December 15, 2006 and to 10.25% on
December 15, 2007 and thereafter. Dividends on the Series A preferred shares are
payable quarterly in arrears and are cumulative.
Holders of shares of the Series B preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.375% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.34 per share. Dividends are cumulative from the date of
original issue and are payable quarterly in arrears on or before the 15th day of
each March, June, September and December or, if not a business day, the next
succeeding business day. Any dividend payable on the Series B preferred stock
for any partial dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends will be payable to holders of
record as of the close of business on the first day of the calendar month in
which the applicable dividend payment date falls or on another date designated
by the Board of Directors of the Company for the payment of dividends that is
not more than 30 nor less than ten days prior to the dividend payment date.
Holders of shares of the Series C preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.20% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.30 per share. The remaining terms relating to dividends of the
Series C preferred stock are substantially identical to the terms of the
Series B preferred stock described above.
Holders of shares of the Series D preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 8.00% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.00 per share. The remaining terms relating to dividends of the
Series D preferred stock are substantially identical to the terms of the
Series B preferred stock described above.
The exact amount of future quarterly dividends to common shareholders will
be determined by the Board of Directors based on the Company's actual and
expected operations for the fiscal year and the Company's overall liquidity
position.
NOTE 14--SEGMENT REPORTING
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131")
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected financial information about operating
segments in interim financial reports issued to shareholders.
The Company has two reportable segments: Real Estate Lending and Corporate
Tenant Leasing. The Company does not have substantial foreign operations. The
accounting policies of the segments are the same as those described in Note 3.
The Company has no single customer that accounts for 10% or more of revenues
(see Note 8 for other information regarding concentrations of credit risk).
F-28
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--SEGMENT REPORTING (CONTINUED)
The Company evaluates performance based on the following financial measures
for each segment. Selected results of operations for the three- and six-month
periods ended June 30, 2001 and 2000 and selected asset information as of
June 30, 2001 and December 31, 2000 regarding the Company's operating segments
are as follows (in thousands):
CREDIT
REAL ESTATE TENANT CORPORATE/ COMPANY
LENDING LEASING (1) OTHER (2) TOTAL
----------- ----------- ---------- ----------
(UNAUDITED)
Total revenues(3):
Three months ended:
June 30, 2001............................. $ 72,592 $ 49,353 $ (1,120) $ 120,825
June 30, 2000............................. 69,468 47,930 516 117,914
Six months ended:
June 30, 2001............................. $ 144,925 $ 98,981 $ (462) $ 243,444
June 30, 2000............................. 134,225 94,330 247 228,802
Total operating and interest expense(4):
Three months ended:
June 30, 2001............................. $ 29,264 $ 25,906 $ 7,698 $ 62,868
June 30, 2000............................. 28,295 18,933 17,257 64,485
Six months ended:
June 30, 2001............................. $ 63,390 $ 51,934 $ 14,660 $ 129,984
June 30, 2000............................. 50,813 39,004 33,742 123,559
Net operating income before minority
interest and gain on sale of net lease
assets(5):
Three months ended:
June 30, 2001............................. $ 43,328 $ 23,447 $ (8,818) $ 57,957
June 30, 2000............................. 41,173 28,997 (16,741) 53,429
Six months ended:
June 30, 2001............................. $ 81,535 $ 47,047 $(15,122) $ 113,460
June 30, 2000............................. 83,412 55,326 (33,495) 105,243
Total long-lived assets(6):
June 30, 2001............................. $2,252,255 $1,634,524 N/A $3,886,779
December 31, 2000......................... 2,225,183 1,670,169 N/A 3,895,352
Total assets:
June 30, 2001............................. $2,252,255 $1,634,524 $166,571 $4,053,350
December 31, 2000......................... 2,225,183 1,670,169 139,423 4,034,775
EXPLANATORY NOTES:
------------
(1) Includes the Company's pre-existing Corporate Tenant Leasing investments
since March 18, 1998 and the Corporate Tenant Leasing business acquired in
the TriNet Acquisition since November 4, 1999.
(2) Corporate and Other represents all corporate level items, including general
and administrative expenses and any intercompany eliminations necessary to
reconcile to the consolidated Company totals. This caption also includes the
Company's servicing business, which is not considered a material separate
segment.
(3) Total revenues represents all revenues earned during the period from the
assets in each segment. Revenue from the Real Estate Lending business
primarily represents interest income and revenue from the Corporate Tenant
Leasing business primarily represents operating lease income.
F-29
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--SEGMENT REPORTING (CONTINUED)
(4) Total operating and interest expense represents provision for possible
credit losses for the Real Estate Lending business and operating costs on
corporate tenant lease assets for the Corporate Tenant Leasing business, as
well as interest expense specifically related to each segment. General and
administrative expense, advisory fees (prior to November 4, 1999) and
stock-based compensation expense is included in Corporate and Other for all
periods. Depreciation and amortization of $8.8 million and $8.9 million for
the three-month periods ended June 30, 2001 and 2000, respectively, and
$17.6 million and $17.9 million for the six-month periods ended June 30,
2001 and 2000, respectively, are included in the amounts presented above.
(5) Net operating income before minority interests represents net operating
income before minority interest, gain on sale of corporate tenant lease
assets and extraordinary loss as defined in note (3) above, less total
operating and interest expense, as defined in note (4) above.
(6) Total long-lived assets is comprised of Loans and Other Lending Investments,
net and Real Estate Subject to Operating Leases, net, for each respective
segment.
NOTE 15--SUBSEQUENT EVENTS
On July 27, 2001, the Company completed a $300.0 million revolving credit
facility with a group of leading financial institutions. The new facility has an
initial maturity of July 2003, with a one-year extension at the Company's option
and another one-year extension at the lenders' option. The new facility replaces
two prior credit facilities maturing in 2002 and 2003, and bears interest at
LIBOR + 2.125%.
F-30
REPORT OF INDEPENDENT ACCOUNTANTS
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 at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 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. These financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes 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.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, NY
March 2, 2001
F-31
ISTAR FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF DECEMBER 31,
-----------------------
2000 1999*
---------- ----------
ASSETS
Loans and other lending investments, net.................... $2,225,183 $2,003,506
Real estate subject to operating leases, net................ 1,670,169 1,714,284
Cash and cash equivalents................................... 22,752 34,408
Restricted cash............................................. 20,441 10,195
Marketable securities....................................... 41 4,344
Accrued interest and operating lease income receivable...... 20,167 16,211
Deferred operating lease income receivable.................. 10,236 1,147
Deferred expenses and other assets.......................... 62,224 29,074
Investment in iStar Operating, Inc.......................... 3,562 383
---------- ----------
Total assets.............................................. $4,034,775 $3,813,552
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities.... $ 52,038 $ 54,773
Dividends payable........................................... 56,661 53,667
Debt obligations............................................ 2,131,967 1,901,204
---------- ----------
Total liabilities......................................... 2,240,666 2,009,644
---------- ----------
Commitments and contingencies............................... -- --
Minority interests in consolidated entities................. 6,224 2,565
Shareholders' equity:
Series A Preferred Stock, $0.001 par value, liquidation
preference $220,000, 4,400 shares issued and outstanding
at December 31, 2000 and December 31, 1999................ 4 4
Series B Preferred Stock, $0.001 par value, liquidation
preference $50,000, 2,000 shares issued and outstanding at
December 31, 2000 and December 31, 1999................... 2 2
Series C Preferred Stock, $0.001 par value, liquidation
preference $32,500, 1,300 shares issued and outstanding at
December 31, 2000 and December 31, 1999................... 1 1
Series D Preferred Stock, $0.001 par value, liquidation
preference $100,000, 4,000 shares issued and outstanding
at December 31, 2000 and December 31, 1999................ 4 4
Common Stock, $0.001 par value, 200,000 shares authorized,
85,726 and 84,985 shares issued and outstanding at
December 31, 2000 and December 31, 1999, respectively..... 85 85
Warrants and options........................................ 16,943 17,935
Additional paid in capital.................................. 1,966,396 1,953,972
Retained earnings (deficit)................................. (154,789) (129,992)
Accumulated other comprehensive income (losses)............. (20) (229)
Treasury stock (at cost).................................... (40,741) (40,439)
---------- ----------
Total shareholders' equity................................ 1,787,885 1,801,343
---------- ----------
Total liabilities and shareholders' equity................ $4,034,775 $3,813,552
========== ==========
----------
* RECLASSIFIED TO CONFORM TO 2000 PRESENTATION.
The accompanying notes are an integral part of the financial statements.
F-32
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
DECEMBER 31,
---------------------------------
2000 1999* 1998*
--------- --------- ---------
REVENUE:
Interest income........................................... $268,011 $209,848 $112,914
Operating lease income.................................... 185,956 42,186 12,378
Other income.............................................. 17,855 12,763 2,804
-------- -------- --------
Total revenue........................................... 471,822 264,797 128,096
-------- -------- --------
COSTS AND EXPENSES:
Interest expense.......................................... 173,891 91,184 44,697
Operating costs-corporate tenant lease assets............. 12,809 2,246 --
Depreciation and amortization............................. 34,514 10,340 4,287
General and administrative................................ 25,706 6,269 2,583
Provision for possible credit losses...................... 6,500 4,750 2,750
Stock option compensation expense......................... 2,864 412 5,985
Advisory fees............................................. -- 16,193 7,837
Costs incurred in acquiring external advisor.............. -- 94,476 --
-------- -------- --------
Total costs and expenses................................ 256,284 225,870 68,139
-------- -------- --------
Net income before minority interest, gain on sale of
corporate tenant lease assets and extraordinary loss...... 215,538 38,927 59,957
Minority interest in consolidated entities.................. (195) (41) (54)
Gain on sale of corporate tenant lease assets............... 2,948 -- --
-------- -------- --------
Net income before extraordinary loss........................ 218,291 38,886 59,903
Extraordinary loss on early extinguishments of debt......... (705) -- --
-------- -------- --------
Net income.................................................. $217,586 $ 38,886 $ 59,903
Preferred dividend requirements............................. (36,908) (23,843) (944)
-------- -------- --------
Net income allocable to common shareholders................. $180,678 $ 15,043 $ 58,959
======== ======== ========
Basic earnings per common share(1).......................... $ 2.11 $ 0.25 $ 1.40
======== ======== ========
Diluted earnings per common share(1)........................ $ 2.10 $ 0.25 $ 1.36
======== ======== ========
EXPLANATORY NOTES:
---------
* RECLASSIFIED TO CONFORM TO 2000 PRESENTATION.
(1) Net income per basic common share excludes 1% of net income allocable to the
Company's class B shares prior to November 4, 1999. These shares were
exchanged for Common Stock in connection with the TriNet Acquisition and
related transactions on November 4, 1999. As a result, the Company now has a
single class of Common Stock outstanding.
The accompanying notes are an integral part of the financial statements.
F-33
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
SERIES A SERIES B SERIES C SERIES D COMMON AT PAR WARRANTS
PREFERRED PREFERRED PREFERRED PREFERRED STOCK -------------------- AND
STOCK STOCK STOCK STOCK AT PAR CLASS A CLASS B OPTIONS
--------- --------- --------- --------- --------- --------- -------- ---------
Balance at January 1,
1998...................... $ -- $ -- $ -- $ -- $ -- $ 7,550 $ 38 $ --
Recapitalization
Transactions.............. -- -- -- -- -- 306,796 1,534 --
Issuance of options to
Advisor................... -- -- -- -- -- -- -- 5,985
Effects of
reorganization(1)......... -- -- -- -- -- (261,956) (1,310) --
Exercise of options......... -- -- -- -- -- 18 -- (270)
Issuance of preferred shares
and warrants.............. 44 -- -- -- -- -- -- 13,189
Dividends
declared-preferred........ -- -- -- -- -- -- -- --
Dividends declared-common... -- -- -- -- -- -- -- --
Net Income for the period... -- -- -- -- -- -- -- --
Change in accumulated other
comprehensive income...... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- --------- ------- --------
Balance at December 31,
1998*..................... $ 44 $ -- $ -- $ -- $ -- $ 52,408 $ 262 $ 18,904
Exercise of options......... -- -- -- -- -- 63 -- (969)
Dividends
declared-preferred........ -- -- -- -- -- -- -- --
Dividends declared-common... -- -- -- -- -- -- -- --
Effects of Incorporation
Merger.................... (40) -- -- -- 53 (52,471) (262) --
Acquisition of TriNet....... -- 2 1 4 29 -- -- --
Issuance of shares of Common
Stock through conversion
of joint venture partners
interest.................. -- -- -- -- -- -- -- --
Advisor Transaction......... -- -- -- -- 4 -- -- --
Special stock dividend...... -- -- -- -- 1 -- -- --
Purchase of treasury
stock..................... -- -- -- -- (2) -- -- --
Net income for the period... -- -- -- -- -- -- -- --
Change in accumulated other
comprehensive income...... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- --------- ------- --------
Balance at December 31,
1999...................... $ 4 $ 2 $ 1 $ 4 $ 85 $ -- $ -- $ 17,935
Exercise of options......... -- -- -- -- -- -- -- (992)
Dividends
declared-preferred........ -- -- -- -- -- -- -- --
Dividends declared-common... -- -- -- -- -- -- -- --
Acquisition of ACRE
Partners.................. -- -- -- -- -- -- -- --
Restricted stock units
issued to employees in
lieu of cash bonuses...... -- -- -- -- -- -- -- --
Restricted stock units
granted to employees...... -- -- -- -- -- -- -- --
Issuance of stock through
DRIP plan................. -- -- -- -- -- -- -- --
Purchase of treasury
stock..................... -- -- -- -- -- -- -- --
Net income for the period... -- -- -- -- -- -- -- --
Change in accumulated other
comprehensive income...... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- --------- ------- --------
Balance at December 31,
2000...................... $ 4 $ 2 $ 1 $ 4 $ 85 $ -- $ -- $ 16,943
==== ==== ==== ==== ==== ========= ======= ========
EXPLANATORY NOTE:
ACCUMULATED
ADDITIONAL RETAINED OTHER
PAID-IN EARNINGS COMPREHENSIVE TREASURY
CAPITAL (DEFICIT) INCOME STOCK TOTAL
---------- --------- --------------- --------- ----------
Balance at January 1,
1998...................... $ -- $ (1,075) $(162) $ -- $ 6,351
Recapitalization
Transactions.............. 432,084 -- -- -- 740,414
Issuance of options to
Advisor................... -- -- -- -- 5,985
Effects of
reorganization(1)......... 262,786 -- -- -- (480)
Exercise of options......... 537 -- -- -- 285
Issuance of preferred shares
and warrants.............. 206,170 -- -- -- 219,403
Dividends
declared-preferred........ 15 (944) -- -- (929)
Dividends declared-common... -- (60,343) -- -- (60,343)
Net Income for the period... -- 59,903 -- -- 59,903
Change in accumulated other
comprehensive income...... -- -- 139 -- 139
---------- --------- ----- -------- ----------
Balance at December 31,
1998*..................... $ 901,592 $ (2,459) $ (23) $ -- $ 970,728
Exercise of options......... 1,853 -- -- -- 947
Dividends
declared-preferred........ 330 (25,149) -- -- (24,819)
Dividends declared-common... -- (116,813) -- -- (116,813)
Effects of Incorporation
Merger.................... 52,720 -- -- -- --
Acquisition of TriNet....... 868,933 -- -- -- 868,969
Issuance of shares of Common
Stock through conversion
of joint venture partners
interest.................. 6,226 -- -- -- 6,226
Advisor Transaction......... 97,862 -- -- -- 97,866
Special stock dividend...... 24,456 (24,457) -- -- --
Purchase of treasury
stock..................... -- -- -- (40,439) (40,441)
Net income for the period... -- 38,886 -- -- 38,886
Change in accumulated other
comprehensive income...... -- -- (206) -- (206)
---------- --------- ----- -------- ----------
Balance at December 31,
1999...................... $1,953,972 $(129,992) $(229) $(40,439) $1,801,343
Exercise of options......... 7,089 -- -- -- 6,097
Dividends
declared-preferred........ 330 (36,906) -- -- (36,576)
Dividends declared-common... -- (205,477) -- -- (205,477)
Acquisition of ACRE
Partners.................. 3,637 -- -- -- 3,637
Restricted stock units
issued to employees in
lieu of cash bonuses...... 1,125 -- -- -- 1,125
Restricted stock units
granted to employees...... 212 -- -- -- 212
Issuance of stock through
DRIP plan................. 31 -- -- -- 31
Purchase of treasury
stock..................... -- -- -- (302) (302)
Net income for the period... -- 217,586 217,586
Change in accumulated other
comprehensive income...... -- -- 209 -- 209
---------- --------- ----- -------- ----------
Balance at December 31,
2000...................... $1,966,396 $(154,789) $ (20) $(40,741) $1,787,885
========== ========= ===== ======== ==========
EXPLANATORY NOTE:
----------------
* RECLASSIFIED TO CONFORM TO 2000 PRESENTATION.
