UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 10, 2004
iSTAR FINANCIAL INC.
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation) |
1-15371 (Commission File Number) |
95-6881527 (IRS Employer Identification Number) |
||
1114 Avenue of the Americas, 27th Floor New York, New York (Address of principal executive offices) |
10036 (Zip Code) |
Registrant's
telephone number, including area code:
(212) 930-9400
Not applicable
(Former name or former address, if changed since last report)
Check
the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy
the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
o |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
|
o |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
|
o |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
iStar Financial Inc. (the "Company") is revising its historical financial statements in connection with its application of Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") to certain transactions. During 2004, the Company sold certain properties and classified others as held for sale. In compliance with SFAS No. 144, the Company has reported revenues and expenses from these properties as income from discontinued operations for each period presented in its quarterly report on Form 10-Q for the quarter ended September 30, 2004 (including the comparable periods of the prior year). This Current Report on Form 8-K updates Items 6, 7 and 8 of the Company's Form 10-K for the fiscal year ended December 31, 2003, and Items 1 and 2 of the Company's Forms 10-Q for the quarterly periods ended March 31, 2004 and June 30, 2004 to reclassify the reported revenues and expenses from these properties as income from discontinued operations in its financial statements for each of the periods presented even though those financial statements relate to a period prior to the transactions giving rise to the reclassification. The Company is required to update its historical audited financial statements in the manner set forth in this Current Report because the financial statements are to be incorporated by reference in registration statements filed under the Securities Act of 1933, as amended. All other items of the Form 10-K and Forms 10-Q remain unchanged.
These reclassifications as discontinued operations have no effect on the Company's reported net income available to common shareholders and HPU holders as reported in prior SEC filings. Instead, they present the revenues and expenses relating to properties sold and held for sale as a single line item titled "Income from discontinued operations," rather than presenting the revenues and expenses along with the Company's other results of operations.
Following each set of these revised financial statements is an updated management's discussion and analysis of financial condition and the results of operations of the Company for the periods presented, which the Company believes may be helpful to the investor in reviewing these restated financial statements.
For the Company's most recent information concerning its financial condition and results of operations (through the third quarter of 2004), please see the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, which is on file with the SEC.
2
Item 9.01. Financial Statements and Exhibits
Exhibit Number |
Description |
|
---|---|---|
23.1 | Consent of PricewaterhouseCoopers LLP. | |
99.1 | Selected Financial Data. | |
99.2 | Financial Statements (including Management's Discussion and Analysis of Financial Condition and Results of Operations). | |
99.3 | Computation of Ratio of EBITDA to interest expense. | |
99.4 | Computation of Ratio of EBITDA to combined fixed charges. | |
99.5 | Computation of Ratio of Earnings to fixed charges and Earnings to fixed charges and preferred stock dividends. |
3
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
iSTAR FINANCIAL INC. Registrant |
||||
Date: December 10, 2004 |
By: |
/s/ JAY SUGARMAN Jay Sugarman Chairman of the Board of Directors and Chief Executive Officer |
4
Exhibit Number |
Description |
|
---|---|---|
23.1 | Consent of PricewaterhouseCoopers LLP. | |
99.1 | Selected Financial Data. | |
99.2 | Financial Statements (including Management's Discussion and Analysis of Financial Condition and Results of Operations). | |
99.3 | Computation of Ratio of EBITDA to interest expense. | |
99.4 | Computation of Ratio of EBITDA to combined fixed charges. | |
99.5 | Computation of Ratio of Earnings to fixed charges and Earnings to fixed charges and preferred stock dividends. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-32946, 333-38486, 333-73592, 333-83646, 333-109599, 333-105945) and the Registration Statement on Form S-8 (No. 333-34300) of iStar Financial Inc. of our report dated February 20, 2004, except for Note 17 which is as of March 12, 2004 and except for Note 18, which is as of December 7, 2004, relating to the financial statements and financial statement schedules as of December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, which appears in this Current Report on Form 8-K.
/s/
PricewaterhouseCoopers LLP
New York, New York
December 8, 2004
Exhibit 99.1
Selected Financial Data
The following table sets forth selected financial data on a consolidated historical basis for the Company. On November 4, 1999, the Company acquired TriNet, which increased the size of the Company's operations, and also acquired its former external advisor. Operating results for the year ended December 31, 1999 reflect only the effects of these transactions subsequent to their consummation.
Accordingly, the results of operations for the Company for the year ended December 31, 1999, does 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 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," included in this Form 8-K. Certain prior year amounts have been reclassified to conform to the 2003 presentation.
|
For the Years Ended December 31, |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2003 |
2002 |
2001 |
2000 |
1999 |
|||||||||||||
|
(In thousands, except per share data and ratios) |
|||||||||||||||||
OPERATING DATA: | ||||||||||||||||||
Interest income | $ | 304,392 | $ | 255,631 | $ | 254,119 | $ | 268,011 | $ | 209,848 | ||||||||
Operating lease income | 247,904 | 225,053 | 171,149 | 163,442 | 38,925 | |||||||||||||
Other income | 36,677 | 27,993 | 31,000 | 17,902 | 12,900 | |||||||||||||
Total revenue | 588,973 | 508,677 | 456,268 | 449,355 | 261,673 | |||||||||||||
Interest expense | 192,295 | 184,933 | 169,586 | 173,143 | 91,044 | |||||||||||||
Operating costs-corporate tenant lease assets | 17,585 | 12,759 | 11,419 | 11,742 | 2,110 | |||||||||||||
Depreciation and amortization | 52,338 | 44,117 | 32,170 | 31,114 | 9,977 | |||||||||||||
General and administrative | 38,153 | 30,449 | 24,151 | 25,706 | 6,269 | |||||||||||||
General and administrativestock-based compensation expense | 3,633 | 17,998 | 3,574 | 2,864 | 412 | |||||||||||||
Provision for loan losses | 7,500 | 8,250 | 7,000 | 6,500 | 4,750 | |||||||||||||
Loss on early extinguishment of debt | | 12,166 | 1,620 | 705 | | |||||||||||||
Advisory fees | | | | | 16,193 | |||||||||||||
Costs incurred in acquiring former external advisor(1) | | | | | 94,476 | |||||||||||||
Total costs and expenses | 311,504 | 310,672 | 249,520 | 251,774 | 225,231 | |||||||||||||
Net income before equity in (loss) earnings from joint ventures and unconsolidated subsidiaries, minority interest and other items | 277,469 | 198,005 | 206,748 | 197,581 | 36,442 | |||||||||||||
Equity in (loss) earnings from joint ventures and unconsolidated subsidiaries | (4,284 | ) | 1,222 | 7,361 | 4,796 | 235 | ||||||||||||
Minority interest in consolidated entities | (249 | ) | (162 | ) | (218 | ) | (195 | ) | (41 | ) | ||||||||
Cumulative effect of change in accounting principle(2) | | | (282 | ) | | | ||||||||||||
Net income from continuing operations | 272,936 | 199,065 | 213,609 | 202,182 | 36,636 | |||||||||||||
Income from discontinued operations | 14,054 | 15,488 | 15,158 | 12,456 | 2,250 | |||||||||||||
Gain from discontinued operations | 5,167 | 717 | 1,145 | 2,948 | | |||||||||||||
Net income | $ | 292,157 | $ | 215,270 | $ | 229,912 | $ | 217,586 | $ | 38,886 | ||||||||
Preferred dividend requirements | (36,908 | ) | (36,908 | ) | (36,908 | ) | (36,908 | ) | (23,843 | ) | ||||||||
Net income allocable to common shareholders and HPU holders(3) | $ | 255,249 | $ | 178,362 | $ | 193,004 | $ | 180,678 | $ | 15,043 | ||||||||
Basic earning per common share(4)(5) | $ | 2.52 | $ | 1.98 | $ | 2.24 | $ | 2.11 | $ | 0.25 | ||||||||
Diluted earnings per common share(5)(6) | $ | 2.43 | $ | 1.93 | $ | 2.19 | $ | 2.10 | $ | 0.25 | ||||||||
Dividends declared per common share(7) | $ | 2.65 | $ | 2.52 | $ | 2.45 | $ | 2.40 | $ | 1.86 | ||||||||
SUPPLEMENTAL DATA: |
||||||||||||||||||
Adjusted diluted earnings allocable to common shareholders and HPU holders(8)(10) | $ | 341,177 | $ | 262,786 | $ | 254,095 | $ | 230,371 | $ | 127,798 | ||||||||
EBITDA(9)(10) | $ | 536,790 | $ | 444,320 | $ | 431,668 | $ | 421,843 | $ | 139,907 | ||||||||
Ratio of EBITDA to interest expense | 2.79x | 2.40x | 2.55x | 2.44x | 1.54x | |||||||||||||
Ratio of EBITDA to combined fixed charges(11) | 2.34x | 2.00x | 2.09x | 2.01x | 1.22x | |||||||||||||
Ratio of earnings to fixed charges(12) | 2.43x | 2.09x | 2.23x | 2.15x | 1.40x | |||||||||||||
Ratio of earnings to fixed charges and preferred stock dividends(12) | 2.05x | 1.75x | 1.83x | 1.78x | 1.11x | |||||||||||||
Weighted average common shares outstanding-basic | 100,314 | 89,886 | 86,349 | 85,441 | 57,749 | |||||||||||||
Weighted average common shares outstanding-diluted | 104,101 | 92,649 | 88,234 | 86,151 | 60,393 | |||||||||||||
Cash flows from: | ||||||||||||||||||
Operating activities | $ | 338,262 | $ | 348,793 | $ | 293,260 | $ | 219,868 | $ | 119,625 | ||||||||
Investing activities | (974,354 | ) | (1,149,070 | ) | (349,525 | ) | (193,805 | ) | (143,911 | ) | ||||||||
Financing activities | 700,248 | 800,541 | 49,183 | (37,719 | ) | 48,584 | ||||||||||||
BALANCE SHEET DATA: |
||||||||||||||||||
Loans and other lending investments, net | 3,702,674 | 3,050,342 | 2,377,763 | 2,227,083 | 2,003,506 | |||||||||||||
Corporate tenant lease assets, net | 2,535,885 | 2,291,805 | 1,781,565 | 1,592,087 | 1,654,300 | |||||||||||||
Total assets | 6,660,590 | 5,611,697 | 4,380,640 | 4,034,775 | 3,813,552 | |||||||||||||
Debt obligations | 4,113,732 | 3,461,590 | 2,495,369 | 2,131,967 | 1,901,204 | |||||||||||||
Minority interest in consolidated entities | 5,106 | 2,581 | 2,650 | 6,224 | 2,565 | |||||||||||||
Shareholders' equity | 2,415,228 | 2,025,300 | 1,787,778 | 1,787,885 | 1,801,343 | |||||||||||||
SUPPLEMENTAL DATA: |
||||||||||||||||||
Total debt to shareholders' equity | 1.7x | 1.7x | 1.4x | 1.2x | 1.1x |
Explanatory Notes:
|
For the Years Ended December 31, |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2003 |
2002 |
2001 |
2000 |
1999 |
||||||||||
|
(In thousands) |
||||||||||||||
Net income | $ | 292,157 | $ | 215,270 | $ | 229,912 | $ | 217,586 | $ | 38,886 | |||||
Add: Interest expense | 192,295 | 184,933 | 169,586 | 173,143 | 91,044 | ||||||||||
Add: Depreciation and amortization | 52,338 | 44,117 | 32,170 | 31,114 | 9,977 | ||||||||||
EBITDA | $ | 536,790 | $ | 444,320 | $ | 431,668 | $ | 421,843 | $ | 139,907 | |||||
2
Exhibit 99.2
iSTAR FINANCIAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
1. | CONSOLIDATED FINANCIAL STATEMENTS | |||
A. March 31, 2004 |
||||
Consolidated Balance Sheets at March 31, 2004 and December 31, 2003 |
2 |
|||
Consolidated Statements of OperationsFor the three months ended March 31, 2004 and 2003 |
3 |
|||
Consolidated Statement of Changes in Shareholders' Equity for the three months ended March 31, 2004 |
4 |
|||
Consolidated Statements of Cash FlowsFor the three months ended March 31, 2004 and 2003 |
5 |
|||
Notes to Consolidated Financial Statements |
6 |
|||
Management's Discussion and Analysis of Financial Condition and Results of Operations |
43 |
|||
B. June 30, 2004 |
||||
Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 |
59 |
|||
Consolidated Statements of OperationsFor the three and six months ended June 30, 2004 and 2003 |
60 |
|||
Consolidated Statement of Changes in Shareholders' Equity for the six months ended June 30, 2004 |
61 |
|||
Consolidated Statements of Cash FlowsFor the three and six months ended June 30, 2004 and 2003 |
62 |
|||
Notes to Consolidated Financial Statements |
63 |
|||
Management's Discussion and Analysis of Financial Condition and Results of Operations |
100 |
|||
C. December 31, 2003 |
||||
Report of Independent Registered Public Accounting Firm |
118 |
|||
Consolidated Balance Sheets at December 31, 2003 and 2002 |
119 |
|||
Consolidated Statements of OperationsFor the years ended December 31, 2003, 2002 and 2001 |
120 |
|||
Consolidated Statements of Changes in Shareholders' EquityFor the years ended December 31, 2003, 2002 and 2001 |
121 |
|||
Consolidated Statements of Cash FlowsFor the years ended December 31, 2003, 2002 and 2001 |
122 |
|||
Notes to Consolidated Financial Statements |
123 |
|||
Management's Discussion and Analysis of Financial Condition and Results of Operations |
169 |
PART I. CONSOLIDATED FINANCIAL INFORMATION
iStar Financial Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(unaudited)
|
As of March 31, 2004 |
As of December 31, 2003 |
||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Loans and other lending investments, net |
$ |
3,985,022 |
$ |
3,702,674 |
||||
Corporate tenant lease assets, net | 2,864,255 | 2,535,885 | ||||||
Investments in and advances to joint ventures and unconsolidated subsidiaries | 19,305 | 25,019 | ||||||
Assets held for sale | 24,800 | 24,800 | ||||||
Cash and cash equivalents | 87,632 | 80,090 | ||||||
Restricted cash | 68,034 | 57,665 | ||||||
Accrued interest and operating lease income receivable | 25,699 | 26,076 | ||||||
Deferred operating lease income receivable | 57,083 | 51,447 | ||||||
Deferred expenses and other assets | 173,017 | 156,934 | ||||||
Total assets | $ | 7,304,847 | $ | 6,660,590 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||
Liabilities: |
||||||||
Accounts payable, accrued expenses and other liabilities | $ | 177,720 | $ | 126,524 | ||||
Debt obligations | 4,630,443 | 4,113,732 | ||||||
Total liabilities | 4,808,163 | 4,240,256 | ||||||
Commitments and contingencies | | | ||||||
Minority interest in consolidated entities |
12,483 |
5,106 |
||||||
Shareholders' equity: |
||||||||
Series B Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 0 and 2,000 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively | | 2 | ||||||
Series C Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 0 and 1,300 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively | | 1 | ||||||
Series D Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and outstanding at March 31, 2004 and December 31, 2003 | 4 | 4 | ||||||
Series E Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,600 shares issued and outstanding at March 31, 2004 and December 31, 2003 | 6 | 6 | ||||||
Series F Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and outstanding at March 31, 2004 and December 31, 2003 | 4 | 4 | ||||||
Series G Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 3,200 shares issued and outstanding at March 31, 2004 and December 31, 2003 | 3 | 3 | ||||||
Series I Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,000 and 0 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively | 5 | | ||||||
High Performance Units | 7,383 | 5,131 | ||||||
Common Stock, $0.001 par value, 200,000 shares authorized, 109,372 and 107,215 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively | 108 | 107 | ||||||
Warrants and options | 19,705 | 20,695 | ||||||
Additional paid-in capital | 2,806,661 | 2,678,772 | ||||||
Retained earnings (deficit) | (297,165 | ) | (242,449 | ) | ||||
Accumulated other comprehensive income (losses) (See Note 12) | (4,457 | ) | 1,008 | |||||
Treasury stock (at cost) | (48,056 | ) | (48,056 | ) | ||||
Total shareholders' equity | 2,484,201 | 2,415,228 | ||||||
Total liabilities and shareholders' equity | $ | 7,304,847 | $ | 6,660,590 | ||||
The accompanying notes are an integral part of the financial statements.
2
iStar Financial Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
|
For the Three Months Ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
|||||||
Revenue: | |||||||||
Interest income | $ | 83,057 | 73,427 | ||||||
Operating lease income | 70,111 | 59,926 | |||||||
Other income | 11,941 | 4,329 | |||||||
Total revenue | 165,109 | 137,682 | |||||||
Costs and expenses: |
|||||||||
Interest expense | 51,976 | 47,148 | |||||||
Operating costscorporate tenant lease assets | 6,131 | 3,641 | |||||||
Depreciation and amortization | 15,315 | 12,307 | |||||||
General and administrative | 13,359 | 7,681 | |||||||
General and administrativestock-based compensation expense | 107,541 | 823 | |||||||
Provision for loan losses | 3,000 | 1,750 | |||||||
Loss on early extinguishment of debt | 12,172 | | |||||||
Total costs and expenses | 209,494 | 73,350 | |||||||
Net income (loss) before equity in earnings (loss) from joint ventures and unconsolidated subsidiaries, minority interest and other items | (44,385 | ) | 64,332 | ||||||
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries | 6,248 | (58 | ) | ||||||
Minority interest in consolidated entities | (133 | ) | (39 | ) | |||||
Net income (loss) from continuing operations | (38,270 | ) | 64,235 | ||||||
Income from discontinued operations | 3,018 | 3,454 | |||||||
Gain from discontinued operations | 136 | 264 | |||||||
Net income (loss) | (35,116 | ) | 67,953 | ||||||
Preferred dividend requirements | (19,600 | ) | (9,227 | ) | |||||
Net income (loss) allocable to common shareholders and HPU holders(1) | $ | (54,716 | ) | $ | 58,726 | ||||
Basic earnings per common share(2) | $ | (0.50 | ) | $ | 0.59 | ||||
Diluted earnings per common share(2)(3) | $ | (0.50 | ) | $ | 0.58 | ||||
Explanatory Notes:
The accompanying notes are an integral part of the financial statements.
3
iStar Financial Inc.
Consolidated Statement of Changes in Shareholders' Equity
(In thousands)
(unaudited)
|
Series B Preferred Stock |
Series C Preferred Stock |
Series D Preferred Stock |
Series E Preferred Stock |
Series F Preferred Stock |
Series G Preferred Stock |
Series H Preferred Stock |
Series I Preferred Stock |
High Performance Units |
Common Stock at Par |
Warrants and Options |
Additional Paid-In Capital |
Retained Earnings (Deficit) |
Accumulated Other Comprehensive Income (Losses) |
Treasury Stock |
Total |
|||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2003 | $ | 2 | $ | 1 | $ | 4 | $ | 6 | $ | 4 | $ | 3 | $ | | $ | | $ | 5,131 | $ | 107 | $ | 20,695 | $ | 2,678,772 | $ | (242,449 | ) | $ | 1,008 | $ | (48,056 | ) | $ | 2,415,228 | |||||||||||||||
Exercise of options | | | | | | | | | | 1 | (990 | ) | 10,730 | | | | 9,741 | ||||||||||||||||||||||||||||||||
Net proceeds from Preferred offering | | | | | | | 3 | 5 | | | | 203,040 | | | | 203,048 | |||||||||||||||||||||||||||||||||
Redemption of Preferred stock | (2 | ) | (1 | ) | | | | | (3 | ) | | | | | (155,956 | ) | | | | (155,962 | ) | ||||||||||||||||||||||||||||
Dividend of requirementpreferred | | | | | | | | | | | | | (19,600 | ) | | | (19,600 | ) | |||||||||||||||||||||||||||||||
Restricted stock units granted to employees | | | | | | | | | | | | 52,497 | | | | 52,497 | |||||||||||||||||||||||||||||||||
Issuance of stockDRIP/Stock purchase plan | | | | | | | | | | | | 15,643 | | | | 15,643 | |||||||||||||||||||||||||||||||||
High Performance Units sold to employees | | | | | | | | | 2,252 | | | | | | | 2,252 | |||||||||||||||||||||||||||||||||
Contributions from significant shareholder | | | | | | | | | | | | 1,935 | | | | 1,935 | |||||||||||||||||||||||||||||||||
Net income (loss) for the period | | | | | | | | | | | | | (35,116 | ) | | | (35,116 | ) | |||||||||||||||||||||||||||||||
Change in accumulated other comprehensive income (losses) | | | | | | | | | | | | | | (5,465 | ) | | (5,465 | ) | |||||||||||||||||||||||||||||||
Balance at March 31, 2004 | $ | | $ | | $ | 4 | $ | 6 | $ | 4 | $ | 3 | $ | | $ | 5 | $ | 7,383 | $ | 108 | $ | 19,705 | $ | 2,806,661 | $ | (297,165 | ) | $ | (4,457 | ) | $ | (48,056 | ) | $ | 2,484,201 | ||||||||||||||
The accompanying notes are an integral part of the financial statements.
4
iStar Financial Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
|
For the Three Months Ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
|||||||
Cash flows from operating activities: | |||||||||
Net income (loss) | $ | (35,116 | ) | $ | 67,953 | ||||
Adjustments to reconcile net income to cash flows provided by operating activities: | |||||||||
Minority interest in consolidated entities | 133 | 39 | |||||||
Non-cash expense for stock-based compensation | 51,438 | 861 | |||||||
Depreciation and amortization | 15,315 | 12,307 | |||||||
Depreciation and amortization from discontinued operations | 735 | 965 | |||||||
Amortization of deferred financing costs | 7,765 | 6,451 | |||||||
Amortization of discounts/premiums, deferred interest and costs on lending investments | (15,865 | ) | (12,491 | ) | |||||
Discounts, loan fees and deferred interest received | 10,640 | 4,086 | |||||||
Equity in earnings from joint ventures and unconsolidated subsidiaries | (6,248 | ) | 58 | ||||||
Distributions from operations of joint ventures | 74 | 1,933 | |||||||
Loss on early extinguishment of debt | 12,172 | | |||||||
Deferred operating lease income receivable | (5,465 | ) | (3,589 | ) | |||||
Gain from discontinued operations | (136 | ) | (264 | ) | |||||
Provision for loan losses | 3,000 | 1,750 | |||||||
Change in investments in and advances to joint ventures and unconsolidated subsidiaries | | (1,845 | ) | ||||||
Changes in assets and liabilities: | |||||||||
Decrease (increase) in accrued interest and operating lease income receivable | 228 | (280 | ) | ||||||
Decrease (increase) in deferred expenses and other assets | 8,012 | (7,304 | ) | ||||||
Increase (decrease) in accounts payable, accrued expenses and other liabilities | 42,747 | (18,631 | ) | ||||||
Cash flows provided by operating activities | 89,429 | 51,999 | |||||||
Cash flows from investing activities: | |||||||||
New investment originations | (710,835 | ) | (347,187 | ) | |||||
Add-on fundings under existing loan commitments | (16,647 | ) | (7,222 | ) | |||||
Net proceeds from sale of corporate tenant lease assets | 2,822 | 3,965 | |||||||
Repayments of and principal collections on loans and other lending investments | 144,880 | 112,338 | |||||||
Capital improvement projects on corporate tenant lease assets | (1,373 | ) | (114 | ) | |||||
Other capital expenditures on corporate tenant lease assets | (2,554 | ) | (896 | ) | |||||
Cash flows used in investing activities | (583,707 | ) | (239,116 | ) | |||||
Cash flows from financing activities: | |||||||||
Borrowings under secured revolving credit facilities | 1,031,335 | 340,003 | |||||||
Repayments under secured revolving credit facilities | (1,197,070 | ) | (111,930 | ) | |||||
Repayments under unsecured revolving credit facilities | (130,000 | ) | | ||||||
Borrowings under term loans | 198,771 | | |||||||
Repayments under term loans | (255,082 | ) | (1,937 | ) | |||||
Borrowings under unsecured bond offerings | 1,007,575 | 4,479 | |||||||
Repayments under unsecured notes | (110,000 | ) | | ||||||
Repayments under secured bond offerings | (70,514 | ) | (55,718 | ) | |||||
Borrowings under other debt obligations | | 24,396 | |||||||
Repayments under other debt obligations | (10,148 | ) | | ||||||
Increase in restricted cash held in connection with debt obligations | (9,708 | ) | (5,231 | ) | |||||
Prepayment penalty on early extinguishment of debt | (9,625 | ) | | ||||||
Payments for deferred financing costs | (1,246 | ) | (13,414 | ) | |||||
Distributions to minority interest in consolidated entities | (208 | ) | (40 | ) | |||||
Net proceeds from preferred offering/exchange | 203,048 | | |||||||
Redemption of preferred stock | (165,000 | ) | | ||||||
Preferred dividends paid | (9,778 | ) | (9,144 | ) | |||||
HPUs issued | 2,252 | | |||||||
Contribution from significant shareholder | 1,935 | | |||||||
Proceeds from exercise of options and issuance of DRIP/Stock purchase shares | 25,283 | 12,994 | |||||||
Cash flows provided by financing activities | 501,820 | 184,458 | |||||||
Increase (decrease) in cash and cash equivalents | 7,542 | (2,659 | ) | ||||||
Cash and cash equivalents at beginning of period | 80,090 | 15,934 | |||||||
Cash and cash equivalents at end of period | $ | 87,632 | $ | 13,275 | |||||
Supplemental disclosure of cash flow information: | |||||||||
Cash paid during the period for interest, net of amount capitalized | $ | 45,965 | $ | 52,595 | |||||
The accompanying notes are an integral part of the financial statements.
5
iStar Financial Inc.
Notes to Consolidated Financial Statements
Note 1Business and Organization.
BusinessiStar Financial Inc. (the "Company") is the leading publicly-traded finance company focused on the commercial real estate industry. The Company provides custom-tailored financing to private and corporate owners of real estate nationwide, including senior and junior mortgage debt, senior and mezzanine corporate capital, and corporate net lease financing. The Company, which is taxed as a real estate investment trust ("REIT"), seeks to deliver strong dividends and superior risk-adjusted returns on equity to shareholders by providing innovative and value-added financing solutions to its customers.
The Company's primary product lines include:
6
be paid by the corporate tenant on a triple net lease basis. Corporate tenant lease ("CTL") transactions have terms generally ranging from ten to 20 years and typically range in size from $20 million to $150 million. As of March 31, 2004, based on gross carrying values, the Company's CTL assets (including investments in and advances to joint ventures and unconsolidated subsidiaries and assets held for sale) represented 43% of its assets.
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:
OrganizationThe 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 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" or the "Leasing Subsidiary"), then the largest publicly-traded company specializing in corporate sale/leaseback transactions for 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 former external advisor in exchange for shares of the Company's common stock ("Common Stock") and converted its organizational form to a Maryland corporation. As part of the conversion to a Maryland corporation, the Company replaced its former dual class common share structure with a single class of Common Stock. The Company's Common Stock began trading on the New York Stock Exchange on
7
November 4, 1999. Prior to this date, the Company's common shares were traded on the American Stock Exchange.
Note 2Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in conformity with the instructions to Form 10-Q and Article 10. Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. The Consolidated Financial Statements include the accounts of the Company, its qualified REIT subsidiaries, its majority-owned and controlled partnerships and a partnership that is consolidated under the provisions of FASB Interpretation No. 46 ("FIN 46")(see Note 6).
Certain other investments in partnerships or joint ventures which the Company does not control are accounted for under the equity method (see Note 6). 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 statement of the Company's consolidated financial position at March 31, 2004 and December 31, 2003 and the results of its operations, changes in shareholders' equity and its cash flows for the three months ended March 31, 2004 and 2003, respectively. Such operating results may not be indicative of the expected results for any other interim periods or the entire year.
Note 3Summary of Significant Accounting Policies
Loans and other lending investments, netAs described in Note 4, "Loans and Other Lending Investments" includes the following investments: senior mortgages, subordinate mortgages, corporate/partnership loans, other lending investments-loans and other lending investments-securities. Management considers nearly all of its loans and other lending investments to be held-to-maturity, although a small number of investments may be classified as available-for-sale. Items classified as held-to-maturity are reflected at amortized historical cost. Items classified as available-for-sale are reported at fair values with unrealized gains and losses included in "Accumulated other comprehensive income (losses)" on the Company's Consolidated Balance Sheets and are not included in the Company's net income.
Corporate tenant lease assets and depreciationCTL assets are generally recorded at cost less accumulated depreciation. 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. Depreciation is computed using the straight-line method of cost recovery over estimated useful lives of 40.0 years for facilities, 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 facility for facility improvements.
CTL assets to be disposed of are reported at the lower of their carrying amount or fair value less costs to sell and are included in "Assets held for sale" on the Company's Consolidated Balance Sheets. 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
8
may not be recoverable. In management's opinion, CTL assets to be held and used are not carried at amounts in excess of their estimated recoverable amounts.
In accordance with the recent adoption of Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations" regarding the Company's acquisition of facilities, purchase costs are allocated to the tangible and intangible assets and liabilities acquired based on their estimated fair values. The value of the tangible assets, consisting of land, buildings and tenant improvements, are determined as if vacant, that is, at replacement cost. Intangible assets including the above-market or below-market value of leases, the value of in-place leases and the value of customer relationships are recorded at their relative fair values.
Above-market and below-market in-place lease values for owned CTL assets are recorded based on the present value (using a discount rate reflecting the risks associated with the leases acquired) of the difference between: (1) the contractual amounts to be paid pursuant to the leases negotiated and in-place at the time of acquisition of the facilities; and (2) management's estimate of fair market lease rates for the facility or equivalent facility, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market (or below-market) lease value is amortized as a reduction of (or, increase to) operating lease income over the remaining non-cancelable term of each lease plus any renewal periods with fixed rental terms that are considered to be below-market.
The total amount of other intangible assets are allocated to in-place lease values and customer relationship intangible values based on management's evaluation of the specific characteristics of each customer's lease and the Company's overall relationship with each customer. Characteristics to be considered in allocating these values include the nature and extent of the existing relationship with the customer, prospects for developing new business with the customer, the customer's credit quality and the expectation of lease renewals among other factors. Factors considered by management's analysis include the estimated carrying costs of the facility during a hypothetical expected lease-up period, current market conditions and costs to execute similar leases. Management also considers information obtained about a property in connection with its pre-acquisition due diligence. Estimated carrying costs include real estate taxes, insurance, other property operating costs and estimates of lost operating lease income at market rates during the hypothetical expected lease-up periods, based on management's assessment of specific market conditions. Management estimates costs to execute leases including commissions and legal costs to the extent that such costs are not already incurred with a new lease that has been negotiated in connection with the purchase of the facility. Management's estimates are used to determine these values. These intangible assets are included in "Deferred expenses and other assets" on the Company's Consolidated Balance Sheets.
The value of above-market or below-market in-place leases are amortized to expense over the remaining initial term of each lease. The value of customer relationship intangibles are amortized to expense over the initial and renewal terms of the leases, but no amortization period for intangible assets will exceed the remaining depreciable life of the building. In the event that a customer terminates its lease, the unamortized portion of each intangible, including market rate adjustments, lease origination costs, in-place lease values and customer relationship values, would be charged to expense.
9
Capitalized interestThe Company capitalizes interest costs incurred during the construction period on qualified build-to-suit projects for corporate tenants, including investments in joint ventures accounted for under the equity method. No interest was capitalized during the three months ended March 31, 2004 and 2003.
Cash and cash equivalentsCash and cash equivalents include cash held in banks or invested in money market funds with original maturity terms of less than 90 days.
Restricted cashRestricted cash represents amounts required to be maintained in escrow under certain of the Company's debt obligations and leasing transactions.
Revenue recognitionThe Company's revenue recognition policies are as follows:
Loans and other lending investments: Management considers nearly all of its loans and other lending investments to be held-to-maturity, although a small number of investments may be classified as available-for-sale. The Company reflects held-to-maturity investments at historical cost adjusted for allowance for loan losses, unamortized acquisition premiums or discounts and unamortized deferred loan fees. Unrealized gains and losses on available-for-sale investments are included in "Accumulated other comprehensive income (losses)" on the Company's Consolidated Balance Sheets and are not included in the Company's net income. On occasion, the Company may acquire loans at small 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. 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. If loans with premiums, discounts, loan origination or exit fees are prepaid, the Company immediately recognizes the unamortized portion as a decrease or increase in the prepayment gain or loss. Interest income is recognized using the effective interest method applied on a loan-by-loan basis.
A small number 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 "Deferred operating lease income receivable" on the Company's Consolidated Balance Sheets.
Provision for loan lossesThe Company's accounting policies require that an allowance for estimated loan 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 loan losses. In establishing loan
10
loss provisions, management periodically evaluates and analyzes the Company's assets, historical and industry loss experience, economic conditions and trends, collateral values and quality, and other relevant factors. Specific valuation allowances are established for impaired loans in the amount by which the carrying value, before allowance for estimated losses, exceeds the fair value of collateral less disposition costs on an individual loan basis. Management considers a loan to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis. Management measures these impaired loans at the fair value of the loans' underlying collateral less estimated disposition costs. Impaired loans may be left on accrual status during the period the Company is pursuing repayment of the loan; however, these loans are placed on non-accrual status at such time as: (1) management believes that the potential risk exists that scheduled debt service payments will not be met within the coming 12 months; (2) the loans become 90 days delinquent; (3) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (4) the net realizable value of the loan's underlying collateral approximates the Company's carrying value of such loan. 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 loan losses. Charge-offs occur when loans, or a portion thereof, are considered uncollectible and of such little value that further pursuit of collection is not warranted. Management also provides a loan 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.
The Company's loans are generally secured by real estate assets or are corporate lending arrangements to entities with significant rental real estate operations (e.g., an unsecured loan to a company which operates residential apartments or retail, industrial or office facilities as rental real estate). While the underlying real estate assets for the corporate lending instruments may not serve as collateral for the Company's investments in all cases, the Company evaluates the underlying real estate assets when estimating loan loss exposure because the Company's loans generally have preclusions as to how much senior and/or secured debt the customer may borrow ahead of the Company's position.
Allowance for doubtful accountsThe Company's accounting policies require a reserve on the Company's accrued operating lease income receivable balances and on the deferred operating lease income receivable balances. The reserve covers asset specific problems (e.g., bankruptcy) as they arise, as well as, a portfolio reserve based on management's evaluation of the credit risks associated with these receivables.
Accounting for derivative instruments and hedging activityIn accordance with Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities" as amended by Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging ActivityDeferral of the Effective date of FASB 133," Statement of Financial Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan Amendment of FASB Statement 133" and Statement of Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative Instrument and Hedging Activities," the Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures 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
11
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.
Accounting for the impairment or disposal of long-lived assetsIn accordance with the Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets" the Company presents current operations prior to the disposition of CTL assets and prior period results of such operations in discontinued operations in the Company's Consolidated Statements of Operations.
Reclassification of extraordinary loss on early extinguishment of debtIn accordance with the Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," the Company can no longer aggregate the gains and losses from the early extinguishment of debt and, if material, classify them as an extraordinary item. The Company is not prohibited from classifying such gains and losses as extraordinary items, so long as they meet the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30 ("APB 30"), "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"; however, due to the nature of the Company's operations, such treatment may not be available to the Company. Any gains or losses on early extinguishments of debt that were previously classified as extraordinary items in prior periods presented that do not meet the criteria in APB 30 for classification as an extraordinary item are reclassified to income from continuing operations.
Income taxesThe 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. In addition, the Company is allowed several other deductions in computing its "REIT taxable income," including non-cash items such as depreciation expense. These deductions allow the Company to shelter a portion of its operating cash flow from its dividend payout requirement under federal tax laws. The Company intends to operate in a manner consistent with and to elect to be treated as a REIT for tax purposes. iStar Operating Inc. ("iStar Operating") and TriNet Management Operating Company, Inc. ("TMOC"), the Company's taxable REIT subsidiaries, 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. Accordingly, except for the Company's taxable REIT subsidiaries, no current or deferred taxes are provided for in the Consolidated Financial Statements. During the third quarter 2003, TMOC was liquidated. See Note 6 for a detailed discussion on the ownership structure and operations of iStar Operating and TMOC.
Earnings per common shareIn accordance with the Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earning per Share," 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 allocable to common shareholders by the weighted average number of shares outstanding for the period. Diluted earnings per share ("Diluted EPS") reflects the potential dilution
12
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.
ReclassificationsCertain prior year amounts have been reclassified in the Consolidated Financial Statements and the related notes to conform to the 2004 presentation.
Use of estimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
New accounting standardsIn December 2003, the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition" which supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21. The Company adopted the provisions of this statement immediately, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," issued during the third quarter of 2003, provides guidance on revenue recognition for revenues derived from a single contract that contain multiple products or services. EITF 00-21 also provides additional requirements to determine when these revenues may be recorded separately for accounting purposes. The Company adopted EITF 00-21 on July 1, 2003, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity." This standard requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatorily redeemable financial instruments, (2) obligations to repurchase the issuer's equity shares by transferring assets; and (3) certain obligations to issue a variable number of shares. The FASB recently issued FASB Staff Position ("FSP") 150-3, which defers the provisions of paragraphs 9 and 10 of SFAS No. 150 indefinitely as they apply to mandatorily redeemable noncontrolling interests associated with finite-lived entities. The Company adopted the provisions of this statement, as required, on July 1, 2003, and it did not have a significant financial impact on the Company's Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of ARB 51. FIN 46 provides guidance on identifying entities for which control is achieved through means other than through voting rights (a "variable interest entity" or "VIE"), and how to determine when and which business enterprise should consolidate a VIE. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The transitional disclosure requirements took effect immediately and were required for all financial statements initially issued or modified after January 31, 2003. Immediate consolidation is required for VIEs entered into or modified after February 1, 2003 in which the Company is deemed the primary beneficiary. For VIEs in which the Company entered into prior to February 1, 2003, FIN 46 was deferred to the quarter ended March 31, 2004. In December 2003, the FASB issued a revised FIN 46 that modifies and clarifies various aspects
13
of the original Interpretation. FIN 46 applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of controlling financial interest, (2) the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interest. The adoption of the additional consolidation provisions of FIN 46 did not have a material impact on the Company's Consolidated Financial Statements (see Note 6).
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based CompensationTransition and Disclosure," an amendment of FASB Statement No. 123 ("SFAS No. 123"). This statement provides alternative transition methods for a voluntary change to the fair value basis of accounting for stock-based employee compensation. However, this Statement does not permit the use of the original SFAS No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation, description of transition method utilized and the effect of the method used on reported results. The Company adopted SFAS No. 148 with retroactive application to grants made subsequent to January 1, 2002 with no material effect on the Company's Consolidated Financial Statements.
SFAS No. 148 disclosure requirements, including the effect on net income and earnings per share if the fair value-based method had been applied to all outstanding and unvested stock awards in each period, are presented below (in thousands except per share amounts):
|
For the Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
||||||
Net income (loss) allocable to common shareholders and HPU holders, as reported(1) | $ | (54,716 | ) | $ | 58,726 | |||
Total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects | | (24 | ) | |||||
Pro forma net income (loss) allocable to common shareholders and HPU holders | $ | (54,716 | ) | $ | 58,702 | |||
Earnings per share: | ||||||||
Basicas reported(2) | $ | (0.50 | ) | $ | 0.59 | |||
Basicpro forma(2) | $ | (0.50 | ) | $ | 0.59 | |||
Dilutedas reported(2)(3) | $ | (0.50 | ) | $ | 0.58 | |||
Dilutedpro forma(2)(3) | $ | (0.50 | ) | $ | 0.58 |
Explanatory Notes:
14
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies," Statement of Financial Accounting Standards No. 57, "Related Party Disclosures," Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" and rescinds FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5." It requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee regardless if the Company receives separately identifiable consideration (e.g., a premium). The disclosure requirements became effective December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company's Consolidated Financial Statements, nor is it expected to have a material impact in the future.
15
iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 4Loans and Other Lending Investments
The following is a summary description of the Company's loans and other lending investments (in thousands)(1):
|
|
|
|
Carrying Value as of |
|
|
|
|
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Type of Investment |
Underlying Property Type |
# of Borrowers In Class |
Principal Balances Outstanding |
March 31, 2004 |
December 31, 2003 |
Effective Maturity Dates |
Contractual Interest Payment Rates(2)(3) |
Contractual Interest Accrual Rates(2)(3) |
Principal Amortization |
Participation Features |
||||||||||||||
Senior Mortgages(4) | Office/Residential/ Retail/Industrial, R&D/ Conference Center/ Mixed Use/Hotel/ Entertainment, Leisure/Other | 43 | $ | 2,329,802 | $ | 2,291,001 | $ | 2,106,791 | 2004 to 2022 | Fixed: 7.03% to 10.30% Variable: LIBOR + 1.50% to LIBOR + 7.25% |
Fixed: 7.03% to 10.30% Variable: LIBOR + 1.50% to LIBOR + 7.25% |
Yes | (5) | Yes | (6) | |||||||||
Subordinate Mortgages |
Office/Residential/ Retail/Mixed Use/ Hotel |
22 |
573,208 |
572,345 |
550,572 |
2004 to 2013 |
Fixed: 7.00% to 18.00% Variable: LIBOR + 1.79% to LIBOR + 7.47% |
Fixed: 7.32% to 18.00% Variable: LIBOR + 1.79% to LIBOR + 7.47% |
Yes |
(5) |
No |
|||||||||||||
Corporate/Partnership Loans |
Office/Residential/ Retail/Industrial, R&D/ Mixed Use/Hotel/ Entertainment, Leisure/ Other |
30 |
796,289 |
767,218 |
710,469 |
2004 to 2013 |
Fixed: 6.00% to 15.00% Variable: LIBOR + 3.50% to LIBOR + 12.77% |
Fixed: 7.33% to 17.50% Variable: LIBOR + 3.50% to LIBOR + 12.77% |
Yes |
(5) |
Yes |
(6) |
||||||||||||
Other Lending InvestmentsLoans |
Office/Mixed Use/Hotel |
4 |
20,303 |
20,596 |
23,767 |
2004 to 2008 |
Fixed: 10.00% to 15.00% |
Fixed: 15.00% to 17.50% |
No |
Yes |
(6) |
|||||||||||||
Other Lending InvestmentsSecurities(7) |
Residential/Industrial, R&D/ Hotel/ Entertainment, Leisure/Other |
11 |
388,137 |
370,298 |
344,511 |
2005 to 2030 |
Fixed: 6.75% to 10.00% Variable: LIBOR + 2.82% to LIBOR + 5.00% |
Fixed: 6.75% to 10.00% Variable: LIBOR +2.82% to LIBOR + 5.00% |
Yes |
(5) |
No |
|||||||||||||
Gross Carrying Value |
$ |
4,021,458 |
$ |
3,736,110 |
||||||||||||||||||||
Provision for Loan Losses |
(36,436 |
) |
(33,436 |
) |
||||||||||||||||||||
Total, Net |
$ |
3,985,022 |
$ |
3,702,674 |
||||||||||||||||||||
Explanatory Notes:
16
During the three months ended March 31, 2004 and 2003, respectively, the Company and its affiliated ventures originated or acquired an aggregate of approximately $408.3 million and $289.7 million in loans and other lending investments, funded $16.6 million and $7.2 million under existing loan commitments, and received principal repayments of $144.9 million and $112.3 million.
