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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-10150
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ISTAR FINANCIAL INC.
(Exact name of registrant as specified in its charter)
MARYLAND 95-6881527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1114 AVENUE OF THE AMERICAS, 27TH FLOOR 10036
NEW YORK, NY 10036 (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 930-9400
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Exchange on which registered:
COMMON STOCK, $0.001 PAR VALUE NEW YORK STOCK EXCHANGE
9.375% SERIES B CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
9.200% SERIES C CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
8.000% SERIES D CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (ii) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 15, 2001, the aggregate market value of the common stock, $0.001
par value per share of iStar Financial Inc. ("Common Stock") held by
non-affiliates(1) of the registrant was approximately $2,063.0 million, based
upon the closing price of $24.01 on the New York Stock Exchange composite tape
on such date.
As of March 15, 2001, there were 85,924,550 shares of Common Stock
outstanding.
(1) For purposes of this Annual Report only, includes all outstanding Common
Stock other than Common Stock held directly by the Registrant's directors
and executive officers.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's definitive proxy statement for the registrant's
2001 Annual Meeting, to be filed within 120 days after the close of the
registrant's fiscal year, are incorporated by reference into Part III of
this Annual Report on Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................ 3
Item 2. Properties.......................................... 17
Item 3. Legal Proceedings................................... 17
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 17
PART II
Item 5. Market for Registrant's Equity and Related Share
Matters................................................... 18
Item 6. Selected Financial Data............................. 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 23
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk............................................... 30
Item 8. Financial Statements and Supplemental Data.......... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 84
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................ 84
Item 11. Executive Compensation............................. 84
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 84
Item 13. Certain Relationships and Related Transactions..... 84
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 84
SIGNATURES.................................................. 87
PART I
ITEM 1. BUSINESS
EXPLANATORY NOTE FOR PURPOSES OF THE "SAFE HARBOR PROVISIONS" OF SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
which involve certain risks and uncertainties. Forward-looking statements are
included with respect to, among other things, the Company's current business
plan, business strategy and portfolio management. The Company's actual results
or outcomes may differ materially from those anticipated. Important factors that
the Company believes might cause such differences are discussed in the
cautionary statements presented under the caption "Factors That May Affect the
Company's Business Strategy" in Item 1 of this Form 10-K or otherwise accompany
the forward-looking statements contained in this Form 10-K. In assessing all
forward-looking statements, readers are urged to read carefully all cautionary
statements contained in this Form 10-K.
OVERVIEW
iStar Financial Inc. (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 is taxed as a
real estate investment trust ("REIT"), seeks to deliver superior risk-adjusted
returns on equity to shareholders by providing innovative and value-added
financing solutions to its customers.
The Company's primary product lines include:
- STRUCTURED FINANCE. The Company provides senior and subordinated loans
from $20 million to $100 million to borrowers controlling institutional
quality real estate. These loans may be either fixed or floating rate and
are structured to meet the specific financing needs of the borrowers,
including the acquisition, financing, repositioning or construction of
large, high-quality real estate. The Company offers borrowers a wide range
of structured finance options, including first mortgages, second
mortgages, partnership loans, participating debt and interim/bridge
facilities.
- PORTFOLIO FINANCE. The Company provides funding to regional and national
borrowers who own multiple properties in a geographically diverse
portfolio. Loans are cross-collateralized to give borrowers the benefit of
all available collateral and underwritten to recognize inherent portfolio
diversification. Property types include multifamily, suburban office,
all-suite, extended stay and full service hotels and other property types
where individual property values are less than $20 million on average.
Loan terms are structured to meet the specific requirements of the
borrower and typically range in size from $25 million to $150 million.
- CORPORATE FINANCE. The Company provides 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.
- LOAN ACQUISITION. The Company acquires whole loans and loan participations
which present attractive risk-reward opportunities. Loans are generally
acquired at a discount to the principal balance outstanding and may be
acquired with financing provided by the seller. Loan acquisitions
typically range from $5 million to $100 million and are collateralized by
all major property types.
- CORPORATE TENANT LEASING. The Company provides capital to corporations, as
well as borrowers who control properties leased to single creditworthy
tenants. The Company's net leased facilities are generally subject to
long-term leases with rated corporate credit tenants, and provide for all
3
expenses at the property to be paid by the tenant on a triple net lease
basis. Corporate tenant transactions typically range in size from
$20 million to $200 million.
- SERVICING. Through its iStar Asset Services division, the Company provides
rated servicing to third-party, institutional loan portfolios, as well as
to the Company's own portfolio.
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, 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., the largest publicly traded company specializing
in the net leasing of corporate office and industrial facilities. The
acquisition of TriNet was structured as a stock-for-stock merger of TriNet with
a subsidiary of the Company. We refer to TriNet throughout this document as the
"Leasing Subsidiary."
Concurrent with the acquisition of TriNet, the Company also acquired its
external advisor in exchange for shares of Common Stock and converted its
organizational form to a Maryland corporation. 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 on November 4, 1999. Prior to this date, the
Company's common shares were traded on the American Stock Exchange.
INVESTMENT STRATEGY
The Company's investment strategy targets specific sectors of the real
estate credit markets in which it believes it can deliver value-added, flexible
financial solutions to its customers, thereby differentiating its financial
products from those offered by other capital providers.
The Company has implemented its investment strategy by:
- 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.
- Developing direct relationships with borrowers and corporate tenants as
opposed to sourcing transactions through intermediaries.
- 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.
- 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.
The Company intends to continue to emphasize a mix of portfolio financing
transactions to create asset diversification and single-asset financings for
properties with strong, long-term competitive market positions. The Company's
credit process will continue to focus on:
- Building diversification by asset type, property type, obligor, loan/lease
maturity and geography.
4
- Financing high-quality commercial real estate assets in major metropolitan
markets.
- Underwriting assets using conservative assumptions regarding collateral
value and future property performance.
- Requiring adequate cash flow coverage on its investments.
- Stress testing potential investments for adverse economic and real estate
market conditions.
As of December 31, 2000, based on current gross carrying values, the
Company's business consists of the following product lines:
PRODUCT LINE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
STRUCTURED FINANCE 24%
Portfolio Finance 9%
Corporate Finance 11%
Corporate Tenant leasing 44%
Loan Acquisition 12%
5
The Company seeks to maintain an investment portfolio which is diversified
by asset type, underlying property type and geography. As of December 31, 2000,
based on current gross carrying values, the Company's total investment portfolio
has the following characteristics:
ASSET TYPE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
FIRST MORTGAGES 31%
Second Mortgages 8%
Corporate/Partnership/Other 18%
Corporate Tenant Lease 43%
PROPERTY TYPE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
HOTEL 20%
Mixed Use 4%
Office 49%
Industrial 7%
R&D 3%
Apartment/Residential 7%
Resort/Entertainment 4%
Homebuilder/Land 3%
Retail 3%
GEOGRAPHY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SOUTHEAST 10%
Mid-Atlantic 9%
Northeast 17%
North Central 2%
Central 7%
South 16%
Southwest 3%
West 32%
Northwest 5%
6
FINANCING STRATEGY
The Company has access to a wide range of debt and equity capital resources
to finance its investment and growth strategies. At December 31, 2000, the
Company had approximately $1.8 billion of tangible book equity capital and a
total market capitalization of approximately $4.2 billion. The Company believes
that its size, diversification, investor sponsorship and track record are
competitive advantages in obtaining attractive financing for its businesses.
The Company seeks to maximize risk-adjusted returns on equity and financial
flexibility by opportunistically accessing a variety of public and private debt
and equity capital sources, including:
- iStar Asset Receivables ("STARs"), the Company's proprietary match-funded,
securitized debt program.
- A combined $1.7 billion available under its unsecured and secured
revolving credit facilities at year end (increased to $2.4 billion
subsequent to year end).
- Long-term, unsecured corporate debt.
The Company's business model is premised on significantly lower leverage
than many other commercial finance companies. In this regard, the Company seeks
to:
- Target a maximum consolidated debt/book equity ratio of 1.5x to 2.0x.
- Maintain a large tangible equity base and conservative credit statistics.
- Match fund assets and liabilities.
A more detailed discussion of the Company's current capital resources is
provided in Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
BUSINESS
REAL ESTATE LENDING:
The Company provides structured financing to private and corporate owners of
real estate nationwide, including senior and junior mortgage debt, as well as
corporate mezzanine and subordinated capital.
Set forth below is information regarding the Company's primary real estate
lending product lines as of December 31, 2000:
CURRENT
CARRYING PERCENTAGE
VALUE OF TOTAL
-------------- ----------
(IN THOUSANDS)
Structured finance................................... $ 967,613 43.2%
Portfolio finance.................................... 371,168 16.6%
Corporate finance.................................... 420,837 18.8%
Loan acquisition..................................... 479,565 21.4%
---------- -----
Gross carrying value............................... 2,239,183 100.0%
=====
Provision for possible credit losses............... (14,000)
----------
Total carrying value, net.......................... $2,225,183
==========
As more fully discussed in Note 3 to the Company's Consolidated Financial
Statements, the Company continually monitors borrower performance and completes
a detailed, loan-by-loan formal credit review on
7
a quarterly basis. After having originated or acquired over $4 billion of
investment transactions, neither the Company nor its private investment fund
predecessors have experienced any actual losses on their investments. Further,
based on current reviews of its portfolio, management is not aware of any
factors relating to specific loans which indicate that such losses may be
experienced in the forseeable future.
While no specific losses are currently indicated, the Company has considered
it prudent to establish a policy of providing reserves for potential losses
inherent in the current portfolio which may occur in the future. Accordingly,
since its 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.
SUMMARY OF INTEREST CHARACTERISTICS
As more fully discussed in Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
as well as in Item 7a.--"Quantitative and Qualitative Disclosures about Market
Risk," the Company utilizes certain interest rate risk management techniques,
including both asset/liability matching and certain other hedging techniques, in
order to mitigate the Company's exposure to interest rate risks.
As of December 31, 2000, the Company's Lending Business portfolio has the
following interest rate characteristics:
CURRENT
CARRYING PERCENTAGE
VALUE OF TOTAL
-------------- ----------
(IN THOUSANDS)
Fixed rate loans..................................... $1,242,552 55.5%
Variable rate loans.................................. 996,631 44.5%
---------- -----
Gross carrying value................................. $2,239,183 100.0%
========== =====
SUMMARY OF PREPAYMENT TERMS
The Company is exposed to risks of prepayment on its loan assets, and
generally seeks to protect itself from such risk by structuring its loans with
prepayment restrictions and/or penalties.
As of December 31, 2000, the Company's Lending Business portfolio has the
following call protection characteristics:
CURRENT
CARRYING PERCENTAGE
VALUE OF TOTAL
-------------- ----------
(IN THOUSANDS)
Substantial lock-out for original term............... $ 611,838 27.3%
Fixed prepayment penalties........................... 553,188 24.7%
Yield maintenance.................................... 299,666 13.4%
No significant prepayment protection................. 774,491 34.6%
---------- -----
Gross carrying value................................. $2,239,183 100.0%
========== =====
8
SUMMARY OF LENDING BUSINESS MATURITIES
As of December 31, 2000, the Company's Lending Business portfolio has the
following maturity characteristics:
NUMBER OF CURRENT
TRANSACTIONS CARRYING PERCENTAGE
YEAR OF MATURITY MATURING VALUE OF TOTAL
- ---------------- ------------ ------------- ----------
(IN THOUSANDS)
2001..................................... 7 $ 302,552 13.5%
2002..................................... 13 351,158 15.7%
2003..................................... 7 425,863 19.0%
2004..................................... 10 453,850 20.3%
2005..................................... 7 278,450 12.4%
2006..................................... 1 35,583 1.6%
2007..................................... 5 179,230 8.0%
2008..................................... 5 60,605 2.7%
2009..................................... -- -- 0.0%
2010..................................... -- -- 0.0%
2011 and thereafter...................... 3 151,892 6.8%
------------- -----
Gross carrying value................... $ 2,239,183 100.0%
============= =====
Weighted average maturity.............. 3.7 years
=============
STRUCTURED FINANCE
The Company provides custom-tailored senior and subordinated loans from
$20 million to $100 million to borrowers controlling institutional quality real
estate. These 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. The Company offers borrowers a wide range of
structured finance options, including first mortgages, second mortgages,
partnership loans, participating debt and interim/bridge facilities.
As of December 31, 2000, the Company's structured finance investments have
the following characteristics:
CURRENT WEIGHTED
# OF INITIAL CURRENT PRINCIPAL AVERAGE
LOANS CARRYING CARRYING BALANCE STATED
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE VALUE (1) OUTSTANDING PAY RATE
- ---------------- ------------------ -------- -------- ---------- ----------- ----------------
First Mortgages:
Fixed.................. Residential/ 6 $222,320 $ 223,749 $ 225,618 9.54%
Resort/Mixed
Use/Office
Floating............... Office/Hotel 4 270,251 285,399 284,151 LIBOR+2.91%
Second Mortgages:
Fixed.................. Office/Mixed 8 184,491 195,207 211,280 10.89%
Use/Hotel
Floating............... -- -- -- -- -- --
Corporate/Partnership/Other Loans:
Fixed.................. Office/Hotel/ 10 184,568 133,519 132,081 10.12%
Retail
Floating............... Office 2 130,000 129,739 130,000 LIBOR+5.19%
-- ---------- ----------
Total.................... 30 $ 967,613 $ 983,130
== ========== ==========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE FIRST AVERAGE LAST
WEIGHTED AVERAGE DOLLAR DOLLAR
AVERAGE ESTIMATED CURRENT CURRENT
STATED ACCOUNTING LOAN-TO- LOAN-TO-
INVESTMENT CLASS ACCRUAL RATE YIELD (2) VALUE (3) VALUE (4)
- ---------------- ---------------- ---------- ------------- ------------
First Mortgages:
Fixed.................. 9.74% 10.81% 0% 61%
Floating............... LIBOR+2.91% 10.42% 0% 73%
Second Mortgages:
Fixed.................. 12.48% 12.35% 38% 71%
Floating............... -- -- -- --
Corporate/Partnership/Oth
Fixed.................. 12.25% 14.71% 62% 75%
Floating............... LIBOR+5.19% 10.86% 63% 80%
Total....................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
9
PORTFOLIO FINANCE
The Company provides funding to regional and national borrowers who own
multiple properties in a geographically diverse portfolio. Loans are
cross-collateralized to give borrowers the benefit of all available collateral
and underwritten to recognize inherent diversification. Property types include
multifamily, suburban office, all-suite, extended stay and limited service
hotels and other property types where individual property values are less than
$20 million on average. Loan terms are structured to meet the specific
requirements of the borrower and typically range in size from $25 million to
$150 million.