(1) As adjusted for one-for-six reverse stock split effective June 19, 1998.
The accompanying notes are an integral part of the financial statements.
F-34
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
-------------------------------------
2000 1999* 1998*
--------- ----------- -----------
Cash flows from operating activities:
Net income.................................................. $ 217,586 $ 38,886 $ 59,903
Adjustments to reconcile net income to cash flows provided
by operating activities:
Minority interest......................................... 195 41 54
Non-cash expense for options issued to Advisor............ 1,700 412 5,985
Non-cash expense for Advisor Transaction.................. -- 94,476 --
Equity in earnings of unconsolidated joint ventures and
subsidiaries............................................ (4,753) (234) (96)
Depreciation and amortization............................. 47,402 15,932 7,662
Amortization of discounts/premiums and deferred
interest................................................ (27,059) (25,493) (17,750)
Distributions from operating joint venture................ 4,511 470 --
Deferred operating lease income adjustments............... (9,130) (1,597) --
Realized (gain)/loss on sale of securities................ 233 (11) --
Gain on sale of corporate tenant lease assets............. (2,948) -- --
Extraordinary loss on early extinguishment of debt........ 705 -- --
Provision for possible credit losses...................... 6,500 4,750 2,750
Changes in assets and liabilities:
(Increase) decrease in restricted cash.................. (10,246) 2,924 (5,699)
Increase in accrued interest and operating lease income
receivable............................................. (3,761) (3,089) (5,613)
Decrease in deferred expenses and other assets.......... (26,764) (1,212) (902)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities......................... (1,702) (3,706) 8,621
--------- ----------- -----------
Cash flows provided by operating activities............... 192,469 122,549 54,915
--------- ----------- -----------
Cash flows from investing activities:
Net cash outflow for the Recapitalization Transactions
(Note 3)................................................ -- -- (334,964)
Net cash outflow for TriNet Acquisition (Note 3).......... -- (23,723) --
Proceeds from sale of corporate tenant lease assets....... 146,265 -- --
New investment originations/acquisitions.................. (849,618) (640,757) (975,670)
Principal fundings on existing loan commitments........... (56,039) (45,916) (16,500)
Investment in iStar Operating, Inc........................ (3,443) -- (426)
Proceeds from sale of investment securities............... 30 -- --
Repayments of and principal collections from loans and
other investments....................................... 584,452 520,768 103,926
Investments (in) and advances to unconsolidated joint
ventures................................................ (24,047) (377) (47,675)
Distributions from unconsolidated joint ventures.......... 34,759 47,365 --
Other capital expenditures on real estate subject to
operating leases........................................ (9,011) (1,271) --
--------- ----------- -----------
Cash flows used in investing activities................. (176,652) (143,911) (1,271,309)
--------- ----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
facilities.............................................. (183,837) 168,592 640,945
Borrowings under term loans............................... 90,000 39,234 368,683
Repayments under term loans............................... (300,799) -- --
Borrowings under repurchase agreements.................... 65,067 (7,331) 46,091
Repayments under repurchase agreements.................... (31,564) -- --
Mortgage note repayments.................................. -- (150) --
Borrowings under bond offerings........................... 863,254 -- --
Repayments under bond offerings........................... (274,919) -- --
Common dividends paid..................................... (202,397) (90,076) (38,638)
Preferred dividends paid.................................. (36,576) (20,524) --
Minority interest......................................... (164) -- --
Extraordinary loss on early extinguishment of debt........ (317) -- --
Payment for deferred financing costs...................... (21,048) (4,593) (11,615)
Proceeds from issuance of class B shares.................. -- -- 1,534
Costs incurred in reorganization.......................... -- -- (480)
Purchase of treasury stock................................ (302) (40,439) --
Proceeds from exercise of options......................... 6,129 947 285
Proceeds from issuance of preferred stock and warrants.... -- -- 219,403
--------- ----------- -----------
Cash flows (used in) provided by financing activities... (27,473) 45,660 1,226,208
--------- ----------- -----------
Increase (decrease) in cash and cash equivalents............ (11,656) 24,298 9,814
Cash and cash equivalents at beginning of period............ 34,408 10,110 296
--------- ----------- -----------
Cash and cash equivalents at end of period.................. $ 22,752 $ 34,408 $ 10,110
========= =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 142,145 $ 85,835 $ 38,006
========= =========== ===========
-------------
* RECLASSIFIED TO CONFORM TO 2000 PRESENTATION.
The accompanying notes are an integral part of the financial statements.
F-35
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS
ORGANIZATION--iStar Financial Inc.(1) (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
approximately $1.1 billion of assets to the Company's predecessor, Starwood
Financial Trust, in exchange for a controlling interest in that company. Since
that time, the Company has grown by originating new lending and leasing
transactions, as well as through corporate acquisitions. Specifically, in
September 1998, the Company acquired the loan origination and servicing business
of a major insurance company, and in December 1998, the Company acquired the
mortgage and mezzanine loan portfolio of its largest private competitor.
Additionally, in November 1999, the Company acquired TriNet Corporate Realty
Trust, Inc. ("TriNet"), which was then the largest publicly traded company
specializing in the net leasing of corporate office and industrial facilities
(the "TriNet Acquisition"). The TriNet Acquisition was structured as a
stock-for-stock merger of TriNet with a subsidiary of the Company. Concurrent
with the TriNet Acquisition, the Company also acquired its external advisor (the
"Advisor Transaction") in exchange for shares of common stock of the Company
("Common Stock") and converted its organizational form to a Maryland corporation
(the "Incorporation Merger"). As part of the conversion to a Maryland
corporation, the Company replaced its 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 under the symbol "SFI" in November 1999.
During 1993 through 1997, the Company did not qualify as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). However, pursuant to a closing agreement with the Internal Revenue
Service (the "IRS") obtained in March 1998, the Company was eligible and elected
to be taxed as a REIT for the taxable year beginning January 1, 1998.
BUSINESS--The Company is the leading publicly traded finance company focused
on the commercial real estate industry. The Company provides structured
financing to private and corporate owners of real estate nationwide, including
senior and junior mortgage debt, corporate mezzanine and subordinated capital,
and corporate net lease financing. The Company, which has elected to be taxed as
a real estate investment trust ("REIT"), seeks to deliver superior risk-adjusted
returns on equity for shareholders by providing innovative and value-added
financing solutions to its customers.
The Company has implemented its investment strategy by: (1) focusing on the
origination of large, highly structured mortgage, corporate and lease financings
where customers require flexible financial solutions, and avoiding commodity
businesses in which there is significant direct competition from other providers
of capital; (2) developing direct relationships with borrowers and corporate
tenants as opposed to sourcing transactions through intermediaries; (3) adding
value beyond simply providing capital by offering borrowers and corporate
tenants specific lending expertise, flexibility, certainty and continuing
relationships beyond the closing of a particular financing transaction; and
(4) taking advantage of market anomalies in the real estate financing markets
when the Company believes credit is mispriced by other providers of capital,
EXPLANATORY NOTE:
------------
(1) As more fully discussed in Note 4, on November 4, 1999, the Company changed
its form and became a corporation under Maryland law and changed its name
from Starwood Financial Trust to Starwood Financial Inc. Further, effective
April 30, 2000, the registrant changed its name to iStar Financial Inc.
F-36
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND BUSINESS (CONTINUED)
such as the spread between lease yields and the yields on corporate tenants'
underlying credit obligations.
The Company intends to continue to emphasize a mix of portfolio financing
transactions to create built-in diversification and single-asset financings for
properties with strong, long-term competitive market positions.
NOTE 2--BASIS OF PRESENTATION
The accompanying audited Consolidated Financial Statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
for complete financial statements. The Consolidated Financial Statements include
the accounts of the Company, its qualified REIT subsidiaries, and its
majority-owned and controlled partnerships. Certain third-party mortgage
servicing operations are conducted through iStar Operating, Inc. ("iStar
Operating"), a taxable corporation which is not consolidated with the Company
for financial reporting or income tax purposes. The Company owns all of the
non-voting preferred stock and a 95% economic interest in iStar Operating, which
is accounted for under the equity method for financial reporting purposes. The
Company does not own any of the outstanding voting stock of iStar Operating. In
addition, the Company has an investment in TriNet Management Operating
Company, Inc. ("TMOC"), a taxable noncontrolled subsidiary of the Company, which
is also accounted for under the equity method. Further, certain other
investments in partnerships or joint ventures which the Company does not control
are also accounted for under the equity method. All significant intercompany
balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying Consolidated Financial
Statements contain all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the Company's consolidated financial
position at December 31, 2000 and December 31, 1999 and the results of its
operations, changes in shareholders' equity and its cash flows for the years
ended December 31, 2000, 1999 and 1998. Such operating results are not
necessarily indicative of the results that may be expected for any other interim
periods or the entire year.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LOANS AND OTHER LENDING INVESTMENTS, NET--As described in Note 5, "Loans and
Other Lending Investments," includes the following investments: senior
mortgages, subordinate mortgages, corporate/partnership loans/unsecured notes,
loan participations and other lending investments. In general, management
considers its investments in this category as held-to-maturity and, accordingly,
reflects such items at amortized historical cost.
REAL ESTATE SUBJECT TO OPERATING LEASES AND DEPRECIATION--Real estate
subject to operating leases is generally recorded at cost. Certain improvements
and replacements are capitalized when they extend the useful life, increase
capacity or improve the efficiency of the asset. Repairs and maintenance items
are expensed as incurred. The Company capitalizes interest costs incurred during
the land development or construction period on qualified development projects,
including investments in joint ventures accounted for under the equity method.
Depreciation is computed using the straight line method of cost recovery over
estimated useful lives of 40.0 years for buildings, five years for furniture and
equipment, the shorter of the remaining lease term or expected life for tenant
improvements, and the remaining life of the building for building improvements.
F-37
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real estate assets to be disposed of are reported at the lower of their
carrying amount or fair value less costs to sell. The Company also periodically
reviews long-lived assets to be held and used for an impairment in value
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. In management's opinion, real estate assets
to be held and used are not carried at amounts in excess of their estimated
recoverable amounts.
CAPITALIZED INTEREST--The Company capitalizes interest costs incurred during
the land development or construction period on qualified development projects,
including investments in joint ventures accounted for under the equity method.
Interest capitalized was approximately $513,000 and $377,000 during the years
ended December 31, 2000 and 1999, respectively.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash held in
banks or invested in money market funds with original maturity terms of less
than 90 days.
RESTRICTED CASH--Restricted cash represents amounts required to be
maintained in escrow under certain of the Company's debt obligations and leasing
cost obligations.
NON-CASH ACTIVITY--During the year ended December 31, 1998, the Company had
significant non-cash activity including: (1) conversion of units in APMT Limited
Partnership (shown as "minority interest" in the consolidated financial
statements) to class A shares of the Company (see Note 4); (2) issuance of
options to Starwood Financial Advisors, L.L.C. (the "Advisor") to acquire
class A shares of the Company (see Note 11); and (3) issuance of new class A
shares in exchange for a portion of the acquisition of loans and related
investments as part of the Recapitalization Transactions (see Note 4).
The cash portion of the Recapitalization Transactions is summarized as
follows (in thousands):
Acquisition of loans and other investments.................. $(1,061,006)
Acquired accrued interest and operating lease income
receivable................................................ (7,451)
Conversion of minority interest............................. (5,387)
Par value of class A shares issued.......................... 306,796
Additional paid in capital on class A shares issued......... 432,084
-----------
Net cash outflow for the Recapitalization Transactions...... $ (334,964)
===========
F-38
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 1999, the Company acquired TriNet (see Note 4). The following is a
summary of the effects of this transaction on the Company's consolidated
financial position (in thousands):
ACQUISITION OF
TRINET
--------------
Fair value of:
Assets acquired........................................... $(1,589,714)
Liabilities assumed....................................... 676,936
Minority interest......................................... 2,524
Stock issued.............................................. 875,195
-----------
Cash paid................................................. (35,059)
Less cash acquired........................................ 11,336
-----------
Net cash outflow for TriNet Acquisition................... $ (23,723)
===========
There was no non-cash activity during the year ended December 31, 2000.
MARKETABLE SECURITIES-- From time to time, the Company invests excess
working capital in short-term marketable securities such as those issued by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC").
Although the Company generally intends to hold such investments for investment
purposes, it may, from time to time, sell any of its investments in these
securities as part of its management of liquidity. Accordingly, the Company
considers such investments as "available-for-sale" and reflects such investments
at fair market value with changes in fair market value reflected as a component
of shareholders' equity.
REPURCHASE AGREEMENTS-- The Company may enter into sales of securities or
loans under agreements to repurchase the same security or loan. The amounts
borrowed under repurchase agreements are carried on the balance sheet as part of
debt obligations at the amount advanced plus accrued interest. Interest incurred
on the repurchase agreements is reported as interest expense.
REVENUE RECOGNITION--The Company's revenue recognition policies are as
follows:
LOANS AND OTHER LENDING INVESTMENTS: The Company generally intends to hold
all of its loans and other lending investments to maturity. Accordingly, it
reflects all of these investments at amortized cost less allowance for loan
losses, acquisition premiums or discounts, deferred loan fees and undisbursed
loan funds. On occasion, the Company may acquire loans at either premiums or
discounts based on the credit characteristics of such loans. These premiums or
discounts are recognized as yield adjustments over the lives of the related
loans. If loans that were acquired at a premium or discount are prepaid, the
Company immediately recognizes the unamortized premium or discount as a decrease
or increase in the prepayment gain or loss, respectively. Loan origination or
exit fees, as well as direct loan origination costs, are also deferred and
recognized over the lives of the related loans as a yield adjustment. Interest
income is recognized using the effective interest method applied on a
loan-by-loan basis.
Certain of the Company's loans provide for accrual of interest at specified
rates which differ from current payment terms. Interest is recognized on such
loans at the accrual rate subject to
F-39
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
management's determination that accrued interest and outstanding principal are
ultimately collectible, based on the underlying collateral and operations of the
borrower.
Prepayment penalties or yield maintenance payments from borrowers are
recognized as additional income when received. Certain of the Company's loan
investments provide for additional interest based on the borrower's operating
cash flow or appreciation of the underlying collateral. Such amounts are
considered contingent interest and are reflected as income only upon certainty
of collection.
LEASING INVESTMENTS: Operating lease revenue is recognized on the
straight-line method of accounting from the later of the date of the origination
of the lease or the date of acquisition of the facility subject to existing
leases. Accordingly, contractual lease payment increases are recognized evenly
over the term of the lease. The cumulative difference between lease revenue
recognized under this method and contractual lease payment terms is recorded as
a deferred operating lease income receivable on the balance sheet.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's accounting policies
require that an allowance for estimated credit losses be maintained at a level
that management, based upon an evaluation of known and inherent risks in the
portfolio, considers adequate to provide for possible credit losses. Specific
valuation allowances are established for impaired loans in the amount by which
the carrying value, before allowance for estimated losses, exceeds the fair
value of collateral less disposition costs on an individual loan basis.