As of March 31, 2004, the Company had 22 loans with unfunded commitments. The total unfunded commitment amount was approximately $328.9 million, of which $15.1 million was discretionary and $313.8 million was non-discretionary.
A portion of the Company's loans and other lending investments are pledged as collateral under either the iStar Asset Receivables secured notes, the secured revolving credit facilities or secured term loans (see Note 7 for a description of the Company's secured and unsecured debt).
The Company has reflected provisions for loan losses of approximately $3.0 million and $1.8 million in its results of operations during the three months ended March 31, 2004 and 2003, respectively. These provisions represent loan 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 credit quality of the underlying collateral. During the 12 months ended December 31, 2003, the Company took a $3.3 million direct impairment on a $30.4 million partnership loan. In August 2003 the borrower stopped making its debt service payments due to insufficient cash flow caused by vacancies at the property. After taking the impairment charge and lowering the book value of the asset to $27.1 million, management believes there is adequate collateral to support the book value of the asset.
Changes in the Company's provision for loan losses were as follows:
Provision for loan losses, December 31, 2002 | $ | 29,250 | |||
Additional provision for loan losses | 7,500 | ||||
Impairment on loans | (3,314 | ) | |||
Provision for loan losses, December 31, 2003 | 33,436 | ||||
Additional provision for loan losses | 3,000 | ||||
Provision for loan losses, March 31, 2004 | $ | 36,436 | |||
Note 5Corporate Tenant Lease Assets
During the three months ended March 31, 2004 and 2003, respectively, the Company acquired an aggregate of approximately $302.5 million and $57.5 million in CTL assets and disposed of CTL assets for net proceeds of approximately $2.8 million and $4.0 million. In relation to the CTL assets acquired during the quarter ended March 31, 2004, the Company allocated approximately $9.0 million of purchase costs to intangible assets based on their estimated fair values (see Note 3). As of March 31, 2004 and December 31, 2003, the Company had unamortized purchase related intangible assets of approximately $33.5 million and $24.9 million, respectively, and included these in "Deferred expenses and other assets" on the Company's Consolidated Balance Sheets.
17
The Company's investments in CTL assets, at cost, were as follows (in thousands):
|
March 31, 2004 |
December 31, 2003 |
||||||
---|---|---|---|---|---|---|---|---|
Facilities and improvements | $ | 2,429,118 | $ | 2,210,592 | ||||
Land and land improvements | 597,795 | 468,708 | ||||||
Direct financing lease | 35,327 | 35,472 | ||||||
Less: accumulated depreciation | (197,985 | ) | (178,887 | ) | ||||
Corporate tenant lease assets, net | $ | 2,864,255 | $ | 2,535,885 | ||||
Under certain leases, the Company is entitled to receive additional participating lease payments to the extent gross revenues of the corporate tenant exceed a base amount. The Company did not earn any such additional participating lease payments on these leases during the three months ended March 31, 2004 and 2003, respectively. In addition, the Company also receives reimbursements from customers for certain facility operating expenses including common area costs, insurance and real estate taxes. Customer expense reimbursements for the three months ended March 31, 2004 and 2003 were approximately $7.7 million and $7.2 million, respectively, and are included as a reduction of "Operating costscorporate tenant lease assets" on the Company's Consolidated Statements of Operations.
The Company is subject to expansion option agreements with two existing customers which could require the Company to fund and to construct up to 161,000 square feet of additional adjacent space on which the Company would receive additional operating lease income under the terms of the option agreements. In addition, upon exercise of such expansion option agreements, the corporate tenants would be required to simultaneously extend their existing lease terms for additional periods ranging from six to ten years.
As of March 31, 2004 and December 31, 2003, there was one CTL asset with a book value of $24.8 million classified as "Assets held for sale" on the Company's Consolidated Balance Sheets.
On February 25, 2004, the Company sold one CTL asset for net proceeds of approximately $2.8 million and realized a gain of approximately $136,000. On January 7, 2003, the Company sold one CTL asset for net proceeds of $4.0 million and realized a gain of approximately $264,000.
For the three months ended March 31, 2004 and 2003, the results of operations from CTL assets sold through September 30, 2004 (prior to their sale) or held for sale as of September 30, 2004 are classified in "Income (loss) from discontinued operations" on the Company's Consolidated Statements of Operations. Gains from CTL assets sold during the three months ended March 31, 2004 and 2003, are classified as "Gain from discontinued operations" on the Company's Consolidated Statements of Operations.
Note 6Joint Ventures, Unconsolidated Subsidiaries and Minority Interest
Income or loss generated from the Company's joint venture investments and unconsolidated subsidiaries is included in "Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries" on the Company's Consolidated Statements of Operations.
The Company's ownership percentages, its investments in and advances to unconsolidated joint ventures and subsidiaries, the Company's pro rata share of its ventures' third-party, non-recourse debt
18
as of March 31, 2004 and its respective income for the three months ended March 31, 2004 are presented below (in thousands):
|
|
|
|
Pro Rata Share of Third-Party Non-Recourse Debt(1) |
Third-Party Debt |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
JV Income for the Three Months Ended March 31, 2004 |
|||||||||||||
|
Ownership % |
Equity Investment |
Interest Rate |
Scheduled Maturity Date |
||||||||||||
Unconsolidated Joint Ventures: | ||||||||||||||||
Sunnyvale | 44.70 | % | N/A | $ | 73 | N/A | N/A | N/A | ||||||||
CTC I | 50.00 | % | 14,312 | 6,135 | 35,307 | 7.87% | 2011 | |||||||||
ACRE Simon | 20.00 | % | 4,993 | 40 | 6,419 | 7.61% 8.43% | Various through 2011 | |||||||||
Total | $ | 19,305 | $ | 6,248 | $ | 41,726 | ||||||||||
Explanatory Note:
Investments in and advances to unconsolidated joint ventures: At March 31, 2004, the Company had investments in two unconsolidated joint ventures: (1) Corporate Technology Centre Associates, LLC ("CTC I"), whose external member is Corporate Technology Centre Partners, LLC; and (2) ACRE Simon, LLC ("ACRE"), whose external partner is William E. Simon & Sons Realty Partners, L.P. These ventures were formed for the purpose of operating, acquiring and, in certain cases, developing CTL facilities.
At March 31, 2004, the ventures held nine net leased facilities. The Company's combined investment in these joint ventures at March 31, 2004 was $19.3 million. The joint ventures' carrying value for the nine facilities owned at March 31, 2004 was $127.4 million. In aggregate, the joint ventures had total assets of $151.5 million and total liabilities of $105.1 million as of March 31, 2004, and net income of $12.7 million for the three months ended March 31, 2004. The Company accounts for these investments under the equity method because the Company's joint venture partners have certain participating rights giving them shared control over the ventures.
Currently, the limited partners of TriNet Sunnyvale Partners L.P. ("Sunnyvale") have the option to put their partnership interest to the Company for cash; however, the Company may elect to deliver 297,728 shares of Common Stock in lieu of cash. As a result, on March 31, 2004, the Company began accounting for its 44.70% interest in Sunnyvale as a VIE (see Note 3) and therefore consolidates this partnership for financial statement reporting purposes. Prior to its consolidation, the Company accounted for this joint venture under the equity method for financial statement reporting purposes and it was presented in "Investments in and advances to joint ventures and unconsolidated subsidiaries," on the Company's Consolidated Balance Sheets and earnings from the joint venture were included in "Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries" in the Company's Consolidated Statements of Operations.
On March 30, 2004, CTC Associates II L.P., a wholly-owned subsidiary of the Company's CTC I joint venture, conveyed its interest in two buildings and the related property to the mortgage lender in exchange for satisfaction of the entity's obligations of the related loan.
19
Investments in and advances to unconsolidated subsidiaries: The Company has an investment in iStar Operating, a taxable REIT subsidiary that, through a wholly-owned subsidiary, services the Company's loans and certain loan portfolios owned by third parties. The Company owns all of the non-voting preferred stock and a 95.00% economic interest in iStar Operating. The common shareholder, an entity controlled by a former director of the Company, is the owner of all the voting common stock and a 5.00% economic interest in iStar Operating. As of March 31, 2004, there have never been any distributions to the common shareholder, nor does the Company expect to make any in the future. At any time, the Company has the right to acquire all of the common stock of iStar Operating at fair market value, which the Company believes to be nominal.
iStar Operating has elected to be treated as a taxable REIT subsidiary for purposes of maintaining compliance with the REIT provisions of the Code and prior to July 1, 2003 was accounted for under the equity method for financial statement reporting purposes and was presented in "Investments in and advances to joint ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance Sheets. As of July 1, 2003, the Company consolidates this entity as a VIE (see Note 3) with no material impact. Prior to its consolidation, the Company charged an allocated portion of its general overhead expenses to iStar Operating based on the number of employees at iStar Operating as a percentage of the Company's total employees. These general overhead expenses were in addition to the direct general and administrative costs of iStar Operating. As of March 31, 2004, iStar Operating had no debt obligations.
In addition, the Company had an investment in TMOC, an entity originally formed to make a $2.0 million investment in the convertible debt securities of a real estate company which trades on the Mexican Stock Exchange. This investment was made by TriNet prior to its acquisition by the Company in 1999. On June 30, 2003, the $2.0 million investment was fully repaid and during the third quarter 2003, the entity was liquidated.
Minority Interest: As discussed above, on March 31, 2004, the Company began accounting for its 44.70% interest in the Sunnyvale joint venture as a VIE and therefore consolidates this partnership for financial statement purposes and records the minority interest of the external partner in "Minority interest in consolidated entities" on the Company's Consolidated Balance Sheets.
On September 29, 2003 the Company acquired a 96.00% interest in iStar Harborside LLC, an infinite life partnership, with the external partner holding the remaining 4.00% interest. The Company consolidates this partnership for financial statement purposes and records the minority interest of the external partner in "Minority interest in consolidated entities" on the Company's Consolidated Balance Sheets.
The Company also holds a 98.00% interest in TriNet Property Partners, L.P with the external partners holding the remaining 2.00% interest. As of August 1999, the external partners have the option to convert their partnership interest into cash; however, the Company may elect to deliver 72,819 shares of Common Stock in lieu of cash. The Company consolidates this partnership for financial statement purposes and records the minority interest of the external partner in "Minority interest in consolidated entities" on the Company's Consolidated Balance Sheets.
20
Note 7Debt Obligations
As of March 31, 2004 and December 31, 2003, the Company has debt obligations under various arrangements with financial institutions as follows (in thousands):
|
|
Carrying Value as of |
|
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Maximum Amount Available |
March 31, 2004 |
December 31, 2003 |
Stated Interest Rates(1) |
Scheduled Maturity Date |
||||||||||
Secured revolving credit facilities: | |||||||||||||||
Line of credit(2) | $ | 250,000 | $ | | $ | 88,640 | LIBOR + 1.50% 2.05% | March 2005 | |||||||
Line of credit | 700,000 | 148,531 | 310,364 | LIBOR + 1.40% 2.15% | January 2007(3) | ||||||||||
Line of credit | 500,000 | 206,598 | 117,211 | LIBOR + 1.75% 2.25% | August 2005(3) | ||||||||||
Line of credit | 500,000 | 175,728 | 180,376 | LIBOR + 1.50% 2.25% | September 2005 | ||||||||||
Unsecured revolving credit facilities: | |||||||||||||||
Line of credit | 300,000 | | 130,000 | LIBOR + 2.125% | July 2004 | ||||||||||
Total revolving credit facilities | $ | 2,250,000 | $ | 530,857 | $ | 826,591 | |||||||||
Secured term loans: | |||||||||||||||
Secured by corporate tenant lease assets | | 193,000 | LIBOR + 1.85% | July 2006(4) | |||||||||||
Secured by corporate tenant lease assets | 139,471 | 140,440 | 7.44% | March 2009 | |||||||||||
Secured by corporate tenant lease assets | 135,000 | 135,000 | LIBOR + 1.75% | October 2008 | |||||||||||
Secured by corporate tenant lease assets | 41,440 | | 7.19% and 7.22% | January 2018 and December 2026 | |||||||||||
Secured by corporate tenant lease assets | 24,000 | | LIBOR + 1.25% | November 2004 | |||||||||||
Secured by corporate tenant lease assets | 92,296 | 92,876 | 6.00% 11.38% | Various through 2022 | |||||||||||
Secured by corporate bond investments(5) | 181,282 | | LIBOR + 1.05% 1.50% | January 2006 | |||||||||||
Secured by corporate lending investments | 77,628 | 77,938 | 6.55% | November 2005 | |||||||||||
Secured by corporate lending investments | 60,699 | 60,874 | 6.41% | January 2013 | |||||||||||
Secured by corporate lending investments | | 60,000 | LIBOR + 2.50% | June 2004(6) | |||||||||||
Secured by corporate lending investments | 48,000 | 48,000 | LIBOR + 2.125% | July 2008 | |||||||||||
Total term loans | 799,816 | 808,128 | |||||||||||||
Less: debt premium / (discount) | 6,090 | (128 | ) | ||||||||||||
Total secured term loans | 805,906 | 808,000 | |||||||||||||
iStar Asset Receivables secured notes: | |||||||||||||||
STARs Series 2002-1: | |||||||||||||||
Class A1 | 33,484 | 40,011 | LIBOR + 0.26% | June 2004(7) | |||||||||||
Class A2 | 381,296 | 381,296 | LIBOR + 0.38% | December 2009(7) | |||||||||||
Class B | 39,955 | 39,955 | LIBOR + 0.65% | April 2011(7) | |||||||||||
Class C | 26,637 | 26,637 | LIBOR + 0.75% | May 2011(7) | |||||||||||
Class D | 21,310 | 21,310 | LIBOR + 0.85% | January 2012(7) | |||||||||||
Class E | 42,619 | 42,619 | LIBOR + 1.235% | January 2012(7) | |||||||||||
Class F | 26,637 | 26,637 | LIBOR + 1.335% | January 2012(7) | |||||||||||
Class G | 21,309 | 21,309 | LIBOR + 1.435% | January 2012(7) | |||||||||||
Class H | 26,637 | 26,637 | 6.35% | January 2012(7) | |||||||||||
Class J | 26,637 | 26,637 | 6.35% | May 2012(7) | |||||||||||
Class K | 26,637 | 26,637 | 6.35% | May 2012(7) | |||||||||||
Total STARs Series 2002-1 | 673,158 | 679,685 | |||||||||||||
Less: debt discount | (3,993 | ) | (4,090 | ) | |||||||||||
STARs Series 2003-1: | |||||||||||||||
Class A1 | 208,467 | 235,808 | LIBOR + 0.25% | October 28, 2005(8) | |||||||||||
Class A2 | 225,227 | 248,206 | LIBOR +0.35% | August 28, 2010(8) | |||||||||||
Class B | 16,744 | 18,452 | LIBOR + 0.55% | July 28, 2011(8) | |||||||||||
Class C | 18,418 | 20,297 | LIBOR + 0.65% | April 28, 2012(8) | |||||||||||
Class D | 11,720 | 12,916 | LIBOR + 0.75% | October 28, 2012(8) | |||||||||||
Class E | 13,395 | 14,762 | LIBOR + 1.05% | May 28, 2013(8) | |||||||||||
Class F | 13,395 | 14,762 | LIBOR + 1.10% | June 28, 2013(8) | |||||||||||
Class G | 11,720 | 12,916 | LIBOR + 1.25% | June 28, 2013(8) | |||||||||||
Class H | 11,721 | 12,916 | 4.97% | June 28, 2013(8) | |||||||||||
Class J | 13,394 | 14,761 | 5.07% | June 28, 2013(8) | |||||||||||
Class K | 23,441 | 25,833 | 5.56% | June 28, 2013(8) | |||||||||||
Total STARS Series 2003-1 | 567,642 | 631,629 | |||||||||||||
Total iStar Asset Receivables secured notes | 1,236,807 | 1,307,224 | |||||||||||||
Unsecured notes: | |||||||||||||||
LIBOR + 1.25% Senior Notes(9) | 175,000 | | LIBOR + 1.25% | March 2007 | |||||||||||
4.875% Senior Notes(10) | 350,000 | | 4.875% | January 2009 | |||||||||||
5.125% Senior Notes(11) | 250,000 | | 5.125% | April 2011 | |||||||||||
5.70% Senior Notes(12) | 250,000 | | 5.70% | March 2014 | |||||||||||
6.00% Senior Notes | 350,000 | 350,000 | 6.00% | December 2010 | |||||||||||
6.50% Senior Notes | 150,000 | 150,000 | 6.50% | December 2013 | |||||||||||
7.00% Senior Notes | 185,000 | 185,000 | 7.00% | March 2008 | |||||||||||
7.70% Notes(13)(14) | 100,000 | 100,000 | 7.70% | July 2017 | |||||||||||
7.95% Notes(13)(14) | 50,000 | 50,000 | 7.95% | May 2006 | |||||||||||
8.75% Notes(15) | 240,000 | 350,000 | 8.75% | August 2008 | |||||||||||
Total unsecured notes | 2,100,000 | 1,185,000 | |||||||||||||
Less: debt discount | (63,478 | ) | (47,921 | ) | |||||||||||
Plus: impact of pay-floating swap agreements(16) | 20,351 | 690 | |||||||||||||
Total unsecured notes | 2,056,873 | 1,137,769 | |||||||||||||
Other debt obligations | | 34,148 | Various | Various | |||||||||||
Total debt obligations | $ | 4,630,443 | $ | 4,113,732 | |||||||||||
21
Explanatory Notes:
22
Availability of amounts under the secured revolving credit facilities are based on percentage borrowing base calculations. In addition, certain of the Company's debt obligations contain covenants. These covenants are both financial and non-financial in nature. Significant financial covenants include limitations on the Company's ability to incur indebtedness beyond specified levels, restrictions on the Company's ability to incur liens on assets and limitations on the amount and type of restricted payments, such as repurchases of its own equity securities, that the Company makes. Significant non-financial covenants include a requirement in its publicly-held debt securities that the Company offer to repurchase those securities at a premium if the Company undergoes a change of control. As of March 31, 2004, the Company believes it is in compliance with all financial and non-financial covenants on its debt obligations.
During the three months ended March 31, 2004, the Company issued $850.0 million aggregate principal amount of fixed-rate Senior Notes bearing interest at annual rates ranging from 4.875% to 5.125% and maturing between 2009 and 2014 and $175.0 million of variable-rate Senior Notes bearing interest at annual rates of three-month LIBOR+1.25% and maturing in 2007. The proceeds from these transactions were used to repay secured indebtedness and to fund new investment activity.
On March 29, 2004, the Company redeemed $110.0 million aggregate principal amount of its outstanding 8.75% Senior Notes due 2008 at a price of 108.75% of par. In connection with this redemption, the Company recognized a charge to income of $11.5 million included in "Loss on early extinguishment of debt" on the Company's Consolidated Statements of Operations.
On March 12, 2004, one of the Company's $700.0 million secured facilities was amended to reduce the maximum amount available to $250.0 million, to shorten the maturity to March 2005 and to reduce the stated interest rate on first mortgages and CTL assets to LIBOR + 1.50% and on subordinate and mezzanine lending investments to LIBOR + 2.05%.
On March 10, 2004, the Company repaid its $193.0 million term loan financing secured by 15 CTL assets with an original maturity of July 2004.
On January 13, 2004, the Company closed $200.0 million of term financing with a leading financial institution that is secured by certain corporate bond investments and other lending securities. A number of these investments were previously financed under existing credit facilities. The new facility bears interest at LIBOR + 1.05%-1.50% and has a final maturity date of January 2006.
On December 5, 2003, the Company issued $350.0 million of 6.00% Senior Notes due in 2010 and $150.0 million of 6.50% Senior Notes due in 2013. The Notes due 2010 were sold at 99.44% of their principal amount and the Notes due 2013 were sold at 99.23% of their principal amount. The Notes are unsecured senior obligations of the Company. The Company used the net proceeds to partially repay secured indebtedness.
On September 29, 2003, the Company closed a $135.0 million term loan secured by a CTL asset it acquired the same day. The loan has a five-year term and bears interest at LIBOR + 1.75%.
On May 21, 2003, a wholly-owned subsidiary of the Company issued iStar Asset Receivables ("STARs"), Series 2003-1, the Company's proprietary match funding program, consisting of $645.8 million of investment-grade bonds secured by the subsidiary's structured finance and CTL assets, which had an aggregate outstanding carrying value of approximately $738.1 million at inception. Principal payments received on the assets will be utilized to repay the most senior class of the bonds
23
then outstanding. The maturity of the bonds match funds the maturity of the underlying assets financed under the program. The weighted average interest rate on the bonds, on an all-floating rate basis, was approximately LIBOR + 0.47% at inception. For accounting purposes, this transaction was treated as a secured financing: the underlying assets and STARs liabilities remained on the Company's Consolidated Balance Sheets, and no gain on sale was recognized.
On April 8, 2003, the Company issued an additional $35.0 million of 7.00% Senior Notes due March 2008, bringing the aggregate principal amount of the Senior Notes to $185.0 million. The add-on Notes have identical terms to the Senior Notes issued in March 2003, although they were issued at 102.75% of their principal amount, to yield 6.34% per annum.
On March 14, 2003, the Company retired the 6.75% Dealer Remarketable Securities of its Leasing Subsidiary by exchanging those securities for newly issued $150.0 million 7.00% Senior Notes due March 2008.
During the three months ended March 31, 2004 the Company incurred an aggregate loss on early extinguishment of debt of approximately $12.2 million as a result of the early retirement of certain debt obligations.
As of March 31, 2004, future expected/scheduled maturities of outstanding long-term debt obligations are as follows (in thousands)(1):
2004 (remaining nine months) | $ | 57,484 | ||
2005 | 671,230 | |||
2006 | 231,282 | |||
2007 | 326,351 | |||
2008 | 608,000 | |||
Thereafter | 2,777,126 | |||
Total principal maturities | 4,671,473 | |||
Net unamortized debt discounts | (61,381 | ) | ||
Impact of pay-floating swap agreements | 20,351 | |||
Total debt obligations | $ | 4,630,443 | ||
Explanatory Note:
Note 8Shareholders' Equity
The Company's charter 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. The Company has 4.0 million shares of 8.00% Series D Cumulative Redeemable Preferred Stock, 5.6 million shares of 7.875% Series E Cumulative Redeemable Preferred Stock, 4.0 million shares of 7.80% Series F Cumulative Redeemable Preferred Stock, 3.2 million shares of 7.65% Series G Cumulative Redeemable Preferred Stock and 5.0 million shares of 7.50% Series I Cumulative Redeemable Preferred Stock. The Series D, E, F, G, and I Cumulative Redeemable Preferred Stock are redeemable without premium at the option of the Company at their respective liquidation preferences beginning on October 8, 2002, July 18, 2008, September 29, 2008, December 19, 2008 and March 1, 2009, respectively.
24
In February 2004, the Company redeemed 2.0 million outstanding shares of its 9.375% Series B Cumulative Redeemable Preferred Stock and 1.3 million outstanding shares of its 9.20% Series C Cumulative Redeemable Preferred Stock. The redemption price was $25.00 per share, plus accrued and unpaid dividends to the redemption date of $0.46 and $0.45 for the Series B and C Preferred Stock, respectively. In connection with this redemption, the Company recognized a charge to net income allocable to common shareholders and HPU holders of approximately $9.0 million included in "Preferred dividend requirements" on the Company's Consolidated Statements of Operations.
In February 2004, the Company completed an underwritten public offering of 5.0 million shares of its 7.50% Series I Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning March 1, 2009. The Company used the net proceeds from the offering of $121.0 million to redeem approximately $110.0 million aggregate principal amount of its outstanding 8.75% Senior Notes due 2008 at a price of 108.75% of their principal amount plus accrued interest to the redemption date.
In January 2004, the Company completed a private placement of 3.3 million shares of its Series H Variable Rate Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and redeemable at par at any time from the purchase date through the first four months. The Company specifically used the proceeds from this offering to redeem the Series B and C Cumulative Redeemable Preferred Stock on February 23, 2004. On January 27, 2004, the Company redeemed all Series H Preferred Stock using excess liquidity from its secured credit facilities.
In December 2003, the Company completed an underwritten public offering of 5.0 million primary shares of the Company's Common Stock. The Company received approximately $191.1 million from the offering and used these proceeds to repay a portion of secured indebtedness.
In December 2003, the Company redeemed 1.6 million shares of the Company's 9.50% Series A Cumulative Redeemable Preferred Stock, having a liquidation preference of $50.00 per share by exchanging those securities for newly issued 3.2 million shares of 7.65% Series G Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning on December 19, 2008. Immediately following this transaction the Company no longer had any Series A Preferred Stock outstanding. The Company did not receive any cash proceeds from the offering.
In September 2003, the Company completed an underwritten public offering of 4.0 million shares of its 7.80% Series F Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning on September 29, 2008. The Company used the proceeds from the offering to repay a portion of secured indebtedness.
In July 2003, the Company redeemed 2.8 million shares of the Company's 9.50% Series A Cumulative Redeemable Preferred Stock, having a liquidation preference of $50.00 per share by exchanging those securities for newly issued 5.6 million shares of 7.875% Series E Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning on July 18, 2008. The Company did not receive any cash proceeds from the offering.
On November 14, 2002, the Company completed an underwritten public offering of 8.0 million primary shares of the Company's Common Stock. The Company received approximately $202.9 million from the offering and used these proceeds to repay a portion of secured indebtedness.
25
On December 15, 1998, the Company issued warrants to acquire 6.1 million shares of Common Stock, as adjusted for dilution, at $34.35 per share. The warrants are exercisable on or after December 15, 1999 at a price of $34.35 per share and expire on December 15, 2005.
DRIP/Stock Purchase PlanThe Company maintains a dividend reinvestment and direct stock purchase plan. Under the dividend reinvestment component of the plan, the Company's shareholders may purchase additional shares of Common Stock without payment of brokerage commissions or service charges by automatically reinvesting all or a portion of their Common Stock cash dividends. Under the direct stock purchase component of the plan, the Company's shareholders and new investors may purchase shares of Common Stock directly from the Company without payment of brokerage commissions or service charges. All purchases of shares in excess of $10,000 per month pursuant to the direct purchase component are at the Company's sole discretion. Shares issued under the plan may reflect a discount of up to 3.00% from the prevailing market price of the Company's Common Stock. The Company is authorized to issue up to 8.0 million shares of Common Stock pursuant to the dividend reinvestment and direct stock purchase plan. During the three months ended March 31, 2004 and 2003, the Company issued a total of approximately 376,000 and 619,000 shares of its Common Stock, respectively, through the direct stock purchase component of the plan. Net proceeds during the three months ended March 31, 2004 and 2003 were approximately $15.5 million and $17.4 million, respectively. There are approximately 2.8 million shares available for issuance under the plan as of March 31, 2004.
Stock Repurchase ProgramThe 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 or loan repayments 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 March 31, 2004, the Company had repurchased a total of approximately 2.3 million shares at an aggregate cost of approximately $40.7 million. The Company has not repurchased any shares under the stock repurchase program since November 2000.
Note 9Risk Management and Use of Financial Instruments
Risk managementIn 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 lending investments that results from a property's, borrower's or corporate tenant's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of loans 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 CTL facilities held by the Company.
Use of derivative financial instrumentsThe 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
26
which the Company and its affiliates may also have other financial relationships. The Company is potentially exposed to credit loss in the event of nonperformance by these counterparties. However, because of their high credit ratings, the Company does not anticipate that any of the counterparties will fail to meet their obligations. The Company does not use derivative instruments to hedge credit/market risk or for speculative purposes.
The Company has entered into the following cash flow and fair value hedges that are outstanding as of March 31, 2004. The net value (liability) associated with these hedges is reflected on the Company's Consolidated Balance Sheets (in thousands).
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
Estimated Value at March 31, 2004 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 235,000 | 1.135 | % | 3/11/04 | 9/15/04 | $ | (50 | ) | ||||
Pay-Fixed Swap | 200,000 | 1.144 | % | 3/11/04 | 9/15/04 | (52 | ) | ||||||
Pay-Fixed Swap | 200,000 | 1.144 | % | 3/11/04 | 9/15/04 | (52 | ) | ||||||
Pay-Fixed Swap | 125,000 | 2.885 | % | 1/23/03 | 6/25/06 | (2,678 | ) | ||||||
Pay-Fixed Swap | 125,000 | 2.838 | % | 2/11/03 | 6/25/06 | (2,546 | ) | ||||||
Pay-Fixed Swap | 75,000 | 5.580 | % | 11/4/99 | (1) | 12/1/04 | (2,528 | ) | |||||
Pay-Floating Swap | 200,000 | 4.381 | % | 12/17/03 | 12/15/10 | 6,328 | |||||||
Pay-Floating Swap | 105,000 | 3.678 | % | 1/15/04 | 1/15/09 | 1,157 | |||||||
Pay-Floating Swap | 100,000 | 4.345 | % | 12/17/03 | 12/15/10 | 2,936 | |||||||
Pay-Floating Swap | 100,000 | 3.878 | % | 11/27/02 | 8/15/08 | 4,117 | |||||||
Pay-Floating Swap | 100,000 | 3.713 | % | 1/15/04 | 1/15/09 | 1,266 | |||||||
Pay-Floating Swap | 100,000 | 3.686 | % | 1/15/04 | 1/15/09 | 1,142 | |||||||
Pay-Floating Swap | 50,000 | 3.810 | % | 11/27/02 | 8/15/08 | 1,915 | |||||||
Pay-Floating Swap | 50,000 | 4.290 | % | 12/17/03 | 12/15/10 | 1,294 | |||||||
Pay-Floating Swap | 45,000 | 3.684 | % | 1/15/04 | 1/15/09 | 508 | |||||||
LIBOR Cap | 345,000 | 8.000 | % | 5/22/02 | 5/28/14 | 8,742 | |||||||
LIBOR Cap | 135,000 | 6.000 | % | 9/29/03 | 10/15/06 | 167 | |||||||
LIBOR Cap | 75,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
LIBOR Cap | 35,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
LIBOR Cap | 24,000 | 9.000 | % | 9/25/03 | 11/9/04 | | |||||||
Total Estimated Value | $ | 21,666 | |||||||||||
Explanatory Note:
27
Between January 1, 2003 and March 31, 2004, the Company also had outstanding the following cash flow hedges that have expired or been settled (in thousands):
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
|||||
---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 125,000 | 7.058 | % | 6/15/00 | 6/25/03 | |||
Pay-Fixed Swap | 125,000 | 7.055 | % | 6/15/00 | 6/25/03 | ||||
Pay-Fixed Swap | 100,000 | 4.139 | % | 9/29/03 | 1/2/11 | ||||
Pay-Fixed Swap | 100,000 | 4.643 | % | 9/29/03 | 1/2/14 | ||||
Pay-Floating Swap | 100,000 | 4.484 | % | 1/16/04 | 5/1/14 | ||||
Pay-Floating Swap | 50,000 | 4.502 | % | 1/16/04 | 5/1/14 | ||||
Pay-Floating Swap | 50,000 | 4.500 | % | 1/16/04 | 5/1/14 |
On March 11, 2004, the Company entered into three pay-fixed interest rate swaps all with six-month terms, rates of 1.135%, 1.144% and 1.144% and notional amounts of $235.0 million, $200.0 million and $200.0 million, respectively.
On January 16, 2004, the Company entered into three forward starting swaps all with 10-year terms and rates of 4.484%, 4.502% and 4.500% and notional amounts of $100.0 million, $50.0 million and $50.0 million, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These three swaps were settled in connection with the Company's issuance of $250.0 million of 10-year Senior Notes in March 2004.
On January 15, 2004, in connection with the Company's fixed-rate corporate bonds, the Company entered into four pay-floating interest rate swaps struck at 3.678%, 3.713%, 3.686% and 3.684% with notional amounts of $105.0 million, $100.0 million, $100.0 million and $45.0 million, respectively, and maturing on January 15, 2009. The Company pays six-month LIBOR and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of five-year Senior Notes attributable to changes in LIBOR. For accounting purposes, the difference between the fixed rate received and the LIBOR rate paid on the notional amount of the swap is recorded as "Interest expense" on the Company's Consolidated Statements of Operations. In addition, the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount on a quarterly basis.
During 2003, the Company entered into two 90-day forward starting swaps each having a $100.0 million notional amount. These pay-fixed swaps which were effective in September 2003, had rates of 4.139% and 4.643%, had seven-year and 10-year terms, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These two swaps were settled in connection with the Company's issuance of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes. In addition, effective in September 2003, the Company entered into a $135.0 million cap with a rate of 6.00% to hedge the Company's current outstanding floating-rate debt. This cap has a three-year term. Further, the Company entered into two $125.0 million forward starting swaps. These pay-fixed swaps were effective in June 2003 and replaced the two $125.0 million pay-fixed swaps mentioned above. The two new pay-fixed swaps have a three-year term and expire on June 25, 2006.
28
In addition, in connection with a portion of the Company's fixed-rate corporate bonds, the Company entered into three pay-floating interest rate swaps in December 2003 struck at 4.381%, 4.345% and 4.29% with notional amounts of $200.0 million, $100.0 million and $50.0 million, respectively, and maturing on December 15, 2010 and also entered into two pay-floating interest rate swaps in November 2002 struck at 3.8775% and 3.81% with notional amounts of $100.0 million and $50.0 million, respectively, and maturing on August 15, 2008. The Company pays six-month LIBOR on the swaps entered into in December 2003 and one-month LIBOR on the swaps entered into in November 2002 and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes attributable to changes in LIBOR. For accounting purposes, the difference between the fixed rate received and the LIBOR rate paid on the notional amount of the swap is recorded as "Interest expense" on the Company's Consolidated Statements of Operations. In addition, the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount on a quarterly basis.
In connection with STARs, Series 2003-1 in May 2003, the Company entered into a LIBOR interest rate cap struck at 6.95% in the notional amount of $270.6 million, and simultaneously sold a LIBOR interest rate cap with the same terms. Since these instruments do not change 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 terms of these arrangements are substantially the same, the effects of a revaluation of these two instruments substantially offset one another.
In connection with STARs, Series 2002-1 in May 2002, the Company entered into a LIBOR interest rate cap struck at 8.00% in the notional amount of $345.0 million. The Company utilizes the provisions of SFAS No. 133 with respect to such instruments. SFAS No. 133 provides that the up-front fees paid on option-based products such as caps should be expensed into earnings based on the allocation of the premium to the affected periods as if the agreement were a series of "caplets." These allocated premiums are then reflected as a charge to income (as part of interest expense) in the affected period. On May 28, 2002, in connection with the STARs, Series 2002-1 transaction, the Company paid a premium of $13.7 million for this interest rate cap. Using the "caplet" methodology discussed above, amortization of the cap premium is dependent upon the actual value of the caplets at inception.
Credit risk concentrationsConcentrations of credit risks arise when a number of borrowers or customers related to the Company's investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of credit risks. Management believes the current portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.
All of the Company's CTL assets (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 10.00%) as of March 31, 2004 in California (21.35%) and New York (11.63%). As of March 31, 2004, the Company's investments also contain greater than 10.00% concentrations in the following asset types: office-CTL (25.90%), office-lending (16.92%), industrial (14.69%) and hotel-lending (11.09%).
29
The Company underwrites the credit of prospective borrowers and customers and often requires them to provide some form of credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although the Company's loans and other lending investments and corporate customer lease assets are geographically diverse and the borrowers and customers operate in a variety of industries, to the extent the Company has a significant concentration of interest or operating lease revenues from any single borrower or customer, the inability of that borrower or customer to make its payment could have an adverse effect on the Company.
Note 10Stock-Based Compensation Plans and Employee Benefits
The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to provide incentive compensation for officers, other key employees and directors of the Company. The Plan provides for awards of stock options and shares of restricted stock and other performance awards. The maximum number of shares of Common Stock available for awards under the Plan is 9.00% of the outstanding shares of Common Stock, calculated on a fully diluted basis, from time to time, provided that the number of shares of Common Stock reserved for grants of options designated as incentive stock options is 5.0 million, subject to certain antidilution provisions in the Plan. All awards under the Plan, other than automatic awards to non-employee directors, are at the discretion of the Board or a committee of the Board. At March 31, 2004, a total of approximately 10.1 million shares of Common Stock were available for awards under the Plan, of which options to purchase approximately 2.2 million shares of Common Stock were outstanding and approximately 411,000 shares of restricted stock were outstanding. A total of approximately 875,000 shares remain available for awards under the Plan as of March 31, 2004.
Changes in options outstanding during the three months ended March 31, 2004 are as follows:
|
Number of Shares |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Weighted Average Exercise Price |
|||||||||
|
Employees |
Non-Employee Directors |
Other |
|||||||
Options outstanding, December 31, 2003 | 2,309,053 | 154,994 | 406,091 | $ | 18.59 | |||||
Granted in 2004 | | | | $ | | |||||
Exercised in 2004 | (445,487 | ) | (31,500 | ) | (69,572 | ) | $ | 18.68 | ||
Forfeited in 2004 | (76,749 | ) | (14,600 | ) | | $ | 16.94 | |||
Options outstanding, March 31, 2004 | 1,786,817 | 108,894 | 336,519 | $ | 18.63 | |||||
30
The following table summarizes information concerning outstanding and exercisable options as of March 31, 2004:
|
OPTIONS OUTSTANDING |
OPTIONS EXERCISABLE |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Exercise Price Range |
Options Outstanding |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Currently Exercisable |
Weighted Average Exercise Price |
|||||||
$14.72$15.00(1) | 510,336 | 4.88 | $ | 14.72 | 500,003 | $ | 14.72 | |||||
$16.69$16.88 | 461,673 | 5.76 | $ | 16.88 | 461,673 | $ | 16.88 | |||||
$17.38$17.56 | 16,667 | 5.96 | $ | 17.38 | 16,667 | $ | 17.38 | |||||
$19.63$19.69 | 1,016,415 | 6.85 | $ | 19.69 | 1,016,415 | $ | 19.69 | |||||
$20.00$21.44 | 50,000 | 6.43 | $ | 20.94 | 50,000 | $ | 20.94 | |||||
$23.32$23.64 | 7,553 | 0.15 | $ | 23.64 | 7,553 | $ | 23.64 | |||||
$24.13$24.94 | 56,900 | 6.41 | $ | 24.84 | 56,900 | $ | 24.84 | |||||
$25.10$26.09 | 13,800 | 2.16 | $ | 26.09 | 13,800 | $ | 26.09 | |||||
$26.30$26.97 | 2,000 | 7.21 | $ | 26.97 | 1,334 | $ | 26.97 | |||||
$27.00 | 25,000 | 7.24 | $ | 27.00 | 16,667 | $ | 27.00 | |||||
$28.54$29.82 | 66,792 | 7.75 | $ | 29.69 | 66,792 | $ | 29.69 | |||||
$55.39 | 5,094 | 5.17 | $ | 55.39 | 5,094 | $ | 55.39 | |||||
2,232,230 | 6.12 | $ | 18.63 | 2,212,898 | $ | 18.62 | ||||||
Explanatory Note:
In the third quarter 2002 (with retroactive application to the beginning of the calendar year), the Company adopted the fair value method for accounting for options issued to employees or directors, as allowed under Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." Accordingly, the Company recognizes a charge equal to the fair value of these options at the date of grant multiplied by the number of options issued. This charge will be amortized over the related remaining vesting terms to individual employees as additional compensation. There were no options issued during the three months ended March 31, 2004. There were 15,500 options issued during the 12 months ended December 31, 2003 with a strike price of $14.72.
If the Company's compensation costs had 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 prior to 2002, the Company's net income for the three months ended March 31, 2004 and 2003, would have been reduced on a pro forma basis by approximately $0 and $24,000, respectively. This would not have significantly impacted the Company's earnings per share.
Future charges may be taken to the extent of additional option grants, which are at the discretion of the Board of Directors.
31
During the three months ended March 31, 2004, the Company granted 31,555 restricted shares to employees that vest proportionately over three years on the anniversary date of the initial grant of which 30,905 remain outstanding. In addition, in connection with the Chief Executive Officer's employment agreement 236,167 restricted shares were issued on March 31, 2004 (see detailed information below).
During the 12 months ended December 31, 2003, the Company granted 40,050 restricted shares to employees that vest proportionately over three years on the anniversary date of the initial grant of which 24,284 remain outstanding.
During the year ended December 31, 2002, the Company granted 199,350 restricted shares to employees. Of these shares, 44,350 will vest proportionately over three years on the anniversary date of the initial grant. Of the 44,350 shares granted, 10,923 remain outstanding as of March 31, 2004. The balance of 155,000 restricted shares granted to several employees vested on March 31, 2004 due to the satisfaction of the following circumstances: (1) the employee remained employed until that date; and (2) the 60-day average closing price of the Company's Common Stock equaled or exceeded a set floor price as of such date. The market price of the stock was $42.30 on March 31, 2004; therefore, the Company incurred a one-time charge to earnings of approximately $6.7 million (the fair market value of the 155,000 shares at $42.30 per share plus the Company's share of taxes). During the year ended December 31, 2002, the Company also granted 208,980 restricted shares to its Chief Financial Officer (see detailed information below).
For accounting purposes, the Company measures compensation costs for these shares, not including the contingently issuable shares, as of the date of the grant and expenses such amounts against earnings, either at the grant date (if no vesting period exists) or ratably over the respective vesting/service period. Such amounts appear on the Company's Consolidated Statements of Operations under "General and administrativestock-based compensation expense."