As of December 31, 2000, the Company's portfolio finance investments have
the following characteristics:
CURRENT WEIGHTED
# OF INITIAL CURRENT PRINCIPAL AVERAGE
LOANS CARRYING CARRYING BALANCE STATED
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE VALUE (1) OUTSTANDING PAY RATE
- ---------------- ------------------ -------- -------- ----------- ----------- ----------------
First Mortgages:
Fixed................. Residential 5 $84,665 $ 60,961 $ 61,091 18.40%
Floating.............. Residential/Office 2 88,861 87,460 87,500 LIBOR + 1.79%
Second Mortgages:
Fixed................. Office/Hotel 3 90,725 90,519 88,808 11.27%
Floating.............. Hotel 1 29,689 39,832 40,000 LIBOR + 5.80%
Corporate/Partnership/Other Loans:
Fixed................. Office 1 23,100 14,745 14,745 10.00%
Floating.............. Hotel 1 69,856 77,651 78,000 LIBOR + 5.37%
-- ----------- -----------
Total................... 13 $ 371,168 $ 370,144
== =========== ===========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE FIRST AVERAGE LAST
WEIGHTED AVERAGE DOLLAR DOLLAR
AVERAGE ESTIMATED CURRENT CURRENT
STATED ACCOUNTING LOAN-TO- LOAN-TO-
INVESTMENT CLASS ACCRUAL RATE YIELD (2) VALUE (3) VALUE (4)
- ---------------- ---------------- ---------- ------------- ------------
First Mortgages:
Fixed................. 20.07% 21.41% 0% 35%
Floating.............. LIBOR + 1.79% 8.29% 0% 68%
Second Mortgages:
Fixed................. 12.70% 13.38% 36% 72%
Floating.............. LIBOR + 5.80% 12.42% 64% 88%
Corporate/Partnership/Ot
Fixed................. 15.00% 15.00% 63% 71%
Floating.............. LIBOR + 5.37% 11.58% 56% 88%
Total...................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal collateral valuation (where no appraisal
available).
(4) Weighted average ratio of last dollar current loan carrying value in
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
CORPORATE FINANCE
The Company provides 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. Corporate financing may be either cash flow-oriented or
asset-based.
10
As of December 31, 2000, the Company's corporate finance investments have
the following characteristics:
CURRENT WEIGHTED
# OF INITIAL CURRENT PRINCIPAL AVERAGE
COLLATERAL LOANS CARRYING CARRYING BALANCE STATED
INVESTMENT CLASS TYPES IN CLASS VALUE VALUE (1) OUTSTANDING PAY RATE
- ---------------- ---------------- -------- -------- ---------- ----------- ----------------
First Mortgages:
Fixed..................... Hotel 1 $19,397 $ 19,422 $ 23,148 7.32%
Floating.................. Homebuilder 1 72,495 72,495 72,495 LIBOR + 6.00%
Corporate/Partnership/Other Loans:
Fixed..................... Resort 4 223,441 226,674 253,150 10.50%
Entertainment/
Homebulider/
Residential
Residential/
Hotel 3 112,873 102,246 104,529 LIBOR + 3.92%
Floating..................
--- ---------- ----------
Total....................... 9 $ 420,837 $ 453,322
=== ========== ==========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE FIRST AVERAGE LAST
WEIGHTED AVERAGE DOLLAR DOLLAR
AVERAGE ESTIMATED CURRENT CURRENT
STATED ACCOUNTING LOAN-TO- LOAN-TO-
INVESTMENT CLASS ACCRUAL RATE YIELD (2) VALUE (3) VALUE (4)
- ---------------- ---------------- ---------- ------------- ------------
First Mortgages:
Fixed..................... 7.32% 9.36% 0% 93%(5)
Floating.................. LIBOR + 6.00% 11.65% 2% 31%
Corporate/Partnership/Other
Fixed..................... 10.67% 13.91% 65% 73%
LIBOR + 3.92% 10.59% 60% 70%
Floating..................
Total.......................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal collateral valuation (where no appraisal
available).
(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
(5) Collateral secured by long-term lease to investment grade tenant.
LOAN ACQUISITION
The Company acquires whole loans and loan participations which may be
performing or sub-performing and which the Company believes represent attractive
risk-reward opportunities. Loans are generally acquired at a discount to the
principal balance outstanding and may be acquired with financing provided by the
seller. The Company restructures many of these loans to performing status on
terms favorable to the Company. In other cases, the Company negotiates a payoff
at a price above the Company's basis in the loan. Loan acquisitions typically
range from $5 million to $100 million and are collateralized by all major
property types.
For accounting purposes, these loans are initially reflected at the
Company's acquisition cost which represents the outstanding balance net of the
acquisition discount or premium. The Company amortizes such discounts or
premiums as an adjustment to increase or decrease the yield, respectively,
realized on these loans using the effective interest method. As such,
differences between carrying value and principal balances outstanding do not
represent embedded losses or gains as the Company generally plans to hold such
loans to maturity or negotiate a favorable restructuring of a discount loan.
11
As of December 31, 2000, the Company's loan acquisition investments have the
following characteristics:
CURRENT WEIGHTED
# OF INITIAL CURRENT PRINCIPAL AVERAGE
LOANS CARRYING CARRYING BALANCE STATED
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE VALUE (1) OUTSTANDING PAY RATE
- ---------------- ------------------- -------- ---------- ----------- ----------- ----------------
First Mortgages:
Fixed................... Office/Retail/Hotel 3 $ 256,655 $ 259,697 $ 274,775 9.00%
Floating................ Office/Hotel 2 200,811 201,809 203,529 LIBOR + 1.75%
Corporate/Partnership/Other Loans:
Fixed................... Mixed Use 1 34,277 18,059 25,905 6.75%
Floating................ -- -- -- -- -- --
------ ----------- -----------
Total.......................................... 6 $ 479,565 $ 504,209
====== =========== ===========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE FIRST AVERAGE LAST
WEIGHTED AVERAGE DOLLAR DOLLAR
AVERAGE ESTIMATED CURRENT CURRENT
STATED ACCOUNTING LOAN-TO- LOAN-TO-
INVESTMENT CLASS ACCRUAL RATE YIELD (2) VALUE (3) VALUE (4)
- ---------------- ---------------- ---------- ------------- ------------
First Mortgages:
Fixed................... 9.57% 10.56% 0% 83%
Floating................ LIBOR + 1.75% 8.21% 30% 85%
Corporate/Partnership/Othe
Fixed................... 6.75% 11.00% 64% 69%
Floating................ -- -- -- --
Total.....................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
LOAN SERVICING
In September 1998, a subsidiary of the Company acquired the loan origination
and servicing business of Phoenix Realty Services, Inc., a subsidiary of Phoenix
Home Life Insurance Company. The acquisition of this servicing business, which
was renamed iStar Asset Services, expanded the Company's ability to service its
own loans and provided the Company with additional relationships with potential
borrowers.
Through its iStar Asset Services division, the Company provides loan
servicing to third-party institutional owners of loan portfolios, as well as to
the Company's own asset base. iStar Asset Services is currently rated "above
average" by Standard & Poor's and "CMS3" (approved) by Fitch Inc. as a master
servicer. The Company's servicing business focuses on maximizing risk-adjusted
investment returns through active, ongoing asset management with particular
focus on risk management, asset financing strategies and opportunistic
responsiveness to changing borrower/tenant needs.
12
CORPORATE TENANT LEASING:
The Company, directly and through its Leasing Subsidiary, provides capital
to corporate owners of office and industrial facilities. Net leased facilities
are generally subject to long-term leases to rated corporate credit tenants, and
typically provide for all expenses at the property to be paid by the tenant on a
triple net lease basis. Corporate tenant lease ("CTL") transactions typically
range in size from $20 million to $200 million.
The Company pursues the origination of corporate tenant lease transactions
by structuring purchase/ leasebacks and by acquiring facilities subject to
existing long-term net leases. In a typical purchase/ leaseback transaction, the
Company purchases a corporation's facility and leases it back to that
corporation subject to a long-term net lease. This structure allows the
corporate customer to reinvest the proceeds from the sale of its facilities into
its core business, while the Company capitalizes on its structured financing
expertise.
The Company generally intends to hold its net leased assets for long-term
investment. However, subject to certain tax restrictions, the Company may
dispose of an asset if it deems the disposition to be in the best interest of
stockholders and may either reinvest the disposition proceeds, use the proceeds
to reduce debt, or distribute the proceeds to stockholders.
The Company's CTL investments primarily represent a diversified portfolio of
strategic office and industrial facilities subject to net lease agreements with
creditworthy corporate tenants. The Company generally seeks high-quality,
general-purpose real estate with residual values that represent a discount to
current market values and replacement costs. Under a typical net lease
agreement, the corporate customer agrees to pay a base monthly operating lease
payment and all facility operating expenses (including taxes, maintenance and
insurance).
The Company generally seeks corporate tenants with the following
characteristics:
- Established companies with stable core businesses or market leaders in
growing industries.
- Investment-grade credit strength or appropriate credit enhancements if
corporate credit strength is not sufficient.
- Commitment to the facility as an important asset to their on-going
businesses.
As of December 31, 2000, the Company had more than 160 corporate customers
operating in more than ten major industry sectors, including aerospace, energy,
finance, healthcare, hospitality, technology and telecommunications. These
customers represent well-recognized national and international companies, such
as Avaya, Federal Express, Hilton, IBM, Microsoft, Nike, Nokia and Verizon.
As of December 31, 2000, the Company's CTL portfolio has the following
tenant credit characteristics:
ANNUALIZED OPERATING PERCENTAGE OF
LEASE PAYMENTS(3) TOTAL
-------------------- -------------
(IN THOUSANDS)
Investment grade(1)........................... $ 99,725 47.9%
Implied investment grade (2).................. 19,719 9.5%
Non-investment grade.......................... 34,702 16.7%
Unrated....................................... 53,818 25.9%
-------- ------
$207,964 100.0%
======== ======
EXPLANATORY NOTES:
- ------------------------------
(1) A tenant's credit rating is considered "Investment Grade" if it has a
published senior unsecured credit rating of Baa3/BBB- or above by one or
more of the three national rating agencies.
(2) A tenant's credit rating is considered "Implied Investment Grade" if it has
no published ratings, but has credit characteristics that the Company
believes warrant an investment grade senior unsecured credit rating.
Examples at December 31, 2000 include Cisco Systems, Inc., and Electronic
Data Systems.
(3) Reflects actual annualized monthly base lease rates in effect at
December 31, 2000 (without giving affect to straight-line adjustments under
GAAP).
13
PORTFOLIO AND ASSET MANAGEMENT STRATEGY. The Company believes that diligent
management of the CTL portfolio is an essential component of its long-term
strategy. There are several ways to optimize the performance and maximize the
value of net leases. The Company monitors its portfolio for changes that could
affect the performance of the markets, credits and industries in which it has
invested. As part of this monitoring, the Company's asset management group
reviews market, customer and industry data and frequently inspects its
facilities. In addition, the Company attempts to develop strong relationships
with its large corporate customers, which provide a source of information
concerning the customers' facilities needs. These relationships allow the
Company to be proactive in obtaining early lease renewals and in conducting
early marketing of assets where the customer has decided not to renew. The
Company will seek to find a new tenant prior to the expiration of the existing
lease.
As of December 31, 2000, the Company owned 142 office and industrial
facilities principally subject to net leases to more than 160 customers,
comprising 18.5 million square feet in 26 states. The Company also has a
portfolio of 17 hotels under a long-term master lease with a single customer.
Information regarding the Company's CTL assets as of December 31, 2000 is set
forth below:
% ANNUALIZED
OPERATING
# OF % LEASE
INDUSTRY FACILITES SQUARE FEET PAYMENTS (1) SIGNIFICANT CUSTOMERS
- -------- --------- ----------- ------------ ----------------------------------
Technology........................ 51 34.4% 37.0% IBM, Cisco, Mitsubishi
Electronics, Hewlett-Packard,
Unisys, Lexmark, Microsoft
Telecommunications................ 16 9.1% 18.6% Nokia, Verizon, Avaya, Alcatel
Network, Nortel Networks, AT&T
Wireless, ICG Holdings, Equinix
Other Industry Sectors............ 13 7.8% 4.7% The Mitre Corp., Andersen
Consulting, Allright Parking
Manufacturing..................... 3 7.8% 3.2% Nike, Adidas America, Inc., Mast
Industries
Food and Related Services......... 20 7.6% 6.2% Caterair, Ralphs Grocery Co.,
Unified Western Grocers, Welch
Foods, Inc.
Energy and Utilities.............. 8 4.7% 6.3% Entergy Services, Exxon-Mobil, Bay
State Gas
Automotive, Aerospace and 9 6.4% 4.3% Volkswagen of America, Unison
Defense......................... Industries, Honeywell, TRW Space
Communications
Hospitality....................... 17 6.1% 7.2% Hilton Hotels Corp.
Financial Services................ 9 5.7% 5.9% Wellpoint Health Networks, Arbella
Capital Corp., Blue Cross & Blue
Shield, Wells Fargo
Consumer Goods.................... 3 7.1% 2.3% Sears Logistics, Rex Stores Corp.,
Dunham's Athleisure, Lever
Brothers
Healthcare........................ 5 1.4% 1.4% Fresenius USA, Haemonetics Corp.,
Avitar
Transportation Services........... 4 1.3% 2.2% Federal Express, State of
California Dept. of Transportation
Government Services............... 1 0.6% 0.7% Massachusetts Lottery
--- ----- -----
Total............................. 159 100.0% 100.0%
=== ===== =====
EXPLANATORY NOTE:
- ----------------------------------
(1) Reflects actual annualized monthly base lease rates in effect at
December 31, 2000 (without giving affect to straight-line adjustments under
GAAP).
14
As of December 31, 2000, lease expirations on the Company's CTL assets,
including facilities owned by the Company's joint ventures, are as follows:
PERCENT OF TOTAL
ANNUAL
OPERATING
NUMBER OF ANNUALIZED LEASE PAYMENTS
LEASES OPERATING LEASE REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING PAYMENTS(1) EXPIRING LEASES
- ------------------------ --------- --------------- ----------------
(IN THOUSANDS)
2001.................................. 22 $ 11,018 5.3%
2002.................................. 27 12,139 5.9%
2003.................................. 19 19,622 9.4%
2004.................................. 28 25,797 12.4%
2005.................................. 15 13,551 6.5%
2006.................................. 22 26,350 12.7%
2007.................................. 14 17,740 8.5%
2008.................................. 8 8,565 4.1%
2009.................................. 10 12,740 6.1%
2010.................................. 6 9,259 4.5%
2011 and thereafter................... 25 51,183 24.6%
------ -------- ------
Total............................... 196 $207,964 100.0%
====== ======== ======
EXPLANATORY NOTE:
- ------------------------------
(1) Reflects actual annualized monthly base lease rates in effect at
December 31, 2000 (without giving affect to straight-line adjustments under
GAAP).
POLICIES WITH RESPECT TO OTHER ACTIVITIES
At all times, the Company intends to make investments in a manner consistent
with the requirements of the Code for the Company to qualify as a REIT.
INVESTMENT RESTRICTIONS OR LIMITATIONS
The Company does not have any prescribed allocation among investments or
product lines. Instead, the Company focuses on corporate and real estate credit
underwriting to develop an in-depth analysis of the risk/reward ratios in
determining the pricing and advisability of each particular transaction.
The Company believes that it is not, and intends to conduct its operations
so as not to become, regulated as an investment company under the Investment
Company Act. The Investment Company Act generally exempts entities that are
"primarily engaged in purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" (collectively, "Qualifying Interests").
The Company intends to rely on current interpretations by the staff of the
Securities and Exchange Commission in an effort to qualify for this exemption.