Management considers a loan to be impaired when, based upon current information
and events, it believes that it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
on a timely basis. Management measures these impaired loans at the fair value of
the loans' underlying collateral less estimated disposition costs. Impaired
loans may be left on accrual status during the period the Company is pursuing
repayment of the loan; however, these loans are placed on non-accrual status at
such time that the loans either: (1) become 90 days delinquent; or
(2) management determines the borrower is incapable of, or has ceased efforts
toward, curing the cause of the impairment. While on non-accrual status,
interest income is recognized only upon actual receipt. Impairment losses are
recognized as direct write-downs of the related loan with a corresponding charge
to the provision for possible credit losses. Charge-offs occur when loans, or a
portion thereof, are considered uncollectible and of such little value that
further pursuit of collection is not warranted. Management also provides a
portfolio reserve based upon its periodic evaluation and analysis of the
portfolio, historical and industry loss experience, economic conditions and
trends, collateral values and quality, and other relevant factors.
INCOME TAXES--The Company did not qualify as a REIT from 1993 through 1997;
however, it did not incur any material tax liabilities as a result of its
operations. See Note 10 to the Consolidated Financial Statements for more
information.
As confirmed in a closing agreement with the IRS obtained in March 1998, the
Company was eligible and has elected to be taxed as a REIT for its tax year
beginning January 1, 1998. As a REIT, the Company is subject to federal income
taxation at corporate rates on its REIT taxable income; however, the Company is
allowed a deduction for the amount of dividends paid to its shareholders,
thereby subjecting the distributed net income of the Company to taxation at the
shareholder level only. iStar Operating and TMOC are not consolidated for
federal income tax purposes and are taxed as corporations. For financial
reporting purposes, current and deferred
F-40
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
taxes are provided for in the portion of earnings recognized by the Company with
respect to its interest in iStar Operating and TMOC.
NET INCOME ALLOCABLE TO COMMON SHARES--Net income allocable to common shares
excludes 1% of net income allocable to the class B shares prior to November 4,
1999. The class A and class B shares were exchanged for Common Stock in
connection with the TriNet Acquisition, as more fully described in Note 4.
EARNINGS (LOSS) PER COMMON SHARES--In accordance with the Statement of
Financial Accounting Standards No. 128 ("FASB No. 128"), the Company presents
both basic and diluted earnings per share ("EPS"). Basic earnings per share
("Basic EPS") excludes dilution and is computed by dividing net income available
to common shareholders by the weighted average number of shares outstanding for
the period. Diluted earnings per share ("Diluted EPS") reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock, where such exercise or conversion
would result in a lower earnings per share amount.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles 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.
NEW ACCOUNTING STANDARDS--In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). On June 23, 1999, the FASB voted to
defer the effectiveness of SFAS No. 133 for one year. SFAS No. 133 is now
effective for fiscal years beginning after June 15, 2000, but earlier
application is permitted as of the beginning of any fiscal quarter subsequent to
June 15, 1998. SFAS No. 133 establishes accounting and reporting standards for
derivative financial instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as:
(1) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment; (2) a hedge of the exposure to
variable cash flows of a forecasted transaction; or (3) in certain
circumstances, a hedge of a foreign currency exposure. The Company adopted this
pronouncement, as amended by Statement of Financial Accounting Standards
No. 137 "Accounting for Derivative Instruments and Hedging Activities--deferral
of the Effective Date of FASB Statement No. 133" and Statement of Financial
Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities--an Amendment of FASB Statement No. 133," on
January 1, 2001. Because the Company has primarily used derivatives as cash flow
hedges of interest rate risk only, the adoption of SFAS No. 133 did not have a
material financial impact on the financial position and results of operations of
the Company. However, should the Company change its current use of such
derivatives (see Note 9), the adoption of SFAS No. 133 could have a more
significant effect on the Company prospectively.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company adopted SAB 101, as
required, in the fourth quarter of fiscal
F-41
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2000. The adoption of SAB 101 did not have a material financial impact on the
financial position or the results of operations of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
was required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The initial adoption of FIN 44 by the Company did
not have a material impact on its consolidated financial position or results of
operations.
NOTE 4--CAPITAL TRANSACTIONS
PRIOR TRANSACTIONS WITH AFFILIATES--Through a series of transactions
beginning in November 1993 and through March 18, 1998, the date of the
Recapitalization Transactions described in the following section, Starwood
Mezzanine Investors, L.P. ("Starwood Mezzanine") and certain other affiliates
(collectively, the "Starwood Investors") had acquired controlling interests in
the Company represented by an aggregate of 874,016 class A shares, or 69.46% of
the then total class A shares outstanding, and 629,167 class B shares,
representing 100% of the then total class B shares outstanding. Together, the
class A and class B shares held by the Starwood Investors represented 79.64% of
the voting interests of the Company.
During the quarter ended March 31, 1998, the Company consummated certain
transactions and entered into agreements which significantly recapitalized and
expanded its capital resources, as well as modified future operations, including
those described herein below in "Recapitalization Transactions" and "Advisor
Agreement."
RECAPITALIZATION TRANSACTIONS--As more fully discussed above, pursuant to a
series of transactions beginning in March 1994 and including the exercise of the
class A and class B warrants in January 1997, the Starwood Investors acquired
joint ownership of 69.46% and 100% of the outstanding class A shares and
class B shares of the Company, respectively, through which they controlled
approximately 79.64% of the voting interests in the Company as of December 31,
1997. Prior to the consummation of these transactions on March 18, 1998
(collectively, the "Recapitalization Transactions"), Starwood Mezzanine also
owned 761,491 units which represented the remaining 91.95% of APMT Limited
Partnership not held by the Company. Those units were convertible into cash, an
additional 761,491 class A shares of the Company, or a combination of the two,
as determined by the Company.
On March 18, 1998, each outstanding unit held by Starwood Mezzanine was
exchanged for one class A share of the Company and, concurrently, the
partnership was liquidated through a distribution of its net assets to the
Company, its then sole partner.
Simultaneously, Starwood Mezzanine contributed various real estate loan
investments to the Company in exchange for 9,191,333 class A shares and
$25.5 million in cash, as adjusted. Starwood Opportunity Fund IV, L.P. ("SOF
IV"), one of the Starwood Investors, contributed loans and other lending
investments, $17.9 million in cash and certain letters of intent in exchange for
41,179,133 class A shares of the Company and a cash payment of $324.3 million.
Concurrently, the holders of the class B shares who were affiliates of the
Starwood Investors acquired 25,565,979 additional class B shares sufficient to
maintain existing voting preferences pursuant
F-42
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
to the Company's Amended and Restated Declaration of Trust. Immediately after
these transactions, the Starwood Investors owned approximately 99.27% of the
outstanding class A shares of the Company and 100% of the class B shares. Assets
acquired from Starwood Mezzanine were reflected using step acquisition
accounting at predecessor basis adjusted to fair value to the extent of
post-transaction, third-party ownership. Assets acquired from SOF IV were
reflected at their fair market value.
ADVISORY AGREEMENT--In connection with the Recapitalization Transactions,
the Company and its former external advisor (the "Advisor"), an affiliate of the
Starwood Investors, entered into an Advisory Agreement (the "Advisory
Agreement") pursuant to which the Advisor managed the affairs of the Company,
subject to the Company's purpose and investment policy, the investment
restrictions and the directives of the Board of Directors.
The Company paid the Advisor a quarterly base management fee of 0.3125%
(1.25% per annum) of the "Book Equity Value" of the Company. "Book Equity Value"
was generally defined as the excess of the book value of the assets of the
Company over all liabilities of the Company.
In addition, the Company paid the Advisor a quarterly incentive fee of 5.00%
of the Company's "Adjusted Net Income" during each quarter that the Adjusted Net
Income for such quarter (restated and annualized as a rate of return on the
Company's Book Equity Value for such quarter) equaled or exceeded the "Benchmark
BB Rate." "Adjusted Net Income" was generally defined as the Company's gross
income less the Company's expenses for the applicable quarter (including the
base fee for such quarter but not the incentive fee for such quarter). The
Advisor was also reimbursed for certain expenses it incurred on behalf of the
Company.
Prior to the transactions described below through which, among other things,
the Company became internally-managed, the Company was dependent on the services
of the Advisor and its officers and employees for the successful execution of
its business strategy.
1999 TRANSACTIONS--On November 3, 1999, consistent with previously announced
terms, the Company's shareholders approved a series of transactions including:
(1) the acquisition, through a merger, of TriNet; (2) the acquisition, through a
merger and a contribution of interests, of 100% of the ownership interests in
the Advisor; and (3) the change in form, through a merger, of the Company's
organization to a Maryland corporation. TriNet shareholders also approved the
TriNet Acquisition on November 3, 1999. These transactions were consummated on
November 4, 1999. As part of these transactions, the Company also replaced its
dual class common share structure with a single class of Common Stock.
TRINET ACQUISITION--TriNet merged with and into a subsidiary of the Company,
with TriNet surviving as a wholly-owned subsidiary of the Company (the "Leasing
Subsidiary"). In the TriNet Acquisition, each share of TriNet common stock was
converted into 1.15 shares of Common Stock, resulting in an aggregate issuance
of 28.9 million shares of Common Stock. Each share of TriNet Series A, Series B
and Series C Cumulative Redeemable Preferred Stock was converted into a share of
Series B, Series C or Series D (respectively) Cumulative Redeemable Preferred
Stock of the Company. The Company's preferred stock issued to the former TriNet
preferred shareholders has substantially the same terms as the TriNet preferred
stock, except that the new Series B, C and D preferred stock has additional
voting rights not associated with the TriNet preferred stock. The holders of the
Company's Series A preferred stock retained the same rights and preferences as
existed prior to the TriNet Acquisition.
F-43
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
The TriNet Acquisition was accounted for as a purchase. Because the
Company's stock prior to the transaction was largely held by the Starwood
Investors, and, as a result, the stock was not widely traded relative to the
amount of shares outstanding, the pro forma financial information presented
below was prepared utilizing a stock price of $28.14 per TriNet share, which was
the average stock price of TriNet during the five-day period before and after
the TriNet Acquisition was agreed to and announced.
ADVISOR TRANSACTION--Contemporaneously with the consummation of the TriNet
Acquisition, the Company acquired 100% of the interests in the Advisor in
exchange for total consideration of four million shares of Common Stock. For
accounting purposes, the Advisor Transaction was not considered the acquisition
of a "business" in applying Accounting Principles Board Opinion No. 16,
"Business Combinations" and, therefore, the market value of the Common Stock
issued in excess of the fair value of the net tangible assets acquired of
approximately $94.5 million was charged to operating income as a non-recurring,
non-cash item in the fourth quarter of 1999, rather than capitalized as
goodwill.
INCORPORATION MERGER--Prior to the consummation of the TriNet Acquisition
and the Advisor Transaction, the Company changed its form from a Maryland trust
to a Maryland corporation in the Incorporation Merger, which technically
involved a merger of the Company with a wholly-owned subsidiary formed solely to
effect such merger. In the Incorporation Merger, the class B shares were
converted into shares of Common Stock on a 49-for-one basis (the same ratio at
which class B shares were previously convertible into class A shares), and the
class A shares were converted into shares of Common Stock on a one-for-one
basis. As a result, the Company no longer has multiple classes of common shares.
The Incorporation Merger was treated as a transfer of assets and liabilities
under common control. Accordingly, the assets and liabilities transferred from
the Maryland trust to the Maryland corporation were reflected at their
predecessor basis and no gain or loss was recognized.
The Company declared and paid a special dividend of one million shares of
its Common Stock payable pro rata to all holders of record of its Common Stock
following completion of the Incorporation Merger, but prior to the effective
time of the TriNet Acquisition and the Advisor Transaction.
PRO FORMA INFORMATION--The summary unaudited pro forma consolidated
statements of operations for the years ended December 31, 1999 and 1998 are
presented as if the following transactions, consummated in November 1999, had
occurred on January 1, 1998: (1) the TriNet Acquisition; (2) the Advisor
Transaction; and (3) the borrowings necessary to consummate the aforementioned
transactions, and as if the following transactions consummated in March 1998 had
occurred on January 1, 1998: (1) the Recapitalization Transactions; (2) the
exchange of each outstanding unit in the APMT Limited Partnership held by
holders other than the Company for one class A share; (3) the liquidation and
termination of the partnership; and (4) the borrowings necessary to consummate
the aforementioned transactions. The unaudited pro forma information is based
upon the historical consolidated results of operations of the Company and TriNet
for the years ended December 31, 1999 and 1998, after giving effect to the
events described above.
F-44
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1999 1998
--------- ---------
(UNAUDITED)
REVENUE:
Interest income........................................... $218,359 $140,261
Operating lease income.................................... 186,776 169,196
Other income.............................................. 21,000 9,776
-------- --------
Total revenue........................................... 426,135 319,233
-------- --------
EXPENSES:
Interest expense.......................................... 135,795 99,138
Operating costs-corporate tenant lease assets............. 12,601 7,651
Depreciation and amortization............................. 36,423 35,053
General and administrative................................ 21,716 20,770
Provision for possible credit losses...................... 4,750 2,750
Stock option compensation expense......................... 2,474 5,985
-------- --------
Total costs and expenses................................ 213,759 171,347
-------- --------
Income before minority interest........................... $212,376 $147,886
Minority interest......................................... (164) (128)
-------- --------
Net income................................................ $212,212 $147,758
Preferred dividend requirements........................... (36,906) (16,622)
-------- --------
Net income allocable to common shareholders............... $175,306 $131,136
======== ========
BASIC EARNINGS PER SHARE:
Basic earnings per common share........................... $ 2.01 $ 1.50
======== ========
Weighted average number of common shares outstanding...... 87,073 87,193
======== ========
Investments and dispositions are assumed to have taken place as of
January 1, 1998; however, loan originations and acquisitions are not reflected
in these pro forma numbers until the actual origination or acquisition date by
the Company. The pro forma information above excludes the charge of
approximately $94.5 million taken by the Company in fiscal 1999 to reflect the
costs incurred in acquiring the Advisor as such charge is non-recurring. The pro
forma information also excludes certain non-recurring historical charges
recorded by TriNet of $3.4 million in 1999 for a provision for a real estate
write-down and $3.0 million in 1998 for a special charge for an expected
reduction in TriNet's investment activity. General and administrative costs
represent estimated expense levels as an internally-managed Company.
The pro forma financial information is not necessarily indicative of what
the consolidated results of operations of the Company would have been as of and
for the periods indicated, nor does it purport to represent the results of
operations for future periods.
F-45
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND OTHER LENDING INVESTMENTS
The following is a summary description of the Company's loans and other
lending investments (in thousands):
CARRYING VALUE
# OF ORIGINAL PRINCIPAL AS OF DECEMBER 31,
UNDERLYING PROPERTY BORROWERS COMMITMENT BALANCES -----------------------
TYPE OF INVESTMENT TYPE(1) IN CLASS(1) AMOUNT(1) OUTSTANDING(1) 2000 1999
---------------------- ---------------------- ----------- ------------- -------------- ---------- ----------
Senior Mortgages(5) Office/Hotel/Mixed 21 $1,337,717 $1,232,307 $1,210,992 $1,039,052
Use/Apartment/Retail/
Resort
Subordinated Mortgages Office/Hotel/Mixed Use 13 372,136 340,088 325,558 464,105
Corporate Loans/ Office/Hotel/Residential/ 14 413,946 401,795 398,978 309,768
Partnership Loans/ Apartment
Unsecured Notes
Loan Participations Office/Retail 3 127,497 111,388 111,251 128,105
Other Lending Resort/Office/Mixed N/A N/A N/A 192,404 69,976
Investments Use/Residential/
Homebuilder
---------- ----------
Gross Carrying Value $2,239,183 $2,011,006
Provision for Possible
Credit Losses (14,000) (7,500)
---------- ----------
Total, Net $2,225,183 $2,003,506
========== ==========
EFFECTIVE PRINCIPAL PARTICI-
MATURITY CONTRACTUAL INTEREST CONTRACTUAL INTEREST AMORTIZ- PATION
TYPE OF INVESTMENT DATES PAYMENT RATES(2) ACCRUAL RATES(3) ATION FEATURES
---------------------- -------------- ------------------------ ------------------------ --------- ---------
Senior Mortgages(5) 2001 to 2019 Fixed: 6.13% to 20.00% Fixed: 6.13% to 24.00% Yes (4) Yes (3)
Variable: LIBOR + 1.50% Variable: LIBOR + 1.50%
to 6.00% to 6.00%
Subordinated Mortgages 2002 to 2007 Fixed: 7.00% to 15.25% Fixed: 10.07% to 17.00% Yes (4) Yes (3)
Variable: LIBOR + 5.80% Variable: LIBOR + 5.80%
Corporate Loans/ 2001 to 2008 Fixed: 6.13% to 14.50% Fixed: 6.13% to 17.50% Yes Yes (3)
Partnership Loans/ Variable: LIBOR + 2.78% Variable: LIBOR + 2.78%
Unsecured Notes to 7.50% to 7.50%
Loan Participations 2003 to 2005 Fixed: 10.00% to 13.60% Fixed: 13.60% to 14.00% No Yes (3)
Variable: LIBOR + 4.50% Variable: LIBOR + 4.50%
Other Lending 2002 and 2013 Fixed: 6.75% to 12.75% Fixed: 6.75% to 12.75% No No
Investments
Gross Carrying Value
Provision for Possible
Credit Losses
Total, Net
EXPLANATORY NOTES:
-------------
(1) Amounts and details are for loans outstanding as of December 31, 2000.