During the year ended December 31, 2002, the Company entered into a three-year employment agreement with its new Chief Financial Officer. Under the agreement, the Chief Financial Officer receives an annual base salary of $225,000. She may also receive a bonus, which is targeted to be $325,000, subject to an annual review for upward or downward adjustment. In addition, the Company granted the Chief Financial Officer 108,980 contingently vested restricted stock awards. These awards become vested on December 31, 2005 if the executive's employment with the Company has not terminated before such date. Dividends will be paid on the restricted shares as dividends are paid on shares of the Company's Common Stock. These dividends are accounted for in a manner consistent with the Company's Common Stock dividends, as a reduction to retained earnings. For accounting purposes, the Company will take a total charge of approximately $3.0 million related to the restricted stock awards, which will be amortized over the period from November 6, 2002 through December 31, 2005. This charge is reflected on the Company's Consolidated Statements of Operations under "General and administrativestock-based compensation."
Further, the Company granted the Chief Financial Officer 100,000 restricted shares which became fully-vested on January 31, 2004 as a result of the Company achieving a 53.28% total shareholder rate of return (dividends since November 6, 2002 plus share price appreciation from January 2, 2003). The Company incurred a one-time charge to earnings during the three months ended March 31, 2004 of approximately $4.1 million (the fair market value of the 100,000 shares at $40.02 per share plus the
32
Company's share of taxes). For accounting purposes, the employment arrangement described above was treated as a contingent, variable plan until January 31, 2004.
During the year ended December 31, 2001, the Company entered into a three-year employment agreement with its Chief Executive Officer. Under the agreement, the Chief Executive Officer receives an annual base salary of $1.0 million. He may also receive a bonus, which is targeted to be an amount equal to his base salary, if the Company achieves certain performance targets set by the Compensation Committee. The bonus award may be increased or reduced from the target depending upon the degree to which the performance goals are exceeded or are not met, and may not exceed 200.00% of his base salary. The bonus is reduced by the amount of any dividends paid to the Chief Executive Officer in respect of phantom shares (described below) which are awarded to him and have contingently vested. The Chief Executive Officer received approximately $4.4 million in such dividends in 2003. As such, no additional bonus was paid in that year. As part of this agreement, the Company confirmed a prior grant of 750,000 stock options made to the executive on March 2, 2001 with an exercise price of $19.69, which represented the market price at the date of the original contingent grant. However, because the grant required further approval by the Compensation Committee and the Board of Directors, no measurement date occurred for accounting purposes until such approvals were made, at which point the market price of the Company's Common Stock was $24.90. Accordingly, an aggregate charge of approximately $3.9 million was recognized with respect to these options over the term of this agreement and is reflected on the Company's Consolidated Statements of Operations under "General and administrativestock-based compensation." These options vested in three equal annual installments of 250,000 shares in each successive January beginning in January 2002. During the last week of March 2004, the Chief Executive Officer exercised and sold 150,000 of these shares. Subsequent to quarter end, on April 1, 2004, the Chief Executive Officer exercised the remaining 600,000 options and sold 100,000 of these shares.
The Company also granted the Chief Executive Officer 2.0 million unvested phantom shares, each of which represents one share of the Company's Common Stock. These shares were scheduled to vest in installments of 350,000 shares, 650,000 shares, 600,000 shares and 400,000 shares on a contingent basis when the average closing price of the Company's Common Stock for a 60 calendar day period achieved thresholds of $25.00, $30.00, $34.00 and $37.00, respectively. As of March 31, 2004 all thresholds have been attained, and a total of 2.0 million of these shares have fully vested. The market price of the Common Stock on March 30, 2004 was $42.40 and the Company incurred a one-time charge to earnings during the three months ended March 31, 2004 of approximately $86.0 million (the fair market value of the 2.0 million shares at $42.40 per share plus the Company's share of taxes). Upon the phantom share units becoming fully vested, the Company delivered to the executive 728,552 shares of Common Stock and $53.9 million of cash, the total of which is equal to the fair market value of the 2.0 million shares of Common Stock multiplied by the closing stock price of $42.40 on March 30, 2004. Prior to March 30, 2004, the executive received dividends on shares that were contingently vested and were not forfeited under the terms of the agreement, when the Company declared and paid dividends on its Common Stock. Because no shares had been issued prior to March 30, 2004, dividends received on these phantom shares were reflected as compensation expense by the Company. For accounting purposes, this arrangement was treated as a contingent, variable plan and no additional compensation expense was recognized until the shares became irrevocably vested on March 30, 2004, at which time the Company reflected a charge equal to the fair value of the shares irrevocably vested.
33
On February 11, 2004, the Company entered into a new employment agreement with its Chief Executive Officer which took effect upon the expiration of the old agreement. The new agreement has an initial term of three years and provides for the following compensation:
In addition, the Chief Executive Officer purchased an 80.00% interest in the Company's 2006 high performance unit program for directors and executive officers. This performance program was approved by the Company's shareholders in 2003 and is described in detail in the Company's 2003 annual proxy statement. The purchase price to be paid by the Chief Executive Officer will be based upon a valuation prepared by an independent investment-banking firm. The interests purchased by the Chief Executive Officer will have no value to him unless the Company achieves total shareholder returns in excess of those achieved by peer group indices, all as more fully described in the Company's 2003 annual proxy statement.
Certain affiliates of SOFI IV and the Company's Chief Executive Officer have agreed to reimburse the Company for the value of restricted shares awarded to the former President in excess of 350,000 shares, net of tax benefits realized by the Company or its shareholders on account of compensation expense deductions. The reimbursement obligation arose once the restricted share award became fully vested on September 30, 2002. The Company's Chief Executive Officer fulfilled his reimbursement obligation through the delivery of shares of the Company's Common Stock owned by him. In the case of the SOFI IV affiliates, the reimbursement payment must be made through the delivery of approximately $2.4 million in cash or 131,250 shares of Common Stock. As of March 31, 2004, the SOFI IV affiliates fulfilled their obligation through the payment of approximately $2.4 million in cash. These reimbursement payments are reflected as "Additional paid-in capital" on the Company's Consolidated Balance Sheets, and not as an offset to the charge referenced above.
High Performance Unit Program
In May 2002, the Company's shareholders approved the iStar Financial High Performance Unit ("HPU") Program. The program, as more fully described in the Company's annual proxy statement dated April 8, 2002, is a performance-based employee compensation plan that only has material value to the participants if the Company provides superior returns to its shareholders. The program entitles the employee participants ("HPU holders") to receive cash distributions in the nature of common stock
34
dividends if the total rate of return on the Company's Common Stock (share price appreciation plus dividends) exceeds certain performance levels.
Initially, there were three plans within the program: the 2002 plan, the 2003 plan, and the 2004 plan. Each plan has 5,000 shares of High Performance Common Stock associated with it. Each share of High Performance Common Stock carries 0.25 votes per share.
For these three plans, the Company's performance is measured over a one-, two-, or three-year valuation period, beginning on January 1, 2002 and ending on December 31, 2002, March 31, 2004 and December 31, 2004, respectively. The end of the valuation period (i.e., the "valuation date") will be accelerated if there is a change in control of the Company. The High Performance Common Stock has a nominal value unless the total rate of shareholder return for the relevant valuation period exceeds the greater of: (1) 10.00%, 20.00%, or 30.00% for the 2002 plan, the 2003 plan and the 2004 plan, respectively; and (2) a weighted industry index total rate of return consisting of equal weightings of the Russell 1000 Financial Index and the Morgan Stanley REIT Index for the relevant period.
If the total rate of return on the Company's Common Stock exceeds the threshold performance levels for a particular plan, then distributions will be paid on the shares of High Performance Common Stock related to that plan in the same amounts and at the same times as distributions are paid on a number of shares of the Company's Common Stock equal to the following: 7.50% of the Company's excess total rate of return (over the higher of the two threshold performance levels) multiplied by the weighted average market value of the Company's common equity capitalization during the measurement period, all as divided by the average closing price of a share of the Company's Common Stock for the 20 trading days immediately preceding the applicable valuation date.
If the total rate of return on the Company's Common Stock does not exceed the threshold performance levels for a particular plan, then the shares of High Performance Common Stock related to that plan will have only nominal value. In this event, each of the 5,000 shares will be entitled to dividends equal to 0.01 times the dividend paid on a share of Common Stock, if and when dividends are declared on the Common Stock.
Regardless of how much the Company's total rate of return exceeds the threshold performance levels, the dilutive impact to the Company's shareholders resulting from distributions on High Performance Common Stock in each plan is limited to the equivalent of 1.00% of the average monthly number of fully diluted shares of the Company's Common Stock outstanding during the valuation period.
The employee participants have purchased their interests in High Performance Common Stock through a limited liability company at purchase prices approved by the Company's Board of Directors. The Company's Board has established the prices of the High Performance Common Stock based upon, among other things, an independent valuation from a major securities firm. The aggregate initial purchase prices were set on June 25, 2002 and were approximately $2.8 million, $1.8 million and $1.3 million for the 2002, 2003 and 2004 plans, respectively. No employee is permitted to exchange his or her interest in the LLC for shares of High Performance Common Stock prior to the applicable valuation date.
The total shareholder return for the valuation period under the 2002 plan was 21.94%, which exceeded both the fixed performance threshold of 10.00% and the industry index return of (5.83%). As a result of this superior performance, the participants in the 2002 plan are entitled to receive cash
35
distributions equivalent to the amount of cash dividends payable on 819,254 shares of the Company's Common Stock, as and when such dividends are paid. Such dividend payments began with the first quarter 2003 dividend. The Company will pay dividends on the 2002 plan shares in the same amount per equivalent share and on the same distribution dates that shares of the Company's Common Stock are paid. The Company has the right, but not the obligation, to repurchase at cost 50.00% of the interests earned by an employee in the 2002 plan if the employee breaches certain non-competition, non-solicitation and confidentiality covenants through January 1, 2005.
The total shareholder return for the valuation period under the 2003 plan was 78.29%, which exceeded the fixed performance threshold of 20.00% and the industry index return of 24.66%. The plan was fully funded and was limited to 1.00% of the average monthly number of fully diluted shares of the Company's Common Stock during the valuation period. As a result of the Company's superior performance, the participants in the 2003 plan are entitled to receive cash distributions equivalent to the amount of cash dividends payable on 987,149 shares of the Company's Common Stock, as and when such dividends are paid. Such dividend payments will begin with the first quarter 2004 dividend. The Company will pay dividends on the 2003 plan shares in the same amount per equivalent share and on the same distribution dates that shares of the Company's Common Stock are paid.
A new 2005 plan has been established with a three-year valuation period ending December 31, 2005. Awards under the 2005 plan were approved on January 14, 2003. The 2005 plan has 5,000 shares of High Performance Common Stock with an aggregate initial purchase price of $573,000. The purchase price of the High Performance Common Stock was established by the Company's Board based upon, among other things, an independent valuation from a major securities firm. The provisions of the 2005 plan are substantially the same as the prior plans.
A new 2006 plan has been established with a three-year valuation period ending December 31, 2006. Awards under the 2006 plan were approved on January 23, 2004. The 2006 plan had 5,000 shares of High Performance Common Stock with an aggregate initial purchase price of $714,700. The purchase price of the High Performance Common Stock was established by the Company's Board based upon, among other things, an independent valuation from a major securities firm. The provisions of the 2006 plan are substantially the same as the prior plans.
The additional equity from the issuance of the High Performance Common Stock is recorded as a separate class of stock and included within shareholders' equity on the Company's Consolidated Balance Sheets. Net income allocable to common shareholders will be reduced by the HPU holders' share of dividends paid and undistributed earnings, if any.
401(k) Plan
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 three months of continuous service with the Company. Each participant may contribute on a pretax basis up to the maximum percentage of compensation and dollar amount permissible under Section 402(g) of the Internal Revenue Code not to exceed the limits of Code Sections 401(k), 404 and 415. At the discretion of the Board of Directors, the Company may make matching contributions on the participant's behalf of up to 50.00% of the first 10.00% of the participant's annual compensation. The Company made gross contributions of approximately $279,000 and $207,000 for the three months ended March 31, 2004 and 2003, respectively.
36
Note 11Earnings Per Share
The following table presents a reconciliation of the numerators and denominators of the basic and diluted EPS calculations for the three months ended March 31, 2004 and 2003, respectively (in thousands, except per share data):
|
For the Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
||||||
Numerator: | ||||||||
Net income (loss) from continuing operations | $ | (38,270 | ) | $ | 64,235 | |||
Preferred dividend requirements | (19,600 | ) | (9,227 | ) | ||||
Net income (loss) allocable to common shareholders and HPU holders before income from discontinued operations and gain from discontinued operations(1) | (57,870 | ) | 55,008 | |||||
Income from discontinued operations | 3,018 | 3,454 | ||||||
Gain from discontinued operations | 136 | 264 | ||||||
Net income (loss) allocable to common shareholders and HPU holders(1) | $ | (54,716 | ) | $ | 58,726 | |||
Denominator: | ||||||||
Weighted average common shares outstanding for basic earnings per common share | 107,468 | 98,472 | ||||||
Add: effect of assumed shares issued under treasury stock method for stock options, restricted shares and warrants | | 1,549 | ||||||
Add: effect of contingent shares | | 1,264 | ||||||
Weighted average common shares outstanding for diluted earnings per common share | 107,468 | 101,285 | ||||||
Basic earnings per common share: | ||||||||
Net income (loss) allocable to common shareholders before income from discontinued operations and gain from discontinued operations(2) | $ | (0.53 | ) | $ | 0.56 | |||
Income from discontinued operations | 0.03 | 0.03 | ||||||
Gain from discontinued operations | 0.00 | 0.00 | ||||||
Net income (loss) allocable to common shareholders(2) | $ | (0.50 | ) | $ | 0.59 | |||
Diluted earnings per common share: | ||||||||
Net income (loss) allocable to common shareholders before income from discontinued operations and gain from discontinued operations(2)(3) | $ | (0.53 | ) | $ | 0.54 | |||
Income from discontinued operations | 0.03 | 0.04 | ||||||
Gain from discontinued operations | 0.00 | 0.00 | ||||||
Net income (loss) allocable to common shareholders(2)(3) | $ | (0.50 | ) | $ | 0.58 | |||
Explanatory Notes:
37
For the three months ended March 31, 2004, there were approximately 2.2 million stock options, 84,000 restricted shares, 2.0 million contingent shares, 6.1 million warrants and 371,000 joint venture shares that were antidilutive. In addition, there were approximately 163,000 stock options, 6.1 million warrants and 298,000 joint venture shares that were antidilutive for the three months ended March 31, 2003.
Note 12Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" 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. Total comprehensive income (loss) was $(40.6) million and $72.5 million for the three months ended March 31, 2004 and 2003, respectively. The primary components of comprehensive income other than net income consist of amounts attributable to the adoption and continued application of SFAS No. 133, to the Company's cash flow and fair value hedges and changes in the fair value of the Company's available-for-sale investments.
For the three months ended March 31, 2004 and 2003, the change in fair market value of the Company's unrealized gains (losses) on available-for-sale investments and cash flow and fair value hedges was a decrease of $5.5 million and an increase $4.6 million, respectively, and was recorded as an adjustment to accumulated other comprehensive income. The reconciliation to comprehensive income is as follows (in thousands):
|
For the Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2004 |
2003 |
|||||
Net income (loss) | $ | (35,116 | ) | $ | 67,953 | ||
Other comprehensive income (loss): | |||||||
Reclassification of unrealized gains into earnings upon realization | (3,897 | ) | | ||||
Unrealized gains on available-for-sale investments | 2,587 | 5,926 | |||||
Unrealized losses on cash flow and fair value hedges | (4,154 | ) | (1,375 | ) | |||
Comprehensive income | $ | (40,580 | ) | $ | 72,504 | ||
Unrealized gains (losses) on available-for-sale investments and cash flow and fair value hedges are recorded as adjustments to shareholders' equity through "Accumulated other comprehensive income (losses)" on the Company's Consolidated Balance Sheets and are not included in adjusted earnings or net income unless realized.
As of March 31, 2004 and December 31, 2003, accumulated other comprehensive income (losses) reflected in the Company's shareholders' equity is comprised of the following (in thousands):
|
As of March 31, 2004 |
As of December 31, 2003 |
|||||
---|---|---|---|---|---|---|---|
Unrealized gains on available-for-sale investments | $ | 8,052 | $ | 9,362 | |||
Unrealized losses on cash flow and fair value hedges | (12,509 | ) | (8,354 | ) | |||
Accumulated other comprehensive income (losses) | $ | (4,457 | ) | $ | 1,008 | ||
38
Over time, the unrealized gains and losses held in other comprehensive income will be reclassified to earnings in the same period(s) in which the hedged items are recognized in earnings. The current balance held in other comprehensive income is expected to be reclassified to earnings over the lives of the current hedging instruments, or for the realized losses on forecasted debt transactions, over the related term of the debt obligation, as applicable.
Note 13Dividends
In order to maintain its election to qualify as a REIT, the Company must currently distribute, at a minimum, an amount equal to 90.00% of its taxable income and must distribute 100.00% of its taxable income to avoid paying corporate federal income taxes. 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 and expenses (such as depreciation), in certain circumstances, the Company may generate operating cash flow in excess of its dividends or, alternatively, may be required to borrow to make sufficient dividend payments.
On April 1, 2004, the Company declared a dividend of approximately $79.4 million, or $0.6975 per common share applicable to the three-month period ended March 31, 2004 and payable to shareholders of record and holder of certain share equivalents on April 15, 2004. The Company also declared dividends aggregating $2.0 million, $2.8 million, $2.0 million and $1.5 million, respectively, on its Series D, E, F and G preferred stock, respectively, for the three months ended March 31, 2004. There are no divided arrearages on any of the preferred shares currently outstanding.
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. In connection with the redemption of the Series B preferred stock on February 23, 2004 the Company paid a final dividend of $920,000 representing unpaid dividends of $0.46 per share for the 70 days from the prior dividend payment on December 15, 2003. Upon redemption, the Company recognized a charge to net income allocable to common shareholders and HPU holders of $5.5 million included in "Preferred dividend requirements" on the Company's Consolidated Statements of Operations.
Holders of shares of the Series C preferred stock are entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative preferential cash dividends at the rate of 9.20% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $2.30 per share. In connection with the redemption of the Series C preferred stock on February 23, 2004 the Company paid a final dividend of $585,000 representing unpaid dividends of $0.45 per share for the 70 days from the prior dividend payment on December 15, 2003. Upon redemption, the Company recognized a charge to net income allocable to common shareholders and HPU holders of $3.5 million included in "Preferred dividend requirements" on the Company's Consolidated Statements of Operations.
Holders of shares of the Series D preferred stock are entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative preferential cash dividends at the rate of 8.00% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $2.00 per share. Dividends are cumulative from the date of original
39
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 D 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 E 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 7.875% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.97 per share. The remaining terms relating to dividends of the Series E preferred stock are substantially identical to the terms of the Series D preferred stock described above.
Holders of shares of the Series F 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 7.80% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.95 per share. The remaining terms relating to dividends of the Series F preferred stock are substantially identical to the terms of the Series D preferred stock described above.
Holders of shares of the Series G 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 7.65% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.91 per share. The remaining terms relating to dividends of the Series G preferred stock are substantially identical to the terms of the Series D preferred stock described above.
Holders of the Series I 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 7.50% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.88 per share. The remaining terms relating to dividends of the Series I preferred stock are substantially identical to the terms of the Series D preferred stock described above.
The 2002 and 2003 High Performance Unit Program reached their valuation dates on December 31, 2002 and 2003, respectively. Based on the Company's 2002 and 2003 total rate of return, the participants are entitled to receive cash dividends on 819,254 shares and 987,149 shares, respectively, of the Company's Common Stock. The Company will pay dividends on these units in the same amount per equivalent share and on the same distribution dates as shares of the Company's Common Stock. Such dividend payments for the 2002 plan began with the first quarter 2003 dividend and such dividends for the 2003 plan will begin with the first quarter 2004 dividend. All dividends to HPU holders will reduce net income allocable to common shareholders when paid. Additionally, net income allocable to common shareholders will be reduced by the HPU holders' share of undistributed earnings, if any.
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The exact amount of future quarterly dividends to common shareholders will be determined by the Board of Directors based on the Company's actual and expected operations for the fiscal year and the Company's overall liquidity position.
Note 14Segment Reporting
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131") establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected financial information about operating segments in interim financial reports issued to shareholders.
The Company has two reportable segments: Real Estate Lending and Corporate Tenant Leasing. The Company does not have any 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 more than 4.23% of revenues (see Note 9 for other information regarding concentrations of credit risk).
The Company evaluates performance based on the following financial measures for each segment:
|
Real Estate Lending |
Corporate Tenant Leasing |
Corporate/ Other(1) |
Company Total |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
(In thousands) |
|
||||||||||
Three months ended March 31, 2004: | |||||||||||||
Total revenues(2): | $ | 94,213 | $ | 70,581 | $ | 315 | $ | 165,109 | |||||
Equity in earnings from joint ventures and unconsolidated subsidiaries: | | 6,248 | | 6,248 | |||||||||
Total operating and interest expense(3): | 15,822 | 38,266 | 155,406 | 209,494 | |||||||||
Net operating income (loss)(4): | 78,391 | 38,563 | (155,091 | ) | (38,137 | ) | |||||||
Three months ended March 31, 2003: | |||||||||||||
Total revenues(2): | $ | 76,897 | $ | 60,235 | $ | 550 | $ | 137,682 | |||||
Equity in (loss) earnings from joint ventures and unconsolidated subsidiaries: | | 1,029 | (1,087 | ) | (58 | ) | |||||||
Total operating and interest expense(3): | 24,575 | 27,292 | 21,483 | 73,350 | |||||||||
Net operating income (loss)(4): | 52,322 | 33,972 | (22,020 | ) | 64,274 | ||||||||
As of March 31, 2004: | |||||||||||||
Total long-lived assets(5): | 3,985,022 | 2,864,255 | N/A | 6,849,277 | |||||||||
Total assets: | 4,093,374 | 3,081,836 | 129,637 | 7,304,847 | |||||||||
As of December 31, 2003: | |||||||||||||
Total long-lived assets(5): | 3,702,674 | 2,535,885 | N/A | 6,238,559 | |||||||||
Total assets: | 3,810,679 | 2,729,716 | 120,195 | 6,660,590 |
41
Explanatory Notes:
Note 15Subsequent Events
On April 19, 2004, the Company completed a new $850.0 million unsecured revolving credit facility with 19 banks and financial institutions. The new facility has a three-year initial term with a one-year extension at the Company's option. The facility bears interest, based upon the Company's current credit ratings, at a rate of LIBOR + 1.00% and has a 25 basis point annual facility fee. This new credit facility replaces the existing $300.0 million unsecured credit facility maturing July 2004.
On April 8, 2004, Lazard Freres exercised warrants issued to them as part of the Company's acquisition of their structured finance portfolio in 1998. As a result of this exercise the Company issued approximately 1.1 million shares of common stock. The warrants had previously been accounted for under the treasury method for earnings per share calculations and were included in the Company's diluted share count.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is in the business of providing custom-tailored financing solutions to private and corporate owners of real estate nationwide. Depending upon market conditions and the Company's views about the United States economy generally and the real estate markets specifically, the Company will adjust its investment focus from time to time and emphasize certain products, industries and geographic markets over others.
The Company began its business in 1993 through private investment funds formed to take advantage of the lack of well-capitalized lenders capable of servicing the needs of customers in its markets. In March 1998, the private investment funds contributed their approximately $1.1 billion of assets to the Company's predecessor in exchange for a controlling interest in that public company. In November 1999, the Company acquired its leasing subsidiary, TriNet Corporate Realty Trust, Inc. ("TriNet" or the "Leasing Subsidiary"), which was then the largest publicly-traded company specializing in corporate sale/leaseback for office and industrial facilities (the "TriNet Acquisition"). Concurrent with the TriNet Acquisition, the Company also acquired its former external advisor in exchange for shares of its Common Stock and converted its organizational form to a Maryland corporation. The Company's Common Stock began trading on the New York Stock Exchange under the symbol "SFI" in November 1999.
The Company has experienced significant growth since its first quarter as a public company in 1998. Transaction volume for the fiscal year ended December 31, 2003 was $2.2 billion, compared to $1.7 billion in 2002 and $1.1 billion in 2001. The Company completed 60 financing commitments in 2003, compared to 41 in 2002 and 35 in 2001. During the first quarter of 2004 the Company had $948.8 million of transaction volume representing 14 financing commitments. Repeat customer business has become a key source of transaction volume for the Company, accounting for approximately 55.8% of the Company's cumulative volume through the first quarter of 2004. Based upon feedback from its customers, the Company believes that greater recognition of the Company and its reputation for completing highly structured transactions in an efficient manner have also contributed to increases in its transaction volume.
The benefits of higher investment volumes were mitigated to an extent by the extremely low interest rate environment in 2002, 2003 and the first quarter of 2004. Low interest rates benefit the Company in that its borrowing costs decrease, but similarly, earnings on its variable-rate lending investments also decrease. Conversely, in an environment of rising interest rates, the Company's borrowing costs may increase, but earnings on its variable-rate lending investments would also increase. The Company's policy is to match fund its fixed-rate assets with fixed-rate debt and variable-rate assets with variable-rate debt so that changes in interest rates do not significantly impact the Company's earnings.
During the difficult economic and real estate market conditions of 2002 and 2003, the Company focused its investment activity on lower risk investments such as first mortgages and corporate tenant lease transactions that met its risk adjusted return standards. The Company continued to emphasize these products in the first quarter of 2004. The Company has experienced minimal losses on its lending investments. In 2003 and the first quarter of 2004, the Company also focused on re-leasing space at its corporate tenant lease facilities under longer-term leases in an effort to reduce the impact of lease expirations on the Company's earnings. The Company has seen indications of improvements in the U.S. economy and strengthening in some sectors of the real estate markets in the first quarter of 2004. The Company believes that the commercial real estate industry is attracting large amounts of investment capital. The Company intends to maintain its disciplined approach to underwriting its investments and
43
will adjust its focus away from markets and products where the Company believes that the available pricing terms do not fairly reflect the risks of the investments.
The Company has continued to broaden its sources of capital and was particularly active in the capital markets in 2003 and in the first quarter of 2004. The Company's strong performance and the low interest rate environment enabled the Company to issue equity and debt securities in 2003 and the first quarter of 2004 on attractive pricing terms. The Company used the proceeds from the issuances to repay secured indebtedness and to refinance higher cost capital. The Company made significant progress in 2003 and continues to make progress in the first quarter of 2004 in migrating its debt obligations from secured debt towards unsecured debt. Subsequent to the first quarter of 2004, the Company completed a new $850.0 million unsecured revolving credit facility with 19 banks and financial institutions. The new facility has a three-year initial term with a one-year extension at the Company's option. The facility bears interest, based upon the Company's current credit ratings, at a rate of LIBOR plus 1.00% and has a 25 basis point annual facility fee. While the Company considers it prudent to have a broad array of sources of capital, including secured financing arrangements, the Company will continue to seek to reduce its use of secured debt and increase its use of unsecured debt.
The Company's earnings for the first quarter of 2004 reflect the following charges:
In the first quarter of 2004, the Company continued to take advantage of opportunities to refinance a portion of its higher cost debt securities and preferred stock through the issuance of unsecured debt and equity securities having much lower costs to the Company.
Results of Operations
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31, 2003
Interest incomeInterest income increased by $9.7 million to $83.1 million for the three months ended March 31, 2004 from $73.4 million for the same period in 2003. This increase was primarily due to $31.1 million of interest income on new originations or additional fundings, offset by an $18.4 million decrease from the repayment of loans and other lending investments. This increase was partially offset by a decrease in interest income on the Company's variable-rate lending investments as a result of lower average one-month LIBOR rates of 1.10% in 2004, compared to 1.34% in 2003.
Operating lease incomeOperating lease income increased by $10.2 million to $70.1 million for the three months ended March 31, 2004 from $59.9 million for the same period in 2003. Of this increase, $12.5 million was attributable to new CTL investments. This increase was partially offset by $1.9 million of lower operating lease income due to vacancies on certain CTL assets.
44
Other incomeOther income generally consists of prepayment penalties and realized gains from the early repayment of loans and other lending investments, asset management fees, lease termination fees, mortgage servicing fees and dividends on certain investments. The Company's experience has been that early repayments increase significantly in low interest rate environments. During the three months ended March 31, 2004, other income included realized gains on sale of lending investments of $4.6 million, income from loan repayments and prepayment penalties of $6.3 million, asset management, mortgage servicing and other fees of approximately $654,000 and other miscellaneous income such as dividend payments of $323,000.
During the three months ended March 31, 2003, other income included realized gains on loan repayments of $3.0 million, asset management, mortgage servicing fees and other fees of approximately $1.2 million and other miscellaneous income such as dividend payments of $121,000.
Interest expenseFor the three months ended March 31, 2004, interest expense increased by $4.9 million to $52.0 million from $47.1 million for the same period in 2003. This increase was primarily due to higher average borrowings on the Company's debt obligations, term loans and secured notes. This increase was partially offset by lower average one-month LIBOR rates, which averaged 1.10% in 2004 compared to 1.34% in 2003 on the unhedged portion of the Company's variable-rate debt and by a $1.3 million increase in amortization of deferred financing costs on the Company's debt obligations in 2004 compared to the same period in 2003.
Operating costscorporate tenant lease assetsFor the three months ended March 31, 2004, operating costs increased by approximately $2.5 million from $3.6 million to $6.1 million for the same period in 2003. This increase is primarily related to new CTL investments and higher unrecoverable operating costs due to vacancies on certain CTL assets.
Depreciation and amortizationDepreciation and amortization increased by $3.0 million to $15.3 million for the three months ended March 31, 2004 from $12.3 million for the same period in 2003. This increase is primarily due to depreciation on new CTL investments.
General and administrativeFor the three months ended March 31, 2004, general and administrative expenses increased by $5.7 million to $13.4 million, compared to $7.7 million for the same period in 2003. This increase is primarily due to the consolidation of iStar Operating and the increase in payroll and compensation expenses.
General and administrativestock-based compensationGeneral and administrative-stock-based compensation increased by $106.7 million for the three months ended March 31, 2004 compared to the same period in 2003. In 2004, the Company recognized a charge of approximately $106.9 million composed of $4.1 million for the performance-based vesting of 100,000 restricted shares granted under the Company's long-term incentive plan to the Chief Financial Officer, $86.0 million for the vesting of 2.0 million phantom shares on March 30, 2004 granted to the Chief Executive Officer, $10.1 million for the one-time award of Common Stock to the Chief Executive Officer, and $6.7 million for the vesting of 155,000 restricted shares granted to several employees.
Provision for loan lossesThe Company's charge for provision for loan losses increased to $3.0 million for the three months ended March 31, 2004 compared to $1.8 million in the same period in 2003. As more fully discussed in Note 4 to the Company's Consolidated Financial Statements, the Company has experienced minimal actual losses on its loan investments to date. The Company considers it prudent to reflect provisions for loan losses on a portfolio basis based upon the Company's assessment of general market conditions, the Company's internal risk management policies and credit risk rating system, industry loss experience, the Company's assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments. Accordingly, since
45
its first full quarter operating its current business as a public company (the quarter ended June 30, 1998), management has reflected quarterly provisions for loan losses in its operating results.
Loss on early extinguishment of debtDuring the three months ended March 31, 2004, the Company had $11.5 million of losses on early extinguishment of debt associated with the prepayment penalties and amortization of deferred financing costs related to the redemption of $110.0 million of the Company's 8.75% Senior Notes due 2008. In addition, the Company incurred $428,000 of losses associated with the amortization of deferred financing costs related to the early repayment of the Company's $60.0 million term loan which had an original maturity of June 2004. The Company also incurred a loss of $287,000 associated with amortization of deferred financing costs related to the early repayment of the Company's $193.0 million term loan which had an original maturity of July 2004. All of these activities related to the Company's strategies of migrating its borrowings toward more unsecured debt and taking advantage of lower cost refinancing opportunities.
During the three months ended March 31, 2003, the Company had no losses on early extinguishment of debt.
Equity in earnings (loss) from joint ventures and unconsolidated subsidiariesFor the three months ended March 31, 2004, equity in earnings (loss) from joint ventures and unconsolidated subsidiaries increased by $6.3 million to $6.2 million from approximately $(58,000) for the same period in 2003. This increase is primarily due to the conveyance by one of the Company's CTL joint ventures of its interest in two buildings and the related property to the mortgage lender in exchange for satisfaction of its obligations of the related loan. (see Note 6 to the Company's Consolidated Financial Statements).
Income from discontinued operationsFor the three months ended March 31, 2004 and 2003, operating income earned by the Company on CTL assets sold through September 30, 2004 (prior to their sale) and assets held for sale as of September 30, 2004, of approximately $3.0 million and $3.5 million, respectively, is classified as "discontinued operations."
Gain from discontinued operationsDuring the three months ended 2004, the Company disposed of one CTL asset for net proceeds of $2.8 million and recognized a gain of approximately $136,000.
During the three months ended 2003, the Company disposed of one CTL asset for net proceeds of $4.0 million and recognized a gain of approximately $264,000.
Adjusted Earnings
Adjusted earnings represents net income allocable to common shareholders and HPU holders computed in accordance with GAAP, before depreciation, amortization, gain from discontinued operations, extraordinary items and cumulative effect of change in accounting principle. Adjustments for unconsolidated partnerships and joint ventures reflect the Company's share of adjusted earnings calculated on the same basis.
The Company believes that adjusted earnings is a helpful measure to consider, in addition to net income, because this measure helps the Company to evaluate how its commercial real estate finance business is performing compared to other commercial finance companies, without the effects of certain GAAP adjustments that are not necessarily indicative of current operating performance. The most significant GAAP adjustments that the Company excludes in determining adjusted earnings are depreciation and amortization. As a commercial finance company that focuses on real estate lending and corporate tenant leasing, the Company records significant depreciation on its real estate assets and amortization of deferred financing costs associated with its borrowings. These items do not affect the Company's daily operations, but they do impact financial results under GAAP. By measuring its performance using adjusted earnings and net income, the Company is able to evaluate how its business
46
is performing both before and after giving effect to recurring GAAP adjustments such as depreciation and amortization and, in the case of adjusted earnings, after including earnings from its joint venture interests on the same basis and excluding gains or losses from the sale of assets that will no longer be part of its continuing operations.
Adjusted earnings is not an alternative or substitute for net income in accordance with GAAP as a measure of the Company's performance. Rather, the Company believes that adjusted earnings is an additional measure that helps analyze how its business is performing. This measure is also used to track compliance with covenants in the Company's borrowing arrangements because several of its material borrowing arrangements have covenants based upon this measure. Adjusted earnings should not be viewed as an alternative measure of either the Company's liquidity or funds available for its cash needs or for distribution to its shareholders. In addition, the Company may not calculate adjusted earnings in the same manner as other companies that use a similarly titled measure.
|
For the Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
||||||
|
(Unaudited) (In thousands) |
|||||||
Adjusted earnings: | ||||||||
Net income (loss) allocable to common shareholders and HPU holders | $ | (54,716 | ) | $ | 58,726 | |||
Add: Joint venture income | | 249 | ||||||
Add: Depreciation | 15,938 | 13,272 | ||||||
Add: Joint venture depreciation and amortization | 1,532 | 1,012 | ||||||
Add: Amortization of deferred financing costs | 10,312 | 6,451 | ||||||
Less: Gains from discontinued operations | (136 | ) | (264 | ) | ||||
Adjusted diluted earnings allocable to common shareholders and HPU holders(1)(2)(3)(4) | $ | (27,070 | ) | $ | 79,446 | |||
Weighted average diluted common shares outstanding(5) | 107,468 | 101,582 | ||||||
Explanatory Notes:
Risk Management
First Dollar and Last Dollar ExposureOne component of the Company's risk management assessment is an analysis of the Company's first and last dollar loan-to-value percentage with respect to the facilities or companies the Company finances. First dollar loan-to-value represents the weighted average beginning point for the Company's lending exposure in the aggregate capitalization of the underlying facilities or companies it finances. Last dollar loan-to-value represents the weighted average
47
ending point for the Company's lending exposure in the aggregate capitalization of the underlying facilities or companies it finances.
Loans and Other Lending Investments Credit Statistics The table below summarizes the Company's loans and other lending investments that are more than 60-days past due in scheduled payments and details the provision for loan losses associated with the Company's lending investments for March 31, 2004, and December 31, 2003, as well as charge-offs for the three months ended March 31, 2004, and the year ended December 31, 2003 (in thousands):
|
As of March 31, 2004 |
As of December 31, 2003 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
$ |
% |
$ |
% |
|||||||
Carrying value of loans past due 60 days or more/ As a percentage of loans and other lending investments |
$ | 27,526 | 0.68 | % | $ | 27,480 | 0.74 | % | |||
Provision for loan losses/ As a percentage of loans and other lending investments |
36,436 | 0.91 | % | 33,436 | 0.89 | % | |||||
Net charge-offs/ As a percentage of loans and other lending investments |
| | 3,314 | 0.09 | % |
Non-Accrual LoansThe Company transfers loans to non-accrual status at such time as: (1) management believes that the potential risk exists that scheduled debt service payments will not be met within the coming 12 months; (2) the loan becomes 90 days delinquent; (3) management determines the borrower is incapable of, or ceased efforts toward, curing the cause of an impairment; or (4) the net realizable value of the loan's underlying collateral approximates the Company's carrying value of such loan. Interest income is recognized only upon actual cash receipt for loans on non-accrual status. As of March 31, 2004, the Company has three assets on non-accrual status with an aggregate carrying value of $40.3 million, or 0.55% of total assets, compared to 0.61% at December 31, 2003. Two of these three borrowers remain current on all of the debt service payments due to the Company. Management believes there is adequate collateral to support the book values of the assets.
Watch List AssetsThe Company conducts a quarterly comprehensive credit review, resulting in an individual risk rating being assigned to each asset. This review is designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis as an "early warning system." As of March 31, 2004, the Company had five assets on its credit watch list, including the three non-accrual loans discussed above, with an aggregate carrying value of $116.2 million, or 1.59% of total assets, compared to 1.55% at December 31, 2003.
Liquidity and Capital Resources
The Company requires significant capital to fund its investment activities and operating expenses. The Company has sufficient 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 or increase capital committed to its operations. However, the Company believes that its access to significant capital resources and financing will enable the Company to meet current and anticipated capital requirements.
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The Company believes that its existing sources of funds will be adequate for purposes of meeting its short- and long-term liquidity needs. The Company's ability to meet its long-term (i.e., beyond one year) liquidity requirements is subject to obtaining additional debt and equity financing. Any decision by the Company's lenders and investors to provide the Company with financing will depend upon a number of factors, such as the Company's 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 capital commitments and the relative attractiveness of alternative investment or lending opportunities.
The following table outlines the contractual obligations related to the Company's long-term debt agreements and operating lease obligations. There are no other long-term liabilities of the Company that would constitute a contractual obligation.
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Principal Payments Due By Period(1) |
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Total |
Less Than 1 Year |
2-3 Years |
4-5 Years |
6-10 Years |
After 10 Years |
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(In thousands) |
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Long-Term Debt Obligations: | |||||||||||||||||||
Secured revolving credit facilities | $ | 530,857 | $ | | $ | 530,857 | $ | | $ | | $ | | |||||||
Unsecured revolving credit facilities | | | | | | | |||||||||||||
Secured term loans | 799,816 | 25,756 | 259,964 | 325,290 | 96,060 | 92,746 | |||||||||||||
iStar Asset Receivables secured notes(2) | 1,240,800 | 33,484 | 208,466 | | 998,850 | | |||||||||||||
Unsecured notes | 2,100,000 | | 225,000 | 775,000 | 1,000,000 | 100,000 | |||||||||||||
Other debt obligations | | | | | | | |||||||||||||
Total | 4,671,473 | 59,240 | 1,224,287 | 1,100,290 | 2,094,910 | 192,746 | |||||||||||||
Operating Lease Obligations:(3) | 16,067 | 2,879 | 5,878 | 4,761 | 2,549 | | |||||||||||||
Total | $ | 4,687,540 | $ | 62,119 | $ | 1,230,165 | $ | 1,105,051 | $ | 2,097,459 | $ | 192,746 | |||||||
Explanatory Notes:
The Company has four LIBOR-based secured revolving credit facilities with an aggregate maximum capacity of $2.0 billion, of which $530.9 million was drawn as of March 31, 2004 (see Note 7 to the Company's Consolidated Financial Statements). Availability under these facilities is based on collateral provided under a borrowing base calculation. At March 31, 2004, the Company also had an unsecured credit facility totaling $300.0 million which bears interest at LIBOR + 2.125% per annum and matures in July 2004. At March 31, 2004, the Company had no amounts drawn under this facility.
The Company's debt obligations contain covenants that are both financial and non-financial in nature. Significant financial covenants include limitations on the Company's ability to incur indebtedness beyond specified levels, restrictions on the Company's ability to incur liens on assets and limitations on the amount and type of restricted payments, such as repurchases of its own equity securities, that the Company makes. Significant non-financial covenants include a requirement in its publicly-held debt securities that the Company offer to repurchase those securities at a premium if the Company undergoes a change of control. As of March 31, 2004, the Company believes it is in compliance with all financial and non-financial covenants on its debt obligations.
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Unencumbered Assets/Unsecured DebtThe Company has made and will continue to make progress in migrating its balance sheet towards more unsecured debt, which generally results in a corresponding reduction of secured debt and an increase in unencumbered assets. The exact timing in which the Company will issue or borrow unsecured debt will be subject to market conditions. The following table shows the ratio of unencumbered assets to unsecured debt at March 31, 2004 and December 31, 2003 (in thousands):
|
As of March 31, 2004 |
As of December 31, 2003 |
||||
---|---|---|---|---|---|---|
Total Unencumbered Assets | $ | 3,588,944 | $ | 2,167,388 | ||
Total Unsecured Debt(1) | $ | 2,100,000 | $ | 1,315,000 | ||
Unencumbered Assets/Unsecured Debt(2) | 171% | 165% |
Explanatory Notes:
Capital Markets FinancingsThe Company was an active issuer in the capital markets in three months ended March 31, 2004. The continued strength of the Company's stock price and the low interest rate environment provided the Company with the opportunity to issue equity and debt securities on attractive pricing terms. During the three months ended March 31, 2004, the Company issued $850.0 million aggregate principal amount of fixed-rate Senior Notes bearing interest at annual rates ranging from 4.875% to 5.700% and maturing between 2009 and 2014 and $175.0 million of variable-rate Senior Notes bearing interest at annual rates of three- month LIBOR+1.25% and maturing in 2007. The Company issued 8.3 million shares of preferred stock in two series with cumulative annual dividend rates of 7.50%.