Based on these interpretations, the Company, among other things, must maintain
at least 55% of its assets in Qualifying Interests and at least 25% of its
assets in real estate-related assets (subject to reduction to the extent the
Company invests more than 55% of its assets in Qualifying Interests). Generally,
the Company's senior mortgages and certain of its subordinated mortgages
constitute Qualifying Interests.
The Company is restricted from making certain types of investments which may
limit its flexibility in implementing its investment policy. Specifically,
without the amendment, termination or waiver of provisions of certain
non-competition agreements between Starwood Capital Group, L.L.C. and Starwood
Hotels & Resorts Worldwide, Inc., the Company is prohibited from: (1) making
investments in loans collateralized by hotel assets where it is anticipated that
the underlying equity will be acquired by the debtholder within one year from
the acquisition of such debt; (2) acquiring equity interests in hotels (other
than acquisitions of warrants, equity participations or similar rights
incidental to a debt investment by the Company or that are acquired as a result
of the exercise of remedies in respect to a loan in which the Company has an
interest); or (3) selling, contributing to or acquiring any interests in
Starwood Hotels &
15
Resorts Worldwide, Inc., including debt positions or equity interests obtained
by the Company under, pursuant to or by reason of the Company's ownership of
debt positions.
Subject to the limitations on ownership of certain types of assets and the
gross income tests imposed by the Code, the Company also may invest in the
securities of other REITs, other entities engaged in real estate activities or
other issuers, including for the purpose of exercising control over such
entities.
COMPETITION
The Company is engaged in a competitive business. In originating and
acquiring assets, the Company competes with public and private companies,
including other finance companies, mortgage banks, pension funds, savings and
loan associations, insurance companies, institutional investors, investment
banking firms and other lenders and industry participants, as well as individual
investors. Existing industry participants and potential new entrants compete
with the Company for the available supply of investments suitable for
origination or acquisition, as well as for debt and equity capital. Certain of
the Company's competitors are larger than the Company, have longer operating
histories, may have access to greater capital and other resources, may have
management personnel with more experience than the officers of the Company, and
may have other advantages over the Company in conducting certain businesses and
providing certain services.
REGULATION
The operations of the Company are subject, in certain instances, to
supervision and regulation by state and federal governmental authorities and may
be subject to various laws and judicial and administrative decisions imposing
various requirements and restrictions, which, among other things: (1) regulate
credit granting activities; (2) establish maximum interest rates, finance
charges and other charges; (3) require disclosures to customers; (4) govern
secured transactions; and (5) set collection, foreclosure, repossession and
claims-handling procedures and other trade practices. Although most states do
not regulate commercial finance, certain states impose limitations on interest
rates and other charges and on certain collection practices and creditor
remedies and require licensing of lenders and financiers and adequate disclosure
of certain contract terms. The Company is also required to comply with certain
provisions of the Equal Credit Opportunity Act that are applicable to commercial
loans.
In the judgment of management, existing statutes and regulations have not
had a material adverse effect on the business conducted by the Company. However,
it is not possible to forecast the nature of future legislation, regulations,
judicial decisions, orders or interpretations, nor their impact upon the future
business, financial condition or results of operations or prospects of the
Company.
The Company has elected and expects to continue to make an election to be
taxed as a REIT under Section 856 through 860 of the Code. As a REIT, the
Company generally will not be subject to federal income tax if it distributes at
least 95% of its taxable income for each year to its shareholders. The
distribution rate was modified to 90% by the REIT Modernization Act beginning in
fiscal 2001. REITs are also subject to a number of organizational and
operational requirements in order to elect and maintain REIT status. These
requirements include specific share ownership tests and assets and gross income
composition tests. If the Company fails to qualify as a REIT in any taxable
year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
tax rates. Even if the Company qualifies for taxation as a REIT, the Company may
be subject to state and local income taxes and to federal income tax and excise
tax on its undistributed income.
Although the Company did not qualify as a REIT for its fiscal years 1993
through 1997, it received a written agreement from the IRS confirming that the
Company was eligible to make an election under Section 856(c)(1) of the Code to
be taxed as a REIT for its taxable years beginning January 1, 1998, and the
Company has made such elections.
16
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS STRATEGY
The implementation of the Company's business strategy and investment
policies are subject to certain risks, including the effect of economic and
other conditions on underlying property values, the less liquid nature of some
of its investments, the risks of borrower and corporate tenant defaults, risks
resulting from delays in enforcing remedies or in gaining control over real
estate collateral following a default, risks that the properties collateralizing
debt instruments held by the Company or net lease assets owned by the Company
will not generate revenues sufficient to meet operating expenses and to pay
scheduled debt service, the risk that prepayment restrictions may be
insufficient to deter prepayments, the existence of junior mortgages that may
affect the Company's rights, liability associated with uninsurable losses and
unknown environmental liabilities.
ENVIRONMENTAL MATTERS
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. Absent succeeding to
ownership or control of real property, a secured lender is not likely to be
subject to any of these forms of environmental liability. The Company is not
currently aware of any environmental issues which could materially affect the
Company.
EMPLOYEES
As of March 15, 2001, the Company had 126 employees and believes its
relationships with its employees to be good. The Company's employees are not
represented by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's principal executive and administrative offices are located at
1114 Avenue of the Americas New York, NY 10036, 27th floor. Its telephone
number, general facsimile number and e-mail address are (212) 930-9400,
(212) 930-9494 and istarfinancial.com, respectively. The lease for the Company's
primary corporate office space expires in February 2010. The Company believes
that this office space is suitable for its operations for the foreseeable
future. The Company also maintains super-regional offices in San Francisco,
California; Hartford, Connecticut; and Atlanta, Georgia, as well as regional
offices in Boston, Massachusetts; Dallas, Texas; and Denver, Colorado.
See Item 1--"Corporate Tenant Leasing" for a discussion of real estate
facilities held by the Company and its Leasing Subsidiary for investment
purposes and Item 8--"Schedule III--Real Estate and Accumulated Depreciation"
for a detailed listing of such facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation or legal proceedings,
or to the best of its knowledge, any threatened litigation or legal proceedings
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on its results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 2000.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED SHARE MATTERS
In November 1999, the Company eliminated its dual class share structure by
exchanging its outstanding class A and class B shares for shares of a single
class of Common Stock. The Company's Common Stock began trading on the New York
Stock Exchange ("NYSE") under the symbol "SFI" on November 4, 1999. Prior to
November 4, 1999, the class A shares were traded on the American Stock Exchange
under the symbol "APT," and there was no established trading market for the
class B shares.
The high and low sales prices per share of Common Stock (or class A shares
for periods prior to November 4, 1999) are set forth below for the periods
indicated.
QUARTER ENDED HIGH LOW
- ------------- ---------- ------------
1999
March 31, 1999.............................................. $63 $42 1/2
June 30, 1999............................................... $66 1/2 $31 5/8
September 30, 1999.......................................... $76 $27 7/8
December 31, 1999........................................... $27 5/8 $16 11/16
2000
March 31, 2000.............................................. $18 3/4 $16 5/8
June 30, 2000............................................... $20 15/16 $17 3/8
September 30, 2000.......................................... $22 7/16 $20 1/4
December 31, 2000........................................... $21 5/8 $19 1/16
On March 15, 2001, the closing sale price of the Common Stock as reported by
the NYSE was $24.01. The Company had approximately 1,267 holders of record of
Common Stock as of March 15, 2001.
On June 12, 1998, the Frank Russell Company announced that the Company would
be included in the Russell 1000 and Russell 3000 equity indices. From the time
of the Company's inclusion in the Russell indices through the time of the
announcement that the Company had agreed to acquire TriNet, the reported stock
price of the Company was highly volatile, and its trading volume was relatively
low due to the very limited number of shares available for trading at that time.
Specifically, the Company believes that index funds that were required to mirror
the Russell indices' performance purchased a large number of shares of the
Company's Common Stock available in the public float. Those purchases, combined
with the limited availability of the shares at that time, resulted in a dramatic
increase in the "market" price for the common stock shortly after the June 12
announcement.
At December 31, 2000, the Company had four series of preferred stock
outstanding: Series A Preferred Stock (which currently pays dividends at the
rate of 9.50% per annum), 9.375% Series B Preferred Stock, 9.20% Series C
Preferred Stock and 8.00% Series D Preferred Stock. Each of the Series B, C and
D preferred stock was issued in connection with the acquisition of TriNet and is
publicly traded.
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, the Company had
repurchased approximately 2.3 million shares at an aggregate cost of
approximately $40.7 million.
DIVIDENDS
The Company's management expects that any taxable income remaining after the
distribution of preferred dividends and the regular quarterly or other dividends
on its Common Stock will be distributed
18
annually to the holders of the Common Stock on or prior to the date of the first
regular quarterly dividend payment date of the following taxable year. The
dividend policy with respect to the Common Stock is subject to revision by the
Board of Directors. All distributions in excess of dividends on preferred stock
or those required for the Company to maintain its REIT status will be made by
the Company at the sole discretion of the Board of Directors and will depend on
the taxable earnings of the Company, the financial condition of the Company, and
such other factors as the Board of Directors deems relevant. The Board of
Directors has not established any minimum distribution level. In order to
maintain its qualifications as a REIT, the Company intends to make regular
quarterly dividends to its shareholders that, on an annual basis, will represent
at least 90% of its taxable income (which may not necessarily equal net income
as calculated in accordance with generally accepted accounting principles),
determined without regard to the deduction for dividends paid and excluding any
net capital gains.
Holders of Common Stock will be entitled to receive distributions if, as and
when the Board of Directors authorizes and declares distributions. However,
rights to distributions may be subordinated to the rights of holders of
preferred stock, when preferred stock is issued and outstanding. In any
liquidation, dissolution or winding up of the Company, each outstanding share of
Common Stock will entitle its holder to a proportionate share of the assets that
remain after the Company pays its liabilities and any preferential distributions
owed to preferred shareholders.
The following table sets forth the dividends paid or declared by the Company
on its Common Stock (or class A shares for periods prior to November 4, 1999):
STOCKHOLDER DIVIDEND/
QUARTERLY PERIOD ENDED RECORD DATE SHARE
- ---------------------- ----------------- ---------
1999
March 31, 1999................................. April 15, 1999 $0.42
June 30, 1999.................................. July 15, 1999 $0.43
September 30, 1999............................. October 15, 1999 $0.44
December 31, 1999.............................. December 31, 1999 $0.57(1)
2000
March 31, 2000................................. April 14, 2000 $0.60
June 30, 2000.................................. July 17, 2000 $0.60
September 30, 2000............................. October 16, 2000 $0.60
December 31, 2000.............................. December 29, 2000 $0.60(2)
EXPLANATORY NOTES:
- ------------------------------
(1) A portion of this quarterly dividend (approximately $0.47 per share) was
treated as income to shareholders of record in 1999, and the remainder was
treated as 2000 income.
(2) A portion of this quarterly dividend (approximately $0.5976 per share) was
treated as income to stockholders of record in 2000, and the remainder will
be treated as 2001 income.
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 Company also declared
dividends aggregating $20.9 million for the Series A preferred stock, which was
outstanding for the entire year ended December 31, 1999. In addition, the
Company declared dividends of $1.2 million, $0.7 million and $2.0 million on its
Series B, C and D preferred stock, respectively, for the year ended
December 31, 1999. The amounts for the Series B, C and D preferred stock for
1999 represent only dividends for the fourth quarter of that year which were
payable by the Company as a result of its acquisition of TriNet. Further, it
declared and paid dividends aggregating $0.2 million per quarter to the holders
of class B shares in connection with the March 31, 1999, June 30, 1999 and
September 30, 1999 quarterly dividends to the holders of the class A shares. As
previously described, the former class A and class B shares were converted into
a single class of shares of Common Stock on November 4, 1999.
19
The Company 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. There are
no dividend arrearages on any of the preferred shares currently outstanding.
Distributions to shareholders will generally be taxable as ordinary income,
although a portion of such dividends may be designated by the Company as capital
gain or may constitute a tax-free return of capital. The Company annually
furnishes to each of its shareholders a statement setting forth the
distributions paid during the preceding year and their characterization as
ordinary income, capital gain or return of capital.
The Company intends to continue to declare quarterly distributions on its
Common Stock. No assurance, however, can be given as to the amounts or timing of
future distributions, as such distributions are subject to the Company's
earnings, financial condition, capital requirements and such other factors as
the Company's Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data on a consolidated
historical basis for the Company. However, prior to the recapitalization of the
Company in March 1998, discussed more fully in Note 4 to the Company's
Consolidated Financial Statements (the "Recapitalization Transactions"), the
Company did not have substantial capital resources or operations. Prior to the
Recapitalization Transactions, the Company's structured finance operations were
conducted by two investment partnerships affiliated with Starwood Capital Group,
L.L.C., which contributed substantially all their structured finance assets to
the Company in the Recapitalization Transactions in exchange for cash and shares
of the Company.
Further, on November 4, 1999, as more fully discussed in Note 4 to the
Company's Consolidated Financial Statements, the Company acquired TriNet, which
increased the size of the Company's operations, and also acquired its external
advisor. Operating results for the year ended December 31, 1999 reflect only the
effects of these transactions subsequent to their consummation.
Accordingly, the historical balance sheet information as of and prior to
December 31, 1998, as well as the results of operations for the Company for all
periods prior to and including the year ended December 31, 1999, do not reflect
the current operations of the Company as a well capitalized, internally-managed
finance company operating in the commercial real estate industry. For these
reasons, the Company believes that the information contained in the following
tables relating to the 1996 and 1997 periods is not indicative of the Company's
current business and should be read in conjunction with the discussions set
forth in Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations."