(2) Substantially all variable-rate loans are based on 30-day LIBOR and reprice
monthly. The 30-day LIBOR rate on December 29, 2000 was 6.56%.
(3) Under some of these loans, the lender receives additional payments
representing additional interest from participation in available cash flow
from operations of the property and the proceeds, in excess of a base
amount, arising from a sale or refinancing of the property.
(4) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity. In addition, one of the loans permits additional
annual prepayments of principal of up to $1.3 million without penalty at the
borrower's option.
(5) The unfunded commitment amount on one of the Company's construction loans,
included in senior mortgages, was $16.2 million as of December 31, 1999. As
of December 31, 2000, the construction loan was fully funded.
F-46
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND OTHER LENDING INVESTMENTS (CONTINUED)
During the years ended December 31, 2000 and 1999, respectively, the Company
and its affiliated ventures originated or acquired an aggregate of approximately
$721.2 million and $663.4 million in loans and other lending investments, funded
$56.0 million and $46.4 million under existing loan commitments and received
principal repayments of $584.5 million and $561.9 million.
As of December 31, 2000, the Company had nine loans with unfunded
commitments. The total unfunded commitment amount was approximately
$151.1 million, of which $83.5 million was discretionary (i.e., at the Company's
option) and $67.6 million was non-discretionary.
The Company's loans and other lending investments are predominantly pledged
as collateral under either the iStar Asset Receivables secured notes, the
secured revolving facilities or secured term loans (see Note 7).
The Company has reflected provisions for possible credit losses of
approximately $6.5 million, $4.8 million and $2.8 million in its results of
operations during the years ended December 31, 2000, 1999 and 1998,
respectively. These provisions represent portfolio 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, and the underlying
collateral. No direct impairment reserves on specific loans were considered
necessary. Management may transfer reserves between general and specific
reserves as considered necessary.
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES
During 2000, the Company acquired one corporate tenant lease facility for a
purchase price of $22.8 million and exercised an option to purchase another
facility for $16.4 million by funding an additional $474,000 on an existing
convertible mortgage loan. Construction was completed on five facilities under
development in one of the Company's joint venture partnerships for a total
development cost of $65.2 million. In addition, the TN-CP joint venture acquired
one facility for a purchase price of $36.8 million. The Company also purchased
78.4 acres of land for approximately $80.7 million subject to a 20-year ground
lease to a corporate customer, with the first year of operating lease payments
equal to a return on cost of approximately 11.6%. In addition, the Company
purchased 32.4 acres of land for approximately $2.3 million on which it is
constructing a build-to-suit distribution facility for a corporate customer
under a 15-year tenant lease.
F-47
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
The Company's investments in real estate subject to operating leases, at
cost, were as follows (in thousands):
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Buildings and improvements......................... $1,294,572 $1,390,933
Land and land improvements......................... 344,490 277,872
Less: accumulated depreciation..................... (46,975) (14,627)
---------- ----------
1,592,087 1,654,178
Investments in unconsolidated joint ventures....... 78,082 60,106
---------- ----------
Real estate subject to operating leases,
net........................................ $1,670,169 $1,714,284
========== ==========
The Company's net lease facilities are leased to customers with initial term
expiration dates from 2001 to 2020. Future operating lease payments under
non-cancelable leases, excluding customer reimbursements of expenses, in effect
at December 31, 2000, are approximately as follows (in thousands):
YEAR AMOUNT
---- ----------
2001........................................................ $ 176,429
2002........................................................ 172,811
2003........................................................ 164,401
2004........................................................ 146,279
2005........................................................ 127,867
Thereafter.................................................. 751,177
----------
$1,538,964
==========
Under certain leases, the Company receives additional participating lease
payments to the extent gross revenues of the tenant exceed a base amount. The
Company earned $0.6 million and $0.5 million of such additional participating
lease payments in the years ended December 31, 2000 and 1999, respectively. In
addition, the Company also receives reimbursements from tenants for certain
facility operating expenses.
At December 31, 2000, the Company had investments in five joint ventures:
(1) TriNet Sunnyvale Partners L.P. ("Sunnyvale"), whose external partners are
John D. O'Donnell, Trustee, John W. Hopkins, and Donald S. Grant; (2) Corporate
Technology Associates LLC ("CTC I"), whose external member is Corporate
Technology Centre Partners LLC; (3) Sierra Land Ventures ("Sierra"), whose
external joint venture partner is Sierra-LC Land, Ltd.; (4) TriNet Milpitas
Associates, LLC ("Milpitas"), whose external member is The Prudential Insurance
Company of America; and (5) ACRE Simon, L.L.C. ("ACRE"), whose external partner
is William E. Simon & Sons Realty Investments, L.L.C. These ventures were formed
for the purpose of operating, acquiring and in certain cases, developing
corporate tenant lease facilities. At December 31, 2000, all facilities held by
CTC II and TN-CP had been sold. The Company previously had an equity investment
in CTC II which was sold for approximately $66.0 million in September, 2000. In
connection with this sale, the note receivable from the venture was modified to
mature on
F-48
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
December 31, 2001. The note receivable and related accrued interest are included
in Loans and Other Lending Investments at December 31, 2000.
Through the TriNet Acquisition, the Company also acquired a 50% interest in
W9/TriNet Poydras LLC ("Poydras"). Effective November 22, 1999, the joint
venture partners, who are affiliates of Whitehall Street Real Estate Limited
Partnership, IX and The Goldman Sachs Group L.P. (the "Whitehall Group"),
elected to exercise their right under the partnership agreement, which was
accelerated as a result of the TriNet Acquisition, to exchange all of their
membership units for 350,746 shares of Common Stock of the Company and a
$767,000 distribution of available cash. As a consequence, Poydras is now wholly
owned and is reflected on a consolidated basis in these financial statements.
At December 31, 2000, the ventures comprised 23 net leased facilities, three
of which were under development (these three facilities became fully operational
with lease payments commencing as of January 2001). Additionally, 17.7 acres of
land are held for sale. The Company's combined investment in these joint
ventures at December 31, 2000 was $78.1 million. The joint ventures' purchase
price for the 23 facilities owned at December 31, 2000 was $295.7 million. The
purchase price of the land held for sale was $6.8 million. In the aggregate, the
joint ventures had total assets of $366.8 million and total liabilities of
$267.8 million as of December 31, 2000, and net income of $7.1 million for the
year ended December 31, 2000. The Company accounts for these investments under
the equity method because the Company's joint venture partners have certain
participating rights which limit the Company's control. The Company's
investments in and advances to unconsolidated joint ventures, its percentage
ownership interests, its respective income and the Company's pro rata share of
its ventures' third-party debt as of December 31, 2000 are presented below (in
thousands):
PRO RATA
ACCRUED JOINT SHARE OF
UNCONSOLIDATED OWNERSHIP EQUITY NOTE INTEREST TOTAL VENTURE INTEREST THIRD-PARTY
JOINT VENTURE % INVESTMENT RECEIVABLE RECEIVABLE INVESTMENT INCOME INCOME DEBT
--------------------- --------- ---------- ---------- ---------- ---------- -------- -------- -----------
Operating:
Sunnyvale.......... 44.7% $12,772 $ -- $ -- $ 12,772 $1,163 $ -- $ 10,728
CTC I.............. 50.0% 32,440 -- -- 32,440 1,053 43,789
CTC II............. 50.0% -- 24,874 6,222 31,096 (755) 5,371 --
Milpitas........... 50.0% 24,289 -- -- 24,289 2,941 -- 40,641
TN-CP.............. 50.0% -- -- -- -- 397 -- --
ACRE Simon......... 20.0% 5,099 -- -- 5,099 42 -- 6,009
Development:
Sierra............. 50.0% 3,482 -- -- 3,482 217 -- 724
------- ------- ------ -------- ------ ------ --------
Total.......... $78,082 $24,874 $6,222 $109,178 $5,058 $5,371 $101,891
======= ======= ====== ======== ====== ====== ========
Effective September 29, 2000, iStar Sunnyvale Partners, LP entered into an
interest rate cap agreement with Bear Stearns Financial Products, limiting the
venture's exposure to interest rate movements on its $24.0 million LIBOR-based
mortgage loan to an interest rate cap of 9.0% through November 9, 2003.
F-49
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
Currently, the limited partners of the Sunnyvale partnership have the option
to convert their partnership interest into cash; however, the Company may elect
to deliver 297,728 shares of Common Stock in lieu of cash. Additionally,
commencing in February 2002, subject to acceleration under certain
circumstances, partnership units held by certain partners of Milpitas may be
converted into 984,476 shares of Common Stock.
Income generated from the above joint venture investments is included in
Operating Lease Income in the Consolidated Statements of Operations.
F-50
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS
As of December 31, 2000 and 1999, the Company has debt obligations under
various arrangements with financial institutions as follows (in thousands):
CARRYING VALUE AS OF
MAXIMUM ----------------------------- STATED SCHEDULED
AMOUNT DECEMBER 31, DECEMBER 31, INTEREST MATURITY
AVAILABLE 2000 1999 RATES DATE
---------- ------------- ------------- -------------------------- -----------------------
SECURED REVOLVING CREDIT
FACILITIES:
Line of credit............ $ 700,000(1) $ 284,371 $ 592,984 LIBOR + 1.75% - 2.25% (1) March 2005 (1)
Line of credit............ 500,000 307,978 169,952 LIBOR + 1.50% - 1.75% (2) August 2002 (2)
UNSECURED REVOLVING CREDIT
FACILITIES:
Line of credit............ 350,000 173,450 186,700 LIBOR + 1.55% May 2001 (3)
Line of credit............ 100,000 -- -- LIBOR + 2.25% January 2002
---------- ---------- ----------
Total revolving credit $1,650,000 765,799 949,636
facilities..............
==========
SECURED TERM LOANS:
Secured by real estate under operating 150,678 153,618 7.44% March 2009
leases..............................
Secured by senior and subordinate -- 109,398 LIBOR + 1.00% August 2000 (4)
mortgage investments................
Secured by senior mortgage -- 90,902 LIBOR + 1.00% August 2000 (4)
investment..........................
Secured by corporate lending 60,000 -- LIBOR + 2.50% June 2003 (5)
investments.........................
Secured by real estate under operating 77,860 78,610 LIBOR + 1.38% June 2001
leases (6)..........................
Secured by real estate under operating 60,471 73,279 Fixed: 6.00%-11.38% (7)
leases.............................. Variable: LIBOR + 1.00%
Secured by senior mortgage -- 54,000 LIBOR+ 1.75% (8) November 2000
investment..........................
---------- ----------
Total principal of term loans......... 349,009 559,807
Add: debt premiums (discounts)........ 51 (521)
---------- ----------
Total secured term loans.............. 349,060 559,286
iStar Asset Receivables
secured notes:
Class A............................... 207,114 -- LIBOR + 0.30% August 2003 (9)
Class B............................... 94,055 -- LIBOR + 0.50% October 2003 (9)
Class C............................... 105,813 -- LIBOR + 1.00% January 2004 (9)
Class D............................... 52,906 -- LIBOR + 1.45% June 2004 (9)
Class E............................... 123,447 -- LIBOR + 2.75% January 2005 (9)
Class F............................... 5,000 -- LIBOR + 3.15% January 2005 (9)
---------- ----------
Total iStar Asset Receivables secured 588,335 --
notes...............................
UNSECURED NOTES (10):
6.75% Dealer Remarketable Securities 125,000 125,000 6.75% March 2013
(11)................................
7.30% Notes........................... 100,000 100,000 7.30% May 2001
7.70% Notes........................... 100,000 100,000 7.70% July 2017
7.95% Notes........................... 50,000 50,000 7.95% May 2006
---------- ----------
Total principal of unsecured notes.... 375,000 375,000
Less: debt discount (12).............. (18,490) (21,481)
---------- ----------
Total unsecured notes................. 356,510 353,519
OTHER DEBT OBLIGATIONS.................... 72,263 38,763 Various Various
---------- ----------
TOTAL DEBT OBLIGATIONS.................... $2,131,967 $1,901,204
========== ==========
EXPLANATORY NOTES:
------------
(1) On December 28, 2000, the Company expanded the facility to $700.0 million,
increased the range of collateral eligible for inclusion in the facility,
increased pricing to LIBOR +1.75% to 2.25%, and extended its final maturity
to March 2005 (including an option to extend for an additional year).
F-51
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS (CONTINUED)
(2) On February 4, 2000, the Company extended the term of its $500.0 million
facility to August 2002 and increased pricing under the facility to
LIBOR + 1.50% to 1.75%.
(3) Subsequent to year end, the Company extended the maturity of this credit
facility to May 2002.
(4) On May 17, 2000, the Company repaid these secured term loan obligations.
(5) The Company has a one-year extension option in June 2003.
(6) The Company provides a guarantee for 25% of the principal balance
outstanding.
(7) These mortgage loans mature at various dates through 2010.
(8) On November 30, 2000, the Company repaid this secured loan obligation.
(9) Principal payments on these bonds are a function of the principal repayments
on loan assets which collateralize these obligations. The dates indicated
above represent the expected date on which the final payment would occur for
such class based on the assumptions that the loans which collateralize the
obligations are not voluntarily prepaid, the loans are paid on their
effective maturity dates and no extensions of the effective maturity dates
of any of the loans are granted. The final maturity date for the underlying
indenture on classes A, B, C, D, E and F is September 25, 2022.
(10) The notes are callable by the Company at any time for an amount equal to
the total of principal outstanding, accrued interest and the applicable
make-whole prepayment premium.
(11) Subject to mandatory tender on March 1, 2003, to either the dealer or the
Leasing Subsidiary. The initial coupon of 6.75% applies to first five-year
term through the mandatory tender date. If tendered to the dealer, the notes
must be remarketed. The rates reset upon remarketing.
(12) These obligations were assumed as part of the TriNet Acquisition. As part
of the accounting for the purchase, these fixed rate obligations were
considered to have stated interest rates which were below the then
prevailing market rates at which the Leasing Subsidiary could issue new debt
obligations and, accordingly, the Company ascribed a market discount to each
obligation. Such discounts will be amortized as an adjustment to interest
expense using the effective interest method over the related term of the
obligations. As adjusted, the effective annual interest rates on these
obligations were 8.81%, 8.75%, 9.51% and 9.04%, for the 6.75% Dealer
Remarketable Securities, 7.30% Notes, 7.70% Notes and 7.95% Notes,
respectively.
F-52
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS (CONTINUED)
Availability of amounts under the secured revolving credit facilities are
based on percentage borrowing base calculations.
Certain of the Leasing Subsidiary's debt obligations contain financial
covenants pertaining to the subsidiary. Such obligations also establish
restrictions on certain intercompany transactions between the Leasing Subsidiary
and other Company affiliates. Further, such obligations also provide for a limit
on distributions from the Leasing Subsidiary at 85% of cash flow from operations
on a rolling four-quarter basis.
On January 31, 2000, the Company closed a new unsecured revolving credit
facility. The facility is led by a major commercial bank, which committed
$50.0 million of the facility amount. On July 7, 2000, the Company increased the
facility amount to $100.0 million through syndication. The new facility has a
two-year primary term and a one-year extension, at the Company's option, and
bears interest at LIBOR plus 2.25%.