During the 12 months ended December 31, 2003, the Company issued $685.0 million aggregate principal amount of fixed-rate Senior Notes bearing interest at annual rates ranging from 6.00% to 7.00% and maturing between 2008 and 2013. All of the shares of preferred stock have a liquidation preference of $25.00 per share. The Company issued 12.8 million shares of preferred stock in three series with cumulative annual dividend rates ranging from 7.650% to 7.875%. The Company also issued 5.0 million shares of Common Stock in 2003 at a price to the public of $38.50 per share.
The Company primarily used the proceeds from the issuances of securities described above to repay secured indebtedness as it migrates its balance sheet towards more unsecured debt and to refinance higher yielding obligations. During the three months ended March 31, 2004, the Company redeemed approximately $110.0 million aggregate principal amount of its outstanding 8.75% Senior Notes due 2008 at a price of 108.75% of par. In connection with this redemption, the Company recognized a charge to income of $11.5 million included in "Loss on early extinguishment of debt" on the Company's Consolidated Statements of Operations. The Company also retired its 3.3 million shares of Series H Variable Rate Cumulative Redeemable Preferred Stock. In addition, the Company redeemed all of its 2.0 million shares of 9.375% Series B Cumulative Redeemable Preferred Stock and all of its 1.3 million shares of 9.200% Series C Cumulative Redeemable Preferred Stock. In connection with this redemption, the Company recognized a charge to net income allocable to common shareholders and HPU holders of approximately $9.0 million included in "Preferred dividend requirements" on the Company's Consolidated Statements of Operations.
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During the 12 months ended December 31, 2003, the Company retired all of its 4.0 million shares of 9.50% Series A Cumulative Redeemable Preferred Stock and the 6.75% Dealer Remarketable Securities of its Leasing Subsidiary.
Other Financing ActivitiesOn March 12, 2004, one of the Company's $700.0 million secured facilities was amended to reduce the maximum amount available to $250.0 million, to extend the maturity to March 2005 and to reduce the stated interest rate on first mortgages and CTL assets to LIBOR + 1.50% and on subordinate and mezzanine lending investments to LIBOR + 2.05%.
On March 10, 2004, the Company repaid its $193.0 million term loan financing secured by 15 CTL assets with an original maturity of July 2004.
On January 13, 2004, the Company closed $200.0 million of term financing with a leading financial institution that is secured by certain corporate bond investments and other lending securities. A number of these investments were previously financed under existing credit facilities. The new facility bears interest at LIBOR + 1.05%-1.50% and has a final maturity date of January 2006.
On December 5, 2003, the Company issued $350.0 million of 6.00% Senior Notes due 2010 and $150.0 million of 6.50% Senior Notes due in 2013. The Notes due 2010 were sold at 99.44% of their principal amount and the Notes due 2013 were sold at 99.23% of their principal amount. The Notes are unsecured senior obligations of the Company. The Company used the net proceeds to partially repay secured indebtedness.
On September 29, 2003, the Company closed a $135.0 million term loan secured by a CTL asset it acquired the same day. The loan has a five-year term and bears interest at LIBOR + 1.75%.
On May 21, 2003, a wholly-owned subsidiary of the Company issued iStar Asset Receivables ("STARs"), Series 2003-1, the Company's proprietary match funding program, consisting of $645.8 million of investment-grade bonds secured by the subsidiary's structured finance and CTL assets, which had an aggregate carrying value of approximately $738.1 million 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 weighted average interest rate on the bonds, on an all-floating rate basis, was approximately LIBOR + 0.47% at inception. For accounting purposes, this transaction was treated as a secured financing: the underlying assets and STARs liabilities remained on the Company's Consolidated Balance Sheets, and no gain on sale was recognized.
Hedging ActivitiesThe Company has variable-rate lending assets and variable-rate debt obligations. These assets and liabilities create a natural hedge against changes in variable interest rates. This means that as interest rates increase, the Company earns more on its variable-rate lending assets and pays more on its variable-rate debt obligations and, conversely, as interest rates decrease, the Company earns less on its variable-rate lending assets and pays less on its variable-rate debt obligations. When the amount of the Company's variable-rate debt obligations exceeds the amount of its variable-rate lending assets, the Company utilizes derivative instruments to limit the impact of changing interest rates on its net income. The Company does not use derivative instruments to hedge assets or for speculative purposes. The derivative instruments the Company uses are typically in the form of interest rate swaps and interest rate caps. Interest rate swaps effectively change variable-rate debt obligations to fixed-rate debt obligations. Interest rate caps effectively limit the maximum interest rate on variable-rate debt obligations.
In addition, when appropriate the Company enters into interest rate swaps that convert fixed-rate debt to variable rate in order to mitigate the risk of changes in fair value of the fixed-rate debt obligations.
The primary risks from the Company's use of derivative instruments are the risks that a counterparty to a hedging arrangement could default on its obligation and the risk that the Company may have to pay certain costs, such as transaction fees or breakage costs, if a hedging arrangement is terminated by the Company. As a matter of policy, the Company enters into hedging arrangements with counterparties that are large, creditworthy financial institutions typically rated at least "A" by Standard & Poor's ("S&P") and "A2" by Moody's Investors Service ("Moody's"). The Company's hedging strategy is approved and monitored by the Company's Audit Committee on behalf of its Board of Directors and may be changed by the Board of Directors without stockholder approval.
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The Company has entered into the following cash flow and fair value hedges that are outstanding as of March 31, 2004. The net value (liability) associated with these hedges is reflected on the Company's Consolidated Balance Sheets (in thousands).
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
Estimated Value at March 31, 2004 |
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Pay-Fixed Swap | $ | 235,000 | 1.135 | % | 3/11/04 | 9/15/04 | $ | (50 | ) | ||||
Pay-Fixed Swap | 200,000 | 1.144 | % | 3/11/04 | 9/15/04 | (52 | ) | ||||||
Pay-Fixed Swap | 200,000 | 1.144 | % | 3/11/04 | 9/15/04 | (52 | ) | ||||||
Pay-Fixed Swap | 125,000 | 2.885 | % | 1/23/03 | 6/25/06 | (2,678 | ) | ||||||
Pay-Fixed Swap | 125,000 | 2.838 | % | 2/11/03 | 6/25/06 | (2,546 | ) | ||||||
Pay-Fixed Swap | 75,000 | 5.580 | % | 11/4/99 | (1) | 12/1/04 | (2,528 | ) | |||||
Pay-Floating Swap | 200,000 | 4.381 | % | 12/17/03 | 12/15/10 | 6,328 | |||||||
Pay-Floating Swap | 105,000 | 3.678 | % | 1/15/04 | 1/15/09 | 1,157 | |||||||
Pay-Floating Swap | 100,000 | 4.345 | % | 12/17/03 | 12/15/10 | 2,936 | |||||||
Pay-Floating Swap | 100,000 | 3.878 | % | 11/27/02 | 8/15/08 | 4,117 | |||||||
Pay-Floating Swap | 100,000 | 3.713 | % | 1/15/04 | 1/15/09 | 1,266 | |||||||
Pay-Floating Swap | 100,000 | 3.686 | % | 1/15/04 | 1/15/09 | 1,142 | |||||||
Pay-Floating Swap | 50,000 | 3.810 | % | 11/27/02 | 8/15/08 | 1,915 | |||||||
Pay-Floating Swap | 50,000 | 4.290 | % | 12/17/03 | 12/15/10 | 1,294 | |||||||
Pay-Floating Swap | 45,000 | 3.684 | % | 1/15/04 | 1/15/09 | 508 | |||||||
LIBOR Cap | 345,000 | 8.000 | % | 5/22/02 | 5/28/14 | 8,742 | |||||||
LIBOR Cap | 135,000 | 6.000 | % | 9/29/03 | 10/15/06 | 167 | |||||||
LIBOR Cap | 75,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
LIBOR Cap | 35,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
LIBOR Cap | 24,000 | 9.000 | % | 9/25/03 | 11/9/04 | | |||||||
Total Estimated Value | $ | 21,666 | |||||||||||
Explanatory Note:
Between January 1, 2003 and March 31, 2004, the Company also had outstanding the following cash flow hedges that have expired or been settled (in thousands):
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
|||||
---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 125,000 | 7.058 | % | 6/15/00 | 6/25/03 | |||
Pay-Fixed Swap | 125,000 | 7.055 | % | 6/15/00 | 6/25/03 | ||||
Pay-Fixed Swap | 100,000 | 4.139 | % | 9/29/03 | 1/2/11 | ||||
Pay-Fixed Swap | 100,000 | 4.643 | % | 9/29/03 | 1/2/14 | ||||
Pay-Floating Swap | 100,000 | 4.484 | % | 1/16/04 | 5/1/14 | ||||
Pay-Floating Swap | 50,000 | 4.502 | % | 1/16/04 | 5/1/14 | ||||
Pay-Floating Swap | 50,000 | 4.500 | % | 1/16/04 | 5/1/14 |
On March 11, 2004, the Company entered into three pay-fixed interest rate swaps all with six-month terms, rates of 1.135%, 1.144% and 1.144% and notional amounts of $235.0 million, $200.0 million and $200.0 million, respectively.
On January 16, 2004, the Company entered into three forward starting swaps all with 10-year terms and rates of 4.484%, 4.502% and 4.500% and notional amounts of $100.0 million, $50.0 million and $50.0 million, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These three swaps were settled in connection with the Company's issuance of $250.0 million of 10-year Senior Notes in March 2004.
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On January 15, 2004, in connection with the Company's fixed-rate corporate bonds, the Company entered into four pay-floating interest rate swaps struck at 3.678%, 3.713%, 3.686% and 3.684% with notional amounts of $105.0 million, $100.0 million, $100.0 million and $45.0 million, respectively, and maturing on January 15, 2009. The Company pays six-month LIBOR and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of five-year Senior Notes attributable to changes in LIBOR. For accounting purposes, the difference between the fixed rate received and the LIBOR rate paid on the notional amount of the swap is recorded as "Interest expense" on the Company's Consolidated Statements of Operations. In addition, the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount on a quarterly basis.
During 2003, the Company entered into two 90-day forward starting swaps each having a $100.0 million notional amount. These pay-fixed swaps which were effective in September 2003, had rates of 4.139% and 4.643%, had seven-year and 10-year terms, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These two swaps were settled in connection with the Company's issuance of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes. In addition, effective in September 2003, the Company entered into a $135.0 million cap with a rate of 6.00% to hedge the Company's current outstanding floating-rate debt. This cap has a three-year term. Further, the Company entered into two $125.0 million forward starting swaps. These pay-fixed swaps were effective in June 2003 and replaced the two $125.0 million pay-fixed swaps mentioned above. The two new pay-fixed swaps have a three-year term and expire on June 25, 2006.
In addition, in connection with a portion of the Company's fixed-rate corporate bonds, the Company entered into three pay-floating interest rate swaps in December 2003 struck at 4.381%, 4.345% and 4.29% with notional amounts of $200.0 million, $100.0 million and $50.0 million, respectively, and maturing on December 15, 2010 and entered into two pay-floating interest rate swaps in November 2002 struck at 3.8775% and 3.81% with notional amounts of $100.0 million and $50.0 million, respectively, and maturing on August 15, 2008. The Company pays six-month LIBOR on the swaps entered into in December 2003 and one-month LIBOR on the swaps entered into in November 2002 and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes attributable to changes in LIBOR. For accounting purposes, the difference between the fixed rate received and the LIBOR rate paid on the notional amount of the swap is recorded as "Interest expense" on the Company's Consolidated Statements of Operations. In addition, the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount on a quarterly basis.
In connection with STARs, Series 2003-1 in May 2003, the Company entered into a LIBOR interest rate cap struck at 6.95% in the notional amount of $270.6 million, and simultaneously sold a LIBOR interest rate cap with the same terms. Since these instruments do not change 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 terms of these arrangements are substantially the same, the effects of a revaluation of these two instruments substantially offset one another.
In connection with STARs, Series 2002-1 in May 2002, the Company entered into a LIBOR interest rate cap struck at 8.00% in the notional amount of $345.0 million. The Company utilizes the provisions of SFAS No. 133 with respect to such instruments. SFAS No. 133 provides that the up-front fees paid on option-based products such as caps should be expensed into earnings based on the allocation of the premium to the affected periods as if the agreement were a series of "caplets." These allocated premiums are then reflected as a charge to income (as part of interest expense) in the affected period. On May 28, 2002, in connection with the STARs, Series 2002-1 transaction, the Company paid a premium of $13.7 million for this interest rate cap. Using the "caplet" methodology
53
discussed above, amortization of the cap premium is dependent upon the actual value of the caplets at inception.
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 term loan bears interest at 7.44% per annum, payable monthly, and amortizes over an approximately 22-year schedule. The 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 term loan over its effective ten-year term.
Off-Balance Sheet TransactionsThe Company is not dependent on the use of any off-balance sheet financing arrangements for liquidity. As of March 31, 2004, the Company had investments in two CTL joint ventures accounted for under the equity method, which had total debt obligations outstanding of approximately $102.7 million. The Company's pro rata share of the ventures' third-party debt was approximately $41.7 million (see Note 6 to the Company's Consolidated Financial Statements). These ventures were formed for the purpose of operating, acquiring and in certain cases, developing CTL facilities. The debt obligations of these joint ventures are non-recourse to the ventures and the Company, and mature between fiscal years 2005 and 2011. As of March 31, 2004, the debt obligations consisted of four term loans bearing fixed rates per annum ranging from 7.61% to 8.43%.
The Company's STARs securitizations are all on-balance sheet financings.
The Company has certain discretionary and non-discretionary unfunded commitments related to its loans and other lending investments that it may need to, or choose to, fund in the future. Discretionary commitments are those under which the Company has sole discretion with respect to future funding. Non-discretionary commitments are those under which the Company is generally obligated to fund at the request of the borrower or upon the occurrence of events outside of the Company's direct control. As of March 31, 2004, the Company had 22 loans with unfunded commitments totaling $328.9 million, of which $15.1 million was discretionary and $313.8 million was non-discretionary.
Ratings TriggersThe $300.0 million unsecured revolving credit facility that the Company held in place at March 31, 2004, bore interest at LIBOR + 2.125% per annum based on the Company's senior unsecured credit ratings of BB+ from S&P, Ba1 from Moody's and BBB- from Fitch Ratings. If the Company achieved a higher rating from either S&P or Moody's, the facility's interest rate would have improved to LIBOR + 2.00% per annum. If the Company's credit rating were downgraded by any of the rating agencies (regardless of how far), the facility's interest rate would have increased to LIBOR + 2.25% per annum. As of March 31, 2004, there was no outstanding balance on this facility. Accordingly, management does not believe any rating changes would have a material adverse impact on the Company's results of operations. There were no other ratings triggers in any of the Company's debt instruments or other operating or financial agreements at March 31, 2004.
On July 30, 2002, the Company's senior unsecured credit rating was upgraded to an investment grade rating of BBB- from BB+ by Fitch Ratings. In addition, on July 31, 2002 and August 1, 2002, Moody's and S&P respectively raised their ratings outlook for the Company's senior unsecured credit rating to "positive." On October 22, 2003, Moody's confirmed its rating of Ba1 and its ratings outlook of "positive" for the Company. On November 20, 2003, S&P also reaffirmed its rating of BB+ and its ratings outlook of "positive" for the Company.
Transactions with Related PartiesThe Company has an investment in iStar Operating Inc. ("iStar Operating"), a taxable subsidiary that, through a wholly-owned subsidiary, services the Company's loans and certain loan portfolios owned by third parties. The Company owns all of the non-voting preferred stock and a 95.00% economic interest in iStar Operating. The common shareholder, an entity controlled by a former director of the Company, is the owner of all the voting common stock and a 5.00% economic interest in iStar Operating. As of March 31, 2004, there have never been any
54
distributions to the common shareholder, nor does the Company expect to make any in the future. At any time, the Company has the right to acquire all of the common stock of iStar Operating at fair market value, which the Company believes to be nominal.
iStar Operating has elected to be treated as a taxable REIT subsidiary for purposes of maintaining compliance with the REIT provisions of the Code and prior to July 1, 2003 was accounted for under the equity method for financial statement reporting purposes and was presented in "Investments in and advances to joint ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance Sheets. As of July 1, 2003, the Company consolidates this entity as a VIE (see Note 3 to the Company's Consolidated Financial Statements) with no material impact. Prior to its consolidation, the Company charged an allocated portion of its general overhead expenses to iStar Operating based on the number of employees at iStar Operating as a percentage of the Company's total employees. These general overhead expenses were in addition to the direct general and administrative costs of iStar Operating. As of March 31, 2004, iStar Operating had no debt obligations.
In addition, the Company had an investment in TriNet Management Operating Company, Inc. ("TMOC"), an entity originally formed to make a $2.0 million investment in the convertible debt securities of a real estate company which trades on the Mexican Stock Exchange. This investment was made by TriNet prior to its acquisition by the Company in 1999. On June 30, 2003, the $2.0 million investment was fully repaid and during the third quarter 2003, the entity was liquidated.
The Company entered into an employment agreement with its Chief Executive Officer as of March 31, 2001. In addition to the salary and bonus provisions of the agreement, the agreement provides for an award of 2.0 million phantom units to the executive, each of which notionally represents one share of the Company's Common Stock. Portions of these phantom units will vest on a contingent basis if the average closing price of the Company's Common Stock achieves certain levels (ranging from $25.00 to $37.00 per share) for 60 consecutive calendar days. The total rate of return (share price appreciation plus the reinvestment of dividends at market price on the date of distribution) from January 1, 2001 through March 30, 2004 was 175.80%. All 2.0 million phantom share units became fully vested on March 30, 2004 as a result of the Company achieving a $37.00 share price for 60 consecutive calendar days. Upon the phantom share units becoming fully vested, the Company delivered to the executive 728,552 shares of Common Stock and $53.9 million of cash, the total of which is equal to the fair market value of the 2.0 million shares of Common Stock multiplied by the closing stock price of $42.40 on March 30, 2004. See "Critical Accounting Policies-Executive Compensation" below for a discussion of the accounting treatment applicable to the compensation awarded to the Chief Executive Officer under this agreement.
As more fully described in Note 10 to the Company's Consolidated Financial Statements certain affiliates of SOF IV and the Company's Executive Officer have agreed to reimburse the Company for the value of restricted shares awarded to the former President in excess of 350,000 shares.
DRIP/Stock Purchase PlanThe Company maintains a dividend reinvestment and direct stock purchase plan. Under the dividend reinvestment component of the plan, the Company's shareholders may purchase additional shares of Common Stock without payment of brokerage commissions or service charges by automatically reinvesting all or a portion of their Common Stock cash dividends. Under the direct stock purchase component of the plan, the Company's shareholders and new investors may purchase shares of Common Stock directly from the Company without payment of brokerage commissions or service charges. All purchases of shares in excess of $10,000 per month pursuant to the direct purchase component are at the Company's sole discretion. Shares issued under the plan may reflect a discount of up to 3.00% from the prevailing market price of the Company's Common Stock. The Company is authorized to issue up to 8.0 million shares of Common Stock pursuant to the dividend reinvestment and direct stock purchase plan. During the three months ended March 31, 2004 and 2003, the Company issued a total of approximately 376,000 million and 619,000 shares of its Common Stock, respectively, through the direct stock purchase component of the plan. Net proceeds
55
during the three months ended March 31, 2004 and 2003 were approximately $15.5 million and $17.4 million, respectively. There are approximately 2.8 million shares available for issuance under the plan as of March 31, 2004.
Stock Repurchase ProgramThe 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 or loan repayments 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 March 31, 2004, the Company had repurchased a total of approximately 2.3 million shares at an aggregate cost of approximately $40.7 million. The Company has not repurchased any shares under the stock repurchase program since November 2000.
Critical Accounting Policies
The Company's Consolidated Financial Statements include the accounts of the Company and all majority-owned and controlled subsidiaries. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe that there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Management has the obligation to ensure that its policies and methodologies are in accordance with GAAP. During the three months ended March 31, 2004, management reviewed and evaluated its critical accounting policies and believes them to be appropriate. The Company's accounting policies are described in Note 3 to the Company's Consolidated Financial Statements. The following are significant events relating to critical accounting policies during the three months ended March 31, 2004:
Executive CompensationThe Company's accounting policies generally provide cash compensation to be estimated and recognized over the period of service. With respect to stock-based compensation arrangements, as of July 1, 2002 (with retroactive application to the beginning of the calendar year), the Company has adopted the fair value method allowed under SFAS No. 123 on a prospective basis, which values options on the date of grant and recognizes an expense equal to the fair value of the option multiplied by the number of options granted over the related service period. Prior to the third quarter 2002, the Company elected to use APB 25 accounting, which measured the compensation charges based on the intrinsic value of such securities when they become fixed and determinable, and recognized such expense over the related service period. These arrangements are often complex and generally structured to align the interests of management with those of the Company's shareholders. See Note 10 to the Company's Consolidated Financial Statements for a detailed discussion of such arrangements and the related accounting effects.
During 2001, the Company entered into three-year employment agreements with its Chief Executive Officer and its former President. In addition, during 2002 the Company entered into a three-year employment agreement with its Chief Financial Officer. See Note 10 to the Company's Consolidated Financial Statements for a more detailed description of these employment agreements.
On March 30, 2004, 2.0 million of the phantom shares awarded to the Chief Executive Officer became fully vested. The market price of the Common Stock on March 30, 2004 was $42.40 and the Company incurred a one-time charge to earnings at that time of approximately $86.0 million (the fair market value of the 2.0 million shares at $42.40 per share plus the Company's share of taxes). The
56
Company paid the Chief Executive Officer $53.9 million in cash with the remainder in the form of 728,552 shares of the Company's Common Stock.
On February 11, 2004, the Company entered into a new employment agreement with its Chief Executive Officer which took effect upon the expiration of the old agreement. The new agreement has an initial term of three years and provides for the following compensation:
In addition, the Chief Executive Officer purchased an 80.00% interest in the Company's 2006 High Performance Unit Program for directors and executive officers. This performance program was approved by the Company's shareholders in 2003 and is described in detail in the Company's 2003 annual proxy statement. The purchase price to be paid by the Chief Executive Officer is based upon a valuation prepared by an independent investment-banking firm. The interests purchased by the Chief Executive Officer will only have nominal value to him unless the Company achieves total shareholder returns in excess of those achieved by peer group indices, all as more fully described in the Company's 2003 annual proxy statement.
New Accounting Standards
In December 2003, the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition" which supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21. The Company adopted the provisions of this statement immediately, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," issued during the third quarter of 2003, provides guidance on revenue recognition for revenues derived from a single contract that contain multiple products or services. EITF 00-21 also provides additional requirements to determine when these revenues may be recorded separately for accounting purposes. The Company adopted EITF 00-21 on July 1, 2003, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity." This standard requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatorily redeemable financial instruments, (2) obligations to repurchase the issuer's equity shares by transferring assets; and (3) certain obligations to issue a variable number of shares. The FASB recently issued FASB Staff Position ("FSP") 150-3, which defers the provisions of paragraphs 9 and 10 of SFAS No. 150 indefinitely as they apply to mandatorily redeemable noncontrolling interests associated with finite-lived entities. The Company adopted the provisions of
57
this statement, as required, on July 1, 2003, and it did not have a significant financial impact on the Company's Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of ARB 51. FIN 46 provides guidance on identifying entities for which control is achieved through means other than through voting rights (a "variable interest entity" or "VIE"), and how to determine when and which business enterprise should consolidate a VIE. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The transitional disclosure requirements took effect immediately and were required for all financial statements initially issued or modified after January 31, 2003. Immediate consolidation is required for VIEs entered into or modified after February 1, 2003 in which the Company is deemed the primary beneficiary. For VIEs in which the Company entered into prior to February 1, 2003, FIN 46 was deferred the quarter ended March 31, 2004. In December 2003, the FASB issued a revised FIN 46 that modifies and clarifies various aspects of the original Interpretation. FIN 46 applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of controlling financial interest, (2) the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interest. The adoption of the additional consolidation provisions of FIN 46 did not have a material impact on the Company's Consolidated Financial Statements (see Note 6).
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based CompensationTransition and Disclosure," an amendment of FASB Statement No. 123 ("SFAS No. 123"). This statement provides alternative transition methods for a voluntary change to the fair value basis of accounting for stock-based employee compensation. However, this Statement does not permit the use of the original SFAS No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation, description of transition method utilized and the effect of the method used on reported results. The Company adopted SFAS No. 148 with retroactive application to grants made subsequent to January 1, 2002 with no material effect on the Company's Consolidated Financial Statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies," Statement of Financial Accounting Standards No. 57, "Related Party Disclosures," Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" and rescinds FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5." It requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee regardless if the Company receives separately identifiable consideration (e.g., a premium). The disclosure requirements are effective December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company's Consolidated Financial Statements, nor is it expected to have a material impact in the future.
58
iStar Financial Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(unaudited)
|
As of June 30, 2004 |
As of December 31, 2003 |
||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Loans and other lending investments, net | $ | 4,255,005 | $ | 3,702,674 | ||||
Corporate tenant lease assets, net | 2,854,967 | 2,535,885 | ||||||
Investments in and advances to joint ventures and unconsolidated subsidiaries | 18,380 | 25,019 | ||||||
Assets held for sale | 51,692 | 24,800 | ||||||
Cash and cash equivalents | 96,073 | 80,090 | ||||||
Restricted cash | 82,625 | 57,665 | ||||||
Accrued interest and operating lease income receivable | 26,689 | 26,076 | ||||||
Deferred operating lease income receivable | 63,412 | 51,447 | ||||||
Deferred expenses and other assets | 157,588 | 156,934 | ||||||
Total assets | $ | 7,606,431 | $ | 6,660,590 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Liabilities: | ||||||||
Accounts payable, accrued expenses and other liabilities | $ | 157,387 | $ | 126,524 | ||||
Debt obligations | 4,942,568 | 4,113,732 | ||||||
Total liabilities | 5,099,955 | 4,240,256 | ||||||
Commitments and contingencies | | | ||||||
Minority interest in consolidated entities |
12,572 |
5,106 |
||||||
Shareholders' equity: |
||||||||
Series B Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 0 and 2,000 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively | | 2 | ||||||
Series C Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 0 and 1,300 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively | | 1 | ||||||
Series D Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and outstanding at June 30, 2004 and December 31, 2003 | 4 | 4 | ||||||
Series E Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,600 shares issued and outstanding at June 30, 2004 and December 31, 2003 | 6 | 6 | ||||||
Series F Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and outstanding at June 30, 2004 and December 31, 2003 | 4 | 4 | ||||||
Series G Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 3,200 shares issued and outstanding at June 30, 2004 and December 31, 2003 | 3 | 3 | ||||||
Series I Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,000 and 0 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively | 5 | | ||||||
High Performance Units | 7,433 | 5,131 | ||||||
Common Stock, $0.001 par value, 200,000 shares authorized, 111,167 and 107,215 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively | 111 | 107 | ||||||
Warrants and options | 6,489 | 20,695 | ||||||
Additional paid-in capital | 2,833,843 | 2,678,772 | ||||||
Retained earnings (deficit) | (303,548 | ) | (242,449 | ) | ||||
Accumulated other comprehensive income (losses) (See Note 12) | (2,390 | ) | 1,008 | |||||
Treasury stock (at cost) | (48,056 | ) | (48,056 | ) | ||||
Total shareholders' equity | 2,493,904 | 2,415,228 | ||||||
Total liabilities and shareholders' equity | $ | 7,606,431 | $ | 6,660,590 | ||||
The accompanying notes are an integral part of the financial statements.
59
iStar Financial Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
|
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
2004 |
2003 |
|||||||||||
Revenue: | |||||||||||||||
Interest income | $ | 92,195 | 74,078 | $ | 175,251 | 147,505 | |||||||||
Operating lease income | 75,676 | 61,289 | 145,788 | 121,215 | |||||||||||
Other income | 9,910 | 8,440 | 21,851 | 12,769 | |||||||||||
Total revenue | 177,781 | 143,807 | 342,890 | 281,489 | |||||||||||
Costs and expenses: | |||||||||||||||
Interest expense | 58,533 | 49,506 | 110,508 | 96,654 | |||||||||||
Operating costscorporate tenant lease assets | 5,798 | 3,750 | 11,929 | 7,391 | |||||||||||
Depreciation and amortization | 16,432 | 12,731 | 31,748 | 25,038 | |||||||||||
General and administrative | 12,511 | 9,038 | 25,870 | 16,719 | |||||||||||
General and administrativestock-based compensation expense | 568 | 866 | 108,109 | 1,689 | |||||||||||
Provision for loan losses | 2,000 | 1,750 | 5,000 | 3,500 | |||||||||||
Loss on early extinguishment of debt | 1,006 | | 13,178 | | |||||||||||
Total costs and expenses | 96,848 | 77,641 | 306,342 | 150,991 | |||||||||||
Net income before equity in earnings (loss) from joint ventures and unconsolidated subsidiaries, minority interest and other items | 80,933 | 66,166 | 36,548 | 130,498 | |||||||||||
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries | (855 | ) | (100 | ) | 5,393 | (158 | ) | ||||||||
Minority interest in consolidated entities | (128 | ) | (40 | ) | (261 | ) | (79 | ) | |||||||
Net income from continuing operations | 79,950 | 66,026 | 41,680 | 130,261 | |||||||||||
Income from discontinued operations | 3,069 | 3,720 | 6,087 | 7,174 | |||||||||||
Gain from discontinued operations | | | 136 | 264 | |||||||||||
Net income | 83,019 | 69,746 | 47,903 | 137,699 | |||||||||||
Preferred dividend requirements | (10,580 | ) | (9,227 | ) | (30,180 | ) | (18,454 | ) | |||||||
Net income allocable to common shareholders and HPU holders(1) | $ | 72,439 | $ | 60,519 | $ | 17,723 | $ | 119,245 | |||||||
Basic earnings per common share(2) | $ | 0.64 | $ | 0.60 | $ | 0.16 | $ | 1.20 | |||||||
Diluted earnings per common share(3)(4) | $ | 0.64 | $ | 0.59 | $ | 0.16 | $ | 1.16 | |||||||
Explanatory Notes:
The accompanying notes are an integral part of the financial statements.
60
iStar Financial Inc.
Consolidated Statement of Changes in Shareholders' Equity
(In thousands)
(unaudited)
|
Series B Preferred Stock |
Series C Preferred Stock |
Series D Preferred Stock |
Series E Preferred Stock |
Series F Preferred Stock |
Series G Preferred Stock |
Series H Preferred Stock |
Series I Preferred Stock |
High Performance Units |
Common Stock at Par |
Warrants and Options |
Additional Paid-In Capital |
Retained Earnings (Deficit) |
Accumulated Other Comprehensive Income (Losses) |
Treasury Stock |
Total |
|||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2003 | $ | 2 | $ | 1 | $ | 4 | $ | 6 | $ | 4 | $ | 3 | $ | | $ | | $ | 5,131 | $ | 107 | $ | 20,695 | $ | 2,678,772 | $ | (242,449 | ) | $ | 1,008 | $ | (48,056 | ) | $ | 2,415,228 | |||||||||||||||
Exercise of options and warrants | | | | | | | | | | 4 | (14,206 | ) | 37,037 | | | | 22,835 | ||||||||||||||||||||||||||||||||
Net proceeds from Preferred offering | | | | | | | 3 | 5 | | | | 202,743 | | | | 202,751 | |||||||||||||||||||||||||||||||||
Redemption of Preferred stock | (2 | ) | (1 | ) | | | | | (3 | ) | | | | | (155,959 | ) | | | | (155,965 | ) | ||||||||||||||||||||||||||||
Dividend declared Common Stock | | | | | | | | | | | | | (77,569 | ) | | | (77,569 | ) | |||||||||||||||||||||||||||||||
Dividend declared HPU Units | | | | | | | | | | | | | (1,253 | ) | | | (1,253 | ) | |||||||||||||||||||||||||||||||
Dividend requirementpreferred | | | | | | | | | | | | | (30,180 | ) | | | (30,180 | ) | |||||||||||||||||||||||||||||||
Restricted stock units granted to employees | | | | | | | | | | | | 53,034 | | | | 53,034 | |||||||||||||||||||||||||||||||||
Issuance of stockDRIP/Stock purchase plan | | | | | | | | | | | | 16,281 | | | | 16,281 | |||||||||||||||||||||||||||||||||
High Performance Units sold to employees | | | | | | | | | 2,302 | | | | | | | 2,302 | |||||||||||||||||||||||||||||||||
Contributions from significant shareholder | | | | | | | | | | | | 1,935 | | | | 1,935 | |||||||||||||||||||||||||||||||||
Net income for the period | | | | | | | | | | | | | 47,903 | | | 47,903 | |||||||||||||||||||||||||||||||||
Change in accumulated other comprehensive income (losses) | | | | | | | | | | | | | | (3,398 | ) | | (3,398 | ) | |||||||||||||||||||||||||||||||
Balance at June 30, 2004 | $ | | $ | | $ | 4 | $ | 6 | $ | 4 | $ | 3 | $ | | $ | 5 | $ | 7,433 | $ | 111 | $ | 6,489 | $ | 2,838,843 | $ | (303,548 | ) | $ | (2,390 | ) | $ | (48,056 | ) | $ | 2,493,904 | ||||||||||||||
The accompanying notes are an integral part of the financial statements.
61
iStar Financial Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
|
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
2004 |
2003 |
|||||||||||
Cash flows from operating activities: | |||||||||||||||
Net income | $ | 83,019 | $ | 69,746 | $ | 47,903 | $ | 137,699 | |||||||
Adjustments to reconcile net income to cash flows provided by operating activities: | |||||||||||||||
Minority interest in consolidated entities | 128 | 40 | 261 | 79 | |||||||||||
Non-cash expense for stock-based compensation | 625 | 904 | 52,791 | 1,765 | |||||||||||
Depreciation and amortization | 16,432 | 12,731 | 31,748 | 25,038 | |||||||||||
Depreciation and amortization from discontinued operations | 731 | 980 | 1,465 | 1,945 | |||||||||||
Amortization of deferred financing costs | 7,853 | 6,957 | 15,618 | 13,408 | |||||||||||
Amortization of discounts/premiums, deferred interest and costs on lending investments | (13,592 | ) | (12,852 | ) | (29,457 | ) | (25,342 | ) | |||||||
Discounts, loan fees and deferred interest received | 3,127 | 6,643 | 13,767 | 10,729 | |||||||||||
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries | 855 | 100 | (5,393 | ) | 158 | ||||||||||
Distributions from operations of joint ventures | 70 | 618 | 143 | 2,551 | |||||||||||
Loss on early extinguishment of debt | 1,006 | | 13,178 | | |||||||||||
Deferred operating lease income receivable | (6,330 | ) | (3,622 | ) | (11,795 | ) | (7,211 | ) | |||||||
Gain from discontinued operations | | | (136 | ) | (264 | ) | |||||||||
Provision for loan losses | 2,000 | 1,750 | 5,000 | 3,500 | |||||||||||
Change in investments in and advances to joint ventures and unconsolidated subsidiaries | | (1,032 | ) | | (2,877 | ) | |||||||||
Changes in assets and liabilities: | |||||||||||||||
Increase in accrued interest and operating lease income receivable | (990 | ) | (1,612 | ) | (762 | ) | (1,893 | ) | |||||||
Decrease (increase) in deferred expenses and other assets | 13,963 | (23,300 | ) | 21,248 | (30,603 | ) | |||||||||
(Decrease) increase in accounts payable, accrued expenses and other liabilities | (58,778 | ) | 27,416 | (16,031 | ) | 8,785 | |||||||||
Cash flows provided by operating activities | 50,119 | 85,467 | 139,548 | 137,467 | |||||||||||
Cash flows from investing activities: | |||||||||||||||
New investment originations | (614,273 | ) | (466,126 | ) | (1,325,108 | ) | (813,314 | ) | |||||||
Add-on fundings under existing loan commitments | (68,649 | ) | (13,919 | ) | (85,297 | ) | (21,141 | ) | |||||||
Net proceeds from sale of corporate tenant lease assets | | | 2,822 | 3,965 | |||||||||||
Repayments of and principal collections on loans and other lending investments | 394,165 | 325,054 | 539,045 | 437,392 | |||||||||||
Capital improvement projects on corporate tenant lease assets | (1,174 | ) | (522 | ) | (2,547 | ) | (636 | ) | |||||||
Other capital expenditures on corporate tenant lease assets | (5,343 | ) | (3,329 | ) | (7,896 | ) | (4,225 | ) | |||||||
Cash flows used in investing activities | (295,274 | ) | (158,842 | ) | (878,981 | ) | (397,959 | ) | |||||||
Cash flows from financing activities: | |||||||||||||||
Borrowings under secured revolving credit facilities | 329,081 | 466,074 | 1,360,416 | 806,077 | |||||||||||
Repayments under secured revolving credit facilities | (582,491 | ) | (854,737 | ) | (1,779,561 | ) | (966,668 | ) | |||||||
Borrowings under unsecured revolving credit facilities | 1,178,000 | | 1,178,000 | | |||||||||||
Repayments under unsecured revolving credit facilities | (395,000 | ) | | (525,000 | ) | | |||||||||
Borrowings under term loans | | 50,000 | 198,771 | 50,000 | |||||||||||
Repayments under term loans | (61,271 | ) | (51,889 | ) | (316,353 | ) | (53,826 | ) | |||||||
Borrowings under unsecured bond offerings | 24,726 | 35,268 | 1,032,301 | 39,747 | |||||||||||
Borrowings under repurchase agreements | | 331 | | 24,727 | |||||||||||
Repayments under unsecured notes | | | (110,000 | ) | | ||||||||||
Borrowings under secured bond offerings | | 645,822 | | 645,822 | |||||||||||
Repayments under secured bond offerings | (141,545 | ) | (108,709 | ) | (212,059 | ) | (164,427 | ) | |||||||
Repayments under other debt obligations | | | (10,148 | ) | | ||||||||||
Increase in restricted cash held in connection with debt obligations | (14,591 | ) | (8,441 | ) | (24,299 | ) | (13,672 | ) | |||||||
Prepayment penalty on early extinguishment of debt | | | (9,625 | ) | | ||||||||||
Payments for deferred financing costs | (6,961 | ) | (16,381 | ) | (8,209 | ) | (29,795 | ) | |||||||
Distributions to minority interest in consolidated entities | (40 | ) | (39 | ) | (247 | ) | (79 | ) | |||||||
Net proceeds from preferred offering/exchange | | | 203,048 | | |||||||||||
Redemption of preferred stock | | | (165,000 | ) | | ||||||||||
Common dividends paid | (77,569 | ) | (65,877 | ) | (77,569 | ) | (65,877 | ) | |||||||
Preferred dividends paid | (10,971 | ) | (9,145 | ) | (20,748 | ) | (18,289 | ) | |||||||
Dividends on HPUs | (1,253 | ) | (536 | ) | (1,253 | ) | (536 | ) | |||||||
HPUs issued | 50 | 3,737 | 2,302 | 3,737 | |||||||||||
Contributions from significant shareholder | | | 1,935 | | |||||||||||
Proceeds from exercise of options and issuance of DRIP/Stock purchase shares | 13,431 | 29,737 | 38,714 | 42,732 | |||||||||||
Cash flows provided by financing activities | 253,596 | 115,215 | 755,416 | 299,673 | |||||||||||
Increase in cash and cash equivalents | 8,441 | 41,840 | 15,983 | 39,181 | |||||||||||
Cash and cash equivalents at beginning of period | 87,632 | 13,275 | 80,090 | 15,934 | |||||||||||
Cash and cash equivalents at end of period | $ | 96,073 | $ | 55,115 | $ | 96,073 | $ | 55,115 | |||||||
Supplemental disclosure of cash flow information: | |||||||||||||||
Cash paid during the period for interest, net of amount capitalized | $ | 39,592 | $ | 31,552 | $ | 85,557 | $ | 84,147 | |||||||
The accompanying notes are an integral part of the financial statements.
62
iStar Financial Inc.
Notes to Consolidated Financial Statements
Note 1Business and Organization
BusinessiStar Financial Inc. (the "Company") is the leading publicly-traded finance company focused on the commercial real estate industry. The Company provides custom-tailored financing to private and corporate owners of real estate nationwide, including senior and junior mortgage debt, senior and mezzanine corporate capital, and corporate net lease financing. The Company, which is taxed as a real estate investment trust ("REIT"), seeks to deliver strong dividends and superior risk-adjusted returns on equity to shareholders by providing innovative and value-added financing solutions to its customers.
The Company's primary product lines include:
63
be paid by the corporate tenant on a triple net lease basis. Corporate tenant lease ("CTL") transactions have terms generally ranging from ten to 20 years and typically range in size from $20 million to $150 million. As of June 30, 2004, based on gross carrying values, the Company's CTL assets (including investments in and advances to joint ventures and unconsolidated subsidiaries and assets held for sale) represented 42% of its assets.
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:
OrganizationThe 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 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" or the "Leasing Subsidiary"), then the largest publicly-traded company specializing in corporate sale/leaseback transactions for 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 former external advisor in exchange for shares of the Company's common stock ("Common Stock") and converted its organizational form to a Maryland corporation. As part of the conversion to a Maryland corporation, the Company replaced its former dual class common share structure with a single class of Common Stock. The Company's Common Stock began trading on the New York Stock Exchange on
64
November 4, 1999. Prior to this date, the Company's common shares were traded on the American Stock Exchange.
Note 2Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. The Consolidated Financial Statements include the accounts of the Company, its qualified REIT subsidiaries, its majority-owned and controlled partnerships and other entities that are consolidated under the provisions of FASB Interpretation No. 46 ("FIN 46")(see Note 6).
Certain other investments in partnerships or joint ventures which the Company does not control are accounted for under the equity method (see Note 6). 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 statement of the Company's consolidated financial position at June 30, 2004 and December 31, 2003 and the results of its operations, changes in shareholders' equity and its cash flows for the three and six months ended June 30, 2004 and 2003, respectively. Such operating results may not be indicative of the expected results for any other interim periods or the entire year.
Note 3Summary of Significant Accounting Policies
Loans and other lending investments, netAs described in Note 4, "Loans and Other Lending Investments" includes the following investments: senior mortgages, subordinate mortgages, corporate/partnership loans, other lending investments-loans and other lending investments-securities. Management considers nearly all of its loans and other lending investments to be held-to-maturity, although a small number of investments may be classified as available-for-sale. Items classified as held-to-maturity are reflected at amortized historical cost. Items classified as available-for-sale are reported at fair values with unrealized gains and losses included in "Accumulated other comprehensive income (losses)" on the Company's Consolidated Balance Sheets and are not included in the Company's net income.