20
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Interest income......................................... $ 268,011 $ 209,848 $ 112,914 $ 896 $ 478
Operating lease income.................................. 185,956 42,186 12,378 -- --
Other income............................................ 17,855 12,763 2,804 991 10
----------- ----------- ----------- -------- --------
Total revenue....................................... 471,822 264,797 128,096 1,887 488
----------- ----------- ----------- -------- --------
Interest expense........................................ 173,891 91,184 44,697 -- 272
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 2,583 461 639
Provision for possible credit losses.................... 6,500 4,750 2,750 -- --
Stock option compensation expense(1).................... 2,864 412 5,985 -- --
Advisory fees........................................... -- 16,193 7,837 -- --
Costs incurred in acquiring external advisor(2)......... -- 94,476 -- -- --
----------- ----------- ----------- -------- --------
Total expenses...................................... 256,284 225,870 68,139 461 911
----------- ----------- ----------- -------- --------
Income (loss) before minority interest.................. 215,538 38,927 59,957 1,426 (423)
Minority interest in consolidated entities(3)........... (195) (41) (54) (1,415) (154)
Gain on sale of corporate tenant lease assets........... 2,948 -- -- -- --
Extraordinary loss on early extinguishment of debt...... (705) -- -- -- --
----------- ----------- ----------- -------- --------
Net income (loss)....................................... $ 217,586 $ 38,886 $ 59,903 $ 11 $ (577)
Preferred dividend requirements......................... (36,908) (23,843) (944) -- --
----------- ----------- ----------- -------- --------
Net income allocable to common shareholders............. $ 180,678 $ 15,043 $ 58,959 $ 11 $ (577)
=========== =========== =========== ======== ========
Basic earnings (loss) per common share(4)............... $ 2.11 $ 0.25 $ 1.40 $ 0.01 $ (1.36)
=========== =========== =========== ======== ========
Diluted earnings (loss) per common share................ $ 2.10 $ 0.25 $ 1.36 $ 0.00 $ (1.36)
=========== =========== =========== ======== ========
Dividends declared per common share(9).................. $ 2.40 $ 1.86 $ 1.14 $ 0.00 $ 0.00
=========== =========== =========== ======== ========
SUPPLEMENTAL DATA:
Dividends declared on preferred shares.................. $ 36,576 $ 24,819 $ 929 $ -- $ --
Dividends declared on common shares..................... 205,477 116,813 60,343 -- --
Adjusted earnings allocable to common shareholders(5)... 230,688 127,798 66,615 11 (577)
Adjusted earnings per common share--basic............... 2.69 2.19 1.59 0.01 (1.36)
Adjusted earnings per common share--diluted............. 2.67 2.07 1.53 0.00 (1.36)
Cash flows from:
Operating activities................................ 192,469 122,549 54,915 1,271 (227)
Investing activities................................ (176,652) (143,911) (1,271,309) (6,013) (522)
Financing activities................................ (27,473) 45,660 1,226,208 4,924 --
EBITDA.................................................. 423,943 251,120 116,778 -- --
Ratio of EBITDA to interest expense(6).................. 2.44x 1.54x 2.44x -- --
Ratio of EBITDA to combined fixed charges(7)............ 2.01x 1.22x 2.39x -- --
Weighted average common shares outstanding--basic(8).... 85,441 57,749 41,607 1,258 425
Weighted average common shares
outstanding--diluted(8)............................... 86,151 60,393 43,460 2,562 425
BALANCE SHEET DATA:
Loans and other lending investments, net................ $ 2,225,183 $ 2,003,506 $ 1,823,761 $ -- $ --
Real estate subject to operating leases, net............ 1,670,169 1,714,284 189,942 -- --
Total assets............................................ 4,034,775 3,813,552 2,059,616 13,441 5,674
Debt obligations........................................ 2,131,967 1,901,204 1,055,719 -- --
Minority interest in consolidated entities(3)........... 6,224 2,565 -- 5,175 3,917
Shareholders' equity.................................... 1,787,885 1,801,343 970,728 6,351 1,578
SUPPLEMENTAL DATA:
Total debt to shareholders' equity...................... 1.2x 1.1x 1.1x -- --
21
EXPLANATORY NOTES:
- ------------------------------
(1) Historical stock option expense represents the option value of approximately
2.5 million fully-vested options to acquire class A shares which were issued
to the Company's external advisor upon consummation of the March 18, 1998
recapitalization of the Company. A portion of those options were then
regranted to employees of the advisor subject to vesting periods which were
typically three years from the date of grant. The remainder of those options
were regranted on a fully-vested basis to an affiliate of Starwood Capital
Group L.L.C., which then further regranted those options to certain of its
employees subject to vesting restrictions.
(2) As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, this amount represents a non-recurring, non-cash charge of
approximately $94.5 million relating to the acquisition of the Company's
external advisor.
(3) Historical minority interest for the Company for fiscal 1998, 1997 and 1996
represents a minority interest in APMT Limited Partnership which was
converted into class A shares on March 18, 1998, the date the partnership
was liquidated and terminated. Minority interests in fiscal 1999 reflects
minority interests in certain of the Leasing Subsidiary's consolidated
ventures. Minority interests in fiscal 2000 also reflects minority interests
in certain of the Leasing Subsidiary's and the Parent's consolidated
ventures.
(4) Earnings per common share excludes 1% of net income allocable to the
Company's class B shares prior to November 4, 1999. The class B shares were
exchanged for Common Stock in connection with the acquisition of TriNet and
other related transactions on November 4, 1999. As a result, the Company now
has a single class of Common Stock outstanding.
(5) Adjusted earnings represent GAAP net income before depreciation and
amortization and, for the year ended December 31, 1999, exclude the
non-recurring, non-cash cost incurred in acquiring the Company's external
advisor (see Note 4 to the Company's Consolidated Financial Statements).
(6) The 1999 and 1998 EBITDA to interest expense ratios on a pro forma basis
would have been 2.83x and 2.84x, respectively (see Note 4).
(7) Combined fixed charges are comprised of interest expense, capitalized
interest, amortization of loan costs and preferred stock dividend
requirements. The 1999 and 1998 EBITDA to combined fixed charges ratios on a
pro forma basis would have been 2.23x and 2.44x, respectively.
(8) As adjusted for one-for-six reverse stock split effected by the Company on
June 19, 1998.
(9) The Company generally declares common and preferred dividends in the month
subsequent to the end of the quarter.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, on March 18, 1998, the Company completed the Recapitalization
Transactions which, among other things, substantially recapitalized the Company
and modified its investment policy. Effective June 18, 1998, the Company (which
was organized under California law) changed its domicile to Maryland by merging
with a newly-formed subsidiary organized under Maryland law, and issued new
shares of the subsidiary to the Company's shareholders in exchange for their
shares in the Company. Concurrently, the Company consummated a one-for-six
reverse stock split.
Immediately prior to the consummation of the Recapitalization Transactions,
the Company's assets primarily consisted of approximately $11.0 million in
short-term, liquid real estate investments, cash and cash equivalents.
On December 15, 1998, the Company sold $220.0 million of preferred shares
and warrants to purchase class A shares to a group of investors affiliated with
Lazard Freres. Concurrent with the sale of the preferred shares and warrants,
the Company purchased $280.3 million in real estate loans and participation
interests from a group of investors also affiliated with Lazard Freres. These
transactions are referred to collectively as the "Lazard Transaction."
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, on November 3, 1999, the Company's shareholders approved a series of
transactions including: (1) the acquisition of TriNet; (2) the acquisition of
the Company's external advisor; and (3) the reorganization of the Company from a
trust to a corporation and the exchange of the class A and class B shares for
Common Stock. Pursuant to the TriNet acquisition, TriNet merged with and into a
subsidiary of the Company, with TriNet surviving as a wholly-owned subsidiary of
the Company. In the acquisition, each share of common stock of TriNet was
converted into 1.15 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 shares
have additional voting rights not associated with the TriNet preferred stock.
The Company's Series A Preferred Stock remained outstanding with the same rights
and preferences as existed prior to the TriNet acquisition. As a consequence of
the acquisition of its external advisor, the Company is now internally-managed
and no longer pays external advisory fees.
The transactions described above and other related transactions have
materially impacted the historical operations of the Company. Accordingly, the
reported historical financial information for periods prior to these
transactions is not believed to be fully indicative of the Company's future
operating results or financial condition.
RESULTS OF OPERATIONS
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 principal
repayments of approximately $584.5 million made to the Company on its loan
investments during the year ended December 31, 2000. In addition, the increase
was in part due to higher average interest rates on the Company's 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.
23
Approximately $134.2 million of this increase is attributable to operating lease
income generated from corporate tenant lease assets acquired in the acquisition
of TriNet, 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 the Company in connection with its original
investment in the asset.
INTEREST EXPENSE--The Company's 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 the 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 by the Company on its 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 the Company's 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 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 TriNet, 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 TriNet, which were
included in operations for the entire year in fiscal 2000 as compared to only
approximately two months in 1999.
GENERAL AND ADMINISTRATIVE--The Company's 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 the Company's
operations associated with the acquisition of TriNet and the direct overhead
costs associated with the Company's former external advisor, which impacted
operations for the entire year in fiscal 2000 as compared to only approximately
two months in 1999.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's 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 the Company's
existing lending portfolio. As more fully discussed in Note 5 to the Company's
Consolidated Financial Statements, the Company has not realized any actual
losses on any of its loan investments to date. However, the Company has
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 its 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. The Company will continue to recognize quarterly
provisions until a stabilized reserve level is attained.
24
STOCK OPTION COMPENSATION EXPENSE--Stock compensation expense increased by
approximately $2.5 million as a result of charges relating to grants of stock
options to the Company's employees, including amortization of the deferred
charge related to options granted to employees of the Company's former external
advisor subsequent to such personnel becoming direct employees of the Company as
of November 4, 1999.
ADVISORY FEES--There were no advisory fees during the year ended
December 31, 2000 because, subsequent to the acquisition of the Company's
external advisor, the Company is now internally-managed. No further advisory
fees will be incurred.
COSTS INCURRED IN ACQUIRING EXTERNAL ADVISOR--As more fully discussed in
Note 4 to the Company's Consolidated Financial Statements, included in fiscal
1999 costs and expenses is a non-recurring, non-cash charge of approximately
$94.5 million relating to the aquisition of the Company's external advisor.
GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--During the year ended 2000,
the Company 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, the Company 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 the third-party debt of the joint venture of
$16.4 million. In connection with this paydown, the venture incurred certain
prepayment penalties, which resulted in an extraordinary loss to the Company 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
the Leasing Subsidiary after 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 Recapitalization Transactions, as well as
approximately $663.4 million of loans and other lending investments
newly-originated or acquired by the Company 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 the
Company 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 TriNet.
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 the Company's
loan investments.
INTEREST EXPENSE--The Company's interest expense increased by $46.5 million
as a result of higher average borrowings by the Company on its 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 the Company's variable-rate debt obligations.
Further, interest expense includes interest incurred by the Leasing Subsidiary
subsequent to its acquisition.
OPERATING COSTS-CORPORATE TENANT LEASE ASSETS--Such operating costs
represent unreimbursed operating expenses incurred by the Leasing Subsidiary
subsequent to its acquisition.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased as a
result of a full year's depreciation on the Company's pre-existing corporate
tenant leasing portfolio, as well as depreciation on the Leasing Subsidiary's
net leased assets subsequent to its acquisition.
25
GENERAL AND ADMINISTRATIVE--General and administrative costs increased by
approximately $3.7 million as a result of additional costs incurred subsequent
to the acquisition of the Company's external advisor, as well as additional
administrative expenses associated with the Leasing Subsidiary subsequent to its
acquisition.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's 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 the Company's
existing lending portfolio. As more fully discussed in Note 5 to the Company's
Consolidated Financial Statements, the Company has not realized any actual
losses on any of its loan investments to date. However, the Company has
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 its 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. The Company will continue to recognize quarterly
provisions until a stabilized reserve level is attained.
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 the Company's external
advisor in fiscal 1998 concurrently with the consummation of the
Recapitalization Transactions.
ADVISORY FEES--Base advisory fees increased by approximately $5.3 million as
a result of fees being incurred from June 16, 1999 through year end in the prior
year and through November 4, 1999 in fiscal 1999. Further, as a result of the
Company's expanded operations, incentive fees paid under the prior advisory
contract increased from $2.3 million in 1998 to $5.4 million in 1999. Subsequent
to the acquisition of the Company's external advisor, the Company is now
internally-managed and no further advisory fees will be incurred.
COSTS INCURRED IN ACQUIRING EXTERNAL ADVISOR--Finally, as more fully
discussed in Note 4 to the Company's Consolidated Financial Statements, included
in fiscal 1999 costs and expenses is a non-recurring, non-cash charge of
approximately $94.5 million relating to the acquisition of the Company's
external advisor.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to fund its investment activities and operating
expenses. The Company has significant access to capital resources to fund its
existing business plan, which includes the expansion of its real estate lending
and corporate tenant leasing businesses. The Company's capital sources include
cash flow from operations, borrowings under lines of credit, additional term
borrowings, long-term financing secured by the Company's assets, unsecured
financing and the issuance of common, convertible and /or preferred equity
securities. Further, the Company may acquire other businesses or assets using
its capital stock, cash or a combination thereof.
The distribution requirements under the REIT provisions of the Code limit
the Company's ability to retain earnings and thereby replenish capital committed
to its operations. However, the Company believes that its significant capital
resources and access to financing will provide it with financial flexibility and
market responsiveness at levels sufficient to meet current and anticipated
capital requirements, including expected new lending and leasing transactions.
The Company's ability to meet its long-term (i.e., beyond one year)
liquidity requirements is subject to the renewal of its credit lines and /or
obtaining other sources of financing, including issuing additional debt or
equity from time to time. Any decision by the Company's lenders and investors to
enter into such transactions with the Company will depend upon a number of
factors, such as compliance with the terms of its existing credit arrangements,
the Company's 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.
26
Based on its monthly interest and other expenses, monthly cash receipts,
existing investment commitments and funding plans, the Company believes that its
existing sources of funds will be adequate for purposes of meeting its short-
and long-term liquidity needs. Material increases in monthly interest expense or
material decreases in monthly cash receipts would negatively impact the
Company's liquidity. On the other hand, material decreases in monthly interest
expense would positively affect the Company's liquidity.
As more fully discussed in Note 7 to the Company's Consolidated Financial
Statements, at December 31, 2000, the Company had existing fixed-rate borrowings
of approximately $150.7 million secured by real estate under operating leases
which mature in 2009, an aggregate of approximately $162.1 million in
LIBOR-based, variable-rate loans secured by various senior and subordinate
mortgage investments and real estate under operating leases which mature between
fiscal 2001 and 2003, fixed-rate corporate debt obligations aggregating
approximately $356.5 million which mature between 2001 and 2017, and other
variable- and fixed-rate secured debt obligations aggregating approximately
$108.6 million which mature at various dates through 2010.
In addition, the Company has entered into LIBOR-based secured revolving
credit facilities of $700.0 and $500.0 million which expire in fiscal 2005 and
2002, respectively. As of December 31, 2000, the Company had drawn approximately
$284.4 million and $308.0 million under these facilities, respectively.
Availability under these facilities is based on collateral provided under a
borrowing base calculation. The Company also has two unsecured credit facilities
totaling $450.0 million. The $100.0 million facility had no outstanding balance
as of December 31, 2000, matures in January 2002 and bears interest at LIBOR
plus 2.25%. In addition, the Leasing Subsidiary's $350.0 million unsecured
credit facility had a balance of $173.5 million as of December 31, 2000, matures
on May 31, 2001 with a one-year extension period at the Company's option and
bears interest at LIBOR plus 1.55%. Under the terms of the this facility, the
Leasing Subsidiary is generally permitted to make cash distributions to the
Company in an amount equal to 85% of cash flow from operations in any rolling
four-quarter period. Subsequent to year end, the Company extended the term of
this facility to May 2002.
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 acquisition of
TriNet, 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
June 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, the net fair value of the Company's interest rate
caps was approximately $0.4 million.
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 acquisition of TriNet, 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
27
notional amount of approximately $112.0 million matured. At December 31, 2000,
the fair value (liability) of the Company's interest rate swaps was ($7.7)
million.
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 the 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 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 and included in other
income in the consolidated statement of operations for the year ended
December 31, 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 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 costs of the new term
loan over its effective ten-year term.
On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, 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. 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 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 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.
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.
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, the Company had repurchased approximately 2.3 million shares at an
aggregate cost of approximately $40.7 million.
28
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 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.
The Company believes that to facilitate a clear understanding of the
historical operating results of the Company, adjusted earnings should be
examined in conjunction with net income as shown in the Consolidated Statements
of Operations. Adjusted earnings should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indicator of the Company's
performance, or to cash flows from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs.