On February 4, 2000, the Company extended the term of its existing
$500.0 million secured credit facility. The Company extended the original
August 2000 maturity date to August 2002, through a one-year extension to the
facility's draw period and an additional one-year "term out" period during which
outstanding principal amortizes 25% per quarter. In connection with the
extension, the Company and the facility lender also expanded the range of assets
that the lender would accept as collateral under the facility. In exchange for
the extension and expansion, the Company agreed to increase the facility's
interest rate from LIBOR plus 1.25% to 1.50%, to a revised rate of LIBOR plus
1.50% to 1.75%, depending upon certain conditions.
On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, iStar Asset Receivables ("STARS"),
Series 2000-1. In the initial transaction, a wholly-owned subsidiary of the
Company issued $896.5 million of investment grade bonds secured by the
subsidiary's assets, which had an aggregate outstanding principal balance of
approximately $1.2 billion at inception. Principal payments received on the
assets will be utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funds the maturity of the
underlying assets financed under the program. The Company initially purchased
the class F bonds at a par value of $38.2 million, which the Company financed
with a $27.8 million repurchase agreement maturing in May 2001, which has a
balance of $24.2 million at December 31, 2000 and is included in other debt
obligations in the preceding table. On July 17, 2000, the Company sold, at par,
$5.0 million of the class F bonds to an institutional investor. For accounting
purposes, these transactions were treated as secured financings.
On June 20, 2000, the Company closed a $60.0 million term loan secured by a
corporate lending investment it originated in the first quarter of 2000. The new
loan replaced a $30.0 million interim facility, and effectively match funds the
expected weighted average maturity of the underlying corporate loan asset. The
loan has a three-year primary term and a one-year extension, at the Company's
option, and bears interest at LIBOR plus 2.50%.
On December 28, 2000, the Company expanded its existing $675.0 million
secured warehouse facility to $700.0 million. The Company extended the original
March 2001 maturity date to March 2005, including a one-year "term-out"
extension option to the facility's maturity during which the interest rate
spread will increase 25 basis points, no additional draws under the facility
will be permitted, and the outstanding principal must amortize 25% per quarter.
In
F-53
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS (CONTINUED)
connection with the extension, the Company and the facility lender also
increased the range of collateral eligible for inclusion in the facility. Also
in connection with the extension, the Company agreed to increase the facility's
interest rate from LIBOR plus 1.50% to a revised rate of LIBOR plus 1.75% to
2.25%, depending upon certain conditions.
See also Note 17--Subsequent Events for information on a new $700.0 million
secured revolving credit facility entered into on January 11, 2001 and the
extension of the Company's $350.0 million unsecured revolving credit facility.
During the year ended December 31, 2000, the Company incurred an
extraordinary loss of approximately $0.7 million as a result of the early
retirement of certain secured debt obligations of its Leasing Subsidiary.
Future expected/scheduled maturities of outstanding long-term debt
obligations are as follows (in thousands):
2001(1)..................................................... $ 280,917
2002(2)..................................................... 496,420
2003........................................................ 361,169
2004........................................................ 158,719
2005(3)..................................................... 416,557
Thereafter.................................................. 436,624
----------
Total principal maturities.................................. 2,150,406
Net unamortized debt (discounts)/premiums................... (18,439)
----------
Total debt obligations...................................... $2,131,967
==========
EXPLANATORY NOTE:
------------
(1) Includes the 1994 mortgage loan balance of $36.3 million which had an
original maturity date in 2004 and was repaid on March 1, 2001.
(2) Reflects the one-year extension on the $350.0 million unsecured revolving
credit facility to mature in 2002.
(3) Assumes exercise of one-year extension option on secured revolving facility.
NOTE 8--SHAREHOLDERS' EQUITY
Prior to November 4, 1999, the Company was authorized to issue 105.0 million
shares, representing 70.0 million class A shares and 35.0 million class B
shares, with a par value of $1.00 and $0.01 per share, respectively. Class B
shares were required to be issued by the Company in an amount equal to one half
of the number of class A shares outstanding. Class A and class B shares were
each entitled to one vote per share with respect to the election of directors
and other matters. Pursuant to the Declaration of Trust, the class B shares were
convertible at the option of the class B shareholders into class A shares on the
basis of 49 class B shares for one class A share. However, the holder of
class B shares had agreed with the Company that it would not convert the
class B shares into class A shares without the approval of a majority of
directors that were not affiliated with such holder. All distributions of cash
were made 99% to the holders of class A shares and 1% to the holders of class B
shares.
F-54
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--SHAREHOLDERS' EQUITY (CONTINUED)
On December 15, 1998, for an aggregate purchase price of $220.0 million, the
Company issued 4.4 million shares of Series A Preferred Stock and warrants to
acquire 6.1 million common shares of Common Stock, as adjusted for dilution, at
$34.35 per share. The warrants are exercisable on or after December 15, 1999 at
a price of $34.35 per share and expire on December 15, 2005. The proceeds were
allocated between the two securities issued based on estimated relative fair
values.
As more fully described in Note 4, the Company consummated a series of
transactions on November 4, 1999 in which its class A and class B shares were
exchanged into a single class of Common Stock. The Company's charter now
provides for the issuance of up to 200.0 million shares of Common Stock, par
value $0.001 per share, and 30.0 million shares of preferred stock. As part of
these transactions, the Company adopted articles supplementary creating four
series of preferred stock designated as 9.5% Series A Cumulative Redeemable
Preferred Stock, consisting of 4.4 million shares, 9.375% Series B Cumulative
Redeemable Preferred Stock, consisting of 2.3 million shares, 9.20% Series C
Cumulative Redeemable Preferred Stock, consisting of approximately 1.5 million
shares, and 8.0% Series D Cumulative Redeemable Preferred Stock, consisting of
4.6 million shares. The Series B, C and D Cumulative Redeemable Preferred Stock
were issued in the TriNet Acquisition in exchange for similar issuances of
TriNet stock then outstanding. The Series A, B, C and D Cumulative Redeemable
Preferred Stock are redeemable without premium at the option of the Company at
their respective liquidation preferences beginning on December 15, 2003,
June 15, 2001, August 15, 2001 and October 8, 2002, respectively.
STOCK REPURCHASE PROGRAM: The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets and excess cash
flow from operations, but also using borrowings under its credit facilities if
the Company determines that it is advantageous to do so. As of December 31, 2000
and December 31, 1999, the Company had repurchased approximately 2.3 million
shares at an aggregate cost of approximately $40.7 million and $40.4 million,
respectively.
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
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 speeds, or different bases, than its
interest-earning assets. Credit risk is the risk of default on the Company's
loan assets that results from a property's, borrower's or tenant's inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of loans 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 and the valuation of corporate tenant lease
facilities held by the Company.
USE OF DERIVATIVE FINANCIAL INSTRUMENTS--The Company's use of derivative
financial instruments is primarily limited to the utilization of interest rate
agreements or other instruments
F-55
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
to manage interest rate risk exposure. The principal objective of such
arrangements is to minimize the risks and/or costs associated with the Company's
operating and financial structure as well as to hedge specific anticipated
transactions. The counterparties to these contractual arrangements are major
financial institutions with which the Company and its affiliates may also have
other financial relationships. The Company is potentially exposed to credit loss
in the event of nonperformance by these counterparties. However, because of
their high credit ratings, the Company does not anticipate that any of the
counterparties will fail to meet their obligations.
The Company has entered into LIBOR interest rate caps struck at 9.00%, 7.50%
and 7.50% in notional amounts of $300.0 million, $40.4 million and
$38.3 million, respectively, which expire in March 2001, January 2001 and
June 2001, respectively. In addition, in connection with the TriNet Acquisition,
the Company acquired LIBOR interest rate caps currently struck at 7.75%, 7.75%
and 7.50% in notional amounts of $75.0 million, $35.0 million and
$75.0 million, respectively, which expire in December 2004, December 2004 and
August 2001, respectively. In connection with the closing of STARS,
Series 2000-1 in May 2000, the Company entered into a LIBOR interest rate cap
struck at 10.00% in the notional amount of $312.0 million, and simultaneously
sold a LIBOR interest rate cap with the same terms. Since these instruments do
not reduce the Company's net interest rate risk exposure, they do not qualify as
hedges and changes in their respective values are charged to earnings. As the
significant terms of these arrangements are substantially the same, the effects
of a revaluation of these two instruments are expected to substantially offset
one another. At December 31, 2000 and 1999, the net fair value of the Company's
interest rate caps were $0.4 million and $2.2 million, respectively.
The Company has entered into LIBOR interest rate swaps struck at 5.714%,
7.055%, and 7.058% in notional amounts of $92.0 million, $125.0 million and
$125.0 million, respectively, which expire in March 2001, June 2003 and
June 2003, respectively. These swaps effectively fix the interest rate on a
portion of the Company's floating-rate term loan obligations. In connection with
the TriNet Acquisition, the Company acquired an interest rate swap which,
together with certain existing interest rate cap agreements, effectively fix the
interest rate on $75.0 million of the Leasing Subsidiary's LIBOR-based
borrowings at 5.58% plus the applicable margin through December 1, 2004.
Management expects that it will have aggregate LIBOR-based borrowings at the
Leasing Subsidiary in excess of the notional amount for the duration of the
swap. The actual borrowing cost to the Company with respect to indebtedness
covered by the swap will depend upon the applicable margin over LIBOR for such
indebtedness, which will be determined by the terms of the relevant debt
instruments. In June 2000, an interest rate swap with a notional amount of
approximately $112.0 million matured. At December 31, 2000 and 1999, the fair
value (liability) of the Company's interest rate swaps were ($7.7) million and
$3.4 million, respectively.
During the year ended December 31, 1999, the Company settled an aggregate
notional amount of approximately $63.0 million that was outstanding under
certain hedging agreements which the Company had entered into in order to hedge
the potential effects of interest rate movements on anticipated fixed-rate
borrowings. The settlement of such agreements resulted in a receipt of
approximately $0.6 million which had been deferred pending completion of the
planned fixed-rate financing transaction. Subsequently, the transaction was
modified and was actually consummated as a variable-rate financing transaction.
As a result, the previously deferred receipt no longer qualified for hedge
accounting treatment and the $0.6 million was
F-56
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
recognized as a gain included in other income in the consolidated statement of
operations for the year ended December 31, 2000 in connection with the closing
of STARS, Series 2000-1.
During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented forecasted transactions for which the Company had
previously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the settlement of such hedges has been deferred and is
being amortized as an increase to the effective financing cost of the new term
loan over its effective ten-year term.
CREDIT RISK CONCENTRATIONS--Concentrations of credit risks arise when a
number of borrowers or tenants related to the Company's investments are engaged
in similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations, including those to the Company, to be similarly
affected by changes in economic conditions. The Company regularly monitors
various segments of its portfolio to assess potential concentrations of credit
risks. Management believes the current credit risk portfolio is reasonably well
diversified and does not contain any unusual concentration of credit risks.
Substantially all of the Company's real estate subject to operating leases
(including those held by joint ventures) and loans and other lending
investments, are collateralized by facilities located in the United States, with
significant concentrations (i.e., greater than 10%) as of December 31, 2000 in
California (23.7%) and Texas (14.7%). As of December 31, 2000, the Company's
investments also contain significant concentrations in the following
asset/collateral types: office (48.5%) and hotel/resorts (20.2%).
The Company underwrites the credit of prospective borrowers and tenants and
often requires them to provide some form of credit support such as corporate
guarantees or letters of credit. Although the Company's loans and other lending
investments and corporate tenant lease assets are geographically diverse and the
borrowers and tenants operate in a variety of industries, to the extent the
Company has a significant concentration of interest or operating lease revenues
from any single borrower or tenant, the inability of that borrower or tenant to
make its payment could have an adverse effect on the Company. As of
December 31, 2000, the Company's five largest borrowers or tenants collectively
accounted for approximately 18.6% of the Company's aggregate annualized interest
and operating lease revenue.
NOTE 10--INCOME TAXES
Although originally formed to qualify as a REIT under the Code for the
purpose of making and acquiring various types of mortgage and other loans,
during 1993 through 1997, the Company failed to qualify as a REIT. As confirmed
by a closing agreement with the Internal Revenue Service (the "IRS") obtained in
March 1998, the Company was eligible, elected to be taxed as a REIT and
qualified for REIT status for the tax years commencing on January 1, 1998. The
Company did not incur any material tax liabilities as a result of its operations
during such years.
F-57
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and income tax purposes, as well as operating loss and tax credit carry
forwards. A valuation allowance is recorded if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
income tax asset will not be realized. Given the limited nature of the Company's
operations and assets and liabilities from 1993 through 1997, the only deferred
tax assets are net operating loss carry forwards ("NOL's") of approximately $4.0
million, which arose during such periods. Since the Company has elected to be
treated as a REIT for its tax years beginning January 1, 1998, the NOL's will
expire unutilized. Accordingly, no net deferred tax asset value, after
consideration of a 100% valuation allowance, has been reflected in these
financial statements as of December 31, 2000 and 1999, nor has any net tax
provision for the fiscal years ended December 31, 2000, 1999 or 1998.
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS
The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to
provide incentive compensation for officers, other key employees and directors
of the Company. The Plan provides for awards of stock options and restricted
stock and other performance awards. The maximum number of shares of Common Stock
available for awards under the Plan is 9% of the outstanding shares of Common
Stock, calculated on a fully diluted basis, from time to time; provided that the
number of shares of Common Stock reserved for grants of options designated as
incentive stock options is 5.0 million, subject to certain antidilution
provisions in the Plan. All awards under the Plan, other than automatic awards
to non-employee directors, are at the discretion of the Board or a committee of
the Board. At December 31, 2000, a total of approximately 7.7 million shares of
Common Stock were available for awards under the Plan, of which options to
purchase approximately 4.7 million shares of Common Stock were outstanding and
approximately 56,000 shares of restricted stock were outstanding.
Concurrently with the Recapitalization Transactions, the Company issued
approximately 2.5 million (as adjusted) fully vested and immediately exercisable
options to purchase class A shares at $14.72 per share (as adjusted) to the
Advisor with a term of ten years. The Advisor granted a portion of these options
to its employees and the remainder were allocated to an affiliate. Upon
consummation of the Advisor Transaction, these individuals became employees of
the Company. In general, the grants to these employees provided for scheduled
vesting over a predefined service period of three to five years and, under
certain conditions, provide for accelerated vesting. These options expire on
March 13, 2008.
In connection with the TriNet Acquisition, outstanding options to purchase
TriNet stock under TriNet's stock option plans were converted into options to
purchase shares of Common Stock on substantially the same terms, except that
both the exercise price and number of shares issuable upon exercise of the
TriNet options were adjusted to give effect to the merger exchange ratio of 1.15
shares of Common Stock for each share of TriNet common stock. In addition,
options held by the former directors of TriNet and certain executive officers
became fully vested as a result of the transaction. Such options were converted
into options to purchase shares of Common Stock on substantially the same terms,
as adjusted for the merger exchange ratio.
F-58
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
Also, as a result of the TriNet Acquisition, TriNet terminated its dividend
equivalent rights program. The program called for immediate vesting and cash
redemption of all dividend equivalent rights upon a change of control of 50% or
more of the voting common stock. Concurrent with the TriNet Acquisition, all
dividend equivalent rights were vested and amounts due to former TriNet
employees of approximately $8.3 million were paid by the Company. Such payments
were included as part of the purchase price paid by the Company to acquire
TriNet for financial reporting purposes.