Corporate tenant lease assets and depreciationCTL assets are generally recorded at cost less accumulated depreciation. 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. Depreciation is computed using the straight-line method of cost recovery over estimated useful lives of 40.0 years for facilities, 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 facility for facility improvements.
CTL assets to be disposed of are reported at the lower of their carrying amount or fair value less costs to sell and are included in "Assets held for sale" on the Company's Consolidated Balance Sheets. 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
65
may not be recoverable. In management's opinion, CTL assets to be held and used are not carried at amounts in excess of their estimated recoverable amounts.
In accordance with the recent adoption of Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations" regarding the Company's acquisition of facilities, purchase costs are allocated to the tangible and intangible assets and liabilities acquired based on their estimated fair values. The value of the tangible assets, consisting of land, buildings and tenant improvements, are determined as if vacant, that is, at replacement cost. Intangible assets including the above-market or below-market value of leases, the value of in-place leases and the value of customer relationships are recorded at their relative fair values.
Above-market and below-market in-place lease values for owned CTL assets are recorded based on the present value (using a discount rate reflecting the risks associated with the leases acquired) of the difference between: (1) the contractual amounts to be paid pursuant to the leases negotiated and in-place at the time of acquisition of the facilities; and (2) management's estimate of fair market lease rates for the facility or equivalent facility, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market (or below-market) lease value is amortized as a reduction of (or, increase to) operating lease income over the remaining non-cancelable term of each lease plus any renewal periods with fixed rental terms that are considered to be below-market.
The total amount of other intangible assets are allocated to in-place lease values and customer relationship intangible values based on management's evaluation of the specific characteristics of each customer's lease and the Company's overall relationship with each customer. Characteristics to be considered in allocating these values include the nature and extent of the existing relationship with the customer, prospects for developing new business with the customer, the customer's credit quality and the expectation of lease renewals among other factors. Factors considered by management's analysis include the estimated carrying costs of the facility during a hypothetical expected lease-up period, current market conditions and costs to execute similar leases. Management also considers information obtained about a property in connection with its pre-acquisition due diligence. Estimated carrying costs include real estate taxes, insurance, other property operating costs and estimates of lost operating lease income at market rates during the hypothetical expected lease-up periods, based on management's assessment of specific market conditions. Management estimates costs to execute leases including commissions and legal costs to the extent that such costs are not already incurred with a new lease that has been negotiated in connection with the purchase of the facility. Management's estimates are used to determine these values. These intangible assets are included in "Deferred expenses and other assets" on the Company's Consolidated Balance Sheets.
The value of above-market or below-market in-place leases are amortized to expense over the remaining initial term of each lease. The value of customer relationship intangibles are amortized to expense over the initial and renewal terms of the leases, but no amortization period for intangible assets will exceed the remaining depreciable life of the building. In the event that a customer terminates its lease, the unamortized portion of each intangible, including market rate adjustments, lease origination costs, in-place lease values and customer relationship values, would be charged to expense.
Capitalized interestThe Company capitalizes interest costs incurred during the construction period on qualified build-to-suit projects for corporate tenants, including investments in joint ventures
66
accounted for under the equity method. No interest was capitalized during the three and six months ended June 30, 2004 and 2003.
Cash and cash equivalentsCash and cash equivalents include cash held in banks or invested in money market funds with original maturity terms of less than 90 days.
Restricted cashRestricted cash represents amounts required to be maintained in escrow under certain of the Company's debt obligations, leasing and derivative transactions.
Revenue recognitionThe Company's revenue recognition policies are as follows:
Loans and other lending investments: Management considers nearly all of its loans and other lending investments to be held-to-maturity, although a small number of investments may be classified as available-for-sale. The Company reflects held-to-maturity investments at historical cost adjusted for allowance for loan losses, unamortized acquisition premiums or discounts and unamortized deferred loan fees. Unrealized gains and losses on available-for-sale investments are included in "Accumulated other comprehensive income (losses)" on the Company's Consolidated Balance Sheets and are not included in the Company's net income. On occasion, the Company may acquire loans at small 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. 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. If loans with premiums, discounts, loan origination or exit fees are prepaid, the Company immediately recognizes the unamortized portion as a decrease or increase in the prepayment gain or loss. Interest income is recognized using the effective interest method applied on a loan-by-loan basis.
A small number of the Company's loans provide for accrual of interest at specified rates that 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 "Deferred operating lease income receivable" on the Company's Consolidated Balance Sheets.
Provision for loan lossesThe Company's accounting policies require that an allowance for estimated loan 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 loan losses. In establishing loan loss provisions, management periodically evaluates and analyzes the Company's assets, historical and industry loss experience, economic conditions and trends, collateral values and quality, and other relevant factors. Specific valuation allowances are established for impaired loans in the amount by
67
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 carries these impaired loans at the fair value of the loans' underlying collateral less estimated disposition costs. Impaired loans may be left on accrual status during the period the Company is pursuing repayment of the loan; however, these loans are placed on non-accrual status at such time as: (1) management believes that the potential risk exists that scheduled debt service payments will not be met within the coming 12 months; (2) the loans become 90 days delinquent; (3) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (4) the net realizable value of the loan's underlying collateral approximates the Company's carrying value of such loan. 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 loan losses. Charge-offs occur when loans, or a portion thereof, are considered uncollectible and of such little value that further pursuit of collection is not warranted. Management also provides a loan 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.
The Company's loans are generally secured by real estate assets or are corporate lending arrangements to entities with significant rental real estate operations (e.g., an unsecured loan to a company which operates residential apartments or retail, industrial or office facilities as rental real estate). While the underlying real estate assets for the corporate lending instruments may not serve as collateral for the Company's investments in all cases, the Company evaluates the underlying real estate assets when estimating loan loss exposure because the Company's loans generally have preclusions as to how much senior and/or secured debt the customer may borrow ahead of the Company's position.
Allowance for doubtful accountsThe Company's accounting policies require a reserve on the Company's accrued operating lease income receivable balances and on the deferred operating lease income receivable balances. The reserve covers asset specific problems (e.g., bankruptcy) as they arise, as well as a portfolio reserve based on management's evaluation of the credit risks associated with these receivables.
Accounting for derivative instruments and hedging activityIn accordance with Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities" as amended by Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging ActivityDeferral of the Effective date of FASB 133," Statement of Financial Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan Amendment of FASB Statement 133" and Statement of Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative Instrument and Hedging Activities," the Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures 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.
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Accounting for the impairment or disposal of long-lived assetsIn accordance with the Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets" the Company presents current operations prior to the disposition of CTL assets and prior period results of such operations in discontinued operations in the Company's Consolidated Statements of Operations.
Reclassification of extraordinary loss on early extinguishment of debtIn accordance with the Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," the Company can no longer aggregate the gains and losses from the early extinguishment of debt and, if material, classify them as an extraordinary item. The Company is not prohibited from classifying such gains and losses as extraordinary items, so long as they meet the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30 ("APB 30"), "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"; however, due to the nature of the Company's operations, such treatment may not be available to the Company. Any gains or losses on early extinguishments of debt that were previously classified as extraordinary items in prior periods presented that do not meet the criteria in APB 30 for classification as an extraordinary item are reclassified to income from continuing operations.
Income taxesThe 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. In addition, the Company is allowed several other deductions in computing its "REIT taxable income," including non-cash items such as depreciation expense. These deductions allow the Company to shelter a portion of its operating cash flow from its dividend payout requirement under federal tax laws. The Company intends to operate in a manner consistent with and to elect to be treated as a REIT for tax purposes. iStar Operating Inc. ("iStar Operating") and TriNet Management Operating Company, Inc. ("TMOC"), the Company's taxable REIT subsidiaries, 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. Accordingly, except for the Company's taxable REIT subsidiaries, no current or deferred taxes are provided for in the Consolidated Financial Statements. During the third quarter 2003, TMOC was liquidated. See Note 6 for a detailed discussion on the ownership structure and operations of iStar Operating and TMOC.
Earnings per common shareIn accordance with the Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earning per Share," the Company presents both basic and diluted earnings per share ("EPS"). Basic earnings per share ("Basic EPS") is computed by dividing net income allocable 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.
ReclassificationsCertain prior year amounts have been reclassified in the Consolidated Financial Statements and the related notes to conform to the 2004 presentation.
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Use of estimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
New accounting standardsIn December 2003, the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition" which supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21. The Company adopted the provisions of this statement immediately, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," issued during the third quarter of 2003, provides guidance on revenue recognition for revenues derived from a single contract that contain multiple products or services. EITF 00-21 also provides additional requirements to determine when these revenues may be recorded separately for accounting purposes. The Company adopted EITF 00-21 on July 1, 2003, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity." This standard requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatorily redeemable financial instruments, (2) obligations to repurchase the issuer's equity shares by transferring assets; and (3) certain obligations to issue a variable number of shares. The FASB recently issued FASB Staff Position ("FSP") 150-3, which defers the provisions of paragraphs 9 and 10 of SFAS No. 150 indefinitely as they apply to mandatorily redeemable noncontrolling interests associated with finite-lived entities. The Company adopted the provisions of this statement, as required, on July 1, 2003, and it did not have a significant financial impact on the Company's Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of ARB 51. FIN 46 provides guidance on identifying entities for which control is achieved through means other than through voting rights (a "variable interest entity" or "VIE"), and how to determine when and which business enterprise should consolidate a VIE. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The transitional disclosure requirements took effect immediately and were required for all financial statements initially issued or modified after January 31, 2003. Immediate consolidation is required for VIEs entered into or modified after February 1, 2003 in which the Company is deemed the primary beneficiary. For VIEs in which the Company entered into prior to February 1, 2003, FIN 46 was deferred to the quarter ended March 31, 2004. In December 2003, the FASB issued a revised FIN 46 that modifies and clarifies various aspects of the original Interpretation. FIN 46 applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of controlling financial interest, (2) the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interest. The adoption
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of the additional consolidation provisions of FIN 46 did not have a material impact on the Company's Consolidated Financial Statements (see Note 6).
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based CompensationTransition and Disclosure," an amendment of FASB Statement No. 123 ("SFAS No. 123"). This statement provides alternative transition methods for a voluntary change to the fair value basis of accounting for stock-based employee compensation. However, this Statement does not permit the use of the original SFAS No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation, description of transition method utilized and the effect of the method used on reported results. The Company adopted SFAS No. 148 with retroactive application to grants made subsequent to January 1, 2002 with no material effect on the Company's Consolidated Financial Statements.
SFAS No. 148 disclosure requirements, including the effect on net income and earnings per share if the fair value-based method had been applied to all outstanding and unvested stock awards in each period, are presented below (in thousands except per share amounts):
|
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
2004 |
2003 |
||||||||||
Net income allocable to common shareholders and HPU holders, as reported (1) | $ | 72,439 | $ | 60,519 | $ | 17,723 | $ | 119,245 | ||||||
Total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects | | (24 | ) | | (48 | ) | ||||||||
Pro forma net income allocable to common shareholders and HPU holders | $ | 72,439 | $ | 60,495 | $ | 17,723 | $ | 119,197 | ||||||
Earnings per share: | ||||||||||||||
Basicas reported (2) | $ | 0.64 | $ | 0.60 | $ | 0.16 | $ | 1.20 | ||||||
Basicpro forma (2) | $ | 0.64 | $ | 0.60 | $ | 0.16 | $ | 1.20 | ||||||
Dilutedas reported (3)(4) | $ | 0.64 | $ | 0.59 | $ | 0.16 | $ | 1.16 | ||||||
Dilutedpro forma (3)(4) | $ | 0.64 | $ | 0.59 | $ | 0.16 | $ | 1.16 |
Explanatory Notes:
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In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies," Statement of Financial Accounting Standards No. 57, "Related Party Disclosures," Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" and rescinds FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5." It requires that, upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee regardless if the Company receives separately identifiable consideration (e.g., a premium). The disclosure requirements became effective December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company's Consolidated Financial Statements, nor is it expected to have a material impact in the future.
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iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 4Loans and Other Lending Investments
The following is a summary description of the Company's loans and other lending investments (in thousands)(1):
|
|
|
|
Carrying Value as of |
|
|
|
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Type of Investment |
Underlying Property Type |
# of Borrowers In Class |
Principal Balances Outstanding |
June 30, 2004 |
December 31, 2003 |
Effective Maturity Dates |
Contractual Interest Payment Rates(2)(3) |
Contractual Interest Accrual Rates(2)(3) |
Principal Amortization |
Participation Features |
|||||||||||||
Senior Mortgages(4) | Office/Residential/ Retail/Industrial,R&D/ Conference Center/Mixed Use/Hotel/Entertainment, Leisure/Other |
49 | $ | 2,554,574 | $ | 2,512,582 | $ | 2,106,791 | 2004 to 2022 | Fixed: 7.03% to 18.20% Variable: LIBOR + 2.90% to LIBOR + 7.50% |
Fixed: 7.03% to 18.20% Variable: LIBOR + 2.90% to LIBOR + 7.50% |
Yes(5) | Yes(6) | ||||||||||
SubOrdinate Mortgages |
Office/Residential/Retail/Mixed Use/Hotel |
23 |
609,361 |
608,838 |
550,572 |
2004 to 2013 |
Fixed: 7.00% to 18.00% Variable: LIBOR + 1.79% to LIBOR + 7.47% |
Fixed: 7.32% to 18.00% Variable: LIBOR + 1.79% to LIBOR + 7.47% |
Yes(5) |
No |
|||||||||||||
Corporate/Partnership Loans(7) |
Office/Residential/ Retail/Industrial, R&D/ Mixed Use/Hotel/ Entertainment, Leisure/ Other |
31 |
826,789 |
797,766 |
710,469 |
2004 to 2013 |
Fixed: 6.00% to 15.00% Variable: LIBOR + 3.50% to LIBOR + 12.77% |
Fixed: 7.33% to 17.50% Variable: LIBOR + 3.50% to LIBOR + 12.77% |
Yes(5) |
Yes(6) |
|||||||||||||
Other Lending Investments Loans |
Office/Mixed Use/Hotel | 4 | 20,823 | 21,060 | 23,767 | 2004 to 2008 | Fixed: 10.00% to 15.00% | Fixed: 15.00% to 17.50% | No | Yes(6) | |||||||||||||
Other Lending Investments Securities(8) |
Residential/Industrial, R&D/ Hotel/ Entertainment, Leisure/Other |
10 |
362,304 |
353,195 |
344,511 |
2005 to 2013 |
Fixed: 8.27% to 10.00% Variable: LIBOR + 2.82% to LIBOR + 5.00% |
Fixed: 8.27% to 10.00% Variable: LIBOR +2.82% to LIBOR + 5.00% |
Yes(5) |
No |
|||||||||||||
Gross Carrying Value | $ | 4,293,441 | $ | 3,736,110 | |||||||||||||||||||
Provision for Loan Losses |
(38,436 |
) |
(33,436 |
) |
|||||||||||||||||||
Total, Net |
$ |
4,255,005 |
$ |
3,702,674 |
|||||||||||||||||||
Explanatory Notes:
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During the six months ended June 30, 2004 and 2003, respectively, the Company and its affiliated ventures originated or acquired an aggregate of approximately $1,022.6 million and $752.7 million in loans and other lending investments, funded $85.3 million and $21.1 million under existing loan commitments, and received principal repayments of $539.0 million and $437.4 million.
As of June 30, 2004, the Company had 27 loans with unfunded commitments. The total unfunded commitment amount was approximately $467.6 million, of which $265.1 million was discretionary and $202.5 million was non-discretionary.
A portion of the Company's loans and other lending investments are pledged as collateral under either the iStar Asset Receivables secured notes, the secured revolving credit facilities or secured term loans (see Note 7 for a description of the Company's secured and unsecured debt).
The Company has reflected provisions for loan losses of approximately $2.0 million and $1.8 million in its results of operations during the three months ended June 30, 2004 and 2003, respectively, and $5.0 million and $3.5 million during the six months ended June 30, 2004 and 2003, respectively. These provisions represent loan 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 credit quality of the underlying collateral. During the 12 months ended December 31, 2003, the Company took a $3.3 million direct impairment on a $30.4 million partnership loan lowering the book value of the asset to $27.1 million. In August 2003 the borrower stopped making its debt service payments due to insufficient cash flow caused by vacancies at the property. After taking the impairment charge management believes there is adequate collateral to support the book value of the asset as of June 30, 2004.
Changes in the Company's provision for loan losses were as follows (in thousands):
Provision for loan losses, December 31, 2002 | $ | 29,250 | |||
Additional provision for loan losses | 7,500 | ||||
Impairment on loans | (3,314 | ) | |||
Provision for loan losses, December 31, 2003 | 33,436 | ||||
Additional provision for loan losses | 5,000 | ||||
Provision for loan losses, June 30, 2004 | $ | 38,436 | |||
Note 5Corporate Tenant Lease Assets
During the six months ended June 30, 2004 and 2003, respectively, the Company acquired an aggregate of approximately $302.5 million and $60.6 million in CTL assets and disposed of CTL assets for net proceeds of approximately $2.8 million and $4.0 million. In relation to the CTL assets acquired during the six months ended June 30, 2004, the Company allocated approximately $9.0 million of purchase costs to intangible assets based on their estimated fair values (see Note 3). As of June 30, 2004 and December 31, 2003, the Company had unamortized purchase related intangible assets of approximately $33.0 million and $24.9 million, respectively, and included these in "Deferred expenses and other assets" on the Company's Consolidated Balance Sheets.
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The Company's investments in CTL assets, at cost, were as follows (in thousands):
|
June 30, 2004 |
December 31, 2003 |
|||||
---|---|---|---|---|---|---|---|
Facilities and improvements | $ | 2,435,979 | $ | 2,210,592 | |||
Land and land improvements | 597,796 | 468,708 | |||||
Direct financing lease | 35,179 | 35,472 | |||||
Less: accumulated depreciation | (213,987 | ) | (178,887 | ) | |||
Corporate tenant lease assets, net | $ | 2,854,967 | $ | 2,535,885 | |||
Under certain leases, the Company is entitled to receive additional participating lease payments to the extent gross revenues of the corporate tenant exceed a base amount. The Company did not earn any such additional participating lease payments on these leases in the three or six months ended June 30, 2004 and 2003. In addition, the Company also receives reimbursements from customers for certain facility operating expenses including common area costs, insurance and real estate taxes. Customer expense reimbursements for the three months ended June 30, 2004 and 2003 were approximately $7.9 million and $7.7 million, respectively, and $15.6 million and $14.9 million for the six months ended June 30, 2004 and 2003, respectively, and are included as a reduction of "Operating costscorporate tenant lease assets" on the Company's Consolidated Statements of Operations.
The Company is subject to expansion option agreements with two existing customers which could require the Company to fund and to construct up to 161,000 square feet of additional adjacent space on which the Company would receive additional operating lease income under the terms of the option agreements. In addition, upon exercise of such expansion option agreements, the corporate tenants would be required to simultaneously extend their existing lease terms for additional periods ranging from six to ten years.
As of June 30, 2004, there were two CTL assets with an aggregate book value of $51.7 million classified as "Assets held for sale" on the Company's Consolidated Balance Sheets. One of these assets with a carrying value of $24.8 million is being marketed for sale. The second asset, with a book value of approximately $27 million, was repossessed by the Company from one of its borrowers on April 1, 2004. Until that time, the borrower had remained current on all payments required under the loan. Subsequent to quarter end, on July 23, 2004, the Company closed on the sale of this asset to a third party and recognized a gain of approximately $76,000.
On February 25, 2004, the Company sold one CTL asset for net proceeds of $2.8 million, and realized a gain of approximately $136,000. On January 7, 2003, the Company sold one CTL asset for net proceeds of $4.0 million and realized a gain of approximately $264,000.
For the three and six months ended June 30, 2004 and 2003, the results of operations from CTL assets sold through September 30, 2004 (prior to their sale) or held for sale as of September 30, 2004 are classified as "Income from discontinued operations," on the Company's Consolidated Statements of Operations. Gains from CTL assets sold during the three and six months ended June 30, 2004 and 2003, are classified as "Gain from discontinued operations" on the Company's Consolidated Statements of Operations.
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Note 6Joint Ventures, Unconsolidated Subsidiaries and Minority Interest
Income or loss generated from the Company's joint venture investments and unconsolidated subsidiaries is included in "Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries" on the Company's Consolidated Statements of Operations.
The Company's ownership percentages, its investments in and advances to unconsolidated joint ventures and subsidiaries, the Company's pro rata share of its ventures' third-party, non-recourse debt as of June 30, 2004 and its respective income (loss) for the three months ended June 30, 2004 are presented below (in thousands):
|
|
|
|
|
Third-Party Debt |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
JV Income (loss) for the Three Months Ended June 30, 2004 |
Pro Rata Share of Third-Party Non-Recourse Debt(1) |
||||||||||||
|
Ownership % |
Equity Investment |
Interest Rate |
Scheduled Maturity Date |
||||||||||||
Unconsolidated Joint Ventures: | ||||||||||||||||
CTC I | 50.00 | % | $ | 13,424 | $ | (889 | ) | $ | 35,229 | 7.87% | 2011 | |||||
ACRE Simon | 20.00 | % | 4,956 | 34 | 6,400 | 7.61%8.43% | Various through 2011 |
|||||||||
Total | $ | 18,380 | $ | (855 | ) | $ | 41,629 | |||||||||
Explanatory Note:
Investments in and advances to unconsolidated joint ventures: At June 30, 2004, the Company had investments in two unconsolidated joint ventures: (1) Corporate Technology Centre Associates, LLC ("CTC I"), whose external member is Corporate Technology Centre Partners, LLC; and (2) ACRE Simon, LLC ("ACRE"), whose external partner is William E. Simon & Sons Realty Partners, L.P. These ventures were formed for the purpose of operating, acquiring and, in certain cases, developing CTL facilities.
At June 30, 2004, the ventures held nine facilities. The Company's combined investment in these joint ventures at June 30, 2004 was $18.4 million. The joint ventures' carrying value for the nine facilities owned at June 30, 2004 was $126.5 million. In aggregate, the joint ventures had total assets of $149.5 million and total liabilities of $104.9 million as of June 30, 2004, and net loss of $(1.5) million and net income of $11.2 million for the three and six months ended June 30, 2004. The Company accounts for these investments under the equity method because the Company's joint venture partners have certain participating rights giving them shared control over the ventures.
Currently, the limited partners of TriNet Sunnyvale Partners L.P. ("Sunnyvale") have the option to put their partnership interest to the Company for cash; however, the Company may elect to deliver 297,728 shares of Common Stock in lieu of cash. As a result, on March 31, 2004, the Company began accounting for its 44.70% interest in Sunnyvale as a VIE (see Note 3) and therefore consolidates this partnership for financial statement reporting purposes. Prior to its consolidation, the Company accounted for this joint venture under the equity method for financial statement reporting purposes and it was presented in "Investments in and advances to joint ventures and unconsolidated subsidiaries," on the Company's Consolidated Balance Sheets and earnings from the joint venture were included in "Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries" in the Company's Consolidated Statements of Operations.
On March 30, 2004, CTC Associates II L.P., a wholly-owned subsidiary of the Company's CTC I joint venture, conveyed its interest in two buildings and the related property to the mortgage lender in exchange for satisfaction of the entity's obligations of the related loan. Prior to the conveyance of the buildings, early lease terminations resulted in one-time income allocable to the Company of approximately $3.5 million during the first quarter of 2004.
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Investments in and advances to unconsolidated subsidiaries: The Company has an investment in iStar Operating, a taxable REIT subsidiary that, through a wholly-owned subsidiary, services the Company's loans and certain loan portfolios owned by third parties. The Company owns all of the non-voting preferred stock and a 95.00% economic interest in iStar Operating. The common shareholder, an entity controlled by a former director of the Company, is the owner of all the voting common stock and a 5.00% economic interest in iStar Operating. As of June 30, 2004, there have never been any distributions to the common shareholder, nor does the Company expect to make any in the future. At any time, the Company has the right to acquire all of the common stock of iStar Operating at fair market value, which the Company believes to be nominal.
iStar Operating has elected to be treated as a taxable REIT subsidiary for purposes of maintaining compliance with the REIT provisions of the Code and prior to July 1, 2003 was accounted for under the equity method for financial statement reporting purposes and was presented in "Investments in and advances to joint ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance Sheets. As of July 1, 2003, the Company consolidates this entity as a VIE (see Note 3) with no material impact. Prior to its consolidation, the Company charged an allocated portion of its general overhead expenses to iStar Operating based on the number of employees at iStar Operating as a percentage of the Company's total employees. These general overhead expenses were in addition to the direct general and administrative costs of iStar Operating. As of June 30, 2004, iStar Operating had no debt obligations.
In addition, the Company had an investment in TMOC, an entity originally formed to make a $2.0 million investment in the convertible debt securities of a real estate company which trades on the Mexican Stock Exchange. This investment was made by TriNet prior to its acquisition by the Company in 1999. On June 30, 2003, the $2.0 million investment was fully repaid and during the third quarter 2003, the entity was liquidated.
Minority Interest: Income or loss allocable to external partners in consolidated entities is included in "Minority interest in consolidated entities" on the Company's Consolidated Statements of Operations.
As discussed above, on March 31, 2004, the Company began accounting for its 44.70% interest in the Sunnyvale joint venture as a VIE and therefore consolidates this partnership for financial statement purposes and records the minority interest of the external partner in "Minority interest in consolidated entities" on the Company's Consolidated Balance Sheets.
On September 29, 2003 the Company acquired a 96.00% interest in iStar Harborside LLC, an infinite life partnership, with the external partner holding the remaining 4.00% interest. The Company consolidates this partnership for financial statement purposes and records the minority interest of the external partner in "Minority interest in consolidated entities" on the Company's Consolidated Balance Sheets.
The Company also holds a 98.00% interest in TriNet Property Partners, L.P with the external partners holding the remaining 2.00% interest. As of August 1999, the external partners have the option to convert their partnership interest into cash; however, the Company may elect to deliver 72,819 shares of Common Stock in lieu of cash. The Company consolidates this partnership for financial statement purposes and records the minority interest of the external partner in "Minority interest in consolidated entities" on the Company's Consolidated Balance Sheets.
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Note 7Debt Obligations
As of June 30, 2004 and December 31, 2003, the Company has debt obligations under various arrangements with financial institutions as follows (in thousands):
|
|
Carrying Value as of |
|
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Maximum Amount Available |
June 30, 2004 |
December 31, 2003 |
Stated Interest Rates(1) |
Scheduled Maturity Date |
||||||||||
Secured revolving credit facilities: | |||||||||||||||
Line of credit(2) | $ | 250,000 | $ | 10,000 | $ | 88,640 | LIBOR + 1.50% 2.05% | March 2005 | |||||||
Line of credit | 700,000 | 103,064 | 310,364 | LIBOR + 1.40% 2.15% | January 2007(3) | ||||||||||
Line of credit | 500,000 | 91,218 | 117,211 | LIBOR + 1.75% 2.25% | August 2005(3) | ||||||||||
Line of credit | 500,000 | 73,164 | 180,376 | LIBOR + 1.50% 2.25% | September 2005 | ||||||||||
Unsecured revolving credit facilities: | |||||||||||||||
Line of credit (4) | 850,000 | 783,000 | | LIBOR + 1.00% | April 2008(5) | ||||||||||
Line of credit (6) | | | 130,000 | LIBOR + 2.125% | July 2004 | ||||||||||
Total revolving credit facilities | $ | 2,800,000 | $ | 1,060,446 | $ | 826,591 | |||||||||
Secured term loans: | |||||||||||||||
Secured by CTL assets | | 193,000 | LIBOR + 1.85% | July 2006(7) | |||||||||||
Secured by CTL assets | 138,513 | 140,440 | 7.44% | March 2009 | |||||||||||
Secured by CTL assets | 135,000 | 135,000 | LIBOR + 1.75% | October 2008 | |||||||||||
Secured by CTL assets | 41,291 | | 7.19% and 7.22% | January 2018 and December 2026 | |||||||||||
Secured by CTL assets | 24,000 | | LIBOR + 1.25% | November 2004 | |||||||||||
Secured by CTL assets | 90,468 | 92,876 | 6.00% 11.38% | Various through 2022 | |||||||||||
Secured by corporate bond investments(8) | 171,439 | | LIBOR + 1.05% 1.50% | January 2006 | |||||||||||
Secured by corporate lending investments | 77,314 | 77,938 | 6.55% | November 2005 | |||||||||||
Secured by corporate lending investments | 60,521 | 60,874 | 6.41% | January 2013 | |||||||||||
Secured by corporate lending investments | | 60,000 | LIBOR + 2.50% | June 2004(9) | |||||||||||
Secured by corporate lending investments | | 48,000 | LIBOR + 2.125% | July 2008(10) | |||||||||||
Total term loans | 738,546 | 808,128 | |||||||||||||
Less: debt premium / (discount) | 6,204 | (128 | ) | ||||||||||||
Total secured term loans | 744,750 | 808,000 | |||||||||||||
iStar Asset Receivables secured notes: | |||||||||||||||
STARs Series 2002-1: | |||||||||||||||
Class A1 | | 40,011 | LIBOR + 0.26% | June 2004(11) | |||||||||||
Class A2 | 277,097 | 381,296 | LIBOR + 0.38% | December 2009(11) | |||||||||||
Class B | 39,955 | 39,955 | LIBOR + 0.65% | April 2011(11) | |||||||||||
Class C | 26,637 | 26,637 | LIBOR + 0.75% | May 2011(11) | |||||||||||
Class D | 21,310 | 21,310 | LIBOR + 0.85% | January 2012(11) | |||||||||||
Class E | 42,619 | 42,619 | LIBOR + 1.235% | January 2012(11) | |||||||||||
Class F | 26,637 | 26,637 | LIBOR + 1.335% | January 2012(11) | |||||||||||
Class G | 21,309 | 21,309 | LIBOR + 1.435% | January 2012(11) | |||||||||||
Class H | 26,637 | 26,637 | 6.35% | January 2012(11) | |||||||||||
Class J | 26,637 | 26,637 | 6.35% | May 2012(11) | |||||||||||
Class K | 26,637 | 26,637 | 6.35% | May 2012(11) | |||||||||||
Total STARs Series 2002-1 | 535,475 | 679,685 | |||||||||||||
Less: debt discount | (3,894 | ) | (4,090 | ) | |||||||||||
STARs Series 2003-1: | |||||||||||||||
Class A1 | 204,604 | 235,808 | LIBOR + 0.25% | October 2005(12) | |||||||||||
Class A2 | 225,227 | 248,206 | LIBOR +0.35% | August 2010(12) | |||||||||||
Class B | 16,744 | 18,452 | LIBOR + 0.55% | July 2011(12) | |||||||||||
Class C | 18,418 | 20,297 | LIBOR + 0.65% | April 2012(12) | |||||||||||
Class D | 11,720 | 12,916 | LIBOR + 0.75% | October 2012(12) | |||||||||||
Class E | 13,395 | 14,762 | LIBOR + 1.05% | May 2013(12) | |||||||||||
Class F | 13,395 | 14,762 | LIBOR + 1.10% | June 2013(12) | |||||||||||
Class G | 11,720 | 12,916 | LIBOR + 1.25% | June 2013(12) | |||||||||||
Class H | 11,721 | 12,916 | 4.97% | June 2013(12) | |||||||||||
Class J | 13,394 | 14,761 | 5.07% | June 2013(12) | |||||||||||
Class K | 23,442 | 25,833 | 5.56% | June 2013(12) | |||||||||||
Total STARS Series 2003-1 | 563,780 | 631,629 | |||||||||||||
Total iStar Asset Receivables secured notes | 1,095,361 | 1,307,224 | |||||||||||||
Unsecured notes: | |||||||||||||||
LIBOR + 1.25% Senior Notes(13) | 200,000 | | LIBOR + 1.25% | March 2007 | |||||||||||
4.875% Senior Notes(14) | 350,000 | | 4.875% | January 2009 | |||||||||||
5.125% Senior Notes(15) | 250,000 | | 5.125% | April 2011 | |||||||||||
5.70% Senior Notes(16) | 250,000 | | 5.70% | March 2014 | |||||||||||
6.00% Senior Notes | 350,000 | 350,000 | 6.00% | December 2010 | |||||||||||
6.50% Senior Notes | 150,000 | 150,000 | 6.50% | December 2013 | |||||||||||
7.00% Senior Notes | 185,000 | 185,000 | 7.00% | March 2008 | |||||||||||
7.70% Notes(17)(18) | 100,000 | 100,000 | 7.70% | July 2017 | |||||||||||
7.95% Notes(17)(18) | 50,000 | 50,000 | 7.95% | May 2006 | |||||||||||
8.75% Notes(19) | 240,000 | 350,000 | 8.75% | August 2008 | |||||||||||
Total unsecured notes | 2,125,000 | 1,185,000 | |||||||||||||
Less: debt discount | (61,500 | ) | (47,921 | ) | |||||||||||
Plus: impact of pay-floating swap agreements(20) | (21,489 | ) | 690 | ||||||||||||
Total unsecured notes | 2,042,011 | 1,137,769 | |||||||||||||
Other debt obligations | | 34,148 | Various | Various | |||||||||||
Total debt obligations |
$ |
4,942,568 |
$ |
4,113,732 |
|||||||||||
78
Note 7Debt Obligations (Continued)
Explanatory Notes:
79
Availability of amounts under the secured revolving credit facilities are based on percentage borrowing base calculations. In addition, certain of the Company's debt obligations contain covenants. These covenants are both financial and non-financial in nature. Significant financial covenants include limitations on the Company's ability to incur indebtedness beyond specified levels, restrictions on the Company's ability to incur liens on assets and limitations on the amount and type of restricted payments, such as repurchases of its own equity securities, that the Company makes. Significant non-financial covenants include a requirement in its publicly-held debt securities that the Company offer to repurchase those securities at a premium if the Company undergoes a change of control. As of June 30, 2004, the Company believes it is in compliance with all financial and non-financial covenants on its debt obligations.
During the six months ended June 30, 2004, the Company issued $850.0 million aggregate principal amount of fixed-rate Senior Notes bearing interest at annual rates ranging from 4.875% to 5.125% and maturing between 2009 and 2014 and $200.0 million of variable-rate Senior Notes bearing interest at annual rates of three-month LIBOR+1.25% and maturing in 2007. The proceeds from these transactions were used to repay secured indebtedness and to fund new investment activity.
On April 19, 2004, the Company completed a new $850.0 million unsecured revolving credit facility with 19 banks and financial institutions. The new facility has a three-year initial term with a one-year extension at the Company's option. The facility bears interest, based upon the Company's current credit ratings, at a rate of LIBOR + 1.00% and has a 25 basis point annual facility fee. This new credit facility replaces the existing $300.0 million unsecured credit facility maturing July 2004.
On March 29, 2004, the Company redeemed $110.0 million aggregate principal amount of its outstanding 8.75% Senior Notes due 2008 at a price of 108.75% of par. In connection with this redemption, the Company recognized a charge to income of $11.5 million included in "Loss on early extinguishment of debt" on the Company's Consolidated Statements of Operations.
On March 12, 2004, one of the Company's $700.0 million secured facilities was amended to reduce the maximum amount available to $250.0 million, to shorten the maturity to March 2005 and to reduce the stated interest rate on first mortgages and CTL assets to LIBOR + 1.50% and on subordinate and mezzanine lending investments to LIBOR + 2.05%.
On March 10, 2004, the Company repaid its $193.0 million term loan financing secured by 15 CTL assets with an original maturity of July 2004.
On January 13, 2004, the Company closed $200.0 million of term financing with a leading financial institution that is secured by certain corporate bond investments and other lending securities. A number of these investments were previously financed under existing credit facilities. The new facility bears interest at LIBOR + 1.05%1.50% and has a final maturity date of January 2006.
On December 5, 2003, the Company issued $350.0 million of 6.00% Senior Notes due in 2010 and $150.0 million of 6.50% Senior Notes due in 2013. The Notes due 2010 were sold at 99.44% of their principal amount and the Notes due 2013 were sold at 99.23% of their principal amount. The Notes are unsecured senior obligations of the Company. The Company used the net proceeds to partially repay secured indebtedness.
On September 29, 2003, the Company closed a $135.0 million term loan secured by a CTL asset it acquired the same day. The loan has a five-year term and bears interest at LIBOR + 1.75%.
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On May 21, 2003, a wholly-owned subsidiary of the Company issued iStar Asset Receivables ("STARs"), Series 2003-1, the Company's proprietary match funding program, consisting of $645.8 million of investment-grade bonds secured by the subsidiary's structured finance and CTL assets, which had an aggregate outstanding carrying value of approximately $738.1 million 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 weighted average interest rate on the bonds, on an all-floating rate basis, was approximately LIBOR + 0.47% at inception. For accounting purposes, this transaction was treated as a secured financing: the underlying assets and STARs liabilities remained on the Company's Consolidated Balance Sheets, and no gain on sale was recognized.
On April 8, 2003, the Company issued an additional $35.0 million of 7.00% Senior Notes due March 2008, bringing the aggregate principal amount of the Senior Notes to $185.0 million. The add-on Notes have identical terms to the Senior Notes issued in March 2003, although they were issued at 102.75% of their principal amount, to yield 6.34% per annum.
On March 14, 2003, the Company retired the 6.75% Dealer Remarketable Securities of its Leasing Subsidiary by exchanging those securities for newly issued $150.0 million 7.00% Senior Notes due March 2008.
During the six months ended June 30, 2004 the Company incurred an aggregate loss on early extinguishment of debt of approximately $13.2 million as a result of the early retirement of certain debt obligations.
As of June 30, 2004, future expected/scheduled maturities of outstanding long-term debt obligations are as follows (in thousands)(1):
2004 (remaining six months) | $ | 24,000 | ||
2005 | 459,052 | |||
2006 | 221,439 | |||
2007 | 305,850 | |||
2008 | 1,343,000 | |||
Thereafter | 2,669,906 | |||
Total principal maturities | 5,023,247 | |||
Net unamortized debt discounts | (59,190 | ) | ||
Impact of pay-floating swap agreements | (21,489 | ) | ||
Total debt obligations | $ | 4,942,568 | ||
Explanatory Note:
Note 8Shareholders' Equity
The Company's charter 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. The Company has 4.0 million shares of 8.00% Series D Cumulative Redeemable Preferred Stock, 5.6 million shares of 7.875%
81
Series E Cumulative Redeemable Preferred Stock, 4.0 million shares of 7.80% Series F Cumulative Redeemable Preferred Stock, 3.2 million shares of 7.65% Series G Cumulative Redeemable Preferred Stock and 5.0 million shares of 7.50% Series I Cumulative Redeemable Preferred Stock. The Series D, E, F, G, and I Cumulative Redeemable Preferred Stock are redeemable without premium at the option of the Company at their respective liquidation preferences beginning on October 8, 2002, July 18, 2008, September 29, 2008, December 19, 2008 and March 1, 2009, respectively.
In February 2004, the Company redeemed 2.0 million outstanding shares of its 9.375% Series B Cumulative Redeemable Preferred Stock and 1.3 million outstanding shares of its 9.20% Series C Cumulative Redeemable Preferred Stock. The redemption price was $25.00 per share, plus accrued and unpaid dividends to the redemption date of $0.46 and $0.45 for the Series B and C Preferred Stock, respectively. In connection with this redemption, the Company recognized a charge to net income allocable to common shareholders and HPU holders of approximately $9.0 million included in "Preferred dividend requirements" on the Company's Consolidated Statements of Operations.
In February 2004, the Company completed an underwritten public offering of 5.0 million shares of its 7.50% Series I Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning March 1, 2009. The Company used the net proceeds from the offering of $121.0 million to redeem approximately $110.0 million aggregate principal amount of its outstanding 8.75% Senior Notes due 2008 at a price of 108.75% of their principal amount plus accrued interest to the redemption date.
In January 2004, the Company completed a private placement of 3.3 million shares of its Series H Variable Rate Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and redeemable at par at any time from the purchase date through the first four months. The Company specifically used the proceeds from this offering to redeem the Series B and C Cumulative Redeemable Preferred Stock on February 23, 2004. On January 27, 2004, the Company redeemed all Series H Preferred Stock using excess liquidity from its secured credit facilities.
In December 2003, the Company completed an underwritten public offering of 5.0 million primary shares of the Company's Common Stock. The Company received approximately $191.1 million from the offering and used these proceeds to repay a portion of secured indebtedness.
In December 2003, the Company redeemed 1.6 million shares of the Company's 9.50% Series A Cumulative Redeemable Preferred Stock, having a liquidation preference of $50.00 per share by exchanging those securities for newly issued 3.2 million shares of 7.65% Series G Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning on December 19, 2008. Immediately following this transaction the Company no longer had any Series A Preferred Stock outstanding. The Company did not receive any cash proceeds from the offering.
In September 2003, the Company completed an underwritten public offering of 4.0 million shares of its 7.80% Series F Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning on September 29, 2008. The Company used the proceeds from the offering to repay a portion of secured indebtedness.
In July 2003, the Company redeemed 2.8 million shares of the Company's 9.50% Series A Cumulative Redeemable Preferred Stock, having a liquidation preference of $50.00 per share by exchanging those securities for newly issued 5.6 million shares of 7.875% Series E Cumulative
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Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning on July 18, 2008. The Company did not receive any cash proceeds from the offering.
On November 14, 2002, the Company completed an underwritten public offering of 8.0 million primary shares of the Company's Common Stock. The Company received approximately $202.9 million from the offering and used these proceeds to repay a portion of secured indebtedness.
On December 15, 1998, the Company issued warrants to acquire 6.1 million shares of Common Stock, as adjusted for dilution, at $34.35 per share. The warrants were exercisable on or after December 15, 1999 at a price of $34.35 per share and expired on December 15, 2005. On April 8, 2004, all 6.1 million warrants were exercised on a net basis and the Company subsequently issued approximately 1.1 million shares.