FOR THE
YEAR ENDED
DECEMBER 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
Adjusted earnings:
Net income................................................ $217,586 $ 38,886
Add: Depreciation......................................... 34,514 11,016
Add: Joint venture depreciation........................... 3,662 365
Add: Amortization......................................... 13,140 6,121
Add: Costs incurred in acquiring external advisor......... -- 94,476
Less: Preferred dividends................................. (36,908) (23,843)
Less: Net income allocable to class B shares(1)........... -- (826)
Less: Gain on sale of corporate tenant lease assets....... (2,948) --
Add: Extraordinary loss--early extinguishment of debt..... 705 --
-------- --------
Adjusted earnings allocable to common shareholders:
Basic..................................................... $229,751 $126,195
======== ========
Diluted................................................... $230,688 $127,798
======== ========
Adjusted earnings per common share:
Basic..................................................... $ 2.69 $ 2.19
======== ========
Diluted................................................... $ 2.67 $ 2.07
======== ========
EXPLANATORY NOTE:
- ------------------------
(1) For the year ended December 31, 1999, net income allocable to class B shares
represents 1% of net income allocable to the Company's class B shares. On
November 4, 1999, the class B shares were exchanged for common shares in
connection with the Company's acquisition of TriNet and related
transactions. As a result, the Company now has a single class of common
shares outstanding.
29
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 Hedging Activities-an Amendment of FASB No. 133," 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 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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. In
pursuing its business plan, the primary market risk to which the Company is
exposed is interest rate risk. Consistent with its liability management
objectives, the Company has implemented an interest rate risk management policy
based on match funding, with the objective that floating-rate assets be
primarily financed by floating-rate liabilities and fixed-rate assets be
primarily financed by fixed-rate liabilities.
The Company's operating results will depend in part on the difference
between the interest and related income earned on its assets and the interest
expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of real estate financing may lead to a decrease
in the interest rate earned on the Company's interest-bearing assets, which the
Company may not be able to offset by obtaining lower interest costs on its
borrowings. Changes in the general level of interest rates prevailing in the
financial markets may affect the spread between the Company's interest-earning
assets and interest-bearing liabilities. Any significant compression of the
spreads between interest-earning assets
30
and interest-bearing liabilities could have a material adverse effect on the
Company. In addition, an increase in interest rates could, among other things,
reduce the value of the Company's interest-bearing assets and its ability to
realize gains from the sale of such assets, and a decrease in interest rates
could reduce the average life of the Company's interest-earning assets.
A substantial portion of the Company's loan investments are subject to
significant prepayment protection in the form of lock-outs, yield maintenance
provisions or other prepayment premiums which provide substantial yield
protection to the Company. Those assets generally not subject to prepayment
penalties include: (1) variable-rate loans based on LIBOR, originated or
acquired at par, which would not result in any gain or loss upon repayment; and
(2) discount loans and loan participations acquired at discounts to face values,
which would result in gains upon repayment. Further, while the Company generally
seeks to enter into loan investments which provide for substantial prepayment
protection, in the event of declining interest rates, the Company could receive
such prepayments and may not be able to reinvest such proceeds at favorable
returns. Such prepayments could have an adverse effect on the spreads between
interest-earning assets and interest-bearing liabilities.
While the Company has not experienced any significant credit losses, in the
event of a significant rising interest rate environment and/or economic
downturn, defaults could increase and result in credit losses to the Company
which adversely affect its liquidity and operating results. Further, such
delinquencies or defaults could have an adverse effect on the spreads between
interest-earning assets and interest-bearing liabilities.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
conditions, and other factors beyond the control of the Company. As more fully
discussed in Note 9 to the Company's Consolidated Financial Statements, the
Company employs match funding-based hedging strategies to limit the effects of
changes in interest rates on its operations, including engaging in interest rate
caps, floors, swaps, futures and other interest rate-related derivative
contracts. These strategies are specifically designed to reduce the Company's
exposure, on specific transactions or on a portfolio basis, to changes in cash
flows as a result of interest rate movements in the market. The Company does not
enter into derivative contracts for speculative purposes nor as a hedge against
changes in credit risk of its borrowers or of the Company itself.
Each interest rate cap or floor agreement is a legal contract between the
Company and a third party (the "counterparty"). When the Company purchases a cap
or floor contract, the Company makes an up-front payment to the counterparty and
the counterparty agrees to make payments to the Company in the future should the
reference rate (typically one- or three-month LIBOR) rise above (cap agreements)
or fall below (floor agreements) the "strike" rate specified in the contract.
Each contract has a notional face amount. Should the reference rate rise above
the contractual strike rate in a cap, the Company will earn cap income. Should
the reference rate fall below the contractual strike rate in a floor, the
Company will earn floor income. Payments on an annualized basis will equal the
contractual notional face amount multiplied by the difference between the actual
reference rate and the contracted strike rate. The cost of the up-front payment
is amortized over the term of the contract.
Interest rate swaps are agreements in which a series of interest rate flows
are exchanged over a prescribed period. The notional amount on which swaps are
based is not exchanged. In general, the Company's swaps are "pay fixed" swaps
involving the exchange of floating-rate interest payments from the counterparty
for fixed interest payments from the Company.
Interest rate futures are contracts, generally settled in cash, in which the
seller agrees to deliver on a specified future date the cash equivalent of the
difference between the specified price or yield indicated in the contract and
the value of that of the specified instrument (e.g., U.S. Treasury securities)
upon settlement. The Company generally uses such instruments to hedge forecasted
fixed-rate borrowings. Under these agreements, the Company will generally
receive additional cash flow at settlement if interest rates rise and pay cash
if interest rates fall. The effects of such receipts or payments will be
deferred and
31
amortized over the term of the specific related fixed-rate borrowings. In the
event that, in the opinion of management, it is no longer probable that a
forecasted transaction will occur under terms substantially equivalent to those
projected, the Company will cease recognizing such transactions as hedges and
immediately recognize related gains or losses based on actual settlement or
estimated settlement value.
While a REIT may freely utilize the types of derivative instruments
discussed above to hedge interest rate risk on its liabilities, the use of
derivatives for other purposes, including hedging asset-related risks such as
credit, prepayment or interest rate exposure on the Company's loan assets, could
generate income which is not qualified income for purposes of maintaining REIT
status. As a consequence, the Company may only engage in such instruments to
hedge such risks on a limited basis.
There can be no assurance that the Company's profitability will not be
adversely affected during any period as a result of changing interest rates. In
addition, hedging transactions using derivative instruments involve certain
additional risks such as counterparty credit risk, legal enforceability of
hedging contracts and the risk that unanticipated and significant changes in
interest rates will cause a significant loss of basis in the contract. With
regard to loss of basis in a hedging contract, indices upon which contracts are
based may be more or less variable than the indices upon which the hedged assets
or liabilities are based, thereby making the hedge less effective. The
counterparties to these contractual arrangements are major financial
institutions with which 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. There can be no assurance
that the Company will be able to adequately protect against the foregoing risks
and that the Company will ultimately realize an economic benefit from any
hedging contract it enters into which exceeds the related costs incurred in
connection with engaging in such hedges.
The following table quantifies the potential changes in net investment
income and net fair value of financial instruments should interest rates
increase or decrease 200 basis points, assuming no change in the shape of the
yield curve (i.e., relative interest rates). Net investment income is calculated
as revenue from loans and other lending investments and operating leases (as of
December 31, 2000), less related interest expense and operating costs on
corporate tenant lease assets, for the year ended December 31, 2000. Net fair
value of financial instruments is calculated as the sum of the value of
off-balance sheet instruments and the present value of cash in-flows generated
from interest-earning assets, less cash out-flows in respect of interest-bearing
liabilities as of December 31, 2000. The cash flows associated with the
Company's assets are calculated based on management's best estimate of expected
payments for each loan based on loan characteristics such as loan-to-value
ratio, interest rate, credit history, prepayment penalty, term and collateral
type. Most of the Company's loans are protected from prepayment as a result of
prepayment penalties and contractual terms which prohibit prepayments during
specified periods. However, for those loans where prepayments are not currently
precluded by contract, declines in interest rates may increase prepayment
speeds. The base interest rate scenario assumes interest rates as of
December 31, 2000. Actual results could differ significantly from those
estimated in the table.
ESTIMATED PERCENTAGE CHANGE IN
NET INVESTMENT NET FAIR VALUE OF
CHANGE IN INTEREST RATES INCOME FINANCIAL INSTRUMENTS (1)
- ------------------------ -------------- -------------------------
- -200 Basis Points............ 1.40% 40.62%
- -100 Basis Points............ 0.70% 19.64%
Base Interest Rate........... 0.00% 0.00%
+100 Basis Points............ (0.66)% (18.34)%
+200 Basis Points............ (0.45)% (35.20)%
EXPLANATORY NOTE:
- ------------------------------
(1) Amounts exclude fair values of non-financial investments, primarily assets
under long-term operating leases and certain forms of corporate finance
investments.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Financial Statements
PAGE
--------
Financial Statements:
Report of Independent Accountants......................... 34
Consolidated Balance Sheets at December 31, 2000 and
1999.................................................... 35
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 2000....... 36
Consolidated Statement of Changes in Shareholders' Equity
for each of the three years in the period ended December
31, 2000................................................ 37
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2000....... 38
Notes to Consolidated Financial Statements................ 39
Financial Statement Schedules:
For the period ended December 31, 2000:
Schedule II--Valuation and Qualifying Accounts and
Reserves................................................ 69
Schedule III--Real Estate and Accumulated Depreciation.... 70
Schedule IV--Mortgage Loans on Real Estate................ 83
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
Financial statements of seven owned companies or joint ventures accounted
for under the equity method have been omitted because the Company's
proportionate share of the income from continuing operations before income taxes
is less than 20% of the respective consolidated amount and the investments in
and advances to each company are less than 20% of consolidated total assets.
33
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
34
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.
35
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE 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.
36
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
PREFERRED PREFERRED PREFERRED PREFERRED STOCK --------------------
STOCK STOCK STOCK STOCK AT PAR CLASS A CLASS B
--------- --------- --------- --------- -------- --------- --------
Balance at January 1, 1998............. $ -- $ -- $ -- $ -- $ -- $ 7,550 $ 38
Recapitalization Transactions.......... -- -- -- -- -- 306,796 1,534
Issuance of options to Advisor......... -- -- -- -- -- -- --
Effects of reorganization(1)........... -- -- -- -- -- (261,956) (1,310)
Exercise of options.................... -- -- -- -- -- 18 --
Issuance of preferred shares and
warrants............................. 44 -- -- -- -- -- --
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
Exercise of options.................... -- -- -- -- -- 63 --
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 $ -- $ --
Exercise of options.................... -- -- -- -- -- -- --
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 $ -- $ --
==== ==== ==== ==== ==== ========= =======
EXPLANATORY NOTE:
ACCUMULATED
WARRANTS ADDITIONAL RETAINED OTHER
AND PAID-IN EARNINGS COMPREHENSIVE TREASURY
OPTIONS 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 -- -- -- -- 5,985
Effects of reorganization(1)........... -- 262,786 -- -- -- (480)
Exercise of options.................... (270) 537 -- -- -- 285
Issuance of preferred shares and
warrants............................. 13,189 206,170 -- -- -- 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*.......... $ 18,904 $ 901,592 $ (2,459) $ (23) $ -- $ 970,728
Exercise of options.................... (969) 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........... $ 17,935 $1,953,972 $(129,992) $(229) $(40,439) $1,801,343
Exercise of options.................... (992) 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........... $ 16,943 $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.
37
ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE 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.
38
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,
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.
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.
39
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
40
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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)
===========
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.
41
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
42
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
43
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
44
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
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 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
45
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
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.
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.
46
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.
47
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,
BORROWERS COMMITMENT BALANCES -----------------------
TYPE OF INVESTMENT UNDERLYING PROPERTY TYPE(1) IN CLASS(1) AMOUNT(1) OUTSTANDING(1) 2000 1999
- --------------------------- --------------------------- ----------- ------------ -------------- ---------- ----------
Senior Mortgages(5) Office/Hotel/Mixed Use/ 21 $1,337,717 $1,232,307 $1,210,992 $1,039,052
Apartment/Retail/Resort
Subordinated Mortgages Office/Hotel/Mixed Use 13 372,136 340,088 325,558 464,105
Corporate Loans/Partnership Office/Hotel/Residential/ 14 413,946 401,795 398,978 309,768
Loans/Unsecured Notes Apartment
Loan Participations Office/Retail 3 127,497 111,388 111,251 128,105
Other Lending Investments Resort/Office/Mixed Use/ N/A N/A N/A 192,404 69,976
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/Partnership 2001 to 2008 Fixed: 6.13% to 14.50% Fixed: 6.13% to 17.50% Yes Yes (3)
Loans/Unsecured Notes Variable: LIBOR + 2.78% Variable: LIBOR + 2.78%
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 Investments 2002 and 2013 Fixed: 6.75% to 12.75% Fixed: 6.75% to 12.75% No No
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.
48
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.
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
========== ==========
49
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
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 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,
50
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
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.
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.
51
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 investment.... -- 90,902 LIBOR + 1.00% August 2000 (4)
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 investment.... -- 54,000 LIBOR+ 1.75% (8) November 2000
---------- ----------
Total term loans......................... 349,009 559,807
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 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).
52
(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.
53
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 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
54
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS (CONTINUED)
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 NOTES:
- ------------------------------
(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.
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
55
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--SHAREHOLDERS' EQUITY (CONTINUED)
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 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.
56
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 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
57
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
58
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
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 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. Such options were converted
into options to purchase shares of Common Stock on substantially the same terms,
as adjusted for the merger exchange ratio.
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.
59
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
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).
60
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 1,992,668 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 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
61
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
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.
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
62
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EARNINGS PER SHARE (CONTINUED)
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 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
63
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--DIVIDENDS (CONTINUED)
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.
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.
64
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
65
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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).
66
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 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. 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.
(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.
67
ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 NOTES:
- ------------------------------
(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.
68
ISTAR FINANCIAL INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGES TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
FOR THE YEAR ENDED DECEMBER 31, 1998
Provision for possible credit losses
(1)................................... $ -- $2,750 $ -- $ -- $ 2,750
FOR THE YEAR ENDED DECEMBER 31, 1999
Provision for possible credit losses
(1)................................... $2,750 $4,750 $ -- $ -- $ 7,500
FOR THE YEAR ENDED DECEMBER 31, 2000
Provision for possible credit losses
(1)................................... $7,500 $6,500 $ -- $ -- $14,000
EXPLANATORY NOTE:
- ------------------------------
(1) See Note 5 to the Company's 2000 Consolidated Financial Statements.