Changes in options outstanding during each of fiscal 1998, 1999 and 2000 are
as follows:
NUMBER OF SHARES
------------------------------------- AVERAGE
NON-EMPLOYEE STRIKE
EMPLOYEES DIRECTORS OTHER PRICE
--------- ------------ ---------- --------
OPTIONS OUTSTANDING, DECEMBER 31, 1997........ -- 1,333 -- $13.32
Granted in 1998............................. -- 9,996 2,402,476 $ --
Exercised in 1998........................... -- (687) (18,000) $15.00
Forfeited in 1998........................... -- (646) -- $15.00
--------- ------- ----------
OPTIONS OUTSTANDING, DECEMBER 31, 1998........ -- 9,996 2,384,476 $15.00
Granted in 1999............................. -- 4,998 -- $57.50
Exercised in 1999........................... -- -- (68,233) $15.00
Forfeited in 1999........................... (23,690) -- (4,166) $24.94
Assumed in TriNet Acquisition............... 1,321,322 131,100 -- $25.62
Reclassification for Advisor
Transaction(1)............................ 1,447,083 -- (1,447,083) $15.00
Adjustment for dilution..................... 33,537 285 16,169 $14.72
--------- ------- ----------
OPTIONS OUTSTANDING, DECEMBER 31, 1999........ 2,778,252 146,379 881,163 $19.03
Granted in 2000............................. 1,852,059 80,000 80,000 $17.34
Exercised in 2000........................... (412,734) -- -- $15.67
Forfeited in 2000........................... (682,005) -- -- $25.47
--------- ------- ----------
OPTIONS OUTSTANDING, DECEMBER 31, 2000........ 3,535,572 226,379 961,163 $18.97
========= ======= ==========
EXPLANATORY NOTE:
---------
(1) Represents the reclassification of stock options originally granted to the
Advisor and regranted to its employees who became employees of the Company
upon consummation of the Advisor Transaction (see Note 4).
F-59
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE CURRENTLY EXERCISE
EXERCISE PRICE RANGE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------------- ----------- ----------- -------- ----------- --------
$14.72 - $15.00(1) 1,992,668 7.20 $14.73 947,168 $14.72
$16.69 - $16.88 1,212,109 8.09 $16.86 81,533 $16.88
$17.38 - $17.56 550,000 9.21 $17.39 -- $ --
$19.50 - $19.69 6,250 9.39 $19.54 -- $ --
$20.63 - $21.44 258,050 6.87 $21.01 100,050 $21.13
$22.44 - $22.45 54,500 3.82 $22.44 34,500 $22.45
$23.32 - $23.64 130,842 2.12 $23.46 101,351 $23.41
$24.13 - $24.57 173,650 3.63 $24.31 173,650 $24.31
$25.22 - $26.09 34,500 3.40 $25.74 34,500 $25.74
$26.30 - $26.85 108,100 2.95 $26.74 108,100 $26.74
$28.26 - $28.54 67,113 1.97 $28.37 60,842 $28.36
$30.33 119,888 1.60 $30.33 99,769 $30.33
$33.15 - $33.70 10,350 1.97 $33.39 8,913 $33.43
$55.39 5,094 8.42 $55.39 1,698 $55.39
--------- ----- ------ --------- ------
4,723,114 7.18 $17.65 1,752,074 $19.25
========= ===== ====== ========= ======
EXPLANATORY NOTE:
------------
(1) Includes approximately 764,000 options which were granted, on a fully
exercisable basis, in connection with the Recapitalization Transactions to
Starwood Capital Group, and were subsequently regranted by that entity to
its employees subject to vesting requirements. As a result of those vesting
requirements, less than 2,000 of these options are currently exercisable by
the beneficial owners. In the event that these employees forfeit such
options, they revert to Starwood Capital Group, who may regrant them at its
discretion.
The Company has elected to use the intrinsic method for accounting for
options issued to employees or directors, as allowed under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS No. 123") and, accordingly, recognizes no compensation charge in
connection with these options to the extent that the options exercise price
equals or exceeds the quoted price of the Company's common shares at the date of
grant or measurement date. In connection with the Advisor Transaction, as part
of the computation of the one-time charge to earnings, the Company calculated a
deferred compensation charge of approximately $5.1 million. This deferred charge
represents the difference of the closing sales price of the shares of Common
Stock on the date of the Advisor Transaction of $20.25 over the strike price of
the options of $14.72 per share (as adjusted) for the unvested portion of the
options granted to former employees of the Advisor who are now employees of the
Company. This deferred charge will be amortized over the related remaining
vesting terms to the individual employees as additional compensation expense.
In connection with the original grant of options in March 1998 to the
Advisor, the Company utilized the option value method as required by SFAS
No. 123. An independent financial advisory
F-60
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
firm estimated the value of these options at date of grant to be approximately
$2.40 per share using a Black-Scholes valuation model. In the absence of
comparable historical market information for the Company, the advisory firm
utilized assumptions consistent with activity of a comparable peer group of
companies, including an estimated option life of five years, a 27.5% volatility
rate and an estimated annual dividend rate of 8.5%. The resulting charge to
earnings was calculated as the number of options allocated to the Advisor
multiplied by the estimated value at consummation. A charge of approximately
$6.0 million was reflected in the Company's first quarter 1998 financial results
for this original grant.
Had the Company's compensation costs been determined using the fair value
method of accounting for stock options issued under the Plan to employees and
directors prescribed by SFAS No. 123, the Company's net income and earnings per
share for the fiscal years ended December 31, 2000 and 1999 would have been
reduced on a pro forma basis by approximately $275,000 and $141,000,
respectively. This would not have significantly impacted earnings per share. As
the Company had no employees prior to the consummation of the Advisor
Transaction, no pro forma adjustment is necessary to reflect in the results of
operations for fiscal 1998 as if the option value were utilized.
For the above SFAS No. 123 calculation, the Company utilized the following
assumptions: a 26.8% volatility rate (historical volatility for the Company's
Common Stock at December 31, 2000), a risk free rate of 5.3% and an estimated
annual dividend rate of 13.5%.
Future charges may be taken to the extent of additional option grants, which
are at the discretion of the Board of Directors.
During the year ended December 31, 2000, the Company granted 76,585
restricted stock units ("RSU's") to new employees. The RSU's vest over a
three-year period, with the exception of 12,500 RSU's, which were immediately
vested on the date of grant. The RSU's are valued at the date of grant and are
reflected as compensation expense over the vesting period.
On July 28, 2000, the Company granted to its employees profits interests in
a wholly-owned subsidiary of the Company called iStar Venture Direct Holdings,
LLC. iStar Venture Direct Holdings, LLC has invested $2.4 million in the
aggregate in the preferred stock of three real estate-related technology
companies. The profits interests have a three-year vesting schedules, and are
subject to forfeiture in the event of termination of employment for cause or a
voluntary resignation.
Effective November 4, 1999, the Company implemented a savings and retirement
plan (the "401 (k) Plan"), which is a voluntary, defined contribution plan. All
employees are eligible to participate in the 401 (k) Plan following completion
of six months of continuous service with the Company. Each participant may
contribute on a pretax basis between 2% and 15% of such participant's
compensation. At the discretion of the Board of Directors, the Company may make
matching contributions on the participant's behalf up to 50% of the first 10% of
the participant's annual contribution. The Company made contributions of
approximately $320,000 to the 401 (k) Plan for the year ended December 31, 2000.
F-61
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EARNINGS PER SHARE
Prior to November 4, 1999, Basic EPS was computed based on the income
allocable to class A shares (net income reduced by accrued dividends on
preferred shares and by 1% allocated to class B shares), divided by the weighted
average number of class A shares outstanding during the period. Diluted EPS was
based on the net earnings allocable to class A shares plus dividends on class B
shares which were convertible into class A shares, divided by the weighted
average number of class A shares and dilutive potential class A shares that were
outstanding during the period. Dilutive potential class A shares included the
class B shares, which were convertible into class A shares at a rate of 49
class B shares for one class A share, and potentially dilutive options to
purchase class A shares issued to the Advisor and the Company's directors and
warrants to acquire class A shares.
As more fully described in Note 4, in the Incorporation Merger, the class A
shares and class B shares were converted into shares of Common Stock and, as a
result, the Company no longer has multiple classes of common shares. Basic and
diluted earnings per share are based upon the following weighted average shares
outstanding during during the years ended December 31, 2000, 1999 and 1998,
respectively:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Weighted average common shares outstanding for basic
earnings per common share................................. 85,441 57,749 41,607
Add effect of assumed shares issued under treasury stock
method for stock options and restricted stock units....... 710 1,500 1,311
Add effects of conversion of class B shares (49-for-one).... -- 450 445
Add effects of assumed warrants exercised under treasury
stock method for stock options............................ -- 694 97
------ ------ ------
Weighted average common shares outstanding for diluted
earnings per common share................................. 86,151 60,393 43,460
====== ====== ======
As previously indicated, effective June 19, 1998, the Company consummated a
one-for-six reverse stock split for its shares. Historical earnings per share
have been retroactively restated to reflect the reverse split for comparative
purposes.
NOTE 13--COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective for fiscal
years beginning after December 15, 1997. The statement changes the reporting of
certain items currently reported as changes in the shareholders' equity section
of the balance sheet and establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all components of comprehensive
income shall be reported in the financial statements in the period in which they
are recognized. Furthermore, a total amount for comprehensive income shall be
displayed in the financial statements. The Company has adopted this standard
effective January 1, 1998. Total comprehensive income was $217.8 million,
$38.7 million and $59.9 million for the years ended
F-62
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--COMPREHENSIVE INCOME (CONTINUED)
December 31, 2000, 1999 and 1998 respectively. The primary component of
comprehensive income other than net income was the change in value of certain
investments in marketable securities classified as available-for-sale. Upon
adoption of SFAS 133/SFAS 137 effective January 1, 2001 (see Note 3), other
comprehensive income will also be affected by the mark-to-market on the
effective portion of hedge instruments.
NOTE 14--DIVIDENDS
In order to maintain its election to qualify as a REIT, the Company must
distribute, at a minimum, an amount equal to 95% of its taxable income and must
distribute 100% of its taxable income to avoid paying corporate federal income
taxes. The distribution rate was modified to 90% by the REIT Modernization Act
beginning in fiscal 2001. Accordingly, the Company anticipates it will
distribute all of its taxable income to its shareholders. Because taxable income
differs from cash flow from operations due to non-cash revenues or expenses, in
certain circumstances, the Company may be required to borrow to make sufficient
dividend payments to meet this anticipated dividend threshold.
On November 4, 1999, the class A shares were converted into shares of Common
Stock on a one-for-one basis. Total dividends declared by the Company aggregated
$116.1 million, or $1.86 per common share, for the year ended December 31, 1999.
For the year ended December 31, 2000, total dividends declared by the Company
aggregated $205.5 million, or $2.40 per common share. The Company also declared
dividends aggregating $20.9 million, $4.7 million, $3.0 million and
$8.0 million, respectively, on its Series A, B, C and D preferred stock,
respectively, for the year ended December 31, 2000.
In November 1999, the Company declared and paid a dividend of a total of one
million shares of Common Stock pro rata to all holders of record of Common Stock
as of the close of business on November 3, 1999.
The Series A preferred stock has a liquidation preference of $50.00 per
share and carries an initial dividend yield of 9.50% per annum. The dividend
rate on the preferred shares will increase to 9.75% on December 15, 2005, to
10.00% on December 15, 2006 and to 10.25% on December 15, 2007 and thereafter.
Dividends on the Series A preferred shares are payable quarterly in arrears and
are cumulative.
Holders of shares of the Series B preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.375% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.34 per share. Dividends are cumulative from the date of
original issue and are payable quarterly in arrears on or before the 15th day of
each March, June, September and December or, if not a business day, the next
succeeding business day. Any dividend payable on the Series B preferred stock
for any partial dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends will be payable to holders of
record as of the close of business on the first day of the calendar month in
which the applicable dividend payment date falls or on another date designated
by the Board of Directors of the Company for the payment of dividends that is
not more than 30 nor less than ten days prior to the dividend payment date.
F-63
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--DIVIDENDS (CONTINUED)
Holders of shares of the Series C preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.20% of the $25.00 liquidation preference per year, equivalent to a fixed
annual rate of $2.30 per share.
Holders of shares of the Series D preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 8.00% of the $25.00 liquidation preference per year, equivalent to a fixed
annual rate of $2.00 per share.
The exact amount of future quarterly dividends to common shareholders will
be determined by the Board of Directors based on the Company's actual and
expected operations for the fiscal year and the Company's overall liquidity
position.
NOTE 15--FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS
No. 107"), requires the disclosure of the estimated fair values of financial
instruments. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Quoted market prices, if available,
are utilized as estimates of the fair values of financial instruments. Because
no quoted market prices exist for a significant part of the Company's financial
instruments, the fair values of such instruments have been derived based on
management's assumptions, the amount and timing of future cash flows and
estimated discount rates. The estimation methods for individual classifications
of financial instruments are described more fully below. Different assumptions
could significantly affect these estimates. Accordingly, the net realizable
values could be materially different from the estimates presented below. The
provisions of SFAS No. 107 do not require the disclosure of the fair value of
non-financial instruments, including intangible assets or the Company's real
estate assets under operating leases.
In addition, the estimates are only indicative of the value of individual
financial instruments and should not be considered an indication of the fair
value of the Company as an operating business.
SHORT-TERM FINANCIAL INSTRUMENTS--The carrying values of short-term
financial instruments including cash and cash equivalents and short-term
investments approximate the fair values of these instruments. These financial
instruments generally expose the Company to limited credit risk and have no
stated maturities, or have an average maturity of less than 90 days and carry
interest rates which approximate market.
LOANS AND OTHER LENDING INVESTMENTS--For the Company's interests in loans
and other lending investments, the fair values were estimated by discounting the
future contractual cash flows (excluding participation interests in the sale or
refinancing proceeds of the underlying collateral) using estimated current
market rates at which similar loans would be made to borrowers with similar
credit ratings for the same remaining maturities.
MARKETABLE SECURITIES--Securities held for investment, securities available
for sale, loans held for sale, trading account instruments, long-term debt and
trust preferred securities traded actively in the secondary market have been
valued using quoted market prices.
F-64
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER FINANCIAL INSTRUMENTS--The carrying value of other financial
instruments including, restricted cash, accrued interest receivable, accounts
payable, accrued expenses and other liabilities approximate the fair values of
the instruments.
DEBT OBLIGATIONS--A substantial portion of the Company's existing debt
obligations bear interest at fixed margins over LIBOR. Such margins may be
higher or lower than those at which the Company could currently replace the
related financing arrangements. Other obligations of the Company bear interest
at fixed rates, which may differ from prevailing market interest rates. As a
result, the fair values of the Company's debt obligations were estimated by
discounting current debt balances from December 31, 2000 or 1999 to maturity
using estimated current market rates at which the Company could enter into
similar financing arrangements.
INTEREST RATE PROTECTION AGREEMENTS--The fair value of interest rate
protection agreements such as interest rate caps, floors, collars and swaps used
for hedging purposes (see Note 9) is the estimated amount the Company would
receive or pay to terminate these agreements at the reporting date, taking into
account current interest rates and current creditworthiness of the respective
counterparties.
The book and fair values of financial instruments as of December 31, 2000
and 1999 were (in thousands):
2000 1999
----------------------- -----------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
FINANCIAL ASSETS:
Loans and other lending
investments........... $2,239,183 $2,333,112 $2,011,006 $2,031,065
Marketable securities... 41 41 4,344 4,344
Allowance for credit
losses................ (14,000) (14,000) (7,500) (7,500)
FINANCIAL LIABILITIES:
Debt obligations........ 2,131,967 2,135,574 1,901,204 1,885,797
Interest rate protection
agreements............ 2,495 (7,261) 3,139 5,556
NOTE 16--SEGMENT REPORTING
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131")
establishes standards for the way the public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected financial information about operating
segments in interim financial reports issued to shareholders.
The Company has two reportable segments: Real Estate Lending and Corporate
Tenant Leasing. The Company does not have substantial foreign operations. The
accounting policies of the segments are the same as those described in Note 3.
The Company has no single customer that accounts for 10% or more of revenues
(see Note 9 for other information regarding concentrations of credit risk).