DRIP/Stock Purchase PlanThe Company maintains a dividend reinvestment and direct stock purchase plan. Under the dividend reinvestment component of the plan, the Company's shareholders may purchase additional shares of Common Stock without payment of brokerage commissions or service charges by automatically reinvesting all or a portion of their Common Stock cash dividends. Under the direct stock purchase component of the plan, the Company's shareholders and new investors may purchase shares of Common Stock directly from the Company without payment of brokerage commissions or service charges. All purchases of shares in excess of $10,000 per month pursuant to the direct purchase component are at the Company's sole discretion. Shares issued under the plan may reflect a discount of up to 3.00% from the prevailing market price of the Company's Common Stock. The Company is authorized to issue up to 8.0 million shares of Common Stock pursuant to the dividend reinvestment and direct stock purchase plan. During the three months ended June 30, 2004 and 2003, the Company issued a total of approximately 17,000 and 750,000 shares of its Common Stock, respectively, and during the six months ended June 30, 2004 and 2003, the Company issued a total of approximately 393,000 and 1.4 million shares of its Common Stock, respectively, through the direct stock purchase component of the plan. Net proceeds during the three months ended June 30, 2004 and 2003 were approximately $640,000 and $25.6 million, respectively, and $16.1 million and $42.9 million during the six months ended June 30, 2004 and 2003, respectively. There are approximately 3.2 million shares available for issuance under the plan as of June 30, 2004.
Stock Repurchase ProgramThe 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 or loan repayments 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 June 30, 2004, the Company had repurchased a total of approximately 2.3 million shares at an aggregate cost of approximately $40.7 million. The Company has not repurchased any shares under the stock repurchase program since November 2000.
Note 9Risk Management and Use of Financial Instruments
Risk managementIn 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 lending investments that results from a property's,
83
borrower's or corporate 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 CTL facilities held by the Company.
Use of derivative financial instrumentsThe 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. The Company does not use derivative instruments to hedge credit/market risk or for speculative purposes.
The Company has entered into the following cash flow and fair value hedges that are outstanding as of June 30, 2004. The net value (liability) associated with these hedges is reflected on the Company's Consolidated Balance Sheets (in thousands).
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
Estimated Value at June 30, 2004 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 235,000 | 1.135 | % | 3/11/04 | 9/15/04 | $ | 185 | |||||
Pay-Fixed Swap | 200,000 | 1.144 | % | 3/11/04 | 9/15/04 | 152 | |||||||
Pay-Fixed Swap | 200,000 | 1.144 | % | 3/11/04 | 9/15/04 | 152 | |||||||
Pay-Fixed Swap | 125,000 | 2.885 | % | 1/23/03 | 6/25/06 | 226 | |||||||
Pay-Fixed Swap | 125,000 | 2.838 | % | 2/11/03 | 6/25/06 | 343 | |||||||
Pay-Fixed Swap | 75,000 | 5.580 | % | 11/4/99 | (1) | 12/1/04 | (1,488 | ) | |||||
Pay-Floating Swap | 200,000 | 4.381 | % | 12/17/03 | 12/15/10 | (6,246 | ) | ||||||
Pay-Floating Swap | 105,000 | 3.678 | % | 1/15/04 | 1/15/09 | (3,191 | ) | ||||||
Pay-Floating Swap | 100,000 | 4.345 | % | 12/17/03 | 12/15/10 | (3,327 | ) | ||||||
Pay-Floating Swap | 100,000 | 3.878 | % | 11/27/02 | 8/15/08 | 520 | |||||||
Pay-Floating Swap | 100,000 | 3.713 | % | 1/15/04 | 1/15/09 | (2,878 | ) | ||||||
Pay-Floating Swap | 100,000 | 3.686 | % | 1/15/04 | 1/15/09 | (3,000 | ) | ||||||
Pay-Floating Swap | 50,000 | 3.810 | % | 11/27/02 | 8/15/08 | 119 | |||||||
Pay-Floating Swap | 50,000 | 4.290 | % | 12/17/03 | 12/15/10 | (1,820 | ) | ||||||
Pay-Floating Swap | 45,000 | 3.684 | % | 1/15/04 | 1/15/09 | (1,355 | ) | ||||||
LIBOR Cap | 345,000 | 8.000 | % | 5/22/02 | 5/28/14 | 7,020 | |||||||
LIBOR Cap | 135,000 | 6.000 | % | 9/29/03 | 10/15/06 | 140 | |||||||
LIBOR Cap | 75,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
LIBOR Cap | 35,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
LIBOR Cap | 24,000 | 9.000 | % | 9/25/03 | 11/9/04 | | |||||||
Total Estimated Value | $ | (14,448 | ) | ||||||||||
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Explanatory Note:
Between January 1, 2003 and June 30, 2004, the Company also had outstanding the following cash flow hedges that have expired or been settled (in thousands):
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
|||||
---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 125,000 | 7.058 | % | 6/15/00 | 6/25/03 | |||
Pay-Fixed Swap | 125,000 | 7.055 | % | 6/15/00 | 6/25/03 | ||||
Pay-Fixed Swap | 100,000 | 4.139 | % | 9/29/03 | 1/2/11 | ||||
Pay-Fixed Swap | 100,000 | 4.643 | % | 9/29/03 | 1/2/14 | ||||
Pay-Fixed Swap | 100,000 | 4.484 | % | 1/16/04 | 5/1/14 | ||||
Pay-Fixed Swap | 50,000 | 4.502 | % | 1/16/04 | 5/1/14 | ||||
Pay-Fixed Swap | 50,000 | 4.500 | % | 1/16/04 | 5/1/14 |
On March 11, 2004, the Company entered into three pay-fixed interest rate swaps all with six-month terms, rates of 1.135%, 1.144% and 1.144% and notional amounts of $235.0 million, $200.0 million and $200.0 million, respectively.
On January 16, 2004, the Company entered into three forward starting swaps all with 10-year terms and rates of 4.484%, 4.502% and 4.500% and notional amounts of $100.0 million, $50.0 million and $50.0 million, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These three swaps were settled in connection with the Company's issuance of $250.0 million of 10-year Senior Notes in March 2004.
On January 15, 2004, in connection with the Company's fixed-rate corporate bonds, the Company entered into four pay-floating interest rate swaps struck at 3.678%, 3.713%, 3.686% and 3.684% with notional amounts of $105.0 million, $100.0 million, $100.0 million and $45.0 million, respectively, and maturing on January 15, 2009. The Company pays six-month LIBOR and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of five-year Senior Notes attributable to changes in LIBOR. For accounting purposes, the difference between the fixed rate received and the LIBOR rate paid on the notional amount of the swap is recorded as "Interest expense" on the Company's Consolidated Statements of Operations. In addition, the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount on a quarterly basis.
During 2003, the Company entered into two 90-day forward starting swaps each having a $100.0 million notional amount. These pay-fixed swaps which were effective in September 2003, had rates of 4.139% and 4.643%, had seven-year and 10-year terms, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These two swaps were settled in connection with the Company's issuance of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes. In addition, effective in September 2003, the Company entered into a $135.0 million cap with a rate of 6.00% to hedge the Company's current outstanding floating-rate debt. This cap has a three-year term. Further, the Company entered into two $125.0 million forward starting swaps. These pay-fixed swaps were effective in June 2003 and replaced
85
the two $125.0 million pay-fixed swaps mentioned above. The two new pay-fixed swaps have a three-year term and expire on June 25, 2006.
In addition, in connection with a portion of the Company's fixed-rate corporate bonds, the Company entered into three pay-floating interest rate swaps in December 2003 struck at 4.381%, 4.345% and 4.29% with notional amounts of $200.0 million, $100.0 million and $50.0 million, respectively, and maturing on December 15, 2010 and also entered into two pay-floating interest rate swaps in November 2002 struck at 3.8775% and 3.81% with notional amounts of $100.0 million and $50.0 million, respectively, and maturing on August 15, 2008. The Company pays six-month LIBOR on the swaps entered into in December 2003 and one-month LIBOR on the swaps entered into in November 2002 and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes attributable to changes in LIBOR. For accounting purposes, the difference between the fixed rate received and the LIBOR rate paid on the notional amount of the swap is recorded as "Interest expense" on the Company's Consolidated Statements of Operations. In addition, the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount on a quarterly basis.
In connection with STARs, Series 2003-1 in May 2003, the Company entered into a LIBOR interest rate cap struck at 6.95% in the notional amount of $270.6 million, and simultaneously sold a LIBOR interest rate cap with the same terms. Since these instruments do not change 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 terms of these arrangements are substantially the same, the effects of a revaluation of these two instruments substantially offset one another.
In connection with STARs, Series 2002-1 in May 2002, the Company entered into a LIBOR interest rate cap struck at 8.00% in the notional amount of $345.0 million. The Company utilizes the provisions of SFAS No. 133 with respect to such instruments. SFAS No. 133 provides that the up-front fees paid on option-based products such as caps should be expensed into earnings based on the allocation of the premium to the affected periods as if the agreement were a series of "caplets." These allocated premiums are then reflected as a charge to income (as part of interest expense) in the affected period. On May 28, 2002, in connection with the STARs, Series 2002-1 transaction, the Company paid a premium of $13.7 million for this interest rate cap. Using the "caplet" methodology discussed above, amortization of the cap premium is dependent upon the actual value of the caplets at inception.
Credit risk concentrationsConcentrations of credit risks arise when a number of borrowers or customers related to the Company's investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of credit risks. Management believes the current portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.
Substantially all of the Company's CTL assets (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 10.00%) as of June 30, 2004 in California (19.55%) and New York (11.82%). As of June 30, 2004, the Company's investments also contain greater than 10.00% concentrations in the following asset types: office-CTL (25.26%), office-lending (14.82%), industrial (15.73%) and hotel-lending (11.01%).
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The Company underwrites the credit of prospective borrowers and customers and often requires them to provide some form of credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although the Company's loans and other lending investments and corporate customer lease assets are geographically diverse and the borrowers and customers operate in a variety of industries, to the extent the Company has a significant concentration of interest or operating lease revenues from any single borrower or customer, the inability of that borrower or customer to make its payment could have an adverse effect on the Company.
Note 10Stock-Based Compensation Plans and Employee Benefits
The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to provide incentive compensation for officers, other key employees and directors of the Company. The Plan provides for awards of stock options and shares of restricted stock and other performance awards. The maximum number of shares of Common Stock available for awards under the Plan is 9.00% of the outstanding shares of Common Stock, calculated on a fully diluted basis, from time to time, provided that the number of shares of Common Stock reserved for grants of options designated as incentive stock options is 5.0 million, subject to certain antidilution provisions in the Plan. All awards under the Plan, other than automatic awards to non-employee directors, are at the discretion of the Board or a committee of the Board. At June 30, 2004, a total of approximately 10.2 million shares of Common Stock were available for awards under the Plan, of which options to purchase approximately 1.6 million shares of Common Stock were outstanding and approximately 410,000 shares of restricted stock were outstanding. A total of approximately 946,000 shares remain available for awards under the Plan as of June 30, 2004.
Changes in options outstanding during the six months ended June 30, 2004 are as follows:
|
Number of Shares |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Weighted Average Exercise Price |
|||||||||
|
Employees |
Non-Employee Directors |
Other |
|||||||
Options outstanding, December 31, 2003 | 2,309,053 | 154,994 | 406,091 | $ | 18.59 | |||||
Granted in 2004 | | | | $ | | |||||
Exercised in 2004 | (1,099,417 | ) | (31,500 | ) | (80,949 | ) | $ | 19.18 | ||
Forfeited in 2004 | (80,972 | ) | (14,600 | ) | | $ | 17.06 | |||
Options outstanding, June 30, 2004 | 1,128,664 | 108,894 | 325,142 | $ | 18.23 | |||||
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The following table summarizes information concerning outstanding and exercisable options as of June 30, 2004:
|
OPTIONS OUTSTANDING |
OPTIONS EXERCISABLE |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Exercise Price Range |
Options Outstanding |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Currently Exercisable |
Weighted Average Exercise Price |
|||||||
$14.72$15.00(1) | 498,959 | 4.65 | $ | 14.72 | 488,626 | $ | 14.72 | |||||
$16.69$16.88 | 447,364 | 5.51 | $ | 16.88 | 447,364 | $ | 16.88 | |||||
$17.38$17.56 | 16,667 | 5.71 | $ | 17.38 | 16,667 | $ | 17.38 | |||||
$19.63$19.69 | 380,124 | 6.51 | $ | 19.69 | 380,124 | $ | 19.69 | |||||
$20.00$21.44 | 50,000 | 6.18 | $ | 20.94 | 50,000 | $ | 20.94 | |||||
$24.13$24.94 | 56,900 | 6.16 | $ | 24.84 | 56,900 | $ | 24.84 | |||||
$25.10$26.09 | 13,800 | 1.92 | $ | 26.09 | 13,800 | $ | 26.09 | |||||
$26.30$26.97 | 2,000 | 6.96 | $ | 26.97 | 2,000 | $ | 26.97 | |||||
$27.00 | 25,000 | 6.99 | $ | 27.00 | 25,000 | $ | 27.00 | |||||
$28.54$29.82 | 66,792 | 7.51 | $ | 29.69 | 66,792 | $ | 29.69 | |||||
$55.39 | 5,094 | 4.92 | $ | 55.39 | 5,094 | $ | 55.39 | |||||
1,562,700 | 5.60 | $ | 18.23 | 1,552,367 | $ | 18.25 | ||||||
Explanatory Note:
In the third quarter 2002 (with retroactive application to the beginning of the calendar year), the Company adopted the fair value method for accounting for options issued to employees or directors, as allowed under Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." Accordingly, the Company recognizes a charge equal to the fair value of these options at the date of grant multiplied by the number of options issued. This charge will be amortized over the related remaining vesting terms to individual employees as additional compensation. There were 15,500 options issued during the 12 months ended December 31, 2003 with a strike price of $14.72.
If the Company's compensation costs had 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 prior to 2002, the Company's net income for the three months ended June 30, 2004 and 2003 would have been reduced on a pro forma basis by approximately $0 and $24,000, respectively, and $0 and $48,000 for the six months ended June 30, 2004 and 2003, respectively. This would not have significantly impacted the Company's earnings per share.
Future charges may be taken to the extent of additional option grants, which are at the discretion of the Board of Directors.
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During the six months ended June 30, 2004, the Company granted 31,555 restricted shares to employees that vest proportionately over three years on the anniversary date of the initial grant of which 30,855 remain outstanding. In addition, in connection with the Chief Executive Officer's employment agreement 236,167 restricted shares were issued on March 31, 2004 (see detailed information below).
During the 12 months ended December 31, 2003, the Company granted 40,050 restricted shares to employees that vest proportionately over three years on the anniversary date of the initial grant of which 23,325 remain outstanding as of June 30, 2004.
During the year ended December 31, 2002, the Company granted 199,350 restricted shares to employees. Of these shares, 44,350 will vest proportionately over three years on the anniversary date of the initial grant. Of the 44,350 shares granted, 10,591 remain outstanding as of June 30, 2004. The balance of 155,000 restricted shares granted to several employees vested on March 31, 2004 due to the satisfaction of the following circumstances: (1) the employee remained employed until that date; and (2) the 60-day average closing price of the Company's Common Stock equaled or exceeded a set floor price as of such date. The market price of the stock was $42.30 on March 31, 2004; therefore, the Company incurred a one-time charge to earnings of approximately $6.7 million (the fair market value of the 155,000 shares at $42.30 per share plus the Company's share of taxes). During the year ended December 31, 2002, the Company also granted 208,980 restricted shares to its Chief Financial Officer (see detailed information below).
For accounting purposes, the Company measures compensation costs for these shares, not including the contingently issuable shares, as of the date of the grant and expenses such amounts against earnings, either at the grant date (if no vesting period exists) or ratably over the respective vesting/service period. Such amounts appear on the Company's Consolidated Statements of Operations under "General and administrativestock-based compensation expense."
During the year ended December 31, 2002, the Company entered into a three-year employment agreement with its new Chief Financial Officer. Under the agreement, the Chief Financial Officer receives an annual base salary of $225,000. She may also receive a bonus, which is targeted to be $325,000, subject to an annual review for upward or downward adjustment. In addition, the Company granted the Chief Financial Officer 108,980 contingently vested restricted stock awards. These awards become vested on December 31, 2005 if the executive's employment with the Company has not terminated before such date. Dividends will be paid on the restricted shares as dividends are paid on shares of the Company's Common Stock. These dividends are accounted for in a manner consistent with the Company's Common Stock dividends, as a reduction to retained earnings. For accounting purposes, the Company will take a total charge of approximately $3.0 million related to the restricted stock awards, which will be amortized over the period from November 6, 2002 through December 31, 2005. This charge is reflected on the Company's Consolidated Statements of Operations under "General and administrativestock-based compensation."
Further, the Company granted the Chief Financial Officer 100,000 restricted shares which became fully-vested on January 31, 2004 as a result of the Company achieving a 53.28% total shareholder rate of return (dividends since November 6, 2002 plus share price appreciation from January 2, 2003). The Company incurred a one-time charge to earnings during the three months ended March 31, 2004 of approximately $4.1 million (the fair market value of the 100,000 shares at $40.02 per share plus the Company's share of taxes). For accounting purposes, the employment arrangement described above was treated as a contingent, variable plan until January 31, 2004.
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During the year ended December 31, 2001, the Company entered into a three-year employment agreement with its Chief Executive Officer. Under the agreement, the Chief Executive Officer receives an annual base salary of $1.0 million. He may also receive a bonus, which is targeted to be an amount equal to his base salary, if the Company achieves certain performance targets set by the Compensation Committee. The bonus award may be increased or reduced from the target depending upon the degree to which the performance goals are exceeded or are not met, and may not exceed 200.00% of his base salary. The bonus is reduced by the amount of any dividends paid to the Chief Executive Officer in respect of phantom shares (described below) which are awarded to him and have contingently vested. The Chief Executive Officer received approximately $4.4 million in such dividends in 2003. As such, no additional bonus was paid in that year. As part of this agreement, the Company confirmed a prior grant of 750,000 stock options made to the executive on March 2, 2001 with an exercise price of $19.69, which represented the market price at the date of the original contingent grant. However, because the grant required further approval by the Compensation Committee and the Board of Directors, no measurement date occurred for accounting purposes until such approvals were made, at which point the market price of the Company's Common Stock was $24.90. Accordingly, an aggregate charge of approximately $3.9 million was recognized with respect to these options over the term of this agreement and is reflected on the Company's Consolidated Statements of Operations under "General and administrativestock-based compensation." These options vested in three equal annual installments of 250,000 shares in each successive January beginning in January 2002. During the last week of March 2004, the Chief Executive Officer exercised and sold 150,000 of these shares. On April 1, 2004, the Chief Executive Officer exercised the remaining 600,000 options and sold 100,000 of these shares.
The Company also granted the Chief Executive Officer 2.0 million unvested phantom shares, each of which represents one share of the Company's Common Stock. These shares were scheduled to vest in installments of 350,000 shares, 650,000 shares, 600,000 shares and 400,000 shares on a contingent basis when the average closing price of the Company's Common Stock for a 60 calendar day period achieved thresholds of $25.00, $30.00, $34.00 and $37.00, respectively. As of March 31, 2004 all thresholds were attained, and a total of 2.0 million of these shares fully vested. The market price of the Common Stock on March 30, 2004 was $42.40 and the Company incurred a one-time charge to earnings during the three months ended March 31, 2004 of approximately $86.0 million (the fair market value of the 2.0 million shares at $42.40 per share plus the Company's share of taxes). Upon the phantom share units becoming fully vested, the Company delivered to the executive 728,552 shares of Common Stock and $53.9 million of cash, the total of which is equal to the fair market value of the 2.0 million shares of Common Stock multiplied by the closing stock price of $42.40 on March 30, 2004. Prior to March 30, 2004, the executive received dividends on shares that were contingently vested and were not forfeited under the terms of the agreement, when the Company declared and paid dividends on its Common Stock. Because no shares had been issued prior to March 30, 2004, dividends received on these phantom shares were reflected as compensation expense by the Company. For accounting purposes, this arrangement was treated as a contingent, variable plan and no additional compensation expense was recognized until the shares became irrevocably vested on March 30, 2004, at which time the Company reflected a charge equal to the fair value of the shares irrevocably vested.
On February 11, 2004, the Company entered into a new employment agreement with its Chief Executive Officer which took effect upon the expiration of the old agreement. The new agreement has an initial term of three years and provides for the following compensation:
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In addition, the Chief Executive Officer purchased an 80.00% interest in the Company's 2006 high performance unit program for directors and executive officers. This performance program was approved by the Company's shareholders in 2003 and is described in detail in the Company's 2003 annual proxy statement. The purchase price to be paid by the Chief Executive Officer will be based upon a valuation prepared by an independent investment-banking firm. The interests purchased by the Chief Executive Officer will have no value to him unless the Company achieves total shareholder returns in excess of those achieved by peer group indices, all as more fully described in the Company's 2003 annual proxy statement.
Certain affiliates of SOFI IV and the Company's Chief Executive Officer have agreed to reimburse the Company for the value of restricted shares awarded to the former President in excess of 350,000 shares, net of tax benefits realized by the Company or its shareholders on account of compensation expense deductions. The reimbursement obligation arose once the restricted share award became fully vested on September 30, 2002. The Company's Chief Executive Officer fulfilled his reimbursement obligation through the delivery of shares of the Company's Common Stock owned by him. In the case of the SOFI IV affiliates, the reimbursement payment must be made through the delivery of approximately $2.4 million in cash or 131,250 shares of Common Stock. As of March 31, 2004, the SOFI IV affiliates fulfilled their obligation through the payment of approximately $2.4 million in cash. These reimbursement payments are reflected as "Additional paid-in capital" on the Company's Consolidated Balance Sheets, and not as an offset to the charge referenced above.
High Performance Unit Program
In May 2002, the Company's shareholders approved the iStar Financial High Performance Unit ("HPU") Program. The program, as more fully described in the Company's annual proxy statement dated April 8, 2002, is a performance-based employee compensation plan that only has material value to the participants if the Company provides superior returns to its shareholders. The program entitles the employee participants ("HPU holders") to receive cash distributions in the nature of common stock dividends if the total rate of return on the Company's Common Stock (share price appreciation plus dividends) exceeds certain performance levels.
Initially, there were three plans within the program: the 2002 plan, the 2003 plan, and the 2004 plan. Each plan has 5,000 shares of High Performance Common Stock associated with it. Each share of High Performance Common Stock carries 0.25 votes per share.
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For these three plans, the Company's performance is measured over a one-, two-, or three-year valuation period, beginning on January 1, 2002 and ending on December 31, 2002, December 31, 2003 and December 31, 2004, respectively. The end of the valuation period (i.e., the "valuation date") will be accelerated if there is a change in control of the Company. The High Performance Common Stock has a nominal value unless the total rate of shareholder return for the relevant valuation period exceeds the greater of: (1) 10.00%, 20.00%, or 30.00% for the 2002 plan, the 2003 plan and the 2004 plan, respectively; and (2) a weighted industry index total rate of return consisting of equal weightings of the Russell 1000 Financial Index and the Morgan Stanley REIT Index for the relevant period.
If the total rate of return on the Company's Common Stock exceeds the threshold performance levels for a particular plan, then distributions will be paid on the shares of High Performance Common Stock related to that plan in the same amounts and at the same times as distributions are paid on a number of shares of the Company's Common Stock equal to the following: 7.50% of the Company's excess total rate of return (over the higher of the two threshold performance levels) multiplied by the weighted average market value of the Company's common equity capitalization during the measurement period, all as divided by the average closing price of a share of the Company's Common Stock for the 20 trading days immediately preceding the applicable valuation date.
If the total rate of return on the Company's Common Stock does not exceed the threshold performance levels for a particular plan, then the shares of High Performance Common Stock related to that plan will have only nominal value. In this event, each of the 5,000 shares will be entitled to dividends equal to 0.01 times the dividend paid on a share of Common Stock, if and when dividends are declared on the Common Stock.
Regardless of how much the Company's total rate of return exceeds the threshold performance levels, the dilutive impact to the Company's shareholders resulting from distributions on High Performance Common Stock in each plan is limited to the equivalent of 1.00% of the average monthly number of fully diluted shares of the Company's Common Stock outstanding during the valuation period.
The employee participants have purchased their interests in High Performance Common Stock through a limited liability company at purchase prices approved by the Company's Board of Directors. The Company's Board has established the prices of the High Performance Common Stock based upon, among other things, an independent valuation from a major securities firm. The aggregate initial purchase prices were set on June 25, 2002 and were approximately $2.8 million, $1.8 million and $1.3 million for the 2002, 2003 and 2004 plans, respectively. No employee is permitted to exchange his or her interest in the LLC for shares of High Performance Common Stock prior to the applicable valuation date.
The total shareholder return for the valuation period under the 2002 plan was 21.94%, which exceeded both the fixed performance threshold of 10.00% and the industry index return of (5.83%). As a result of this superior performance, the participants in the 2002 plan are entitled to receive cash distributions equivalent to the amount of cash dividends payable on 819,254 shares of the Company's Common Stock, as and when such dividends are paid. Such dividend payments began with the first quarter 2003 dividend. The Company will pay dividends on the 2002 plan shares in the same amount per equivalent share and on the same distribution dates that shares of the Company's Common Stock are paid. The Company has the right, but not the obligation, to repurchase at cost 50.00% of the interests earned by an employee in the 2002 plan if the employee breaches certain non-competition, non-solicitation and confidentiality covenants through January 1, 2005.
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The total shareholder return for the valuation period under the 2003 plan was 78.29%, which exceeded the fixed performance threshold of 20.00% and the industry index return of 24.66%. The plan was fully funded and was limited to 1.00% of the average monthly number of fully diluted shares of the Company's Common Stock during the valuation period. As a result of the Company's superior performance, the participants in the 2003 plan are entitled to receive cash distributions equivalent to the amount of cash dividends payable on 987,149 shares of the Company's Common Stock, as and when such dividends are paid. Such dividend payments will begin with the first quarter 2004 dividend. The Company will pay dividends on the 2003 plan shares in the same amount per equivalent share and on the same distribution dates that shares of the Company's Common Stock are paid.
A new 2005 plan has been established with a three-year valuation period ending December 31, 2005. Awards under the 2005 plan were approved on January 14, 2003. The 2005 plan has 5,000 shares of High Performance Common Stock with an aggregate initial purchase price of $573,000. The purchase price of the High Performance Common Stock was established by the Company's Board based upon, among other things, an independent valuation from a major securities firm. The provisions of the 2005 plan are substantially the same as the prior plans.
A new 2006 plan has been established with a three-year valuation period ending December 31, 2006. Awards under the 2006 plan were approved on January 23, 2004. The 2006 plan had 5,000 shares of High Performance Common Stock with an aggregate initial purchase price of $714,700. The purchase price of the High Performance Common Stock was established by the Company's Board based upon, among other things, an independent valuation from a major securities firm. The provisions of the 2006 plan are substantially the same as the prior plans.
The additional equity from the issuance of the High Performance Common Stock is recorded as a separate class of stock and included within shareholders' equity on the Company's Consolidated Balance Sheets. Net income allocable to common shareholders will be reduced by the HPU holders' share of dividends paid and undistributed earnings, if any.
401(k) Plan
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 three months of continuous service with the Company. Each participant may contribute on a pretax basis up to the maximum percentage of compensation and dollar amount permissible under Section 402(g) of the Internal Revenue Code not to exceed the limits of Code Sections 401(k), 404 and 415. At the discretion of the Board of Directors, the Company may make matching contributions on the participant's behalf of up to 50.00% of the first 10.00% of the participant's annual compensation. The Company made gross contributions of approximately $88,000 and $78,000 for the three months ended June 30, 2004 and 2003, respectively, and $367,000 and $285,000 for the six months ended June 30, 2004 and 2003, respectively.
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Note 11Earnings Per Share
The following table presents a reconciliation of the numerators and denominators of the basic and diluted EPS calculations for the three and six months ended June 30, 2004 and 2003, respectively (in thousands, except per share data):
|
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
2004 |
2003 |
||||||||||
Numerator: | ||||||||||||||
Net income from continuing operations | $ | 79,950 | $ | 66,026 | $ | 41,680 | $ | 130,261 | ||||||
Preferred dividend requirements | (10,580 | ) | (9,227 | ) | (30,180 | ) | (18,454 | ) | ||||||
Net income allocable to common shareholders and HPU holders before income from discontinued operations and gain from discontinued operations(1) | 69,370 | 56,799 | 11,500 | 111,807 | ||||||||||
Income from discontinued operations | 3,069 | 3,720 | 6,087 | 7,174 | ||||||||||
Gain from discontinued operations | | | 136 | 264 | ||||||||||
Net income allocable to common shareholders and HPU holders(1) | $ | 72,439 | $ | 60,519 | $ | 17,723 | $ | 119,245 | ||||||
Denominator: | ||||||||||||||
Weighted average common shares outstanding for basic earnings per common share | 110,695 | 99,445 | 109,081 | 98,784 | ||||||||||
Add: effect of assumed shares issued under treasury stock method for stock options, restricted shares and warrants | 1,071 | 1,607 | 1,770 | 1,526 | ||||||||||
Add: effect of contingent shares | 109 | 1,264 | 1,175 | 1,264 | ||||||||||
Add: effect of joint venture shares | 371 | 73 | 298 | 73 | ||||||||||
Weighted average common shares outstanding for diluted earnings per common share | 112,246 | 102,389 | 112,324 | 101,647 | ||||||||||
Basic earnings per common share: | ||||||||||||||
Net income allocable to common shareholders before income from discontinued operations and gain from discontinued operations(2) | $ | 0.62 | 0.57 | $ | 0.10 | $ | 1.12 | |||||||
Income from discontinued operations | 0.02 | 0.03 | 0.06 | 0.08 | ||||||||||
Gain from discontinued operations | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||
Net income allocable to common shareholders(2) | $ | 0.64 | $ | 0.60 | $ | 0.16 | $ | 1.20 | ||||||
Diluted earnings per common share: | ||||||||||||||
Net income allocable to common shareholders before income from discontinued operations and gain from discontinued operations(3)(4) | $ | 0.61 | $ | 0.55 | $ | 0.10 | $ | 1.09 | ||||||
Income from discontinued operations | 0.03 | 0.04 | 0.06 | 0.07 | ||||||||||
Gain from discontinued operations | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||
Net income allocable to common shareholders(3)(4) | $ | 0.64 | $ | 0.59 | $ | 0.16 | $ | 1.16 | ||||||
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Explanatory Notes:
For the three and six months ended June 30, 2004 and 2003, the following shares were antidilutive (in thousands):
|
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
2004 |
2003 |
||||
Stock options | 5 | 5 | 5 | 5 | ||||
Warrants | | 6,113 | | 6,113 | ||||
Joint venture shares | | 298 | 73 | |
Note 12Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" 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. Total comprehensive income was $85.1 million and $76.6 million for the three months ended June 30, 2004 and 2003, respectively, and $44.5 million and $149.1 million for the six months ended June 30, 2004 and 2003, respectively. The primary components of comprehensive income other than net income consist of amounts attributable to the adoption and continued application of SFAS No. 133, to the Company's cash flow and fair value hedges and changes in the fair value of the Company's available-for-sale investments.
For the three and six months ended June 30, 2004, the change in fair market value of the Company's unrealized gains (losses) on available-for-sale investments and cash flow and fair value hedges was an increase of $2.1 million and a decrease $3.4 million, respectively, and was recorded as an
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adjustment to accumulated other comprehensive income. The reconciliation to comprehensive income is as follows (in thousands):
|
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
2004 |
2003 |
|||||||||
Net income | $ | 83,019 | $ | 69,746 | $ | 47,903 | $ | 137,699 | |||||
Other comprehensive income: | |||||||||||||
Reclassification of unrealized gains into earnings upon realization | (2,845 | ) | (1,664 | ) | (6,742 | ) | (1,664 | ) | |||||
Unrealized gains (losses) on available-for-sale investments | (941 | ) | 9,370 | 1,646 | 15,295 | ||||||||
Unrealized gains (losses) on cash flow hedges | 5,852 | (825 | ) | 1,698 | (2,199 | ) | |||||||
Comprehensive income | $ | 85,085 | $ | 76,627 | $ | 44,505 | $ | 149,131 | |||||
Unrealized gains (losses) on available-for-sale investments and cash flow and fair value hedges are recorded as adjustments to shareholders' equity through "Accumulated other comprehensive income (losses)" on the Company's Consolidated Balance Sheets and are not included in net income unless realized.
As of June 30, 2004 and December 31, 2003, accumulated other comprehensive income (losses) reflected in the Company's shareholders' equity is comprised of the following (in thousands):
|
As of June 30, 2004 |
As of December 31, 2003 |
|||||
---|---|---|---|---|---|---|---|
Unrealized gains on available-for-sale investments | $ | 4,266 | $ | 9,362 | |||
Unrealized losses on cash flow and fair value hedges | (6,656 | ) | (8,354 | ) | |||
Accumulated other comprehensive income (losses) | $ | (2,390 | ) | $ | 1,008 | ||
Over time, the unrealized gains and losses held in other comprehensive income will be reclassified to earnings in the same period(s) in which the hedged items are recognized in earnings. The current balance held in other comprehensive income is expected to be reclassified to earnings over the lives of the current hedging instruments, or for the realized losses on forecasted debt transactions, over the related term of the debt obligation, as applicable.
Note 13Dividends
In order to maintain its election to qualify as a REIT, the Company must currently distribute, at a minimum, an amount equal to 90.00% of its taxable income and must distribute 100.00% of its taxable income to avoid paying corporate federal income taxes. 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 and expenses (such as depreciation), in certain circumstances, the Company may generate operating cash flow in excess of its dividends or, alternatively, may be required to borrow to make sufficient dividend payments.
Total dividends declared by the Company aggregated $77.6 million, or $0.6975 per share on Common Stock during the six months ended June 30, 2004. This dividend, paid on April 29, 2004 was applicable to the three months ended March 31, 2004 and payable to shareholders of record on
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April 15, 2004. On July 1, 2004, the Company declared a dividend of $0.6975 per share of Common Stock, applicable to the second quarter and payable to shareholders of record on July 15, 2004. The Company also declared and paid dividends aggregating $4.0 million, $5.5 million, $3.9 million, $3.0 million and $2.7 million, respectively, on its Series D, E, F, G and I preferred stock, respectively, during the six months ended June 30, 2004.
In connection with the redemption of the Series B preferred stock on February 23, 2004 the Company paid a final dividend of $920,000 representing unpaid dividends of $0.46 per share for the 70 days from the prior dividend payment on December 15, 2003. Upon redemption, the Company recognized a charge to net income allocable to common shareholders and HPU holders of $5.5 million included in "Preferred dividend requirements" on the Company's Consolidated Statements of Operations.
In connection with the redemption of the Series C preferred stock on February 23, 2004 the Company paid a final dividend of $585,000 representing unpaid dividends of $0.45 per share for the 70 days from the prior dividend payment on December 15, 2003. Upon redemption, the Company recognized a charge to net income allocable to common shareholders and HPU holders of $3.5 million included in "Preferred dividend requirements" on the Company's Consolidated Statements of Operations.
Holders of shares of the Series D preferred stock are entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative preferential cash dividends at the rate of 8.00% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $2.00 per share. 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 D 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 E 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 7.875% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.97 per share. The remaining terms relating to dividends of the Series E preferred stock are substantially identical to the terms of the Series D preferred stock described above.
Holders of shares of the Series F 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 7.80% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.95 per share. The remaining terms relating to dividends of the Series F preferred stock are substantially identical to the terms of the Series D preferred stock described above.
Holders of shares of the Series G 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 7.65% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.91 per share. The remaining terms relating to dividends of the
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Series G preferred stock are substantially identical to the terms of the Series D preferred stock described above.
Holders of the Series I 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 7.50% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.88 per share. The remaining terms relating to dividends of the Series I preferred stock are substantially identical to the terms of the Series D preferred stock described above.
The 2002 and 2003 High Performance Unit Program reached their valuation dates on December 31, 2002 and 2003, respectively. Based on the Company's 2002 and 2003 total rate of return, the participants are entitled to receive cash dividends on 819,254 shares and 987,149 shares, respectively, of the Company's Common Stock. The Company will pay dividends on these units in the same amount per equivalent share and on the same distribution dates as shares of the Company's Common Stock. Such dividend payments for the 2002 plan began with the first quarter 2003 dividend and such dividends for the 2003 plan will begin with the first quarter 2004 dividend. All dividends to HPU holders will reduce net income allocable to common shareholders when paid. Additionally, net income allocable to common shareholders will be reduced by the HPU holders' share of undistributed earnings, if any.
The exact amount of future quarterly dividends to common shareholders will be determined by the Board of Directors based on the Company's actual and expected operations for the fiscal year and the Company's overall liquidity position.
Note 14Segment Reporting
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131") establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected financial information about operating segments in interim financial reports issued to shareholders.
The Company has two reportable segments: Real Estate Lending and Corporate Tenant Leasing. The Company does not have any 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 more than 3.94% of revenues (see Note 9 for other information regarding concentrations of credit risk).
The Company evaluates performance based on the following financial measures for each segment:
|
Real Estate Lending |
Corporate Tenant Leasing |
Corporate/ Other(1) |
Company Total |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(In thousands) |
||||||||||||
Three months ended June 30, 2004: |
|||||||||||||
Total revenues(2): | $ | 101,674 | $ | 75,794 | $ | 313 | $ | 177,781 | |||||
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries: | | (855 | ) | | (855 | ) | |||||||
Total operating and interest expense(3): | 17,474 | 35,629 | 43,745 | 96,848 | |||||||||
Net operating income (loss)(4): | 84,200 | 39,310 | (43,432 | ) | 80,078 | ||||||||
Three months ended June 30, 2003: |
|||||||||||||
Total revenues(2): | $ | 81,624 | $ | 62,058 | $ | 125 | $ | 143,807 | |||||
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries: | | 1,078 | (1,178 | ) | (100 | ) | |||||||
Total operating and interest expense(3): | 23,999 | 29,595 | 24,047 | 77,641 | |||||||||
Net operating income (loss)(4): | 57,625 | 33,541 | (25,100 | ) | 66,066 |
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|
Real Estate Lending |
Corporate Tenant Leasing |
Corporate/ Other(1) |
Company Total |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(In thousands) |
||||||||||||
Six months ended June 30, 2004: |
|||||||||||||
Total revenues(2): | $ | 195,887 | $ | 146,375 | $ | 628 | $ | 342,890 | |||||
Equity in earnings from joint ventures and unconsolidated subsidiaries: | | 5,393 | | 5,393 | |||||||||
Total operating and interest expense(3): | 36,537 | 70,652 | 199,153 | 306,342 | |||||||||
Net operating income (loss)(4): | 159,350 | 81,116 | (198,525 | ) | 41,941 | ||||||||
Six months ended June 30, 2003: |
|||||||||||||
Total revenues(2): | $ | 158,520 | $ | 122,293 | $ | 676 | $ | 281,489 | |||||
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries: | | 2,094 | (2,252 | ) | (158 | ) | |||||||
Total operating and interest expense(3): | 46,946 | 58,575 | 45,470 | 150,991 | |||||||||
Net operating income (loss)(4): | 111,574 | 65,812 | (47,046 | ) | 130,340 | ||||||||
As of June 30, 2004: |
|||||||||||||
Total long-lived assets(5): | 4,255,005 | 2,854,967 | N/A | 7,109,972 | |||||||||
Total assets | 4,391,551 | 3,103,505 | 111,375 | 7,606,431 | |||||||||
As of December 31, 2003: |
|||||||||||||
Total long-lived assets(5): | 3,702,674 | 2,535,885 | N/A | 6,238,559 | |||||||||
Total assets | 3,810,679 | 2,729,716 | 120,195 | 6,660,590 |
Explanatory Notes:
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
The Company is in the business of providing custom-tailored financing solutions to private and corporate owners of real estate nationwide. Depending upon market conditions and the Company's views about the United States economy generally and the real estate markets specifically, the Company will adjust its investment focus from time to time and emphasize certain products, industries and geographic markets over others.
The Company began its business in 1993 through private investment funds formed to take advantage of the lack of well-capitalized lenders capable of servicing the needs of customers in its markets. In March 1998, the private investment funds contributed their approximately $1.1 billion of assets to the Company's predecessor in exchange for a controlling interest in that public company. In November 1999, the Company acquired its leasing subsidiary, TriNet Corporate Realty Trust, Inc. ("TriNet" or the "Leasing Subsidiary"), which was then the largest publicly-traded company specializing in corporate sale/leaseback for office and industrial facilities (the "TriNet Acquisition"). Concurrent with the TriNet Acquisition, the Company also acquired its former external advisor in exchange for shares of its Common Stock and converted its organizational form to a Maryland corporation. The Company's Common Stock began trading on the New York Stock Exchange under the symbol "SFI" in November 1999.
The Company has experienced significant growth since its first quarter as a public company in 1998. Transaction volume for the fiscal year ended December 31, 2003 was $2.2 billion, compared to $1.7 billion in 2002 and $1.1 billion in 2001. The Company completed 60 financing commitments in 2003, compared to 41 in 2002 and 35 in 2001. During the first six months of 2004 the Company had $1.7 billion of transaction volume representing 31 financing commitments. Repeat customer business has become a key source of transaction volume for the Company, accounting for approximately 56% of the Company's cumulative volume through June 30, 2004. Based upon feedback from its customers, the Company believes that greater recognition of the Company and its reputation for completing highly structured transactions in an efficient manner have also contributed to increases in its transaction volume.
The benefits of higher investment volumes were mitigated to an extent by the extremely low interest rate environment in 2002, 2003 and the first six months of 2004. Low interest rates benefit the Company in that its borrowing costs decrease, but similarly earnings on its variable-rate lending investments also decrease. Conversely, in an environment of rising interest rates, the Company's borrowing costs may increase, but earnings on its variable-rate lending investments would also increase. The Company's policy is to match fund its fixed-rate assets with fixed-rate debt and variable-rate assets with variable-rate debt so that changes in interest rates do not significantly impact the Company's earnings.
During the difficult economic and real estate market conditions of 2002 and 2003, the Company focused its investment activity on lower risk investments such as first mortgages and corporate tenant lease transactions that met its risk adjusted return standards. The Company continued to emphasize these products in the first six months of 2004. The Company has experienced minimal losses on its lending investments. In 2003 and the first six months of 2004, the Company also focused on re-leasing space at its corporate tenant lease facilities under longer-term leases in an effort to reduce the impact of lease expirations on the Company's earnings. The Company has seen indications of improvements in the U.S. economy and strengthening in some sectors of the real estate markets in the first six months of 2004. The Company believes that the commercial real estate industry is attracting large amounts of investment capital. The Company intends to maintain its disciplined approach to underwriting its investments and will adjust its focus away from markets and products where the Company believes that the available pricing terms do not fairly reflect the risks of the investments.