69
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
UNISYS CENTRAL TRAINING CENTER
1 2611 Corporate West Drive
Lisle, IL $ 5,805 $ 6,153 $ 14,993 $ -- $ 6,153 $ 14,993 $ 21,146
REX STORES CORPORATION
2 2875 Needmore Road
Dayton, OH 1,890 873 4,614 -- 873 4,614 5,487
THE STANDARD REGISTER COMPANY
3 4000 South Racine Avenue
Chicago, IL -- 409 2,893 -- 409 2,893 3,302
RALPHS GROCERY COMPANY
4 2652 East Long Beach Avenue
Los Angeles, CA -- 9,334 12,501 -- 9,334 12,501 21,835
UNIVERSAL TECHNICAL INSTITUTE
5-6 3002 North 27th Avenue
Phoenix, AZ -- 1,000 1,997 -- 1,000 1,997 2,997
CATERAIR INTERNATIONAL CORPORATION
7 50 Adrian Court
Burlingame, CA -- 1,219 3,470 -- 1,219 3,470 4,689
8 370 Adrian Road
Millbrae, CA -- 741 2,107 -- 741 2,107 2,848
9 3500 N.W. 24th Street
Miami, FL -- 3,048 8,676 -- 3,048 8,676 11,724
10 3630 N.W. 25th Street
Miami, FL -- 1,612 4,586 -- 1,612 4,586 6,198
11 4101 N.W. 25th Street
Miami, FL -- 1,393 3,967 -- 1,393 3,967 5,360
12 221 West 79th Street
Bloomington, MN -- 403 1,147 -- 403 1,147 1,550
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
UNISYS CENTRAL TRAINING CENTER
1 2611 Corporate West Drive
Lisle, IL $ (437) 1999 40.0
REX STORES CORPORATION
2 2875 Needmore Road
Dayton, OH (135) 1999 40.0
THE STANDARD REGISTER COMPANY
3 4000 South Racine Avenue
Chicago, IL (84) 1999 40.0
RALPHS GROCERY COMPANY
4 2652 East Long Beach Avenue
Los Angeles, CA (365) 1999 40.0
UNIVERSAL TECHNICAL INSTITUTE
5-6 3002 North 27th Avenue
Phoenix, AZ (58) 1999 40.0
CATERAIR INTERNATIONAL CORPORATION
7 50 Adrian Court
Burlingame, CA (101) 1999 40.0
8 370 Adrian Road
Millbrae, CA (61) 1999 40.0
9 3500 N.W. 24th Street
Miami, FL (253) 1999 40.0
10 3630 N.W. 25th Street
Miami, FL (134) 1999 40.0
11 4101 N.W. 25th Street
Miami, FL (116) 1999 40.0
12 221 West 79th Street
Bloomington, MN (33) 1999 40.0
70
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
13 1085 Bible Way
Reno, NV -- 248 707 -- 248 707 955
14 18850 28th Avenue, South
Seattle, WA -- 828 2,355 -- 828 2,355 3,183
15 2800 Collingswood Drive
Orlando, FL -- 1,476 4,198 -- 1,476 4,198 5,674
16 45-10 19th Avenue
Astoria, NY -- 1,796 5,109 -- 1,796 5,109 6,905
17 24-20 49th Street
Astoria, NY -- 897 2,555 -- 897 2,555 3,452
18 8401 Escort Street
Philadelphia, PA -- 619 1,765 -- 619 1,765 2,384
SEARS LOGISTICS SERVICES
19 4150 Lockbourne Industrial
Parkway
Columbus, OH 2,390 375 7,191 -- 375 7,191 7,566
NORTHERN STATES POWER COMPANY
20 3115 Centre Point Drive
Roseville, MN 1,205 1,113 4,452 -- 1,113 4,452 5,565
PNC MORTGAGE CORPORATION OF
AMERICA, INC.
21 440 North Fairway Drive
Vernon Hills, IL -- 1,400 12,597 -- 1,400 12,597 13,997
VOLKSWAGEN OF AMERICA, INC.
22 450 Barclay Boulevard
Lincolnshire, IL 2,896 3,192 7,508 -- 3,192 7,508 10,700
23 500 South Seventh Avenue
City of Industry, CA 2,258 5,002 11,766 -- 5,002 11,766 16,768
24 11650 Central Parkway
Jacksonville, FL 1,621 2,310 5,435 -- 2,310 5,435 7,745
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
13 1085 Bible Way
Reno, NV (21) 1999 40.0
14 18850 28th Avenue, South
Seattle, WA (69) 1999 40.0
15 2800 Collingswood Drive
Orlando, FL (122) 1999 40.0
16 45-10 19th Avenue
Astoria, NY (149) 1999 40.0
17 24-20 49th Street
Astoria, NY (75) 1999 40.0
18 8401 Escort Street
Philadelphia, PA (51) 1999 40.0
SEARS LOGISTICS SERVICES
19 4150 Lockbourne Industrial
Parkway
Columbus, OH (210) 1999 40.0
NORTHERN STATES POWER COMPANY
20 3115 Centre Point Drive
Roseville, MN (130) 1999 40.0
PNC MORTGAGE CORPORATION OF
AMERICA, INC.
21 440 North Fairway Drive
Vernon Hills, IL (367) 1999 40.0
VOLKSWAGEN OF AMERICA, INC.
22 450 Barclay Boulevard
Lincolnshire, IL (219) 1999 40.0
23 500 South Seventh Avenue
City of Industry, CA (343) 1999 40.0
24 11650 Central Parkway
Jacksonville, FL (159) 1999 40.0
71
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
LAND O LAKES
25 1275 Red Fox Road
Arden Hills, MN 1,557 719 6,541 -- 719 6,541 7,260
MICROSOFT CORPORATION
26 1321 Greenway
Irving, TX 1,248 1,804 5,815 131 1,804 5,946 7,750
UNIVERSAL CARD SERVICES
27 7595 Oak Grove Plaza
Jacksonville, FL 2,040 1,384 3,911 -- 1,384 3,911 5,295
VACANT
28 7585 Oak Grove Plaza
Jacksonville, FL 1,055 877 2,237 39 877 2,276 3,153
UNISON INDUSTRIES, L.P.
29 7575 Oak Grove Plaza
Jacksonville, FL 3,465 2,366 6,072 -- 2,366 6,072 8,438
NIKE DISTRIBUTION WAREHOUSE
30 8400 Winchester Road
Memphis, TN 5,316 1,486 23,279 -- 1,486 23,279 24,765
CIRRUS LOGIC, INC.
31 46702 Bayside Parkway
Fremont, CA 1,046 654 4,591 -- 654 4,591 5,245
32 46831 Lakeview Blvd.
Fremont, CA -- 1,086 7,964 -- 1,086 7,964 9,050
UNIFIED WESTERN GROCERS
33 5200 Sheila Street
Commerce, CA 2,504 3,454 12,915 -- 3,454 12,915 16,369
FIRST HEALTH STRATEGIES, INC.
34-37 Decker Lake Lane Center
Salt Lake City, UT -- 1,179 12,861 -- 1,179 12,861 14,040
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
LAND O LAKES
25 1275 Red Fox Road
Arden Hills, MN (191) 1999 40.0
MICROSOFT CORPORATION
26 1321 Greenway
Irving, TX (171) 1999 40.0
UNIVERSAL CARD SERVICES
27 7595 Oak Grove Plaza
Jacksonville, FL (113) 1999 40.0
VACANT
28 7585 Oak Grove Plaza
Jacksonville, FL (66) 1999 40.0
UNISON INDUSTRIES, L.P.
29 7575 Oak Grove Plaza
Jacksonville, FL (177) 1999 40.0
NIKE DISTRIBUTION WAREHOUSE
30 8400 Winchester Road
Memphis, TN (679) 1999 40.0
CIRRUS LOGIC, INC.
31 46702 Bayside Parkway
Fremont, CA (134) 1999 40.0
32 46831 Lakeview Blvd.
Fremont, CA (232) 1999 40.0
UNIFIED WESTERN GROCERS
33 5200 Sheila Street
Commerce, CA (377) 1999 40.0
FIRST HEALTH STRATEGIES, INC.
34-37 Decker Lake Lane Center
Salt Lake City, UT (375) 1999 40.0
72
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
TRW SPACE AND ELECTRONICS GROUP
38 3701 Doolittle Drive
Redondo Beach, CA -- 2,598 9,212 -- 2,598 9,212 11,810
DUNHAM'S ATHLEISURE CORPORATION
39 2201 E. Loew Road
Marion, IN -- 131 4,254 -- 131 4,254 4,385
ACOSTA SALES & MARKETING CO.
40 6300 Dumbarton Circle
Fremont, CA -- 880 4,846 -- 880 4,846 5,726
INTERNATIONAL FOOD SOLUTION
41 5015 South Water Circle
Wichita, KS -- 213 3,189 -- 213 3,189 3,402
TECH DATA CORPORATION
42 3900 William Richardson Drive
South Bend, IN -- 140 4,640 -- 140 4,640 4,780
PRIMERICA LIFE INSURANCE COMPANY
43-44 3120 Breckinridge
Boulevard
Duluth, GA -- 1,655 14,484 38 1,655 14,522 16,177
LUCENT TECHNOLOGIES
45 Capstone Building
Aurora, CO -- 453 3,060 49 453 3,109 3,562
KOCH MEMBRANE SYSTEMS
46 10054 Old Grove Road
San Diego, CA -- 1,530 3,060 -- 1,530 3,060 4,590
NISSAN MOTOR ACCEPTANCE
CORPORATION
47 2901 Kinwest Parkway
Irving, TX -- 1,363 10,628 -- 1,363 10,628 11,991
LEVER BROTHERS COMPANY
48 3501 E. Terra Drive
O'Fallon, MO -- 1,388 12,700 -- 1,388 12,700 14,088
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
TRW SPACE AND ELECTRONICS GROUP
38 3701 Doolittle Drive
Redondo Beach, CA (269) 1999 40.0
DUNHAM'S ATHLEISURE CORPORATION
39 2201 E. Loew Road
Marion, IN (124) 1999 40.0
ACOSTA SALES & MARKETING CO.
40 6300 Dumbarton Circle
Fremont, CA (141) 1999 40.0
INTERNATIONAL FOOD SOLUTION
41 5015 South Water Circle
Wichita, KS (93) 1999 40.0
TECH DATA CORPORATION
42 3900 William Richardson Drive
South Bend, IN (135) 1999 40.0
PRIMERICA LIFE INSURANCE COMPANY
43-44 3120 Breckinridge
Boulevard
Duluth, GA (424) 1999 40.0
LUCENT TECHNOLOGIES
45 Capstone Building
Aurora, CO (91) 1999 40.0
KOCH MEMBRANE SYSTEMS
46 10054 Old Grove Road
San Diego, CA (89) 1999 40.0
NISSAN MOTOR ACCEPTANCE
CORPORATION
47 2901 Kinwest Parkway
Irving, TX (310) 1999 40.0
LEVER BROTHERS COMPANY
48 3501 E. Terra Drive
O'Fallon, MO (370) 1999 40.0
73
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
FEDERAL EXPRESS CORPORATION
49-51 NonConnah Corporate Center
Memphis, TN -- 2,702 25,129 -- 2,702 25,129 27,831
VACANT
52 500 Airline Drive
Coppell, TX -- 1,664 12,471 33 1,664 12,504 14,168
FRESENIUS USA, INC.
53 2637 Shadelands Drive
Walnut Creek, CA -- 808 8,306 -- 808 8,306 9,114
TERADYNE, INC.
54 2625 Shadelands Drive
Walnut Creek, CA -- 571 5,874 -- 571 5,874 6,445
LAM RESEARCH CORPORATION
55 1210 California Circle
Milpitas, CA -- 4,095 8,323 -- 4,095 8,323 12,418
BLUE CROSS & BLUE SHIELD UNITED OF
WISCONSIN
56 401 West Michigan Street
Milwaukee, WI -- 1,875 13,914 -- 1,875 13,914 15,789
NORTHERN TELECOM INC.
57 2021 Lakeside Boulevard
Richardson, TX -- 1,230 5,660 8 1,230 5,668 6,898
adidas AMERICA, INC.
58 5675 North Blackstock Road
Spartanburg, SC -- 943 16,836 -- 943 16,836 17,779
GLOBAL CROSSING
59 12110 North Pecos Street
Westminster, CO -- 307 3,524 -- 307 3,524 3,831
RATIONAL SOFTWARE
60 18880 Homestead Road
Cupertino, CA -- 7,994 19,037 -- 7,994 19,037 27,031
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
FEDERAL EXPRESS CORPORATION
49-51 NonConnah Corporate Center
Memphis, TN (733) 1999 40.0
VACANT
52 500 Airline Drive
Coppell, TX (364) 1999 40.0
FRESENIUS USA, INC.
53 2637 Shadelands Drive
Walnut Creek, CA (242) 1999 40.0
TERADYNE, INC.
54 2625 Shadelands Drive
Walnut Creek, CA (171) 1999 40.0
LAM RESEARCH CORPORATION
55 1210 California Circle
Milpitas, CA (243) 1999 40.0
BLUE CROSS & BLUE SHIELD UNITED OF
WISCONSIN
56 401 West Michigan Street
Milwaukee, WI (406) 1999 40.0
NORTHERN TELECOM INC.
57 2021 Lakeside Boulevard
Richardson, TX (165) 1999 40.0
adidas AMERICA, INC.
58 5675 North Blackstock Road
Spartanburg, SC (491) 1999 40.0
GLOBAL CROSSING
59 12110 North Pecos Street
Westminster, CO (103) 1999 40.0
RATIONAL SOFTWARE
60 18880 Homestead Road
Cupertino, CA (555) 1999 40.0
74
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
GALILEO INTERNATIONAL PARTNERSHIP
61 6901 S. Havana Street
Englewood, CO -- 2,967 15,008 -- 2,967 15,008 17,975
AVAYA INC.
62 6162 S. Willow Drive
Englewood, CO -- 1,757 16,930 5 1,757 16,935 18,692
INTERNATIONAL BUSINESS MACHINES
CORP.
63 13800 Diplomat Drive
Farmers Branch, TX -- 1,314 8,903 -- 1,314 8,903 10,217
RIVEREDGE SUMMIT
64 1500-1600 RiverEdge Parkway
Atlanta, GA -- 5,709 49,091 3,657 5,709 52,748 58,457
NORTHERN TELECOM INC.
65 Cardinal Commerce Center
Richardson, TX -- 858 8,556 -- 858 8,556 9,414
CANYON CORPORATE CENTER
66 5515 East La Palma Avenue
Anaheim, CA -- 3,512 13,379 46 3,512 13,425 16,937
67 5601 East La Palma Avenue
Anaheim, CA -- 2,227 8,519 -- 2,227 8,519 10,746
68 5605 East La Palma Avenue
Anaheim, CA -- 622 2,346 155 622 2,501 3,123
SUNBELT BEVERAGE CORP.
69 7621 Energy Parkway
Baltimore, MD -- 1,535 9,324 4 1,535 9,328 10,863
GLOBAL CROSSING
70 1499 West 121st. Street
Westminister, CO -- 616 7,291 -- 616 7,291 7,907
CHARLESTON PLACE
71 1545 Charleston Road
Mountain View, CA -- 5,798 12,720 -- 5,798 12,720 18,518
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
GALILEO INTERNATIONAL PARTNERSHIP
61 6901 S. Havana Street
Englewood, CO (438) 1999 40.0
AVAYA INC.
62 6162 S. Willow Drive
Englewood, CO (494) 1999 40.0
INTERNATIONAL BUSINESS MACHINES
CORP.
63 13800 Diplomat Drive
Farmers Branch, TX (260) 1999 40.0
RIVEREDGE SUMMIT
64 1500-1600 RiverEdge Parkway
Atlanta, GA (1,516) 1999 40.0
NORTHERN TELECOM INC.
65 Cardinal Commerce Center
Richardson, TX (250) 1999 40.0
CANYON CORPORATE CENTER
66 5515 East La Palma Avenue
Anaheim, CA (392) 1999 40.0
67 5601 East La Palma Avenue
Anaheim, CA (248) 1999 40.0
68 5605 East La Palma Avenue
Anaheim, CA (69) 1999 40.0
SUNBELT BEVERAGE CORP.