F-65
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SEGMENT REPORTING (CONTINUED)
The Company evaluates performance based on the following financial measures
for each segment:
CORPORATE
REAL ESTATE TENANT CORPORATE/ COMPANY
LENDING LEASING (1) OTHER (2) TOTAL
----------- ----------- ---------- ----------
(IN THOUSANDS)
2000:
Total revenues(3): $ 279,680 $ 191,821 $ 321 $ 471,822
Total operating and interest expense(4): 115,906 111,808 28,570 256,284
Net operating income before minority
interests(5): 163,774 80,013 (28,249) 215,538
Total long-lived assets(6): 2,225,183 1,670,169 N/A 3,895,352
Total assets: 2,225,183 1,670,169 139,423 4,034,775
1999:
Total revenues(3): 209,848 42,186 12,763 264,797
Total operating and interest expense(4): 70,778 36,749 118,343 225,870
Net operating income before minority
interests(5): 139,070 5,437 (105,580) 38,927
Total long-lived assets(6): 2,003,506 1,714,284 N/A 3,717,790
Total assets: 2,003,506 1,714,284 95,762 3,813,552
1998:
Total revenues(3): 112,914 12,378 2,804 128,096
Total operating and interest expense(4): 36,998 12,554 18,587 68,139
Net operating income before minority
interests(5): 75,916 (176) (15,783) 59,957
Total long-lived assets(6): 1,823,761 189,942 N/A 2,013,703
Total assets: 1,823,761 189,942 45,913 2,059,616
EXPLANATORY NOTE:
---------
(1) Includes the Company's pre-existing Corporate Tenant Leasing investments
since March 18, 1998 and the Corporate Tenant Leasing business acquired in
the TriNet Acquisition since November 4, 1999.
(2) Corporate and Other represents all corporate-level items, including general
and administrative expenses and any intercompany eliminations necessary to
reconcile to the consolidated Company totals. This caption also includes the
Company's servicing business, which is not considered a material separate
segment. In addition, as more fully discussed in Note 4, Corporate and Other
for the year ended December 31, 1999 includes a non-recurring charge,
non-cash of approximately $94.5 million relating to the Advisor Transaction.
(3) Total revenues represents all revenues earned during the period from the
assets in each segment. Revenue from the Real Estate Lending business
primarily represents interest income and revenue from the Corporate Tenant
Leasing business primarily represents operating lease income.
(4) Total operating and interest expense represents provision for possible
credit losses for the Real Estate Lending business and operating costs on
corporate tenant lease assets for the Corporate Tenant Leasing business, as
well as interest expense specifically related to each segment. General and
administrative expense, advisory fees (prior to November 4, 1999) and stock
option compensation expense is included in Corporate and Other for all
periods. Depreciation and amortization of $34,514, $10,340 and $4,287 in
2000, 1999 and 1998, respectively, are included in the amounts presented
above.
F-66
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SEGMENT REPORTING (CONTINUED)
(5) Net operating income before minority interests represents net operating
income before minority interest, gain on sale of corporate tenant lease
assets and extraordinary loss as defined in note (3) above, less total
operating and interest expense, as defined in note (4) above.
(6) Total long-lived assets is comprised of Loans and Other Lending Investments,
net and Real Estate Subject to Operating Leases, net, for each respective
segment.
NOTE 17--SUBSEQUENT EVENTS
On January 11, 2001 the Company closed a new $700.0 million secured revolving
credit facility which is led by a major commercial bank. The new facility has a
three-year primary term and one-year "term-out" extension option, and bears
interest at LIBOR plus 1.40% to 2.15%, depending upon the collateral contributed
to the borrowing base. The new facility accepts a broad range of structured
finance assets and has a final maturity of January 2005. In addition, subsequent
to year end, the Company extended the maturity of its $350.0 million unsecured
revolving credit facility to May 2002.
NOTE 18--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the selected quarterly financial data for the
Company (in thousands, except per share amounts).
QUARTER ENDED
----------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- --------- ---------
2000:
Revenue..................................... $122,337 $120,683 $117,914 $110,888
Net income.................................. 56,177 55,591 53,829 51,989
Net income allocable to common shares....... 46,950 46,364 44,602 42,762
Net income per common share................. $ 0.55 $ 0.54 $ 0.52 $ 0.50
Weighted average common shares
outstanding--basic........................ 85,731 85,662 85,281 85,087
1999:
Revenue..................................... $ 89,483 $ 60,635 $ 59,255 $ 55,424
Net income (loss)(1)........................ (50,485) 31,271 29,883 28,217
Net income (loss) allocable to common
shares(2)................................. (58,405) 25,963 24,575 22,909
Net income (loss) per common shares......... $ (0.80) $ 0.49 $ 0.46 $ 0.43
Weighted average common shares
outstanding--basic........................ 73,427 52,471 52,471 52,447
EXPLANATORY NOTE:
---------
(1) As more fully discussed in Note 4, the quarter ended December 31, 1999
includes a non-recurring, non cash charge of approximately $94.5 million
relating to the Advisor Transaction. Excluding such charge, net income for
the quarter would have been approximately $44.0 million and net income per
common share for the quarter would have been $0.49.
(2) On November 4, 1999, through the Incorporation Merger, the class B shares
were effectively converted into shares of Common Stock on a 49-for-one basis
and the class A shares were converted into shares of Common Stock on a
one-for-one basis.
F-67
PROSPECTUS
ISTAR FINANCIAL INC.
COMMON STOCK
PREFERRED STOCK
DEPOSITARY SHARES
DEBT SECURITIES
AND
WARRANTS
------------------
We may from time to time offer our common stock, preferred stock (which we
may issue in one or more series), depositary shares representing shares of
preferred stock, debt securities (which we may issue in one or more series) or
warrants entitling the holders to purchase common stock, preferred stock,
depositary shares or debt securities, at an aggregate initial offering price
which will not exceed $500,000,000. We will determine when we sell securities,
the amounts of securities we will sell and the prices and other terms on which
we will sell them. We may sell securities to or through underwriters, through
agents or directly to purchasers.
We will describe in a prospectus supplement, which we will deliver with this
prospectus, the terms of particular securities which we offer in the future. We
may describe the terms of those securities in a term sheet which will precede
the prospectus supplement.
In each prospectus supplement we will include the following information:
- The names of the underwriters or agents, if any, through which we will
sell the securities.
- The proposed amounts of securities, if any, which the underwriters will
purchase.
- The compensation, if any, of those underwriters or agents.
- The initial public offering price of the securities.
- Information about securities exchanges, electronic communications
networks or automated quotation systems on which the securities will be
listed or traded.
- Any other material information about the offering and sale of the
securities.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FEBRUARY 28, 2001
TABLE OF CONTENTS
PAGE
--------
FORWARD-LOOKING INFORMATION................................. i
THE COMPANY................................................. 1
RATIO OF EARNINGS TO FIXED CHARGES.......................... 1
USE OF PROCEEDS............................................. 2
DESCRIPTION OF DEBT SECURITIES.............................. 2
DESCRIPTION OF WARRANTS..................................... 5
DESCRIPTION OF COMMON STOCK AND PREFERRED STOCK............. 5
DESCRIPTION OF DEPOSITARY SHARES............................ 8
LEGAL MATTERS............................................... 9
EXPERTS..................................................... 9
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 9
INFORMATION WE FILE......................................... 10
FORWARD-LOOKING INFORMATION
We make forward-looking statements about our business in our filings with
the Securities and Exchange Commission. Although we believe the expectations
reflected in those forward-looking statements are reasonable, it is possible
they will prove not to have been correct. Among the factors which can affect our
future performance are:
- The success or failure of our efforts to implement our current business
strategy.
- Economic conditions generally and in the commercial real estate and
finance markets specifically.
- The performance and financial condition of borrowers and corporate
tenants.
- The actions of our competitors and our ability to respond to those
actions.
- The cost of our capital, which depends in part on our asset quality, the
nature of our relationships with our lenders and other capital providers,
our business prospects and outlook, and general market conditions.
- Changes in governmental regulations, tax rates and similar matters.
- Legislative and regulatory changes (including changes to laws governing
the taxation of REITs).
- Other factors which may be discussed in a prospectus supplement.
i
THE COMPANY
We are the largest publicly traded finance company focused exclusively on
the commercial real estate industry. We provide structured financing to private
and corporate owners of high-quality real estate nationwide, including senior
and junior mortgage debt, corporate net lease financing and corporate mezzanine
and subordinated capital. Our objective is to deliver superior risk-adjusted
returns on equity to shareholders by providing innovative and value-added
financing solutions to our customers. We are taxed as a real estate investment
trust.
We began our 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 approximately $1.1 billion of assets to our
predecessor, Starwood Financial Trust, in exchange for a controlling interest in
that company. Since that time, we have grown by originating new lending and
leasing transactions, as well as through corporate acquisitions.
Specifically, in September 1998, we acquired the loan origination and
servicing business of a major insurance company, and in December 1998, we
acquired the mortgage and mezzanine loan portfolio of our largest private
competitor. Additionally, in November 1999, we acquired TriNet Corporate Realty
Trust, Inc., the largest publicly traded company specializing in the net leasing
of corporate office and industrial facilities. The TriNet transaction was
structured as a stock-for-stock merger of TriNet with one of our subsidiaries.
Concurrent with the TriNet transaction, we also acquired our external
advisor in exchange for shares of common stock and converted our organizational
form to a Maryland corporation. As part of the conversion to a Maryland
corporation, we replaced our dual class common share structure with a single
class of common stock Our common stock began trading on the New York Stock
Exchange on November 4, 1999 under the trading symbol "SFI." Prior to this date,
our common shares were traded on the American Stock Exchange.
RATIO OF EARNINGS TO FIXED CHARGES
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
Ratio of earnings to fixed
charges(1)........................... 1.9x 1.9x 1.1x(2) 2.3x NA(3) NA(3) NA(3)
------------------------
(1) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of income from continuing operations before income taxes
and cumulative effect of changes in accounting principles plus "fixed
charges" and certain other adjustments. "Fixed charges" consist of interest
incurred on all indebtedness related to continuing operations (including
amortization of original issue discount), preferred stock dividends and the
implied interest component of our rent obligations in the years presented.
(2) Includes the effect of a non-recurring, non-cash charge in the amount of
approximately $94.5 million relating to our November 1999 acquisition of the
external advisor to our company. Excluding the effect of this non-recurring,
non-cash charge, our ratio of earnings to fixed charges for the year ended
December 31, 1999 would have been 2.0x.
(3) Prior to March 1998, we conducted our structured finance operations through
two private investment partnerships, which contributed substantially all of
their structured finance assets to our company's predecessor in a series of
transactions in March 1998. Prior to that time, our company's predecessor
had no significant resources or operations. Such information is presented in
Exhibit 12 to this Registration Statement. Such periods include Fiscal 1996
and 1995, which reflected losses as
1
a result of the sale and liquidation of the previous business. Therefore, we
do not believe that information for the 1995 through 1997 periods is
indicative of our current business.
USE OF PROCEEDS
Except as may be set forth in a particular prospectus supplement, we will
add the net proceeds from sales of securities to our general corporate funds,
which we may use to repay indebtedness, for new investments, or for other
general corporate purposes.
DESCRIPTION OF DEBT SECURITIES
We will issue the debt securities under an indenture dated as of
February 5, 2001 with State Street Bank and Trust Company, N.A., as trustee,
which we may supplement from time to time. The following paragraphs describe the
provisions of the indenture. We have filed the indenture as an exhibit to the
registration statement of which this prospectus is a part and you may inspect it
at the office of the trustee.
GENERAL
The debt securities will be our direct, unsecured obligations and may be
either senior debt securities or subordinated debt securities. The indenture
does not limit the principal amount of debt securities that we may issue. We may
issue debt securities in one or more series. A supplemental indenture will set
forth specific terms of each series of debt securities. There will be prospectus
supplements relating to particular series of debt securities. Each prospectus
supplement will describe:
- The title of the debt securities and whether the debt securities are
senior or subordinated debt securities.
- Any limit upon the aggregate principal amount of a series of debt
securities which we may issue.
- The date or dates on which principal of the debt securities will be
payable and the amount of principal which will be payable.
- The rate or rates (which may be fixed or variable) at which the debt
securities will bear interest, if any, as well as the dates from which
interest will accrue, the dates on which interest will be payable, the
persons to whom interest will be payable, if other than the registered
holders on the record date, and the record date for the interest payable
on any payment date.
- The currency or currencies in which principal, premium, if any, and
interest, if any, will be paid.
- The place or places where principal, premium, if any, and interest, if
any, on the debt securities will be payable and where debt securities
which are in registered form can be presented for registration of transfer
or exchange.
- Any provisions regarding our right to prepay debt securities or of holders
to require us to prepay debt securities.
- The right, if any, of holders of the debt securities to convert them into
common stock or other securities, including any provisions intended to
prevent dilution of the conversion rights.
- Any provisions requiring or permitting us to make payments to a sinking
fund which will be used to redeem debt securities or a purchase fund which
will be used to purchase debt securities.
- Any index or formula used to determine the required payments of principal,
premium, if any, or interest, if any.
- The percentage of the principal amount of the debt securities which is
payable if maturity of the debt securities is accelerated because of a
default.
2
- Any special or modified events of default or covenants with respect to the
debt securities.
- Any other material terms of the debt securities.
The indenture does not contain any restrictions on the payment of dividends
or the repurchase of our securities or any financial covenants. However,
supplemental indentures relating to particular series of debt securities may
contain provisions of that type.
We may issue debt securities at a discount from their stated principal
amount. A prospectus supplement may describe federal income tax considerations
and other special considerations applicable to a debt security issued with
original issue discount.
If the principal of, premium, if any, or interest with regard to any series
of debt securities is payable in a foreign currency, we will describe in the
prospectus supplement relating to those debt securities any restrictions on
currency conversions, tax considerations or other material restrictions with
respect to that issue of debt securities.
FORM OF DEBT SECURITIES
We may issue debt securities in certificated or uncertificated form, in
registered form with or without coupons or in bearer form with coupons, if
applicable.
We may issue debt securities of a series in the form of one or more global
certificates evidencing all or a portion of the aggregate principal amount of
the debt securities of that series. We may deposit the global certificates with
depositaries, and the certificates may be subject to restrictions upon transfer
or upon exchange for debt securities in individually certificated form.
EVENTS OF DEFAULT AND REMEDIES
An event of default with respect to each series of debt securities will
include:
- Our default in payment of the principal of or premium, if any, on any debt
securities of any series beyond any applicable grace period.
- Our default for 30 days or a period specified in a supplemental indenture,
which may be no period, in payment of any installment of interest due with
regard to debt securities of any series.
- Our default for 60 days after notice in the observance or performance of
any other covenants in the indenture.
- Certain events involving our bankruptcy, insolvency or reorganization.
Supplemental indentures relating to particular series of debt securities may
include other events of default.
The indenture provides that the trustee may withhold notice to the holders
of any series of debt securities of any default (except a default in payment of
principal, premium, if any, or interest, if any) if the trustee considers it in
the interest of the holders of the series to do so.
The indenture provides that if any event of default has occurred and is
continuing, the trustee or the holders of not less than 25% in principal amount
of a series of debt securities then outstanding may declare the principal of and
accrued interest, if any, on that series of debt securities to be due and
payable immediately. However, if we cure all defaults (except the failure to pay
principal, premium or interest which became due solely because of the
acceleration) and certain other conditions are met, that declaration may be
annulled and past defaults may be waived by the holders of a majority in
principal amount of the applicable series of debt securities.
3
The holders of a majority of the outstanding principal amount of a series of
debt securities will have the right to direct the time, method and place of
conducting proceedings for any remedy available to the trustee, subject to
certain limitations specified in the indenture.
A prospectus supplement will describe any additional or different events of
default which apply to any series of debt securities.
MODIFICATION OF THE INDENTURE
We and the trustee may:
- Without the consent of holders of debt securities, modify the indenture to
cure errors or clarify ambiguities.
- With the consent of the holders of not less than a majority in principal
amount of the debt securities which are outstanding under the indenture,
modify the indenture or the rights of the holders of the debt securities
generally.
- With the consent of the holders of not less than a majority in outstanding
principal amount of any series of debt securities, modify any supplemental
indenture relating solely to that series of debt securities or the rights
of the holders of that series of debt securities.
However, we may not:
- Extend the fixed maturity of any debt securities, reduce the rate or
extend the time for payment of interest, if any, on any debt securities,
reduce the principal amount of any debt securities or the premium, if any,
on any debt securities, impair or affect the right of a holder to
institute suit for the payment of principal, premium, if any, or interest,
if any, with regard to any debt securities, change the currency in which
any debt securities are payable or impair the right, if any, to convert
any debt securities into common stock or any of our other securities,
without the consent of each holder of debt securities who will be
affected.