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The Company has continued to broaden its sources of capital and was particularly active in the capital markets in 2003 and in the first six months of 2004. The Company's strong performance and the low interest rate environment enabled the Company to issue equity and debt securities in 2003 and the first six months of 2004 on attractive pricing terms. The Company used the proceeds from the issuances to repay secured indebtedness and to refinance higher cost capital. The Company made significant progress in 2003 and continues to make progress in the first six months of 2004 in migrating its debt obligations from secured debt towards unsecured debt. On April 19, 2004, the Company completed a new $850.0 million unsecured revolving credit facility with 19 banks and financial institutions. The new facility has a three-year initial term with a one-year extension at the Company's option. The facility bears interest, based upon the Company's current credit ratings, at a rate of LIBOR plus 1.00% and has a 25 basis point annual facility fee. While the Company considers it prudent to have a broad array of sources of capital, including secured financing arrangements, the Company will continue to seek to reduce its use of secured debt and increase its use of unsecured debt.
The Company's earnings for the first six months of 2004 reflect the following charges from the first quarter of 2004:
Results of Operations
Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30, 2003
Interest incomeInterest income increased by $18.1 million to $92.2 million for the three months ended June 30, 2004 from $74.1 million for the same period in 2003. This increase was primarily due to $36.3 million of interest income on new originations or additional fundings, offset by an $16.8 million decrease from the repayment of loans and other lending investments. This increase was partially offset by a decrease in interest income on the Company's variable-rate lending investments as a result of lower average one-month LIBOR rates of 1.15% in 2004, compared to 1.26% in 2003.
Operating lease incomeOperating lease income increased by $14.4 million to $75.7 million for the three months ended June 30, 2004 from $61.3 million for the same period in 2003. Of this increase, $16.4 million is attributable to new CTL investments. This increase is partially offset by $2.1 million of lower operating lease income due to vacancies and lower rental rates on certain CTL assets.
Other incomeOther income generally consists of prepayment penalties and realized gains from the early repayment of loans and other lending investments, asset management fees, lease termination fees, mortgage servicing fees and dividends on certain investments. The Company's experience has been that early repayments may increase in low interest rate environments. During the three months ended June 30, 2004, other income included realized gains on sale of lending investments of $2.2 million, income from loan repayments and prepayment penalties of $7.2 million, asset management, mortgage
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servicing and other fees of approximately $316,000 and other miscellaneous income such as dividend payments of $210,000.
During the three months ended June 30, 2003, other income included realized gains on sale of lending investments of $4.8 million, income from loan repayments and prepayment penalties of $2.7 million, asset management, mortgage servicing fees and other fees of approximately $796,000 and other miscellaneous income such as dividend payments of $125,000.
Interest expenseFor the three months ended June 30, 2004, interest expense increased by $9.0 million to $58.5 million from $49.5 million for the same period in 2003. This increase was primarily due to higher average borrowings on the Company's debt obligations, term loans and secured notes, and by an $884,000 increase in amortization of deferred financing costs on the Company's debt obligations in 2004 compared to the same period in 2003. This increase was partially offset by lower average one-month LIBOR rates, which averaged 1.15% in 2004 compared to 1.26% in 2003 on the unhedged portion of the Company's variable-rate debt.
Operating costscorporate tenant lease assetsFor the three months ended June 30, 2004, operating costs increased by approximately $2.0 million from $3.8 million to $5.8 million for the same period in 2003. This increase is primarily related to new CTL investments and higher unrecoverable operating costs due to vacancies on certain CTL assets.
Depreciation and amortizationDepreciation and amortization increased by $3.7 million to $16.4 million for the three months ended June 30, 2004 from $12.7 million for the same period in 2003. This increase is primarily due to depreciation on new CTL investments and the consolidation of Sunnyvale (see Note 6 to the Company's Consolidated Financial Statements).
General and administrativeFor the three months ended June 30, 2004, general and administrative expenses increased by $3.5 million to $12.5 million, compared to $9.0 million for the same period in 2003. This increase is primarily due to the consolidation of iStar Operating and the increase in payroll and compensation expenses.
General and administrativestock-based compensationGeneral and administrative-stock-based compensation decreased by $300,000 for the three months ended June 30, 2004 compared to the same period in 2003 primarily due to the final vesting of stock-based compensation to senior executives in December 2003.
Provision for loan lossesThe Company's charge for provision for loan losses increased to $2.0 million for the three months ended June 30, 2004 compared to $1.8 million in the same period in 2003. As more fully discussed in Note 4 to the Company's Consolidated Financial Statements, the Company has experienced minimal actual losses on its loan investments to date. The Company considers it prudent to reflect provisions for loan losses on a portfolio basis based upon the Company's assessment of general market conditions, the Company's internal risk management policies and credit risk rating system, industry loss experience, the Company's assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments. Accordingly, since its first full quarter operating its current business as a public company (the quarter ended June 30, 1998), management has reflected quarterly provisions for loan losses in its operating results.
Loss on early extinguishment of debtDuring the three months ended June 30, 2004, the Company incurred $755,000 of losses on early extinguishments of debt associated with the amortization of deferred financing costs related to the early repayment of the Company's $48.0 million term loan which had an original maturity of July 2008. The Company also incurred a loss of $251,000 associated with the amortization of deferred financing costs related to the early termination of the Company's $300.0 million unsecured credit facility maturing July 2004. All of these activities related to the Company's strategies of migrating its borrowings toward more unsecured debt and taking advantage of lower cost refinancing opportunities.
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During the three months ended June 30, 2003, the Company had no losses on early extinguishment of debt.
Equity in earnings (loss) from joint ventures and unconsolidated subsidiariesFor the three months ended June 30, 2004, equity in earnings (loss) from joint ventures and unconsolidated subsidiaries decreased by approximately $755,000 to approximately $(855,000) from approximately $(100,000) for the same period in 2003. This decrease is primarily due to the conveyance by one of the Company's CTL joint ventures of its interest in two buildings and the related property to the mortgage lender in exchange for satisfaction of its obligations of the related loan in the first quarter of 2004. In addition, this decrease is due to vacancies and the consolidation of Sunnyvale in March 2004 and is partially offset by the consolidation of iStar Operating in July 2003 (see Note 6 to the Company's Consolidated Financial Statements).
Income from discontinued operationsFor the three months ended June 30, 2004 and 2003, operating income earned by the Company on CTL assets sold through September 30, 2004 (prior to their sale) and assets held for sale as of September 30, 2004, of approximately $3.1 million and $3.7 million, respectively, is classified as "discontinued operations."
Gain from discontinued operationsDuring the three months ended June 30, 2004 and the three months ended June 30, 2003, the Company did not dispose of any CTL assets.
Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003
Interest incomeInterest income increased by $27.8 million to $175.3 million for the six months ended June 30, 2004 from $147.5 million for the same period in 2003. This increase was primarily due to $65.8 million of interest income on new originations or additional fundings, offset by a $32.2 million decrease from the repayment of loans and other lending investments. This increase was partially offset by a decrease in interest income on the Company's variable-rate lending investments as a result of lower average one-month LIBOR rates of 1.13% in 2004, compared to 1.30% in 2003.
Operating lease incomeOperating lease income increased by $24.6 million to $145.8 million for the six months ended June 30, 2004 from $121.2 million for the same period in 2003. Of this increase, $28.9 million is attributable to new CTL investments. This increase is partially offset by $4.4 million of lower operating lease income due to vacancies and lower rental rates on certain CTL assets.
Other incomeOther income generally consists of prepayment penalties and realized gains from the early repayment of loans and other lending investments, asset management fees, lease termination fees, mortgage servicing fees and dividends on certain investments. The Company's experience has been that early repayments may increase in low interest rate environments. During the six months ended June 30, 2004, other income included realized gains on sale of lending investments of $6.8 million, income from loan repayments and prepayment penalties of $13.5 million, asset management, mortgage servicing and other fees of approximately $970,000 and other miscellaneous income such as dividend payments of $532,000.
During the six months ended June 30, 2003, other income included realized gains on sale of lending investments of $5.4 million, income from loan repayments and prepayment penalties of $5.1 million, asset management, mortgage servicing fees and other fees of approximately $2.0 million and other miscellaneous income such as dividend payments of $238,000.
Interest expenseFor the six months ended June 30, 2004, interest expense increased by $13.8 million to $110.5 million from $96.7 million for the same period in 2003. This increase was primarily due to higher average borrowings on the Company's debt obligations, term loans and secured notes, and by a $2.2 million increase in amortization of deferred financing costs on the Company's debt obligations in 2004 compared to the same period in 2003. This increase was partially offset by lower
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average one-month LIBOR rates, which averaged 1.13% in 2004 compared to 1.30% in 2003 on the unhedged portion of the Company's variable-rate debt.
Operating costscorporate tenant lease assetsFor the six months ended June 30, 2004, operating costs increased by $4.5 million from $7.4 million to $11.9 million for the same period in 2003. This increase is primarily related to new CTL investments and higher unrecoverable operating costs due to vacancies on certain CTL assets.
Depreciation and amortizationDepreciation and amortization increased by $6.7 million to $31.7 million for the six months ended June 30, 2004 from $25.0 million for the same period in 2003. This increase is primarily due to depreciation on new CTL investments and the consolidation of Sunnyvale (see Note 6 to the Company's Consolidated Financial Statements).
General and administrativeFor the six months ended June 30, 2004, general and administrative expenses increased by $9.2 million to $25.9 million, compared to $16.7 million for the same period in 2003. This increase is primarily due to the consolidation of iStar Operating and the increase in payroll and compensation expenses.
General and administrativestock-based compensationGeneral and administrative-stock-based compensation increased by $106.4 million for the six months ended June 30, 2004 compared to the same period in 2003. In the first quarter of 2004, the Company recognized a charge of approximately $106.9 million composed of $4.1 million for the performance-based vesting of 100,000 restricted shares granted under the Company's long-term incentive plan to the Chief Financial Officer, $86.0 million for the vesting of 2.0 million phantom shares on March 30, 2004 granted to the Chief Executive Officer, $10.1 million for the one-time award of Common Stock to the Chief Executive Officer, and $6.7 million for the vesting of 155,000 restricted shares granted to several employees.
Provision for loan lossesThe Company's charge for provision for loan losses increased to $5.0 million for the six months ended June 30, 2004 compared to $3.5 million in the same period in 2003. As more fully discussed in Note 4 to the Company's Consolidated Financial Statements, the Company has experienced minimal actual losses on its loan investments to date. The Company considers it prudent to reflect provisions for loan losses on a portfolio basis based upon the Company's assessment of general market conditions, the Company's internal risk management policies and credit risk rating system, industry loss experience, the Company's assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments. Accordingly, since its first full quarter operating its current business as a public company (the quarter ended June 30, 1998), management has reflected quarterly provisions for loan losses in its operating results.
Loss on early extinguishment of debtDuring the six months ended June 30, 2004, the Company incurred $755,000 of losses on early extinguishment of debt associated with the amortization of deferred financing costs related to the early repayment of the Company's $48.0 million term loan which had an original maturity of July 2008. The Company also incurred a loss of $251,000 associated the amortization of deferred financing costs related to the early termination of the Company's $300.0 million unsecured credit facility maturing July 2004. In addition, the Company had $11.5 million of losses on early extinguishment of debt associated with the prepayment penalties and amortization of deferred financing costs related to the redemption of $110.0 million of the Company's 8.75% Senior Notes due 2008. In addition, the Company incurred $428,000 of losses associated with the amortization of deferred financing costs related to the early repayment of the Company's $60.0 million term loan which had an original maturity of June 2004. The Company also incurred a loss of $287,000 associated with amortization of deferred financing costs related to the early repayment of the Company's $193.0 million term loan which had an original maturity of July 2004. All of these activities related to the Company's strategies of migrating its borrowings toward more unsecured debt and taking advantage of lower cost refinancing opportunities.
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During the six months ended June 30, 2003, the Company had no losses on early extinguishments of debt.
Equity in earnings (loss) from joint ventures and unconsolidated subsidiariesFor the six months ended June 30, 2004, equity in earnings (loss) from joint ventures and unconsolidated subsidiaries increased by $5.6 million to $5.4 million from approximately $(158,000) for the same period in 2003. This increase is primarily due to lease terminations and the subsequent conveyance by one of the Company's CTL joint ventures of its interest in two buildings and the related property to the mortgage lender in exchange for satisfaction of its obligations of the related loan in the first quarter of 2004. In addition, this increase was due to the consolidation of iStar Operating and is partially offset by the consolidation of Sunnyvale in March 2004 (see Note 6 to the Company's Consolidated Financial Statements).
Income from discontinued operationsFor the six months ended June 30, 2004 and 2003, operating income earned by the Company on CTL assets sold through September 30, 2004 (prior to their sale) and assets held for sale as of September 30, 2004, of approximately $6.1 million and $7.2 million, respectively, is classified as "discontinued operations."
Gain from discontinued operationsDuring the six months ended June 30, 2004, the Company disposed of one CTL asset for net proceeds of $2.8 million, and recognized a gain of approximately $136,000.
During the six months ended June 30, 2003, the Company disposed of one CTL asset for net proceeds of $4.0 million, and recognized a gain of approximately $264,000.
Adjusted Earnings
The Company measures its performance using adjusted earnings in addition to net income. Adjusted earnings represents net income allocable to common shareholders and HPU holders computed in accordance with GAAP, before depreciation, amortization, gain (loss) from discontinued operations, extraordinary items and cumulative effect of change in accounting principle. Adjustments for unconsolidated partnerships and joint ventures reflect the Company's share of adjusted earnings calculated on the same basis.
The Company believes that adjusted earnings is a helpful measure to consider, in addition to net income, because this measure helps the Company to evaluate how its commercial real estate finance business is performing compared to other commercial finance companies, without the effects of certain GAAP adjustments that are not necessarily indicative of current operating performance. The most significant GAAP adjustments that the Company excludes in determining adjusted earnings are depreciation and amortization. As a commercial finance company that focuses on real estate lending and corporate tenant leasing, the Company records significant depreciation on its real estate assets and amortization of deferred financing costs associated with its borrowings. These items do not affect the Company's daily operations, but they do impact financial results under GAAP. By measuring its performance using adjusted earnings and net income, the Company is able to evaluate how its business is performing both before and after giving effect to recurring GAAP adjustments such as depreciation and amortization and, in the case of adjusted earnings, after including earnings from its joint venture interests on the same basis and excluding gains or losses from the sale of assets that will no longer be part of its continuing operations.
Adjusted earnings is not an alternative or substitute for net income in accordance with GAAP as a measure of the Company's performance. Rather, the Company believes that adjusted earnings is an additional measure that helps analyze how its business is performing. This measure is also used to track compliance with covenants in the Company's borrowing arrangements because several of its material borrowing arrangements have covenants based upon this measure. Adjusted earnings should not be
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viewed as an alternative measure of either the Company's liquidity or funds available for its cash needs or for distribution to its shareholders. In addition, the Company may not calculate adjusted earnings in the same manner as other companies that use a similarly titled measure.
|
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004 |
2003 |
2004 |
2003 |
|||||||||
|
(In thousands) |
||||||||||||
|
(unaudited) |
||||||||||||
Adjusted earnings: | |||||||||||||
Net income allocable to common shareholders and HPU holders | $ | 72,439 | $ | 60,519 | $ | 17,723 | $ | 119,245 | |||||
Add: Joint venture income | 41 | 251 | 5 | 500 | |||||||||
Add: Depreciation | 17,081 | 13,711 | 33,019 | 26,983 | |||||||||
Add: Joint venture depreciation and amortization | 490 | 982 | 2,022 | 1,994 | |||||||||
Add: Amortization of deferred financing costs | 8,859 | 6,957 | 19,171 | 13,408 | |||||||||
Less: Gains from discontinued operations | | | (136 | ) | (264 | ) | |||||||
Adjusted diluted earnings allocable to common shareholders and HPU holders(1)(2)(3)(4) | $ | 98,910 | $ | 82,420 | $ | 71,804 | $ | 161,866 | |||||
Weighted average diluted common shares outstanding(5) | 112,246 | 102,687 | 112,324 | 101,945 | |||||||||
Explanatory Notes:
Risk Management
First Dollar and Last Dollar Exposure One component of the Company's risk management assessment is an analysis of the Company's first and last dollar loan-to-value percentage with respect to the facilities or companies the Company finances. First dollar loan-to-value represents the weighted average beginning point for the Company's lending exposure in the aggregate capitalization of the underlying facilities or companies it finances. Last dollar loan-to-value represents the weighted average ending point for the Company's lending exposure in the aggregate capitalization of the underlying facilities or companies it finances.
Loans and Other Lending Investments Credit StatisticsThe table below summarizes the Company's loans and other lending investments that are more than 90-days past due in scheduled payments and details the provision for loan losses associated with the Company's lending investments for June 30,
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2004, and December 31, 2003, as well as charge-offs for the six months ended June 30, 2004, and the year ended December 31, 2003 (in thousands):
|
As of June 30, 2004 |
As of December 31, 2003 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
$ |
% |
$ |
% |
|||||||
Carrying value of loans past due 90 days or more/ As a percentage of total assets | $ | 27,526 | 0.36 | % | $ | 27,480 | 0.41 | % | |||
Provision for loan losses/As a percentage of total assets | 38,436 | 0.51 | % | 33,436 | 0.50 | % | |||||
Net charge-offs/As a percentage of total assets | | | 3,314 | 0.05 | % |
Non-Accrual LoansThe Company transfers loans to non-accrual status at such time as: (1) management believes that the potential risk exists that scheduled debt service payments will not be met within the coming 12 months; (2) the loan becomes 90 days delinquent; (3) management determines the borrower is incapable of, or ceased efforts toward, curing the cause of an impairment; or (4) the net realizable value of the loan's underlying collateral approximates the Company's carrying value of such loan. Interest income is recognized only upon actual cash receipt for loans on non-accrual status. As of June 30, 2004, the Company has two assets on non-accrual status with an aggregate carrying value of $27.5 million, or 0.36% of total assets, compared to 0.41% at December 31, 2003. One of these two borrowers remains current on all of the debt service payments due to the Company. Management believes there is adequate collateral to support the book values of the assets.
Watch List AssetsThe Company conducts a quarterly comprehensive credit review, resulting in an individual risk rating being assigned to each asset. This review is designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis as an "early warning system." As of June 30, 2004, the Company had four assets on its credit watch list, including the two non-accrual loans discussed above, with an aggregate carrying value of $76.1 million, or 1.00% of total assets, compared to 1.55% at December 31, 2003.
Liquidity and Capital Resources
The Company requires significant capital to fund its investment activities and operating expenses. The Company has sufficient 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 or increase capital committed to its operations. However, the Company believes that its access to significant capital resources and financing will enable the Company to meet current and anticipated capital requirements.
The Company believes that its existing sources of funds will be adequate for purposes of meeting its short- and long-term liquidity needs. The Company's ability to meet its long-term (i.e., beyond one year) liquidity requirements is subject to obtaining additional debt and equity financing. Any decision by the Company's lenders and investors to provide the Company with financing will depend upon a number of factors, such as the Company's 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 capital commitments and the relative attractiveness of alternative investment or lending opportunities.
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The following table outlines the contractual obligations related to the Company's long-term debt agreements and operating lease obligations as of June 30, 2004. There are no other long-term liabilities of the Company that would constitute a contractual obligation.
|
|
Principal Payments Due By Period(1) |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total |
Less Than 1 Year |
2-3 Years |
4-5 Years |
6-10 Years |
After 10 Years |
|||||||||||||
|
(In thousands) |
||||||||||||||||||
Long-Term Debt Obligations: | |||||||||||||||||||
Secured revolving credit facilities | $ | 277,446 | $ | 10,000 | $ | 267,446 | $ | | $ | | $ | | |||||||
Unsecured revolving credit facilities | 783,000 | | | 783,000 | | | |||||||||||||
Secured term loans | 738,546 | 26,751 | 251,540 | 291,349 | 77,878 | 91,028 | |||||||||||||
iStar Asset Receivables secured notes(2) | 1,099,255 | | 204,604 | | 894,651 | | |||||||||||||
Unsecured notes | 2,125,000 | | 250,000 | 775,000 | 1,000,000 | 100,000 | |||||||||||||
Total | 5,023,247 | 36,751 | 973,590 | 1,849,349 | 1,972,529 | 191,028 | |||||||||||||
Operating Lease Obligations:(3) | 16,066 | 2,879 | 5,878 | 4,760 | 2,549 | | |||||||||||||
Total | $ | 5,039,313 | $ | 39,630 | $ | 979,468 | $ | 1,854,109 | $ | 1,975,078 | $ | 191,028 | |||||||
Explanatory Notes:
The Company has four LIBOR-based secured revolving credit facilities with an aggregate maximum capacity of $2.0 billion, of which $277.4 million was drawn as of June 30, 2004. Availability under these facilities is based on collateral provided under a borrowing base calculation. At June 30, 2004, the Company also had an unsecured credit facility totaling $850.0 million which bears interest at LIBOR + 1.00% per annum and matures in April 2008. At June 30, 2004, the Company had $783.0 million drawn under this facility (see Note 7 to the Company's Consolidated Financial Statements).
The Company's debt obligations contain covenants that are both financial and non-financial in nature. Significant financial covenants include limitations on the Company's ability to incur indebtedness beyond specified levels, restrictions on the Company's ability to incur liens on assets and limitations on the amount and type of restricted payments, such as repurchases of its own equity securities, that the Company makes. Significant non-financial covenants include a requirement in its publicly-held debt securities that the Company offer to repurchase those securities at a premium if the Company undergoes a change of control. As of June 30, 2004, the Company believes it is in compliance with all financial and non-financial covenants on its debt obligations.
Unencumbered Assets/Unsecured Debt The Company has made and will continue to make progress in migrating its balance sheet towards more unsecured debt, which generally results in a corresponding reduction of secured debt and an increase in unencumbered assets. The exact timing in which the Company will issue or borrow unsecured debt will be subject to market conditions. The following table
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shows the ratio of unencumbered assets to unsecured debt at June 30, 2004 and December 31, 2003 (in thousands):
|
As of June 30, 2004 |
As of December 31, 2003 |
||||
---|---|---|---|---|---|---|
Total Unencumbered Assets | $ | 4,553,995 | $ | 2,167,388 | ||
Total Unsecured Debt(1) | $ | 2,908,000 | $ | 1,315,000 | ||
Unencumbered Assets/Unsecured Debt(2) | 157% | 165% |
Explanatory Notes:
Capital Markets FinancingsThe Company was an active issuer in the capital markets in the six months ended June 30, 2004. The continued strength of the Company's stock price and the low interest rate environment provided the Company with the opportunity to issue equity and debt securities on attractive pricing terms. During the six months ended June 30, 2004, the Company issued $850.0 million aggregate principal amount of fixed-rate Senior Notes bearing interest at annual rates ranging from 4.875% to 5.700% and maturing between 2009 and 2014, and $200.0 million of variable-rate Senior Notes bearing interest at annual rates of three-month LIBOR + 1.25% and maturing in 2007. The Company issued 8.3 million shares of preferred stock in two series with cumulative annual dividend rates of 7.50%.
On April 19, 2004, the Company completed a new $850.0 million unsecured revolving credit facility with 19 banks and financial institutions. The new facility has a three-year initial term with a one-year extension at the Company's option. The facility bears interest, based upon the Company's current credit ratings, at a rate of LIBOR + 1.00% and has a 25 basis point annual facility fee. This new credit facility replaces the existing $300.0 million unsecured credit facility maturing July 2004.
During the 12 months ended December 31, 2003, the Company issued $685.0 million aggregate principal amount of fixed-rate Senior Notes bearing interest at annual rates ranging from 6.00% to 7.00% and maturing between 2008 and 2013. All of the shares of preferred stock have a liquidation preference of $25.00 per share. The Company issued 12.8 million shares of preferred stock in three series with cumulative annual dividend rates ranging from 7.650% to 7.875%. The Company also issued 5.0 million shares of Common Stock in 2003 at a price to the public of $38.50 per share.
The Company primarily used the proceeds from the issuances of securities described above to repay secured indebtedness as it migrates its balance sheet towards more unsecured debt and to refinance higher yielding obligations. During the six months ended June 30, 2004, the Company redeemed approximately $110.0 million aggregate principal amount of its outstanding 8.75% Senior Notes due 2008 at a price of 108.75% of par. In connection with this redemption, the Company recognized a charge to income of $11.5 million included in "Loss on early extinguishment of debt" on the Company's Consolidated Statements of Operations. The Company also retired its 3.3 million shares of Series H Variable Rate Cumulative Redeemable Preferred Stock. In addition, the Company redeemed all of its 2.0 million shares of 9.375% Series B Cumulative Redeemable Preferred Stock and all of its 1.3 million shares of 9.200% Series C Cumulative Redeemable Preferred Stock. In connection with this redemption, the Company recognized a charge to net income allocable to common shareholders and HPU holders of approximately $9.0 million included in "Preferred dividend requirements" on the Company's Consolidated Statements of Operations.
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During the 12 months ended December 31, 2003, the Company retired all of its 4.0 million shares of 9.50% Series A Cumulative Redeemable Preferred Stock and the 6.75% Dealer Remarketable Securities of its Leasing Subsidiary.
Other Financing ActivitiesOn March 12, 2004, one of the Company's $700.0 million secured facilities was amended to reduce the maximum amount available to $250.0 million, to extend the maturity to March 2005 and to reduce the stated interest rate on first mortgages and CTL assets to LIBOR + 1.50% and on subordinate and mezzanine lending investments to LIBOR + 2.05%.
On March 10, 2004, the Company repaid its $193.0 million term loan financing secured by 15 CTL assets with an original maturity of July 2004.
On January 13, 2004, the Company closed $200.0 million of term financing with a leading financial institution that is secured by certain corporate bond investments and other lending securities. A number of these investments were previously financed under existing credit facilities. The new facility bears interest at LIBOR + 1.05%-1.50% and has a final maturity date of January 2006.
On September 29, 2003, the Company closed a $135.0 million term loan secured by a CTL asset it acquired the same day. The loan has a five-year term and bears interest at LIBOR + 1.75%.
On May 21, 2003, a wholly-owned subsidiary of the Company issued iStar Asset Receivables ("STARs"), Series 2003-1, the Company's proprietary match funding program, consisting of $645.8 million of investment-grade bonds secured by the subsidiary's structured finance and CTL assets, which had an aggregate carrying value of approximately $738.1 million 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 weighted average interest rate on the bonds, on an all-floating rate basis, was approximately LIBOR + 0.47% at inception. For accounting purposes, this transaction was treated as a secured financing: the underlying assets and STARs liabilities remained on the Company's Consolidated Balance Sheets, and no gain on sale was recognized.
Hedging ActivitiesThe Company has variable-rate lending assets and variable-rate debt obligations. These assets and liabilities create a natural hedge against changes in variable interest rates. This means that as interest rates increase, the Company earns more on its variable-rate lending assets and pays more on its variable-rate debt obligations and, conversely, as interest rates decrease, the Company earns less on its variable-rate lending assets and pays less on its variable-rate debt obligations. When the amount of the Company's variable-rate debt obligations exceeds the amount of its variable-rate lending assets, the Company utilizes derivative instruments to limit the impact of changing interest rates on its net income. The Company does not use derivative instruments to hedge assets or for speculative purposes. The derivative instruments the Company uses are typically in the form of interest rate swaps and interest rate caps. Interest rate swaps effectively change variable-rate debt obligations to fixed-rate debt obligations. Interest rate caps effectively limit the maximum interest rate on variable-rate debt obligations.
In addition, when appropriate the Company enters into interest rate swaps that convert fixed-rate debt to variable rate in order to mitigate the risk of changes in fair value of the fixed-rate debt obligations.
The primary risks from the Company's use of derivative instruments are the risks that a counterparty to a hedging arrangement could default on its obligation and the risk that the Company may have to pay certain costs, such as transaction fees or breakage costs, if a hedging arrangement is terminated by the Company. As a matter of policy, the Company enters into hedging arrangements with counterparties that are large, creditworthy financial institutions typically rated at least "A" by Standard & Poor's ("S&P") and "A2" by Moody's Investors Service ("Moody's"). The Company's
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hedging strategy is approved and monitored by the Company's Audit Committee on behalf of its Board of Directors and may be changed by the Board of Directors without stockholder approval.
The Company has entered into the following cash flow and fair value hedges that are outstanding as of June 30, 2004. The net value (liability) associated with these hedges is reflected on the Company's Consolidated Balance Sheets (in thousands).
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
Estimated Value at June 30, 2004 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 235,000 | 1.135 | % | 3/11/04 | 9/15/04 | $ | 185 | |||||
Pay-Fixed Swap | 200,000 | 1.144 | % | 3/11/04 | 9/15/04 | 152 | |||||||
Pay-Fixed Swap | 200,000 | 1.144 | % | 3/11/04 | 9/15/04 | 152 | |||||||
Pay-Fixed Swap | 125,000 | 2.885 | % | 1/23/03 | 6/25/06 | 226 | |||||||
Pay-Fixed Swap | 125,000 | 2.838 | % | 2/11/03 | 6/25/06 | 343 | |||||||
Pay-Fixed Swap | 75,000 | 5.580 | % | 11/4/99 | (1) | 12/1/04 | (1,488 | ) | |||||
Pay-Floating Swap | 200,000 | 4.381 | % | 12/17/03 | 12/15/10 | (6,246 | ) | ||||||
Pay-Floating Swap | 105,000 | 3.678 | % | 1/15/04 | 1/15/09 | (3,191 | ) | ||||||
Pay-Floating Swap | 100,000 | 4.345 | % | 12/17/03 | 12/15/10 | (3,327 | ) | ||||||
Pay-Floating Swap | 100,000 | 3.878 | % | 11/27/02 | 8/15/08 | 520 | |||||||
Pay-Floating Swap | 100,000 | 3.713 | % | 1/15/04 | 1/15/09 | (2,878 | ) | ||||||
Pay-Floating Swap | 100,000 | 3.686 | % | 1/15/04 | 1/15/09 | (3,000 | ) | ||||||
Pay-Floating Swap | 50,000 | 3.810 | % | 11/27/02 | 8/15/08 | 119 | |||||||
Pay-Floating Swap | 50,000 | 4.290 | % | 12/17/03 | 12/15/10 | (1,820 | ) | ||||||
Pay-Floating Swap | 45,000 | 3.684 | % | 1/15/04 | 1/15/09 | (1,355 | ) | ||||||
LIBOR Cap | 345,000 | 8.000 | % | 5/22/02 | 5/28/14 | 7,020 | |||||||
LIBOR Cap | 135,000 | 6.000 | % | 9/29/03 | 10/15/06 | 140 | |||||||
LIBOR Cap | 75,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
LIBOR Cap | 35,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
LIBOR Cap | 24,000 | 9.000 | % | 9/25/03 | 11/9/04 | | |||||||
Total Estimated Value | $ | (14,448 | ) | ||||||||||
Explanatory Note:
Between January 1, 2003 and June 30, 2004, the Company also had outstanding the following cash flow hedges that have expired or been settled (in thousands):
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
|||||
---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 125,000 | 7.058 | % | 6/15/00 | 6/25/03 | |||
Pay-Fixed Swap | 125,000 | 7.055 | % | 6/15/00 | 6/25/03 | ||||
Pay-Fixed Swap | 100,000 | 4.139 | % | 9/29/03 | 1/2/11 | ||||
Pay-Fixed Swap | 100,000 | 4.643 | % | 9/29/03 | 1/2/14 | ||||
Pay-Fixed Swap | 100,000 | 4.484 | % | 1/16/04 | 5/1/14 | ||||
Pay-Fixed Swap | 50,000 | 4.502 | % | 1/16/04 | 5/1/14 | ||||
Pay-Fixed Swap | 50,000 | 4.500 | % | 1/16/04 | 5/1/14 |
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On March 11, 2004, the Company entered into three pay-fixed interest rate swaps all with six-month terms, rates of 1.135%, 1.144% and 1.144% and notional amounts of $235.0 million, $200.0 million and $200.0 million, respectively.
On January 16, 2004, the Company entered into three forward starting swaps all with 10-year terms and rates of 4.484%, 4.502% and 4.500% and notional amounts of $100.0 million, $50.0 million and $50.0 million, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These three swaps were settled in connection with the Company's issuance of $250.0 million of 10-year Senior Notes in March 2004.
On January 15, 2004, in connection with the Company's fixed-rate corporate bonds, the Company entered into four pay-floating interest rate swaps struck at 3.678%, 3.713%, 3.686% and 3.684% with notional amounts of $105.0 million, $100.0 million, $100.0 million and $45.0 million, respectively, and maturing on January 15, 2009. The Company pays six-month LIBOR and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of five-year Senior Notes attributable to changes in LIBOR. For accounting purposes, the difference between the fixed rate received and the LIBOR rate paid on the notional amount of the swap is recorded as "Interest expense" on the Company's Consolidated Statements of Operations. In addition, the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount on a quarterly basis.
During 2003, the Company entered into two 90-day forward starting swaps each having a $100.0 million notional amount. These pay-fixed swaps which were effective in September 2003, had rates of 4.139% and 4.643%, had seven-year and 10-year terms, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These two swaps were settled in connection with the Company's issuance of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes. In addition, effective in September 2003, the Company entered into a $135.0 million cap with a rate of 6.00% to hedge the Company's current outstanding floating-rate debt. This cap has a three-year term. Further, the Company entered into two $125.0 million forward starting swaps. These pay-fixed swaps were effective in June 2003 and replaced the two $125.0 million pay-fixed swaps mentioned above. The two new pay-fixed swaps have a three-year term and expire on June 25, 2006.
In addition, in connection with a portion of the Company's fixed-rate corporate bonds, the Company entered into three pay-floating interest rate swaps in December 2003 struck at 4.381%, 4.345% and 4.29% with notional amounts of $200.0 million, $100.0 million and $50.0 million, respectively, and maturing on December 15, 2010 and entered into two pay-floating interest rate swaps in November 2002 struck at 3.8775% and 3.81% with notional amounts of $100.0 million and $50.0 million, respectively, and maturing on August 15, 2008. The Company pays six-month LIBOR on the swaps entered into in December 2003 and one-month LIBOR on the swaps entered into in November 2002 and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes attributable to changes in LIBOR. For accounting purposes, the difference between the fixed rate received and the LIBOR rate paid on the notional amount of the swap is recorded as "Interest expense" on the Company's Consolidated Statements of Operations. In addition, the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount on a quarterly basis.
In connection with STARs, Series 2003-1 in May 2003, the Company entered into a LIBOR interest rate cap struck at 6.95% in the notional amount of $270.6 million, and simultaneously sold a LIBOR interest rate cap with the same terms. Since these instruments do not change the Company's net interest rate risk exposure, they do not qualify as hedges and changes in their respective values are
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charged to earnings. As the terms of these arrangements are substantially the same, the effects of a revaluation of these two instruments substantially offset one another.
In connection with STARs, Series 2002-1 in May 2002, the Company entered into a LIBOR interest rate cap struck at 8.00% in the notional amount of $345.0 million. The Company utilizes the provisions of SFAS No. 133 with respect to such instruments. SFAS No. 133 provides that the up-front fees paid on option-based products such as caps should be expensed into earnings based on the allocation of the premium to the affected periods as if the agreement were a series of "caplets." These allocated premiums are then reflected as a charge to income (as part of interest expense) in the affected period. On May 28, 2002, in connection with the STARs, Series 2002-1 transaction, the Company paid a premium of $13.7 million for this interest rate cap. Using the "caplet" methodology discussed above, amortization of the cap premium is dependent upon the actual value of the caplets at inception.
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 term loan bears interest at 7.44% per annum, payable monthly, and amortizes over an approximately 22-year schedule. The 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 term loan over its effective ten-year term.
Off-Balance Sheet TransactionsThe Company is not dependent on the use of any off-balance sheet financing arrangements for liquidity. As of June 30, 2004, the Company had investments in two CTL joint ventures accounted for under the equity method, which had total debt obligations outstanding of approximately $102.5 million. The Company's pro rata share of the ventures' third-party debt was approximately $41.6 million (see Note 6 to the Company's Consolidated Financial Statements). These ventures were formed for the purpose of operating, acquiring and in certain cases, developing CTL facilities. The debt obligations of these joint ventures are non-recourse to the ventures and the Company, and mature between fiscal years 2005 and 2011. As of June 30, 2004, the debt obligations consisted of four term loans bearing fixed rates per annum ranging from 7.61% to 8.43%.
The Company's STARs securitizations are all on-balance sheet financings.
The Company has certain discretionary and non-discretionary unfunded commitments related to its loans and other lending investments that it may need to, or choose to, fund in the future. Discretionary commitments are those under which the Company has sole discretion with respect to future funding. Non-discretionary commitments are those that the Company is generally obligated to fund at the request of the borrower or upon the occurrence of events outside of the Company's direct control. As of June 30, 2004, the Company had 27 loans with unfunded commitments totaling $467.6 million, of which $265.1 million was discretionary and $202.5 million was non-discretionary.
Ratings TriggersThe $850.0 million unsecured revolving credit facility that the Company held in place at June 30, 2004, bore interest at LIBOR + 1.00% per annum based on the Company's senior unsecured credit ratings of BB+ from S&P, Ba1 from Moody's and BBB- from Fitch Ratings. If the Company achieved a higher rating from either S&P or Moody's, the facility's interest rate would have improved to LIBOR + 0.875% per annum. There were no other ratings triggers in any of the Company's debt instruments or other operating or financial agreements at June 30, 2004.
On July 30, 2002, the Company's senior unsecured credit rating was upgraded to an investment grade rating of BBB- from BB+ by Fitch Ratings. In addition, on July 31, 2002 and August 1, 2002, Moody's and S&P respectively raised their ratings outlook for the Company's senior unsecured credit rating to "positive." On October 22, 2003, Moody's confirmed its rating of Ba1 and its ratings outlook
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of "positive" for the Company. On November 20, 2003, S&P also reaffirmed its rating of BB+ and its ratings outlook of "positive" for the Company.
Transactions with Related PartiesThe Company has an investment in iStar Operating Inc. ("iStar Operating"), a taxable subsidiary that, through a wholly-owned subsidiary, services the Company's loans and certain loan portfolios owned by third parties. The Company owns all of the non-voting preferred stock and a 95.00% economic interest in iStar Operating. The common shareholder, an entity controlled by a former director of the Company, is the owner of all the voting common stock and a 5.00% economic interest in iStar Operating. As of June 30, 2004, there have never been any distributions to the common shareholder, nor does the Company expect to make any in the future. At any time, the Company has the right to acquire all of the common stock of iStar Operating at fair market value, which the Company believes to be nominal.
iStar Operating has elected to be treated as a taxable REIT subsidiary for purposes of maintaining compliance with the REIT provisions of the Code. Prior to July 1, 2003 it was accounted for under the equity method for financial statement reporting purposes and was presented in "Investments in and advances to joint ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance Sheets. As of July 1, 2003, the Company consolidates this entity as a VIE (see Note 3 to the Company's Consolidated Financial Statements) with no material impact. Prior to its consolidation, the Company charged an allocated portion of its general overhead expenses to iStar Operating based on the number of employees at iStar Operating as a percentage of the Company's total employees. These general overhead expenses were in addition to the direct general and administrative costs of iStar Operating. As of June 30, 2004, iStar Operating had no debt obligations.
In addition, the Company had an investment in TriNet Management Operating Company, Inc. ("TMOC"), an entity originally formed to make a $2.0 million investment in the convertible debt securities of a real estate company which trades on the Mexican Stock Exchange. This investment was made by TriNet prior to its acquisition by the Company in 1999. On June 30, 2003, the $2.0 million investment was fully repaid and during the third quarter 2003, the entity was liquidated.
As more fully described in Note 10 to the Company's Consolidated Financial Statements certain affiliates of SOF IV and the Company's Executive Officer have reimbursed the Company for the value of restricted shares awarded to the Company's former President in excess of 350,000 shares.
DRIP/Stock Purchase PlanThe Company maintains a dividend reinvestment and direct stock purchase plan. Under the dividend reinvestment component of the plan, the Company's shareholders may purchase additional shares of Common Stock without payment of brokerage commissions or service charges by automatically reinvesting all or a portion of their Common Stock cash dividends. Under the direct stock purchase component of the plan, the Company's shareholders and new investors may purchase shares of Common Stock directly from the Company without payment of brokerage commissions or service charges. All purchases of shares in excess of $10,000 per month pursuant to the direct purchase component are at the Company's sole discretion. Shares issued under the plan may reflect a discount of up to 3.00% from the prevailing market price of the Company's Common Stock. The Company is authorized to issue up to 8.0 million shares of Common Stock pursuant to the dividend reinvestment and direct stock purchase plan. During the three months ended June 30, 2004 and 2003, the Company issued a total of approximately 17,000 and 750,000 shares of its Common Stock, respectively, and during the six months ended June 30, 2004 and 2003, the Company issued a total of approximately 393,000 and 1.4 million shares of its Common Stock, respectively, through the direct stock purchase component of the plan. Net proceeds during the three months ended June 30, 2004 and 2003 were approximately $640,000 million and $25.6 million, respectively, and $16.1 million and $42.9 million during the six months ended June 30, 2004 and 2003, respectively. There are approximately 3.2 million shares available for issuance under the plan as of June 30, 2004.
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Stock Repurchase ProgramThe 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 or loan repayments 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 June 30, 2004, the Company had repurchased a total of approximately 2.3 million shares at an aggregate cost of approximately $40.7 million. The Company has not repurchased any shares under the stock repurchase program since November 2000.
Critical Accounting Policies
The Company's Consolidated Financial Statements include the accounts of the Company and all majority-owned and controlled subsidiaries. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe that there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Management has the obligation to ensure that its policies and methodologies are in accordance with GAAP. During the six months ended June 30, 2004, management reviewed and evaluated its critical accounting policies and believes them to be appropriate. The Company's accounting policies are described in Note 3 to the Company's Consolidated Financial Statements. The following are significant events relating to critical accounting policies during the six months ended June 30, 2004:
Executive CompensationThe Company's accounting policies generally provide cash compensation to be estimated and recognized over the period of service. With respect to stock-based compensation arrangements, as of July 1, 2002 (with retroactive application to the beginning of the calendar year), the Company has adopted the fair value method allowed under SFAS No. 123 on a prospective basis, which values options on the date of grant and recognizes an expense equal to the fair value of the option multiplied by the number of options granted over the related service period. Prior to the third quarter 2002, the Company elected to use APB 25 accounting, which measured the compensation charges based on the intrinsic value of such securities when they become fixed and determinable, and recognized such expense over the related service period. These arrangements are often complex and generally structured to align the interests of management with those of the Company's shareholders. See Note 10 to the Company's Consolidated Financial Statements for a detailed discussion of such arrangements and the related accounting effects.