69 7621 Energy Parkway
Baltimore, MD (272) 1999 40.0
GLOBAL CROSSING
70 1499 West 121st. Street
Westminister, CO (213) 1999 40.0
CHARLESTON PLACE
71 1545 Charleston Road
Mountain View, CA (371) 1999 40.0
75
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
72 1565-1585 Charleston Road
Mountain View, CA -- 12,834 28,158 -- 12,834 28,158 40,992
BAY STATE GAS
73 300 Friberg Parkway
Westborough, MA -- 1,651 10,758 -- 1,651 10,758 12,409
WARNER CROSSING
74 1120 West Warner Road
Tempe, AZ -- 701 4,339 -- 701 4,339 5,040
75 1130 West Warner Road
Tempe, AZ -- 1,033 6,652 -- 1,033 6,652 7,685
76 1140 West Warner Road
Tempe, AZ -- 1,033 6,652 -- 1,033 6,652 7,685
77 8440 South Hardy Drive
Tempe, AZ -- 1,033 6,652 -- 1,033 6,652 7,685
78 8320 South Hardy Drive
Tempe, AZ -- 1,512 9,732 -- 1,512 9,732 11,244
GATEWAY LAKES
79 1551 102nd Avenue
St. Petersburg, FL -- 722 3,061 -- 722 3,061 3,783
80 1527 102nd Avenue
St. Petersburg, FL -- 634 2,685 8 634 2,693 3,327
EDENVALE BUSINESS PARK
81 5853-5863 Rue Ferrari Drive
San Jose, CA -- 9,677 23,288 -- 9,677 23,288 32,965
ELECTRONIC DATA SYSTEMS CORP.
82 105 West Bethany Drive
Allen, TX -- 1,238 9,224 -- 1,238 9,224 10,462
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
72 1565-1585 Charleston Road
Mountain View, CA (821) 1999 40.0
BAY STATE GAS
73 300 Friberg Parkway
Westborough, MA (314) 1999 40.0
WARNER CROSSING
74 1120 West Warner Road
Tempe, AZ (127) 1999 40.0
75 1130 West Warner Road
Tempe, AZ (194) 1999 40.0
76 1140 West Warner Road
Tempe, AZ (194) 1999 40.0
77 8440 South Hardy Drive
Tempe, AZ (194) 1999 40.0
78 8320 South Hardy Drive
Tempe, AZ (284) 1999 40.0
GATEWAY LAKES
79 1551 102nd Avenue
St. Petersburg, FL (89) 1999 40.0
80 1527 102nd Avenue
St. Petersburg, FL (78) 1999 40.0
EDENVALE BUSINESS PARK
81 5853-5863 Rue Ferrari Drive
San Jose, CA (679) 1999 40.0
ELECTRONIC DATA SYSTEMS CORP.
82 105 West Bethany Drive
Allen, TX (269) 1999 40.0
76
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
COMPUTER SCIENCES CORP
83 7700-7720 Hubble Drive
Lanham, MD -- 2,486 12,047 164 2,486 12,211 14,697
POLYCOM, INC.
84 1565 Barber Lane
Milpitas, CA -- 4,880 12,367 1,498 4,880 13,865 18,745
ALLIANCE DATA SYSTEMS
85 17201 Waterview Parkway
Dallas, TX -- 1,918 4,632 -- 1,918 4,632 6,550
HEWLETT PACKARD
86 3000 Waterview Parkway
Richardson, TX -- 2,932 31,235 -- 2,932 31,235 34,167
MULTILINK
87 Six Riverside Drive
Andover, MA -- 639 7,176 -- 639 7,176 7,815
WELLPOINT HEALTH NETWORK, INC.
88-89 2000 Corporate Center
Drive
Newbury Park, CA -- 4,563 24,911 -- 4,563 24,911 29,474
TRINET PROPERTY PARTNERS, L.P.
90 1022 Hingham Street
Rockland, MA -- 2,010 11,761 18 2,010 11,779 13,789
91 65 Dan Road
Canton, MA -- 742 3,155 86 742 3,241 3,983
92 One Longwater Circle
Norwell, MA -- 1,140 1,658 33 1,140 1,691 2,831
93 100 Longwater Circle
Norwell, MA -- 973 3,805 12 973 3,817 4,790
94 101 Philip Drive
Norwell, MA 2,232 506 2,277 11 506 2,288 2,794
95 30 Dan Road
Canton, MA -- 1,409 3,890 42 1,409 3,932 5,341
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
COMPUTER SCIENCES CORP
83 7700-7720 Hubble Drive
Lanham, MD (355) 1999 40.0
POLYCOM, INC.
84 1565 Barber Lane
Milpitas, CA (506) 1999 40.0
ALLIANCE DATA SYSTEMS
85 17201 Waterview Parkway
Dallas, TX (135) 1999 40.0
HEWLETT PACKARD
86 3000 Waterview Parkway
Richardson, TX (911) 1999 40.0
MULTILINK
87 Six Riverside Drive
Andover, MA (209) 1999 40.0
WELLPOINT HEALTH NETWORK, INC.
88-89 2000 Corporate Center
Drive
Newbury Park, CA (727) 1999 40.0
TRINET PROPERTY PARTNERS, L.P.
90 1022 Hingham Street
Rockland, MA (343) 1999 40.0
91 65 Dan Road
Canton, MA (92) 1999 40.0
92 One Longwater Circle
Norwell, MA (49) 1999 40.0
93 100 Longwater Circle
Norwell, MA (111) 1999 40.0
94 101 Philip Drive
Norwell, MA (67) 1999 40.0
95 30 Dan Road
Canton, MA (113) 1999 40.0
77
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
96 85 Dan Road
Canton, MA -- 1,077 2,746 67 1,077 2,813 3,890
97 300 Foxborough Boulevard
Foxborough, MA 3,191 1,218 3,756 -- 1,218 3,756 4,974
98 105 Forbes Boulevard
Mansfield, MA 1,005 584 1,443 -- 584 1,443 2,027
99 60 Columbian Street
Braintree, MA -- 2,225 7,403 9 2,225 7,412 9,637
100 76 Pacella Park Drive
Randolph, MA 2,754 615 3,471 -- 615 3,471 4,086
101 260 Kenneth W. Welch Drive
Lakeville, MA -- 1,012 4,048 -- 1,012 4,048 5,060
102 700 Longwater Drive
Norwell, MA -- 1,357 5,429 -- 1,357 5,429 6,786
103 3000 Longwater Drive
Norwell, MA 2,004 1,155 1,651 300 1,155 1,951 3,106
ICG HOLDINGS, INC.
104 161 Inverness Drive West
Englewood, CO -- 8,572 27,428 -- 8,572 27,428 36,000
CONCORD FARMS
105 Three Concord Farms
Concord, MA -- 1,024 4,367 502 1,024 4,869 5,893
106 Four Concord Farms
Concord, MA -- 1,852 10,839 64 1,852 10,903 12,755
107 Five Concord Farms
Concord, MA -- 2,206 11,715 108 2,206 11,823 14,029
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
96 85 Dan Road
Canton, MA (80) 1999 40.0
97 300 Foxborough Boulevard
Foxborough, MA (109) 1999 40.0
98 105 Forbes Boulevard
Mansfield, MA (42) 1999 40.0
99 60 Columbian Street
Braintree, MA (216) 1999 40.0
100 76 Pacella Park Drive
Randolph, MA (101) 1999 40.0
101 260 Kenneth W. Welch Drive
Lakeville, MA (118) 1999 40.0
102 700 Longwater Drive
Norwell, MA (158) 1999 40.0
103 3000 Longwater Drive
Norwell, MA (48) 1999 40.0
ICG HOLDINGS, INC.
104 161 Inverness Drive West
Englewood, CO (800) 1999 40.0
CONCORD FARMS
105 Three Concord Farms
Concord, MA (132) 1999 40.0
106 Four Concord Farms
Concord, MA (317) 1999 40.0
107 Five Concord Farms
Concord, MA (344) 1999 40.0
78
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
108 Six Concord Farms
Concord, MA -- 1,834 10,483 64 1,834 10,547 12,381
Two Concord Farms--Under
development
Concord, MA -- 1,656 -- 297 1,656 297 1,953
Seven Concord Farms--Land
Concord, MA -- 1,266 -- 7 1,266 7 1,273
ARBELLA CAPITAL CORP.
109 1100 Crown Colony Drive
Quincy, MA 12,989 3,562 23,420 237 3,562 23,657 27,219
MAST INDUSTRIES
110 100 Old River Road
Andover, MA -- 1,787 8,486 -- 1,787 8,486 10,273
HAEMONETICS CORP.
111 355 Wood Road
Braintree, MA -- 792 4,929 43 792 4,972 5,764
NOKIA
112 6000 Connection Drive
Irving, TX -- 6,083 42,016 -- 6,083 42,016 48,099
ANDERSEN CONSULTING
113 1661 Page Mill Road
Palo Alto, CA -- -- 19,168 -- -- 19,168 19,168
WINDWARD FOREST
114 960 Northpoint Parkway
Alpharetta, GA -- 905 6,744 -- 905 6,744 7,649
THE MITRE CORPORATION
115 11493 Sunset Hills Road
Fairfax, VA -- 4,436 22,362 52 4,436 22,414 26,850
VERIZON SELECT SERVICES, INC.
116 Sierra I at Los Colinas
Irving, TX -- 3,363 21,376 -- 3,363 21,376 24,739
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
108 Six Concord Farms
Concord, MA (308) 1999 40.0
Two Concord Farms--Under
development
Concord, MA 1999
Seven Concord Farms--Land
Concord, MA 1999
ARBELLA CAPITAL CORP.
109 1100 Crown Colony Drive
Quincy, MA (683) 1999 40.0
MAST INDUSTRIES
110 100 Old River Road
Andover, MA (248) 1999 40.0
HAEMONETICS CORP.
111 355 Wood Road
Braintree, MA (145) 1999 40.0
NOKIA
112 6000 Connection Drive
Irving, TX (1,225) 1999 40.0
ANDERSEN CONSULTING
113 1661 Page Mill Road
Palo Alto, CA (559) 1999 40.0
WINDWARD FOREST
114 960 Northpoint Parkway
Alpharetta, GA (197) 1999 40.0
THE MITRE CORPORATION
115 11493 Sunset Hills Road
Fairfax, VA (654) 1999 40.0
VERIZON SELECT SERVICES, INC.
116 Sierra I at Los Colinas
Irving, TX (623) 1999 40.0
79
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
POYDRAS PLAZA
117 Entergy Building
New Orleans, LA 77,860 1,427 24,252 603 1,427 24,855 26,282
118 Mobil Building
New Orleans, LA -- 1,664 16,653 1,149 1,664 17,802 19,466
119 Parking Garage
New Orleans, LA -- 4,239 6,462 5 4,239 6,467 10,706
ALCATEL
120 Campbell Commoms 1,233 $ 15,160 -- 1,233 15,160 16,393
EQUINIX
121 Great Oaks--Land
San Jose, CA 82,220 $ -- -- 82,220 -- 82,220
FEDERAL EXPRESS--Under development
3201 Columbia Road
Richfield, OH 2,327 $ -- 4,724 2,327 4,724 7,051
LEXMARK
122 1510 East 4th Street
Seymour, IN 550 $ 22,239 -- 550 22,239 22,789
HILTON HOTELS CORPORATION
123 18740 Pacific Highway South
Seattle, WA 153,618 5,101 32,080 -- 5,101 32,080 37,181
255 Southwest Temple
Salt Lake City, UT -- 5,620 32,695 -- 5,620 32,695 38,315
1401 Arden Way
Sacramento, CA -- 1,281 9,809 -- 1,281 9,809 11,090
7450 Hazard Center Drive
San Diego, CA -- 4,394 27,030 -- 4,394 27,030 31,424
One Doubletree Drive
Sonoma, CA -- 3,308 20,623 -- 3,308 20,623 23,931
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
POYDRAS PLAZA
117 Entergy Building
New Orleans, LA (703) 1999 40.0
118 Mobil Building
New Orleans, LA (499) 1999 40.0
119 Parking Garage
New Orleans, LA (181) 1999 40.0
ALCATEL
120 Campbell Commoms (158) 1999 40.0
EQUINIX
121 Great Oaks--Land
San Jose, CA -- 2000
FEDERAL EXPRESS--Under development
3201 Columbia Road
Richfield, OH -- 2000
LEXMARK
122 1510 East 4th Street
Seymour, IN (6) 2000 40.0
HILTON HOTELS CORPORATION
123 18740 Pacific Highway South
Seattle, WA (2,604) 1998 40.0
255 Southwest Temple
Salt Lake City, UT (2,713) 1998 40.0
1401 Arden Way
Sacramento, CA (1,062) 1998 40.0
7450 Hazard Center Drive
San Diego, CA (2,401) 1998 40.0
One Doubletree Drive
Sonoma, CA (1,447) 1998 40.0
80
ISTAR FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
200 North Riverside
Medford, OR -- 609 4,668 -- 609 4,668 5,277
1800 Fairview Ave.
Boise, ID -- 968 6,405 -- 968 6,405 7,373
304 Southeast Nye Avenue
Pendleton, OR -- 556 4,245 -- 556 4,245 4,801
510 Kelso Drive
Kelso, WA -- 502 3,779 -- 502 3,779 4,281
100 Columbia Street
Vancouver, WA -- 507 3,981 -- 507 3,981 4,488
501 Camino Del Rio
Durango, CO -- 1,242 7,865 -- 1,242 7,865 9,107
1225 North Wenatchee Avenue
Wenatchee, WA -- 513 3,825 -- 513 3,825 4,338
1313 North Bayshore Drive
Coos Bay, OR -- 404 3,049 -- 404 3,049 3,453
205 Coburg Road
Eugene, OR -- 361 2,721 -- 361 2,721 3,082
499 Industrial Street
Astoria, OR -- 269 2,043 -- 269 2,043 2,312
700 West Broadway Street
Missoula, MT -- 210 1,607 -- 210 1,607 1,817
1415 Northeast Third Street
Bend, OR -- 233 1,729 -- 233 1,729 1,962
-------- -------- ---------- ------- -------- ---------- ----------
TOTAL REAL ESTATE SUBJECT TO
OPERATING LEASES $291,949 $344,490 $1,280,304 $14,268 $344,490 $1,294,572 $1,639,062
======== ======== ========== ======= ======== ========== ==========
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
200 North Riverside
Medford, OR (511) 1998 40.0
1800 Fairview Ave.
Boise, ID (637) 1998 40.0
304 Southeast Nye Avenue
Pendleton, OR (502) 1998 40.0
510 Kelso Drive
Kelso, WA (447) 1998 40.0
100 Columbia Street
Vancouver, WA (482) 1998 40.0
501 Camino Del Rio
Durango, CO (707) 1998 40.0
1225 North Wenatchee Avenue
Wenatchee, WA (435) 1998 40.0
1313 North Bayshore Drive
Coos Bay, OR (334) 1998 40.0
205 Coburg Road
Eugene, OR (320) 1998 40.0
499 Industrial Street
Astoria, OR (216) 1998 40.0
700 West Broadway Street
Missoula, MT (195) 1998 40.0
1415 Northeast Third Street
Bend, OR (198) 1998 40.0
--------
TOTAL REAL ESTATE SUBJECT TO
OPERATING LEASES $(46,975)
========
81
ISTAR FINANCIAL INC.