- Reduce the percentage of holders of debt securities required to consent to
an amendment, supplement or waiver, without the consent of the holders of
all the then outstanding debt securities or outstanding debt securities of
the series which will be affected.
MERGERS AND OTHER TRANSACTIONS
We may not consolidate with or merge into any other entity, or transfer or
lease our assets substantially as an entirety to another person, unless:
(1) the entity formed by the consolidation or into which we are merged, or which
acquires or leases our assets substantially as an entirety, assumes by a
supplemental indenture all our obligations with regard to outstanding debt
securities and our other covenants under the indenture; and (2) with regard to
each series of debt securities, immediately after giving effect to the
transaction, no event of default, with respect to that series of debt
securities, and no event which would become an event of default, will have
occurred and be continuing.
GOVERNING LAW
The indenture, each supplemental indenture, and the debt securities issued
under them will be governed by, and construed in accordance with, the laws of
New York.
4
DESCRIPTION OF WARRANTS
Each issue of warrants will be the subject of a warrant agreement which will
contain the terms of the warrants. We will distribute a prospectus supplement
with regard to each issue of warrants. Each prospectus supplement will describe,
as to the warrants to which it relates:
- The securities which may be purchased by exercising the warrants (which
may be common stock, preferred stock, debt securities, depositary shares
or units consisting of two or more of those types of securities).
- The exercise price of the warrants (which may be wholly or partly payable
in cash or wholly or partly payable with other types of consideration).
- The period during which the warrants may be exercised.
- Any provision adjusting the securities which may be purchased on exercise
of the warrants and the exercise price of the warrants in order to prevent
dilution or otherwise.
- The place or places where warrants can be presented for exercise or for
registration of transfer or exchange.
- Any other material terms of the warrants.
DESCRIPTION OF COMMON STOCK AND PREFERRED STOCK
Our authorized capital stock consists of 200,000,000 shares of common stock,
$0.001 par value, and 30,000,000 shares of preferred stock, $0.001 par value, of
which 4,400,000 shares are designated 9.500% Series A Cumulative Redeemable
Preferred Stock, $0.001 par value, 2,300,000 shares are designated 9.375%
Series B Cumulative Redeemable Preferred Stock, $0.001 par value, 1,495,000
shares are designated 9.200% Series C Cumulative Redeemable Preferred Stock,
$0.001 par value, and 4,600,000 shares are designated 8.000% Series D Cumulative
Redeemable Preferred Stock, $0.001 par value. At December 31, 2000, 85,726,561
shares of common stock, 4,400,000 shares of Series A preferred stock, 2,000,000
shares of Series B preferred stock, 1,300,000 shares of Series C preferred
stock, and 4,000,000 shares of Series D preferred stock were outstanding.
COMMON STOCK
Holders of common stock will be entitled to receive distributions on common
stock 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 the event of our liquidation, dissolution or winding up, each
outstanding share of common stock will entitle its holder to a proportionate
share of the assets that remain after we pay our liabilities and any
preferential distributions owed to preferred stockholders.
Holders of the common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of the Series B preferred
stock, Series C preferred stock, and Series D preferred stock are entitled to
0.25 of a vote for each share on all matters submitted to a stockholder vote.
They will vote with the common stock as a single class. There is no
cumulative voting in the election of directors.
Holders of shares of common stock have no preference, conversion, sinking
fund, redemption, appraisal or exchange rights or any preemptive rights to
subscribe for any of our securities. All shares of common stock have equal
dividend, distribution, liquidation and other rights.
5
We may be dissolved if the Board of Directors, by resolution adopted by a
majority of the entire Board of Directors, declares the dissolution advisable
and directs that the proposed dissolution be submitted for consideration at
either an annual or special meeting of stockholders. Dissolution will occur once
it is approved by the affirmative vote of a majority of stockholders entitled to
cast votes on the matter.
Our charter grants the Board of Directors the power to authorize the
issuance of additional authorized but unissued shares of common stock and
preferred stock. The Board of Directors may also classify or reclassify unissued
shares of common stock or preferred stock and authorize their issuance.
Our charter also provides that, to the extent permitted by the General
Corporate Law of Maryland, the Board of Directors may, without any action by the
stockholders, amend our charter from time to time to increase or decrease the
aggregate number of shares of stock or the number of shares of stock of any
class or series that we have authority to issue.
We believe that these powers of the Board of Directors provide increased
flexibility in structuring possible future financings and acquisitions and in
meeting other needs which might arise. Although the Board of Directors does not
intend to do so at the present time, it could authorize the issuance of a class
or series that could delay, defer or prevent a change of control or other
transaction that might involve a premium price for the common stock or otherwise
be in the best interest of the stockholders.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
To maintain our REIT qualification under the Internal Revenue Code, no group
of five or fewer individuals can own, actually or constructively, more than 50%
in value of our issued and outstanding stock at any time during the last half of
a taxable year. Additionally, at least 100 persons must beneficially own our
stock during at least 335 days of a taxable year. To help insure that we meet
these tests, our charter provides that no person other than persons who were our
shareholders as of November 3, 1999 or persons exempted by our Board of
Directors may beneficially or constructively own more than 9.8% of the number or
value of the outstanding shares of any class or series of our capital stock.
Each person who is a beneficial or constructive owner of shares of stock and
each person, including the stockholder of record, who is holding shares of stock
for a beneficial or constructive owner must provide us in writing any
information with respect to direct, indirect and constructive ownership of
shares of stock as the Board of Directors deems reasonably necessary to comply
with the provisions of the Internal Revenue Code applicable to a REIT, to
determine our status as a REIT, to comply with the requirements of any taxing
authority or governmental agency or to determine any such compliance.
These restrictions on ownership and transfer will not apply to our stock if
the Board of Directors determines that it is no longer in our best interests to
qualify as a REIT.
These restrictions on ownership and transfer could delay, defer or prevent a
transaction or a change of control of us that might involve a premium price for
shares of our stock or otherwise be in the best interest of our stockholders.
PREFERRED STOCK
We may issue preferred stock in series with any rights and preferences which
may be authorized by our board of directors. We will distribute a prospectus
supplement with regard to each series of preferred stock. Each prospectus
supplement will describe, as to the preferred stock to which it relates:
- The title of the series.
- Any limit upon the number of shares of the series which may be issued.
6
- The preference, if any, to which holders of the series will be entitled
upon our liquidation.
- The date or dates on which we will be required or permitted to redeem
shares of the series.
- The terms, if any, on which we or holders of the series will have the
option to cause shares of the series to be redeemed.
- The voting rights of the holders of the preferred stock.
- The dividends, if any, which will be payable with regard to the series
(which may be fixed dividends or participating dividends and may be
cumulative or non-cumulative).
- The right, if any, of holders of the series to convert them into another
class of our stock or securities, including provisions intended to prevent
dilution of those conversion rights.
- Any provisions by which we will be required or permitted to make payments
to a sinking fund which will be used to redeem shares of the series or a
purchase fund which will be used to purchase shares of the series.
- Any other material terms of the series.
Holders of shares of preferred stock will not have preemptive rights.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock and preferred stock is
Equiserve Trust Company, N.A.
7
DESCRIPTION OF DEPOSITARY SHARES
We may issue depositary receipts representing interests in shares of
particular series of preferred stock which are called depositary shares. We will
deposit the preferred stock of a series which is the subject of depositary
shares with a depositary, which will hold that preferred stock for the benefit
of the holders of the depositary shares, in accordance with a deposit agreement
between the depositary and us. The holders of depositary shares will be entitled
to all the rights and preferences of the preferred stock to which the depositary
shares relate, including dividend, voting, conversion, redemption and
liquidation rights, to the extent of their interests in that preferred stock.
While the deposit agreement relating to a particular series of preferred
stock may have provisions applicable solely to that series of preferred stock,
all deposit agreements relating to preferred stock we issue will include the
following provisions:
DIVIDENDS AND OTHER DISTRIBUTIONS. Each time we pay a cash dividend or make
any other type of cash distribution with regard to preferred stock of a series,
the depositary will distribute to the holder of record of each depositary share
relating to that series of preferred stock an amount equal to the dividend or
other distribution per depositary share the depositary receives. If there is a
distribution of property other than cash, the depositary either will distribute
the property to the holders of depositary shares in proportion to the depositary
shares held by each of them, or the depositary will, if we approve, sell the
property and distribute the net proceeds to the holders of the depositary shares
in proportion to the depositary shares held by them.
WITHDRAWAL OF PREFERRED STOCK. A holder of depositary shares will be
entitled to receive, upon surrender of depositary receipts representing
depositary shares, the number of whole or fractional shares of the applicable
series of preferred stock, and any money or other property, to which the
depositary shares relate.
REDEMPTION OF DEPOSITARY SHARES. Whenever we redeem shares of preferred
stock held by a depositary, the depositary will be required to redeem, on the
same redemption date, depositary shares constituting, in total, the number of
shares of preferred stock held by the depositary which we redeem, subject to the
depositary's receiving the redemption price of those shares of preferred stock.
If fewer than all the depositary shares relating to a series are to be redeemed,
the depositary shares to be redeemed will be selected by lot or by another
method we determine to be equitable.
VOTING. Any time we send a notice of meeting or other materials relating to
a meeting to the holders of a series of preferred stock to which depositary
shares relate, we will provide the depositary with sufficient copies of those
materials so they can be sent to all holders of record of the applicable
depositary shares, and the depositary will send those materials to the holders
of record of the depositary shares on the record date for the meeting. The
depositary will solicit voting instructions from holders of depositary shares
and will vote or not vote the preferred stock to which the depositary shares
relate in accordance with those instructions.
LIQUIDATION PREFERENCE. Upon our liquidation, dissolution or winding up,
the holder of each depositary share will be entitled to what the holder of the
depositary share would have received if the holder had owned the number of
shares (or fraction of a share) of preferred stock which is represented by the
depositary share.
CONVERSION. If shares of a series of preferred stock are convertible into
common stock or other of our securities or property, holders of depositary
shares relating to that series of preferred stock will, if they surrender
depositary receipts representing depositary shares and appropriate instructions
to convert them, receive the shares of common stock or other securities or
property into which the number of shares (or fractions of shares) of preferred
stock to which the depositary shares relate could at the time be converted.
8
AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT. We and the depositary may
amend a deposit agreement, except that an amendment which materially and
adversely affects the rights of holders of depositary shares, or would be
materially and adversely inconsistent with the rights granted to the holders of
the preferred stock to which they relate, must be approved by holders of at
least two-thirds of the outstanding depositary shares. No amendment will impair
the right of a holder of depositary shares to surrender the depositary receipts
evidencing those depositary shares and receive the preferred stock to which they
relate, except as required to comply with law. We may terminate a deposit
agreement with the consent of holders of a majority of the depositary shares to
which it relates. Upon termination of a deposit agreement, the depositary will
make the whole or fractional shares of preferred stock to which the depositary
shares issued under the deposit agreement relate available to the holders of
those depositary shares. A deposit agreement will automatically terminate if:
- All outstanding depositary shares to which it relates have been redeemed
or converted.
- The depositary has made a final distribution to the holders of the
depositary shares issued under the deposit agreement upon our liquidation,
dissolution or winding up.
MISCELLANEOUS. There will be provisions: (1) requiring the depositary to
forward to holders of record of depositary shares any reports or communications
from us which the depositary receives with respect to the preferred stock to
which the depositary shares relate; (2) regarding compensation of the
depositary; (3) regarding resignation of the depositary; (4) limiting our
liability and the liability of the depositary under the deposit agreement
(usually to failure to act in good faith, gross negligence or willful
misconduct); and (5) indemnifying the depositary against certain possible
liabilities.
LEGAL MATTERS
Clifford Chance Rogers & Wells LLP, 200 Park Avenue, New York, New York
10166, will pass upon the validity of the securities we are offering by this
prospectus. If the validity of any securities is also passed upon by counsel for
the underwriters of an offering of those securities, that counsel will be named
in the prospectus supplement relating to that offering.
EXPERTS
The financial statements incorporated in this prospectus by reference to the
Annual Report on Form 10-K for the year ended December 31, 1999, have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We are incorporating by reference in this prospectus the following documents
which we have previously filed with the Securities and Exchange Commission under
the File Number 1-10150:
(1) our Annual Report on Form 10-K for the fiscal year ended
December 31, 1999;
(2) our Quarterly Reports on Form 10-Q for the quarter ended March 31,
2000, June 30, 2000 and September 30, 2000; and
(3) the descriptions of our common stock and preferred stock contained
in our registration statement on Form 8-A filed on October 5, 1999, as those
descriptions have been altered by amendments or reports filed for the
purpose of updating those descriptions.
Whenever after the date of this prospectus we file reports or documents
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended, those reports and documents will be deemed to be part of this
prospectus from the time they are filed. If anything in a report or document we
file after the date of this prospectus changes anything in it, this prospectus
will be
9
deemed to be changed by that subsequently filed report or document beginning on
the date the report or document is filed.
We will provide to each person to whom a copy of this prospectus is
delivered a copy of any or all of the information that has been incorporated by
reference in this prospectus, but not delivered with this prospectus. We will
provide this information at no cost to the requestor upon written or oral
request addressed to iStar Financial Inc., 1114 Avenue of the Americas,
27th Floor, New York, New York 10036, attention: Lianne Merchant, Vice
President--Investor Relations (Telephone: (212) 930-9400).
INFORMATION WE FILE
We file annual, quarterly and current reports, proxy statements and other
materials with the SEC. The public may read and copy any materials we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers (including us) that file
electronically with the SEC. The address of that site is http://www.sec.gov.
Reports, proxy statements and other information we file also can be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
10
----------------------------------------------
WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS ABOUT THE TRANSACTIONS WE DISCUSS IN THIS PROSPECTUS SUPPLEMENT
OR THE ACCOMPANYING PROSPECTUS OTHER THAN THOSE CONTAINED IN THEM. IF YOU ARE
GIVEN ANY INFORMATION OR REPRESENTATIONS ABOUT THESE MATTERS THAT IS NOT
DISCUSSED IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, YOU MUST
NOT RELY ON THAT INFORMATION.
THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES ANYWHERE OR TO ANYONE WHERE OR TO WHOM WE ARE NOT
PERMITTED TO OFFER OR SELL SECURITIES UNDER APPLICABLE LAW. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND ANY SALE OF SECURITIES OFFERED BY THIS PROSPECTUS
SUPPLEMENT DOES NOT, UNDER ANY CIRCUMSTANCES, MEAN THAT THERE HAS NOT BEEN A
CHANGE IN OUR AFFAIRS SINCE THE DATE HEREOF. IT ALSO DOES NOT MEAN THAT THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS CORRECT AFTER THIS DATE.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Forward-looking Statements.............. S-i
Summary................................. S-1
Risk Factors............................ S-10
Use of Proceeds......................... S-15
Capitalization.......................... S-16
Selected Financial Data................. S-17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ S-19
iStar Financial Inc..................... S-29
Our Strategy............................ S-37
Management.............................. S-45
Description of Notes.................... S-51
Federal Income Tax Consequences......... S-78
Underwriting............................ S-81
Legal Matters........................... S-82
Experts................................. S-82
Financial Information................... F-1
PROSPECTUS
Forward-Looking Information............. i
The Company............................. 1
Ratio of Earnings to Fixed Charges...... 1
Use of Proceeds......................... 2
Description of Debt Securities.......... 2
Description of Warrants................. 5
Description of Common Stock and
Preferred Stock....................... 5
Description of Depositary Shares........ 8
Legal Matters........................... 9
Experts................................. 9
Incorporation of Certain Documents by
Reference............................. 9
Information We File..................... 10
-----------------------------
PROSPECTUS SUPPLEMENT
-----------------------------
$350,000,000
[LOGO]
8 3/4% SENIOR NOTES DUE 2008
LEAD MANAGER
SOLE BOOK-RUNNING MANAGER
DEUTSCHE BANC ALEX. BROWN
CO-LEAD MANAGER
BEAR, STEARNS & CO. INC.
FLEET SECURITIES, INC.
UBS WARBURG LLC
AUGUST 9, 2001