NOTES TO SCHEDULE III
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
1. RECONCILIATION OF REAL ESTATE SUBJECT TO OPERATING LEASES:
The following table reconciles Real Estate from January 1, 1998 to
December 31, 2000:
2000 1999 1998
---------- ---------- --------
Balance at January 1....................................... $1,669,038 $ 194,462 $ --
Additions (see Note 4 to the Consolidated Financial
Statements).............................................. 137,998 1,474,576 194,462
Dispositions............................................... (146,715) -- --
Impact of purchase accounting adjustments.................. (21,259) -- --
---------- ---------- --------
Balance at December 31..................................... $1,639,062 $1,669,038 $194,462
========== ========== ========
2. RECONCILIATION OF ACCUMULATED DEPRECIATION:
The following table reconciles Accumulated Depreciation from January 1, 1998
to December 31, 2000:
2000 1999 1998
-------- -------- --------
Balance at January 1........................................ $(14,860) $ (4,520) $ --
Additions................................................... (33,739) (10,340) (4,520)
Dispositions................................................ 1,624 -- --
-------- -------- -------
Balance at December 31...................................... $(46,975) $(14,860) $(4,520)
======== ======== =======
82
ISTAR FINANCIAL INC.
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INTEREST ACCRUAL INTEREST PAYMENT FINAL MATURITY
TYPE OF LOAN/BORROWER DESCRIPTION/LOCATION RATES(3) RATES DATE
- --------------------- ---------------------------- -------------------- ---------------- --------------
Senior Mortgages:
Borrower A......................
Hotel, Various States 7.39% 7.39% 9/11/11
Borrower B......................
Retail, Chicago, IL 8.88% 8.88% 1/1/04
Borrower C(1)...................
Hotel, Various States LIBOR + 1.75% LIBOR + 1.75% 9/15/03
Borrower D......................
Office, San Diego, CA LIBOR + 1.50% LIBOR + 1.50% 12/31/04
Borrower E......................
Office, Dallas. TX LIBOR + 1.75% LIBOR + 1.75% 9/8/01
Borrower F(1)...................
Office, Dallas. TX LIBOR + 1.75% LIBOR + 1.75% 8/26/04
Borrower G......................
Resort/Conference Center Rye
Brook, NY 10.30% 10.30% 3/31/07
Borrower H......................
Office, Los Angeles, CA LIBOR + 4.50% LIBOR + 4.50% 11/30/02
Borrower I......................
Residential, South Florida LIBOR + 6.00% LIBOR + 6.00% 12/30/02
All other senior mortgages
individually < 3%.............
Subordinate Mortgages:
Borrower D(1)...................
Office, San Diego, CA 13.00% 10.00% 2/29/04
Borrower C(1)...................
Hotel, Various States LIBOR + 5.80% LIBOR + 5.80% 9/15/03
Borrower F(1)...................
Office, Dallas. TX 15.00% 11.00% 8/26/04
All other subordinate mortgages
individually < 3%.............
Corporate/Partnership
Loans/Unsecured Notes:
Borrower C(1)...................
Hotel, Various States LIBOR + 5.37% LIBOR + 5.37% 9/15/03
Borrower J(1)...................
Residential, Various States LIBOR + 7.00% LIBOR + 7.00% 3/1/05
Borrower K......................
Hotel, Various States LIBOR + 2.78% LIBOR + 2.78% 12/1/03
All other partnership
loans/unsecured notes
individually < 3%.............
Loan Participations:
Borrower L......................
Office, New York, NY LIBOR + 4.50% LIBOR + 4.50% 8/1/03
All other loan participations
individually < 3%.............
Other Lending Investments:
Borrower J(1)...................
Residential, Various States 10.00% 10.00% 3/1/05
All other lending investments
individually < 3%.............
Subtotal..........................
Provision for Possible Credit
Losses..........................
Total:............................
PERIODIC FACE CARRYING
PAYMENT PRIOR AMOUNT OF AMOUNT OF
TYPE OF LOAN/BORROWER TERMS(3) LIENS(2) LOANS LOANS
- --------------------- -------- ---------- ---------- ----------
Senior Mortgages:
Borrower A......................
P&I $ -- $ 129,500 $ 114,412
Borrower B......................
P&I -- 108,220 107,838
Borrower C(1)...................
P&I -- 106,405 106,405
Borrower D......................
IO -- 105,000 105,000
Borrower E......................
IO -- 97,124 95,404
Borrower F(1)...................
IO -- 86,313 86,314
Borrower G......................
P&I -- 77,892 78,469
Borrower H......................
IO -- 73,147 73,226
Borrower I......................
IO -- 72,495 72,495
All other senior mortgages
individually < 3%............. -- 376,211 371,429
---------- ---------- ----------
-- 1,232,307 1,210,992
---------- ---------- ----------
Subordinate Mortgages:
Borrower D(1)...................
IO -- 29,000 26,878
Borrower C(1)...................
IO -- 40,000 39,832
Borrower F(1)...................
IO -- 32,132 32,364
All other subordinate mortgages
individually < 3%............. -- 238,956 226,484
---------- ---------- ----------
-- 340,088 325,558
---------- ---------- ----------
Corporate/Partnership
Loans/Unsecured Notes:
Borrower C(1)...................
IO 133,100 78,000 77,651
Borrower J(1)...................
IO 1,087,607 25,000 24,894
Borrower K......................
IO 418,497 70,000 67,871
All other partnership
loans/unsecured notes
individually < 3%............. -- 228,795 228,562
---------- ---------- ----------
1,639,204 401,795 398,978
---------- ---------- ----------
Loan Participations:
Borrower L......................
IO 500,000 100,000 100,000
All other loan participations
individually < 3%............. -- 11,388 11,251
---------- ---------- ----------
500,000 111,388 111,251
---------- ---------- ----------
Other Lending Investments:
Borrower J(1)...................
IO 150,000 123,059
All other lending investments
individually < 3%............. -- 75,227 69,345
---------- ---------- ----------
-- 225,227 192,404
---------- ---------- ----------
Subtotal.......................... 2,139,204 2,310,805 2,239,183
---------- ---------- ----------
Provision for Possible Credit
Losses.......................... -- -- (14,000)
---------- ---------- ----------
Total:............................ $2,139,204 $2,310,805 $2,225,183
========== ========== ==========
EXPLANATORY NOTES:
- ----------------------------------
(1) Loan is a part of a common borrowing provided by the Company (see
corresponding letter reference).
(2) Represents only third-party liens and excludes senior loans held by the
Company from the same borrower on the same collateral.
(3) P&I = principal and interest, IO = interest only.
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Portions of the Company's definitive proxy statement for the 2001 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Portions of the Company's definitive proxy statement for the 2001 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Portions of the Company's definitive proxy statement for the 2001 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Portions of the Company's definitive proxy statement for the 2001 annual
meeting of the shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d). Financial statements and schedules--see Index to Financial
Statements and Schedules included in Item 8.
(b) Reports on Form 8-K.
None.
(c) Exhibits--see index on following page.
84
INDEX TO EXHIBITS
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of June 15, 1999, by
and among Starwood Financial Trust, ST Merger Sub, Inc. and
TriNet Corporate Realty Trust, Inc. (4)
2.2 Agreement and Plan of Merger, dated as of June 15, 1999, by
and among Starwood Financial Trust, Starwood Financial, Inc.
and to the extent described therein, TriNet Corporate Realty
Trust, Inc. (4)
2.3 Agreement and Plan of Merger, dated as of June 15, 1999, by
and among Starwood Financial Trust, SA Merger Sub, Inc., STW
Holdings I, Inc., the Stockholders named therein, Starwood
Capital Group, L.L.C. and, to the extent described therein,
TriNet Corporate Realty Trust, Inc. (4)
3.1 Amended and Restated Charter of the Company (including the
Articles Supplementary for the Series A, B, C and D
Preferred Stock). (7)
3.2 Bylaws of the Company (8)
4.1 Amended and Restated Registration Rights Agreement dated
March 18, 1998 among Starwood Financial Trust and Starwood
Mezzanine Investors, L.P., SAHI Partners and SOFI-IV SMT
Holdings, L.L.C.(2)
4.2 Investor Rights Agreement, dated as of December 15, 1998
among Starwood Financial Trust, a Maryland real estate
investment trust, Starwood Mezzanine Investors, L.P., a
Delaware limited partnership, SOFI-IV SMT Holdings, L.L.C.,
a Delaware limited liability company, B Holdings, L.L.C., a
Delaware limited liability company, and Lazard Freres Real
Estate Fund II, L.P., a Delaware limited partnership, Lazard
Freres Real Estate Offshore Fund II L.P., a Delaware limited
Partnership, and LF Mortgage REIT, a Maryland real estate
investment trust.(3)
4.3 Form of warrant certificates. (3)
4.4 Form of stock certificate for the Company's Common Stock.
(6)
4.5 Form of certificate for Series A Preferred Shares of
beneficial interest. (3)
10.1 Starwood Financial Trust 1996 Share Incentive Plan. (2)
10.2 Contribution Agreement dated as of February 11, 1998,
between Starwood Financial Trust, Starwood Mezzanine
Investors, L.P. and Starwood Opportunity Fund IV, L.P. (2)
10.3 Second Amended and Restated Shareholder's Agreement dated
March 18, 1998 among B Holdings, L.L.C., SAHI Partners,
Starwood Mezzanine Investors, L.P., SOFI-IV SMT Holdings,
L.L.C., and Starwood Financial Trust. (2)
10.4 Securities Purchase Agreement, dated as of December 15,
1998, by and between Starwood Financial Trust, Lazard Freres
Real Estate Fund II, L.P., a Delaware limited partnership,
Lazard Freres Real Estate Offshore Fund II, L.P., a Delaware
limited partnership, and LF Mortgage REIT, a Maryland real
estate investment trust. (2)
10.5 Asset Purchase and Sale Agreement, dated as of December 15,
1998 by and between Lazard Freres Real Estate Fund, L.P., a
Delaware limited partnership, Lazard Freres Real Estate Fund
II, L.P., a Delaware limited partnership, Prometheus
Mid-Atlantic Holding, L.P., a Delaware limited partnership,
Pacific Preferred LLC, a New York limited liability company,
Atlantic Preferred II LLC, a New York limited liability
company, Indian Preferred LLC, a New York limited liability
company and Prometheus Investment Holding, L.P., a Delaware
limited partnership and Starwood Financial Trust. (3)
85
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
10.6 Form of Advisor Lock-Up Agreement, dated as of June 15,
1999, among Greenhill & Co., LLC and each owner of interests
in the Advisor. (5)
10.7 Form of Option Standstill Agreement, dated as of June 15,
1999, among Starwood Financial Trust and each of George R.
Puskar, Willis Anderson, Jr., Stephen B. Oresman, Robert W.
Holman Jr. and John G. McDonald. (5)
10.8 Form of Starwood Financial Trust Affiliate Lock-Up
Agreement, dated as of June 15, 1999, between Greenhill &
Co., LLC and each of B Holdings L.L.C., SOFI-IV SMT
Holdings, L.L.C. and Starwood Mezzanine Investors, L.P. (5)
10.9 Stock Purchase Agreement dated as of June 15, 1999 among Jay
Sugarman, Spencer B. Haber, A. William Stein and Robert
Holman, Jr. (5)
10.10 Amendment No. 1 to the Stock Purchase Agreement dated as of
July 26, 1999, which amends the Stock Purchase Agreement
dated as of June 15, 1999 among Jay Sugarman, Spencer B.
Haber, A. William Stein and Robert Holman, Jr. (5)
10.11 Shareholder Agreement, dated as of June 15, 1999, among
SOFI-IV SMT Holdings, L.L.C., Starwood Mezzanine Investors,
L.P., B Holdings, L.L.C. and TriNet Corporate Realty Trust,
Inc. (5)
10.12 First Amendment to Shareholder Agreement dated as of July
15, 1999, which amends the Shareholder Agreement, dated as
of June 15, 1999, among SOFI-IV SMT Holdings, L.L.C.,
Starwood Mezzanine Investors, L.P., B Holdings L.L.C. and
TriNet Corporate Realty Trust, Inc. (5)
10.13 Employment Agreement, dated as of May 20, 1999, by and
between Starwood Financial Advisors, L.L.C. and Jay
Sugarman. (6)
10.14 Indenture, dated May 17, 2000, among iStar Asset Receivables
Trust, La Salle Bank National Association and ABN AMRO BANK
N.V.
12.1 Computation of Ratio of EBITDA to interest expense.
12.2 Computation of Ratio of EBITDA to combined fixed charges.
21.1 Subsidiaries of the Company.
23. Consents of PricewaterhouseCoopers LLP.
EXPLANATORY NOTES:
- ------------------------
(1) Incorporated by reference from the Company's Registration Statement on
Form S-4 filed on May 12, 1998.
(2) Incorporated by reference from the Company's Annual Report on Form 10- K
for the year ended December 31, 1997 filed on April 2, 1998.
(3) Incorporated by reference from the Company's Form 8-K filed on
December 23, 1998.
(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
on June 22, 1999.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-4 filed on August 25, 1999.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 filed on March 30, 2000.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000 filed on May 15, 2000.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 filed on August 14, 2000.
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
iSTAR FINANCIAL INC.
REGISTRANT
Date March 30, 2001
------------------------------------------------
Jay Sugarman
CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following person on behalf of
the registrant and in the capacities and on the dates indicated.
Date March 30, 2001
-------------------------------------------
Jay Sugarman
CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR
Date March 30, 2001
-------------------------------------------
Spencer B. Haber
CHIEF FINANCIAL OFFICER, SECRETARY AND DIRECTOR
(EXECUTIVE VICE PRESIDENT--FINANCE)
Date March 30, 2001
-------------------------------------------
Willis Andersen Jr.
DIRECTOR
Date March 30, 2001
-------------------------------------------
Jeffrey G. Dishner
DIRECTOR
Date March 30, 2001
-------------------------------------------
Jonathan D. Eilian
DIRECTOR
Date March 30, 2001
-------------------------------------------
Madison F. Grose
DIRECTOR
87
Date March 30, 2001
-------------------------------------------
Robert W. Holman, Jr.
DIRECTOR
Date March 30, 2001
-------------------------------------------
Robin Josephs
DIRECTOR
Date March 30, 2001
-------------------------------------------
Merrick R. Kleeman
DIRECTOR
Date March 30, 2001
-------------------------------------------
William M. Matthes
DIRECTOR
Date March 30, 2001
-------------------------------------------
John G. McDonald
DIRECTOR
Date March 30, 2001
-------------------------------------------
Michael G. Medzigian
DIRECTOR
Date March 30, 2001
-------------------------------------------
Stephen B. Oresman
DIRECTOR
Date March 30, 2001
-------------------------------------------
George R. Puskar
DIRECTOR
Date March 30, 2001
-------------------------------------------
Barry S. Sternlicht
DIRECTOR
Date March 30, 2001
-------------------------------------------
Kneeland C. Youngblood
DIRECTOR
88