During 2001, the Company entered into a three-year employment agreement with its Chief Executive Officer. In addition, during 2002 the Company entered into a three-year employment agreement with its Chief Financial Officer. See Note 10 to the Company's Consolidated Financial Statements for a more detailed description of these employment agreements.
On March 30, 2004, 2.0 million of the phantom shares awarded to the Chief Executive Officer became fully vested. The market price of the Common Stock on March 30, 2004 was $42.40 and the Company incurred a one-time charge to earnings at that time of approximately $86.0 million (the fair market value of the 2.0 million shares at $42.40 per share plus the Company's share of taxes). The Company paid the Chief Executive Officer $53.9 million in cash with the remainder in the form of 728,552 shares of the Company's Common Stock.
115
On February 11, 2004, the Company entered into a new employment agreement with its Chief Executive Officer which took effect upon the expiration of the old agreement. The new agreement has an initial term of three years and provides for the following compensation:
In addition, the Chief Executive Officer purchased an 80.00% interest in the Company's 2006 High Performance Unit Program for directors and executive officers. This performance program was approved by the Company's shareholders in 2003 and is described in detail in the Company's 2003 annual proxy statement. The purchase price to be paid by the Chief Executive Officer is based upon a valuation prepared by an independent investment-banking firm. The interests purchased by the Chief Executive Officer will only have nominal value to him unless the Company achieves total shareholder returns in excess of those achieved by peer group indices, all as more fully described in the Company's 2003 annual proxy statement.
New Accounting Standards
In December 2003, the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition" which supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21. The Company adopted the provisions of this statement immediately, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," issued during the third quarter of 2003, provides guidance on revenue recognition for revenues derived from a single contract that contain multiple products or services. EITF 00-21 also provides additional requirements to determine when these revenues may be recorded separately for accounting purposes. The Company adopted EITF 00-21 on July 1, 2003, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity." This standard requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatorily redeemable financial instruments, (2) obligations to repurchase the issuer's equity shares by transferring assets; and (3) certain obligations to issue a variable number of shares. The FASB recently issued FASB Staff Position ("FSP") 150-3, which defers the provisions of paragraphs 9 and 10 of SFAS No. 150 indefinitely as they apply to mandatorily redeemable noncontrolling interests associated with finite-lived entities. The Company adopted the provisions of
116
this statement, as required, on July 1, 2003, and it did not have a significant financial impact on the Company's Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of ARB 51. FIN 46 provides guidance on identifying entities for which control is achieved through means other than through voting rights (a "variable interest entity" or "VIE"), and how to determine when and which business enterprise should consolidate a VIE. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The transitional disclosure requirements took effect immediately and were required for all financial statements initially issued or modified after January 31, 2003. Immediate consolidation is required for VIEs entered into or modified after February 1, 2003 in which the Company is deemed the primary beneficiary. For VIEs in which the Company entered into prior to February 1, 2003, FIN 46 was deferred to the quarter ended March 31, 2004. In December 2003, the FASB issued a revised FIN 46 that modifies and clarifies various aspects of the original Interpretation. FIN 46 applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of controlling financial interest, (2) the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interest. The adoption of the additional consolidation provisions of FIN 46 did not have a material impact on the Company's Consolidated Financial Statements (see Note 6).
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based CompensationTransition and Disclosure," an amendment of FASB Statement No. 123 ("SFAS No. 123"). This statement provides alternative transition methods for a voluntary change to the fair value basis of accounting for stock-based employee compensation. However, this Statement does not permit the use of the original SFAS No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation, description of transition method utilized and the effect of the method used on reported results. The Company adopted SFAS No. 148 with retroactive application to grants made subsequent to January 1, 2002 with no material effect on the Company's Consolidated Financial Statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies," Statement of Financial Accounting Standards No. 57, "Related Party Disclosures," Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" and rescinds FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5." It requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee regardless if the Company receives separately identifiable consideration (e.g., a premium). The disclosure requirements are effective December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company's Consolidated Financial Statements, nor is it expected to have a material impact in the future.
117
Report of Independent Registered Public Accounting Firm
To
the Board of Directors and Shareholders
of iStar Financial Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of iStar Financial Inc. and its subsidiaries (the "Company") at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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
February 20, 2004, except for Note 17, which is as of March 12, 2004 and except for Note 18, which is as of December 7, 2004
118
iStar Financial Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
|
As of December 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2003 |
2002 |
||||||
ASSETS | ||||||||
Loans and other lending investments, net | $ | 3,702,674 | $ | 3,050,342 | ||||
Corporate tenant lease assets, net | 2,535,885 | 2,291,805 | ||||||
Investments in and advances to joint ventures and unconsolidated subsidiaries | 25,019 | 30,611 | ||||||
Assets held for sale | 24,800 | 28,501 | ||||||
Cash and cash equivalents | 80,090 | 15,934 | ||||||
Restricted cash | 57,665 | 40,211 | ||||||
Accrued interest and operating lease income receivable | 26,076 | 26,804 | ||||||
Deferred operating lease income receivable | 51,447 | 36,739 | ||||||
Deferred expenses and other assets | 156,934 | 90,750 | ||||||
Total assets | $ | 6,660,590 | $ | 5,611,697 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||
Liabilities: | ||||||||
Accounts payable, accrued expenses and other liabilities | $ | 126,524 | $ | 117,001 | ||||
Dividends payable | | 5,225 | ||||||
Debt obligations | 4,113,732 | 3,461,590 | ||||||
Total liabilities | 4,240,256 | 3,583,816 | ||||||
Commitments and contingencies | | | ||||||
Minority interest in consolidated entities |
5,106 |
2,581 |
||||||
Shareholders' equity: |
||||||||
Series A Preferred Stock, $0.001 par value, liquidation preference $50.00 per share, 0 and 4,400 shares issued and outstanding at December 31, 2003 and 2002, respectively | | 4 | ||||||
Series B Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 2,000 shares issued and outstanding at December 31, 2003 and 2002 | 2 | 2 | ||||||
Series C Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 1,300 shares issued and outstanding at December 31, 2003 and 2002 | 1 | 1 | ||||||
Series D Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and outstanding at December 31, 2003 and 2002 | 4 | 4 | ||||||
Series E Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,600 and 0 shares issued and outstanding at December 31, 2003 and 2002, respectively | 6 | | ||||||
Series F Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 and 0 shares issued and outstanding at December 31, 2003 and 2002, respectively | 4 | | ||||||
Series G Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 3,200 and 0 shares issued and outstanding at December 31, 2003 and 2002, respectively | 3 | | ||||||
High Performance Units | 5,131 | 1,359 | ||||||
Common Stock, $0.001 par value, 200,000 shares authorized, 107,215 and 98,114 shares issued and outstanding at December 31, 2003 and 2002, respectively | 107 | 98 | ||||||
Warrants and options | 20,695 | 20,322 | ||||||
Additional paid-in capital | 2,678,772 | 2,281,636 | ||||||
Retained earnings (deficit) | (242,449 | ) | (227,769 | ) | ||||
Accumulated other comprehensive income (losses) (See Note 12) | 1,008 | (2,301 | ) | |||||
Treasury stock (at cost) | (48,056 | ) | (48,056 | ) | ||||
Total shareholders' equity | 2,415,228 | 2,025,300 | ||||||
Total liabilities and shareholders' equity | $ | 6,660,590 | $ | 5,611,697 | ||||
The accompanying notes are an integral part of the financial statements.
119
iStar Financial Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
|
For the Year Ended December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2003 |
2002* |
2001* |
|||||||||
Revenue: | ||||||||||||
Interest income | $ | 304,392 | $ | 255,631 | $ | 254,119 | ||||||
Operating lease income | 247,904 | 225,053 | 171,149 | |||||||||
Other income | 36,677 | 27,993 | 31,000 | |||||||||
Total revenue | 588,973 | 508,677 | 456,268 | |||||||||
Costs and expenses: | ||||||||||||
Interest expense | 192,295 | 184,933 | 169,586 | |||||||||
Operating costscorporate tenant lease assets | 17,585 | 12,759 | 11,419 | |||||||||
Depreciation and amortization | 52,338 | 44,117 | 32,170 | |||||||||
General and administrative | 38,153 | 30,449 | 24,151 | |||||||||
General and administrativestock-based compensation expense | 3,633 | 17,998 | 3,574 | |||||||||
Provision for loan losses | 7,500 | 8,250 | 7,000 | |||||||||
Loss on early extinguishment of debt | | 12,166 | 1,620 | |||||||||
Total costs and expenses | 311,504 | 310,672 | 249,520 | |||||||||
Net income before equity in (loss) earnings from joint ventures and unconsolidated subsidiaries, minority interest and other items | 277,469 | 198,005 | 206,748 | |||||||||
Equity in (loss) earnings from joint ventures and unconsolidated subsidiaries | (4,284 | ) | 1,222 | 7,361 | ||||||||
Minority interest in consolidated entities | (249 | ) | (162 | ) | (218 | ) | ||||||
Cumulative effect of change in accounting principle (See Note 3) | | | (282 | ) | ||||||||
Net income from continuing operations | 272,936 | 199,065 | 213,609 | |||||||||
Income from discontinued operations | 14,054 | 15,488 | 15,158 | |||||||||
Gain from discontinued operations | 5,167 | 717 | 1,145 | |||||||||
Net income | 292,157 | 215,270 | 229,912 | |||||||||
Preferred dividend requirements | (36,908 | ) | (36,908 | ) | (36,908 | ) | ||||||
Net income allocable to common shareholders and HPU holders(1) | $ | 255,249 | $ | 178,362 | $ | 193,004 | ||||||
Basic earnings per common share(2) | $ | 2.52 | $ | 1.98 | $ | 2.24 | ||||||
Diluted earnings per common share(2)(3) | $ | 2.43 | $ | 1.93 | $ | 2.19 | ||||||
Explanatory Notes:
The accompanying notes are an integral part of the financial statements.
120
iStar Financial Inc.
Consolidated Statements of Changes in Shareholders' Equity
(In thousands)
|
Series A Preferred Stock |
Series B Preferred Stock |
Series C Preferred Stock |
Series D Preferred Stock |
Series E Preferred Stock |
Series F Preferred Stock |
Series G Preferred Stock |
High Performance Units |
Common Stock at Par |
Warrants and Options |
Additional Paid-In Capital |
Retained Earnings (Deficit) |
Accumulated Other Comprehensive Income (Losses) |
Treasury Stock |
Total |
|||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2000 | $ | 4 | $ | 2 | $ | 1 | $ | 4 | $ | | $ | | $ | | $ | | $ | 85 | $ | 16,943 | $ | 1,966,396 | $ | (154,789 | ) | $ | (20 | ) | $ | (40,741 | ) | $ | 1,787,885 | |||||||||||||
Exercise of options | | | | | | | | | 2 | (835 | ) | 22,550 | | | | 21,717 | ||||||||||||||||||||||||||||||
Dividends declaredpreferred | | | | | | | | | | | 330 | (36,908 | ) | | | (36,578 | ) | |||||||||||||||||||||||||||||
Dividends declaredcommon | | | | | | | | | | | | (213,089 | ) | | | (213,089 | ) | |||||||||||||||||||||||||||||
Acquisition of ACRE Partners | | | | | | | | | | | 1,219 | | | | 1,219 | |||||||||||||||||||||||||||||||
Restricted stock units issued to employees in lieu of cash bonuses |
| | | | | | | | | | 1,478 | | | | 1,478 | |||||||||||||||||||||||||||||||
Restricted stock units granted to employees | | | | | | | | | | | 1,250 | | | | 1,250 | |||||||||||||||||||||||||||||||
Options granted to employees | | | | | | | | | | 4,348 | | | | | 4,348 | |||||||||||||||||||||||||||||||
Issuance of stock-DRIP plan | | | | | | | | | | | 4,708 | | | | 4,708 | |||||||||||||||||||||||||||||||
Net income for the period | | | | | | | | | | | | 229,912 | | | 229,912 | |||||||||||||||||||||||||||||||
Cumulative effect of change in accounting principle | | | | | | | | | | | | | (9,445 | ) | | (9,445 | ) | |||||||||||||||||||||||||||||
Change in accumulated other comprehensive income | | | | | | | | | | | | | (5,627 | ) | | (5,627 | ) | |||||||||||||||||||||||||||||
Balance at December 31, 2001 | $ | 4 | $ | 2 | $ | 1 | $ | 4 | $ | | $ | | $ | | $ | | $ | 87 | $ | 20,456 | $ | 1,997,931 | $ | (174,874 | ) | $ | (15,092 | ) | $ | (40,741 | ) | $ | 1,787,778 | |||||||||||||
Exercise of options | | | | | | | | | 2 | (443 | ) | 16,170 | | | | 15,729 | ||||||||||||||||||||||||||||||
Proceeds from equity offering | | | | | | | | | 8 | | 202,891 | | | | 202,899 | |||||||||||||||||||||||||||||||
Dividends declaredpreferred | | | | | | | | | | | 330 | (36,908 | ) | | | (36,578 | ) | |||||||||||||||||||||||||||||
Dividends declaredcommon | | | | | | | | | | | | (231,257 | ) | | | (231,257 | ) | |||||||||||||||||||||||||||||
Restricted stock units granted to employees | | | | | | | | | | | 19,048 | | | | 19,048 | |||||||||||||||||||||||||||||||
Options granted to employees | | | | | | | | | | 309 | | | | | 309 | |||||||||||||||||||||||||||||||
High performance units sold to employees | | | | | | | | 1,359 | | | | | | | 1,359 | |||||||||||||||||||||||||||||||
Contributions from significant shareholder | | | | | | | | | | | 506 | | | | 506 | |||||||||||||||||||||||||||||||
Issuance of stock-DRIP plan | | | | | | | | | 1 | | 44,426 | | | | 44,427 | |||||||||||||||||||||||||||||||
Purchase of treasury shares | | | | | | | | | | | 334 | | | (7,315 | ) | (6,981 | ) | |||||||||||||||||||||||||||||
Net income for the period | | | | | | | | | | | | 215,270 | | | 215,270 | |||||||||||||||||||||||||||||||
Change in accumulated other comprehensive income | | | | | | | | | | | | | 12,791 | | 12,791 | |||||||||||||||||||||||||||||||
Balance at December 31, 2002 | $ | 4 | $ | 2 | $ | 1 | $ | 4 | $ | | $ | | $ | | $ | 1,359 | $ | 98 | $ | 20,322 | $ | 2,281,636 | $ | (227,769 | ) | $ | (2,301 | ) | $ | (48,056 | ) | $ | 2,025,300 | |||||||||||||
Exercise of options | | | | | | | | | 1 | 373 | 27,754 | | | | 28,128 | |||||||||||||||||||||||||||||||
Net proceeds from preferred offering/exchange | (4 | ) | | | | 6 | 4 | 3 | | | | 87,900 | | | | 87,909 | ||||||||||||||||||||||||||||||
Proceeds from equity offering | | | | | | | | | 5 | | 190,931 | | | | 190,936 | |||||||||||||||||||||||||||||||
Dividends declaredpreferred | | | | | | | | | | | 195 | (36,908 | ) | | | (36,713 | ) | |||||||||||||||||||||||||||||
Dividends declaredcommon | | | | | | | | | | | | (267,785 | ) | | | (267,785 | ) | |||||||||||||||||||||||||||||
Dividends declaredHPU's | | | | | | | | | | | | (2,144 | ) | | | (2,144 | ) | |||||||||||||||||||||||||||||
Restricted stock units granted to employees | | | | | | | | | | | 1,339 | | | | 1,339 | |||||||||||||||||||||||||||||||
Options granted to employees | | | | | | | | | | | 82 | | | | 82 | |||||||||||||||||||||||||||||||
High performance units sold to employees | | | | | | | | 3,772 | | | | | | | 3,772 | |||||||||||||||||||||||||||||||
Issuance of stock-DRIP/Stock purchase plan | | | | | | | | | 3 | | 88,935 | | | | 88,938 | |||||||||||||||||||||||||||||||
Net income for the period | | | | | | | | | | | | 292,157 | | | 292,157 | |||||||||||||||||||||||||||||||
Change in accumulated other comprehensive income (losses) | | | | | | | | | | | | | 3,309 | | 3,309 | |||||||||||||||||||||||||||||||
Balance at December 31, 2003 | $ | | $ | 2 | $ | 1 | $ | 4 | $ | 6 | $ | 4 | $ | 3 | $ | 5,131 | $ | 107 | $ | 20,695 | $ | 2,678,772 | $ | (242,449 | ) | $ | 1,008 | $ | (48,056 | ) | $ | 2,415,228 | ||||||||||||||
The accompanying notes are an integral part of the financial statements.
121
iStar Financial Inc.
Consolidated Statements of Cash Flows
(In thousands)
|
For the Year Ended December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2003 |
2002* |
2001* |
|||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 292,157 | $ | 215,270 | $ | 229,912 | ||||||
Adjustments to reconcile net income to cash flows provided by operating activities: | ||||||||||||
Minority interest in consolidated entities | 249 | 162 | 218 | |||||||||
Non-cash expense for stock-based compensation | 3,781 | 18,059 | 3,574 | |||||||||
Depreciation and amortization | 52,338 | 44,117 | 32,170 | |||||||||
Depreciation and amortization from discontinued operations | 3,741 | 3,924 | 3,472 | |||||||||
Amortization of deferred financing costs | 27,180 | 23,460 | 20,720 | |||||||||
Amortization of discounts/premiums, deferred interest and costs on lending investments | (54,799 | ) | (33,086 | ) | (41,067 | ) | ||||||
Discounts, loan fees and deferred interest received | 36,063 | 36,714 | 28,425 | |||||||||
Equity in earnings from joint ventures and unconsolidated subsidiaries | 4,284 | (1,222 | ) | (7,361 | ) | |||||||
Distributions from operations of joint ventures | 2,839 | 5,802 | 4,802 | |||||||||
Loss on early extinguishment of debt | | 12,166 | 1,620 | |||||||||
Cumulative effect of change in accounting principle | | | 282 | |||||||||
Deferred operating lease income receivable | (15,366 | ) | (15,265 | ) | (10,923 | ) | ||||||
Gain from discontinued operations | (5,167 | ) | (717 | ) | (1,145 | ) | ||||||
Provision for loan losses | 7,500 | 8,250 | 7,000 | |||||||||
Change in investments in and advances to joint ventures and unconsolidated subsidiaries | (2,877 | ) | (6,598 | ) | (2,568 | ) | ||||||
Changes in assets and liabilities: | ||||||||||||
(Increase) decrease in accrued interest and operating lease income receivable | (647 | ) | 3,809 | 5,083 | ||||||||
(Increase) decrease in deferred expenses and other assets | (20,690 | ) | 1,763 | (519 | ) | |||||||
Increase in accounts payable, accrued expenses and other liabilities | 7,676 | 32,185 | 19,565 | |||||||||
Cash flows provided by operating activities | 338,262 | 348,793 | 293,260 | |||||||||
Cash flows from investing activities: | ||||||||||||
New investment originations | (2,086,890 | ) | (1,812,993 | ) | (924,455 | ) | ||||||
Add-on fundings under existing loan commitments | (46,164 | ) | (21,619 | ) | (99,626 | ) | ||||||
Net proceeds from sale of corporate tenant lease assets | 47,569 | 3,702 | 26,306 | |||||||||
Net proceeds from discontinued operations | | 17,500 | | |||||||||
Repayments of and principal collections on loans and other lending investments | 1,119,743 | 671,965 | 650,970 | |||||||||
Investments in and advances to unconsolidated joint ventures | | (127 | ) | (1,601 | ) | |||||||
Distributions from unconsolidated joint ventures | | | 24,265 | |||||||||
Capital improvements for build-to-suit projects | | (1,064 | ) | (14,266 | ) | |||||||
Capital improvement projects on corporate tenant lease assets | (3,487 | ) | (2,277 | ) | (6,629 | ) | ||||||
Other capital expenditures on corporate tenant lease assets | (5,125 | ) | (4,157 | ) | (4,489 | ) | ||||||
Cash flows used in investing activities | (974,354 | ) | (1,149,070 | ) | (349,525 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Borrowings under secured revolving credit facilities | 1,643,552 | 2,496,200 | 2,420,638 | |||||||||
Repayments under secured revolving credit facilities | (2,220,715 | ) | (2,122,994 | ) | (2,285,892 | ) | ||||||
Borrowings under unsecured revolving credit facilities | 130,000 | | | |||||||||
Borrowings under term loans | 233,000 | 115,099 | 277,664 | |||||||||
Repayments under term loans | (107,723 | ) | (18,279 | ) | (120,333 | ) | ||||||
Borrowings under unsecured bond offerings | 526,966 | | 350,000 | |||||||||
Repayments under unsecured notes | | | (100,000 | ) | ||||||||
Borrowings under secured bond offerings | 645,822 | 885,079 | | |||||||||
Repayments under secured bond offerings | (210,876 | ) | (475,679 | ) | (125,962 | ) | ||||||
Borrowings under other debt obligations | 25,251 | 1,094 | 279 | |||||||||
Repayments under other debt obligations | (7,064 | ) | (1,668 | ) | (56,008 | ) | ||||||
Contribution from minority interest partner | 2,522 | | | |||||||||
(Increase) decrease in restricted cash held in connection with debt obligations | (17,454 | ) | (22,359 | ) | 2,590 | |||||||
Prepayment penalty on early extinguishment of debt | | (3,950 | ) | (1,037 | ) | |||||||
Payments for deferred financing costs | (35,609 | ) | (45,702 | ) | (30,382 | ) | ||||||
Distributions to minority interest in consolidated entities | (159 | ) | (231 | ) | (3,794 | ) | ||||||
Net proceeds from preferred offering/exchange | 87,909 | | | |||||||||
Common dividends paid(1) | (267,785 | ) | (231,257 | ) | (264,527 | ) | ||||||
Preferred dividends paid | (36,713 | ) | (36,578 | ) | (36,578 | ) | ||||||
Dividends on HPUs | (2,144 | ) | | | ||||||||
HPUs issued | 3,772 | 1,359 | | |||||||||
Purchase of treasury stock | | (6,981 | ) | | ||||||||
Proceeds from equity offering | 190,936 | 202,899 | | |||||||||
Contribution from significant shareholder | | 506 | | |||||||||
Proceeds from exercise of options and issuance of DRIP/Stock purchase shares | 116,760 | 63,983 | 22,525 | |||||||||
Cash flows provided by financing activities | 700,248 | 800,541 | 49,183 | |||||||||
Increase (decrease) in cash and cash equivalents | 64,156 | 264 | (7,082 | ) | ||||||||
Cash and cash equivalents at beginning of period | 15,934 | 15,670 | 22,752 | |||||||||
Cash and cash equivalents at end of period | $ | 80,090 | $ | 15,934 | $ | 15,670 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid during the period for interest, net of amount capitalized | $ | 165,757 | $ | 157,618 | $ | 141,271 | ||||||
Explanatory Note:
The accompanying notes are an integral part of the financial statements.
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iStar Financial Inc.
Notes to Consolidated Financial Statements
Note 1Business and Organization.
BusinessiStar Financial Inc. (the "Company") is the leading publicly-traded finance company focused on the commercial real estate industry. The Company provides custom-tailored financing to private and corporate owners of real estate nationwide, including senior and junior mortgage debt, senior, mezzanine and subordinated corporate capital, and corporate net lease financing. The Company, which is taxed as a real estate investment trust ("REIT"), seeks to deliver strong dividends and superior risk-adjusted returns on equity to shareholders by providing innovative and value-added financing solutions to its customers.
The Company's primary product lines include:
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be paid by the corporate tenant on a triple net lease basis. Corporate tenant lease ("CTL") transactions have terms generally ranging from ten to 20 years and typically range in size from $20 million to $150 million. As of December 31, 2003, based on gross carrying values, the Company's CTL assets assets (including investments in and advances to joint ventures and unconsolidated subsidiaries and assets held for sale) represented 41.89% of its assets.
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:
OrganizationThe 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 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" or the "Leasing Subsidiary"), then the largest publicly-traded company specializing in corporate sale/leaseback transactions for 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 former external advisor in exchange for shares of the Company's common stock ("Common Stock") and converted its organizational form to a Maryland corporation. As part of the conversion to a Maryland corporation, the Company replaced its former dual class common share structure with a single class of Common Stock. The Company's Common Stock began trading on the New York Stock Exchange on
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November 4, 1999. Prior to this date, the Company's common shares were traded on the American Stock Exchange.
Note 2Basis of Presentation
The accompanying audited Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles in the United States of America ("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 other investments in partnerships or joint ventures which the Company does not control are accounted for under the equity method (see Notes 5 and 6). All significant intercompany balances and transactions have been eliminated in consolidation.
Note 3Summary of Significant Accounting Policies
Loans and other lending investments, netAs described in Note 4, "Loans and Other Lending Investments" includes the following investments: senior mortgages, subordinate mortgages, corporate/partnership loans, other lending investments-loans and other lending investments-securities. Management considers nearly all of its loans and other lending investments to be held-to-maturity, although a small number of investments may be classified as available-for-sale. Items classified as held-to-maturity are reflected at amortized historical cost. Items classified as available-for-sale are reported at fair values with unrealized gains and losses included in "Accumulated other comprehensive income (losses)" on the Company's Consolidated Balance Sheets and are not included in the Company's net income.
Corporate tenant lease assets and depreciationCTL assets are generally recorded at cost less accumulated depreciation. 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. Depreciation is computed using the straight-line method of cost recovery over estimated useful lives of 40.0 years for facilities, 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 facility for facility improvements.
CTL 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, CTL assets to be held and used are not carried at amounts in excess of their estimated recoverable amounts.
In accordance with the recent adoption of Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations" regarding the Company's acquisition of facilities, purchase costs will be allocated to the tangible and intangible assets and liabilities acquired based on their estimated fair values. The value of the tangible assets, consisting of land, buildings and tenant improvements, will be determined as if vacant, that is, at replacement cost. Intangible assets including the above-market or below-market value of leases, the value of in-place leases and the value of customer relationships will be recorded at their relative fair values.
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Above-market and below-market in-place lease values for owned CTL assets will be recorded based on the present value (using a discount rate reflecting the risks associated with the leases acquired) of the difference between: (1) the contractual amounts to be paid pursuant to the leases negotiated and in-place at the time of acquisition of the facilities; and (2) management's estimate of fair market lease rates for the facility or equivalent facility, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market (or below-market) lease value will be amortized as a reduction of (or, increase to) operating lease income over the remaining non-cancelable term of each lease plus any renewal periods with fixed rental terms that are considered to be below-market.
The total amount of other intangible assets will be allocated to in-place lease values and customer relationship intangible values based on management's evaluation of the specific characteristics of each customer's lease and the Company's overall relationship with each customer. Characteristics to be considered in allocating these values include the nature and extent of the existing relationship with the customer, prospects for developing new business with the customer, the customer's credit quality and the expectation of lease renewals among other factors. Factors considered by management's analysis include the estimated carrying costs of the facility during a hypothetical expected lease-up period, current market conditions and costs to execute similar leases. Management will also consider information obtained about a property in connection with its pre-acquisition due diligence. Estimated carrying costs will include real estate taxes, insurance, other property operating costs and estimates of lost operating lease income at market rates during the hypothetical expected lease-up periods, based on management's assessment of specific market conditions. Management will estimate costs to execute leases including commissions and legal costs to the extent that such costs are not already incurred with a new lease that has been negotiated in connection with the purchase of the facility. Management's estimates will be used to determine these values. These intangible assets are included in "Deferred expenses and other assets" on the Company's Consolidated Balance Sheets.
The value of above-market or below-market in-place leases will be amortized to expense over the remaining initial term of each lease. The value of customer relationship intangibles will be amortized to expense over the initial and renewal terms of the leases, but no amortization period for intangible assets will exceed the remaining depreciable life of the building. In the event that a customer terminates its lease, the unamortized portion of each intangible, including market rate adjustments, lease origination costs, in-place lease values and customer relationship values, would be charged to expense.
Capitalized interestThe Company capitalizes interest costs incurred during the construction period on qualified build-to-suit projects for corporate tenants, including investments in joint ventures accounted for under the equity method. No interest was capitalized during the 12 months ended December 31, 2003 and approximately $70,000 was capitalized during the 12 months ended December 31, 2002.
Cash and cash equivalentsCash and cash equivalents include cash held in banks or invested in money market funds with original maturity terms of less than 90 days.
Restricted cashRestricted cash represents amounts required to be maintained in escrow under certain of the Company's debt obligations and leasing transactions.
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Revenue recognitionThe Company's revenue recognition policies are as follows:
Loans and other lending investments: Management considers nearly all of its loans and other lending investments to be held-to-maturity, although a small number of investments may be classified as available-for-sale. The Company reflects held-to-maturity investments at amortized cost less allowance for loan losses, acquisition premiums or discounts, deferred loan fees and undisbursed loan funds. Unrealized gains and losses on available-for-sale investments are included in "Accumulated other comprehensive income (losses)" on the Company's Consolidated Balance Sheets and are not included in the Company's net income. On occasion, the Company may acquire loans at small 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. 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. If loans with premiums, discounts, loan origination or exit fees are prepaid, the Company immediately recognizes the unamortized portion as a decrease or increase in the prepayment gain or loss. Interest income is recognized using the effective interest method applied on a loan-by-loan basis.
A small number 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 "Deferred operating lease income receivable" on the Company's Consolidated Balance Sheets.
Provision for loan lossesThe Company's accounting policies require that an allowance for estimated loan 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 loan losses. In establishing loan loss provisions, management periodically evaluates and analyzes the Company's assets, historical and industry loss experience, economic conditions and trends, collateral values and quality, and other relevant factors. Specific valuation allowances are established for impaired loans in the amount by which the carrying value, before allowance for estimated losses, exceeds the fair value of collateral less disposition costs on an individual loan basis. Management considers a loan to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis. Management measures these impaired loans at the fair value of the loans' underlying collateral less estimated disposition costs. Impaired loans may be left on accrual status during the period the Company is pursuing repayment of the loan; however, these loans are placed on non-accrual status at such time as: (1) management believes that the potential risk exists that scheduled debt service
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payments will not be met within the coming 12 months; (2) the loans become 90 days delinquent; (3) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (4) the net realizable value of the loan's underlying collateral approximates the Company's carrying value of such loan. 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 loan losses. Charge-offs occur when loans, or a portion thereof, are considered uncollectible and of such little value that further pursuit of collection is not warranted. Management also provides a loan 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.
The Company's loans are generally secured by real estate assets or are corporate lending arrangements to entities with significant rental real estate operations (e.g., an unsecured loan to a company which operates residential apartments or retail, industrial or office facilities as rental real estate). While the underlying real estate assets for the corporate lending instruments may not serve as collateral for the Company's investments in all cases, the Company evaluates the underlying real estate assets when estimating loan loss exposure because the Company's loans generally have preclusions as to how much senior and/or secured debt the customer may borrow ahead of the Company's position.
Allowance for doubtful accountsThe Company has recently developed an accounting policy that requires a reserve on the Company's accrued operating lease income receivable balances and on the deferred operating lease income receivable balances. The reserve covers asset specific problems (e.g., bankruptcy) as they arise, as well as, a portfolio reserve based on management's evaluation of the credit risks associated with these receivables.
Accounting for derivative instruments and hedging activityIn accordance with Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities" as amended by Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging ActivityDeferral of the Effective date of FASB 133," Statement of Financial Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activitiesan Amendment of FASB Statement 133" and Statement of Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative Instrument and Hedging Activities," the Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures 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.
Upon adoption, on January 1, 2001, the Company recognized a charge to net income of approximately $282,000 and an additional charge of $9.4 million to "Accumulated other comprehensive income (losses)," on the Company's Consolidated Balance Sheets representing the cumulative effect of the change in accounting principle.
Income taxesThe 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. In addition, the Company is allowed several other deductions in computing its
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"REIT taxable income," including non-cash items such as depreciation expense. These deductions allow the Company to shelter a portion of its operating cash flow from its dividend payout requirement under federal tax laws. The Company intends to operate in a manner consistent with and to elect to be treated as a REIT for tax purposes. iStar Operating Inc. ("iStar Operating") and TriNet Management Operating Company, Inc. ("TMOC"), the Company's REIT taxable subsidiaries, 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. Accordingly, except for the Company's taxable subsidiaries, no current or deferred taxes are provided for in the Consolidated Financial Statements. Prior to December 31, 2003, TMOC was liquidated. See Note 6 for a detailed discussion on the ownership structure and operations of iStar Operating and TMOC.
Earnings per common shareIn accordance with the Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earning per Share," 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 allocable 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.
ReclassificationsCertain prior year amounts have been reclassified in the Consolidated Financial Statements and the related notes to conform to the 2003 presentation.
Use of estimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
New accounting standardsIn December 2003, the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition" which supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21. The Company adopted the provisions of this statement immediately, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," issued during the third quarter of 2003, provides guidance on revenue recognition for revenues derived from a single contract that contain multiple products or services. EITF 00-21 also provides additional requirements to determine when these revenues may be recorded separately for accounting purposes. The Company adopted EITF 00-21 on July 1, 2003, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity." This standard requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatorily redeemable financial instruments, (2) obligations to repurchase the issuer's equity shares by transferring assets; and (3) certain obligations to issue a variable number
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of shares. The FASB recently issued FASB Staff Position ("FSP") 150-3, which defers the provisions of paragraphs 9 and 10 of SFAS No. 150 indefinitely as they apply to mandatorily redeemable noncontrolling interests associated with finite-lived entities. The Company adopted the provisions of this statement, as required, on July 1, 2003, and it did not have a significant financial impact on the Company's Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," an interpretation of ARB 51. FIN 46 provides guidance on identifying entities for which control is achieved through means other than through voting rights (a "variable interest entity" or "VIE"), and how to determine when and which business enterprise should consolidate a VIE. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The transitional disclosure requirements took effect immediately and were required for all financial statements initially issued or modified after January 31, 2003. Immediate consolidation is required for VIEs entered into or modified after February 1, 2003 in which the Company is deemed the primary beneficiary. For VIEs in which the Company entered into prior to February 1, 2003, the FASB recently issued FSP to defer FIN 46 for those older entities to the reporting period ending after March 15, 2004. The adoption of the additional consolidation provisions of FIN 46 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based CompensationTransition and Disclosure," an amendment of FASB Statement No. 123 ("SFAS No. 123"). This statement provides alternative transition methods for a voluntary change to the fair value basis of accounting for stock-based employee compensation. However, this Statement does not permit the use of the original SFAS No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation, description of transition method utilized and the effect of the method used on reported results. The Company adopted SFAS No. 148 with retroactive application to grants made subsequent to January 1, 2002 with no material effect on the Company's Consolidated Financial Statements.
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SFAS No. 148 disclosure requirements, including the effect on net income and earnings per share if the fair value-based method had been applied to all outstanding and unvested stock awards in each period, are presented below (in thousands except per share amounts):
|
For the Years Ended December 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2003 Basic EPS |
2002 Basic EPS |
2001 Basic EPS |
|||||||
Net income allocable to common shareholders and HPU holders, as reported(1) | $ | 255,249 | $ | 178,362 | $ | 193,004 | ||||
Total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects | (289 | ) | (565 | ) | (705 | ) | ||||
Pro forma net income allocable to common shareholders and HPU holders | $ | 254,960 | $ | 177,797 | $ | 192,299 | ||||
Earnings per share: | ||||||||||
Basicas reported(2) | $ | 2.52 | $ | 1.98 | $ | 2.24 | ||||
Basicpro forma(2) | 2.52 | 1.98 | 2.23 | |||||||
Dilutedas reported(2)(3) |
$ |
2.43 |
$ |
1.93 |
$ |
2.19 |
||||
Dilutedpro forma(2)(3) | 2.43 | 1.92 | 2.18 |
Explanatory Notes:
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies," Statement of Financial Accounting Standards No. 57, "Related Party Disclosures," Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" and rescinds FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5." It requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee regardless if the Company receives separately identifiable consideration (e.g., a premium). The disclosure requirements became effective December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company's Consolidated Financial Statements, nor is it expected to have a material impact in the future.
In September 2002, the FASB issued Statement of Financial Accounting Standards No. 147 ("SFAS No. 147"), "Acquisitions of Certain Financial Institutions," an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for the acquisitions of financial institutions, except those acquisitions between two or more mutual enterprises. SFAS No. 147 removes acquisitions of financial institutions from the scope of both FASB No. 72,
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"Accounting for Certain Acquisitions of Banking or Thrift Institutions," and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, "When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method," and requires that those transactions be accounted for in accordance with SFAS No. 141 and SFAS No. 142. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term, customer-relationship intangible assets of financial institutions such as depositor-relationship and borrower-relationship intangible assets and credit cardholder intangible assets. The Company adopted the provisions of this statement, as required, on October 1, 2002, and it did not have a significant financial impact on the Company's Consolidated Financial Statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Exit or Disposal Activities," to address significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes: (1) costs related to terminating a contract that is not a capital lease; and (2) termination benefits received by employees involuntarily terminated under the terms of a one-time benefit arrangement that is not an on-going benefit arrangement or an individual deferred-compensation contract. The Company adopted the provisions of SFAS 146 on December 31, 2002, as required, and it did not have a material effect on the Company's Consolidated Financial Statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds both FASB Statements No. 4 ("SFAS No. 4"), "Reporting Gains and Losses from Extinguishment of Debt," and the amendment to SFAS No. 4, FASB Statement No. 64 ("SFAS No. 64"), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through this rescission, SFAS No. 145 eliminates the requirement (in both SFAS No. 4 and SFAS No. 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. An entity is not prohibited from classifying such gains and losses as extraordinary items, so long as they meet the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30 ("APB 30"), "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"; however, due to the nature of the Company's operations, such treatment may not be available to the Company. Any gains or losses on extinguishments of debt that were previously classified as extraordinary items in prior periods presented that do not meet the criteria in APB 30 for classification as an extraordinary item will be reclassified to income from continuing operations. The provisions of SFAS No. 145 are effective for financial statements issued for fiscal years beginning after May 15, 2002. The Company adopted the provisions of this statement, as required, on January 1, 2003. For the years ended December 31, 2002 and 2001, the Company reclassified $12.2 million and $1.6 million, respectively from "Extraordinary loss from early extinguishment of debt" into "Loss on early extinguishment of debt" in income from continuing operations on the Company's Consolidated Statements of Operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides
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guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of, and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 requires that current operations prior to the disposition of CTL assets and prior period results of such operations be presented in discontinued operations in the Company's Consolidated Statements of Operations. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and must be applied at the beginning of a fiscal year. The Company adopted the provisions of this statement on January 1, 2002, as required, and it did not have a significant financial impact on the Company.
In July 2001, the FASB issued SFAS No. 141 and Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also addresses the initial recognition and measurement of goodwill and other intangible assets acquired in business combinations and requires intangible assets to be recognized apart from goodwill if certain tests are met. SFAS No. 142 requires that goodwill not be amortized but instead be measured for impairment at least annually, or when events indicate that there may be an impairment. The Company adopted the provisions of both statements for transactions initiated after June 30, 2001, as required, and the adoption did not have a significant impact on the Company.
In July 2001, the SEC released Staff Accounting Bulletin No. 102 ("SAB 102"), "Selected Loan Loss Allowance and Documentation Issues." SAB 102 summarizes certain of the SEC's views on the development, documentation and application of a systematic methodology for determining allowances for loan and lease losses. Adoption of SAB 102 by the Company did not have a significant impact on the Company.
In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement is applicable for transfers of assets and extinguishments of liabilities occurring after June 30, 2001. The Company adopted the provisions of this statement as required for all transactions entered into on or after April 1, 2001. The adoption of SFAS No. 140 did not have a significant impact on the Company.
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iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)
Note 4Loans and Other Lending Investments
The following is a summary description of the Company's loans and other lending investments (in thousands)(1):
|
|
|
|
Carrying Value as of |
|
|
|
|
|
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Type of Investment |
Underlying Property Type |
# of Borrowers In Class |
Principal Balances Outstanding |
December 31, 2003 |
December 31, 2002 |
Effective Maturity Dates |
Contractual Interest Payment Rates(2) |
Contractual Interest Accrual Rates(2) |
Principal Amortization |
Participation Features |
|||||||||||||
Senior Mortgages(3) | Office/Residential/ Retail/Industrial, R&D/ Conference Center/ Mixed Use/Hotel/ Entertainment, Leisure/Other | 41 | $ | 2,143,326 | $ | 2,106,791 | $ | 1,675,797 | 2004 to 2022 | Fixed: 7.03% to 12.00% Variable: LIBOR + 1.50% to LIBOR + 6.50% | Fixed: 7.03% to 12.00% Variable: LIBOR + 1.50% to LIBOR + 6.50% | Yes(4) | No | ||||||||||
Subordinate Mortgages |
Office/Residential/ Retail/Mixed Use/ Hotel |
21 |
551,634 |
550,572 |
629,486 |
2004 to 2013 |
Fixed: 7.00% to 18.00% Variable: LIBOR + 1.79% to LIBOR + 7.47% |
Fixed: 7.32% to 18.00% Variable: LIBOR + 1.79% to LIBOR + 7.47% |
Yes(4) |
No |
|||||||||||||
Corporate/Partnership Loans |
Office/Residential/Retail/Industrial, R&D/ Mixed Use/Hotel/Entertainment, Leisure/Other |
27 |
740,529 |
710,469 |
441,028 |
2004 to 2013 |
Fixed: 6.00% to 15.00% Variable: LIBOR + 3.50% to LIBOR + 12.77% |
Fixed: 7.33% to 17.50% Variable: LIBOR + 3.50% to LIBOR + 12.77% |
Yes(4) |
Yes(5) |
|||||||||||||
Other Lending InvestmentsLoans |
Office/Mixed Use/Hotel/Other |
5 |
26,096 |
23,767 |
23,167 |
2004 to 2008 |
Fixed: 10.00% to 15.00% Variable: LIBOR + 4.75% |
Fixed: 15.00% to 17.50% Variable: LIBOR + 4.75% |
No |
Yes(5) |
|||||||||||||
Other Lending InvestmentsSecurities(6) |
Residential/Industrial, R&D/ Hotel/ Entertainment, Leisure/Other |
11 |
364,050 |
344,511 |
310,114 |
2005 to 2030 |
Fixed: 6.75% to 10.00% Variable: LIBOR + 2.82% to LIBOR + 5.00% |
Fixed: 6.75% to 10.00% Variable: LIBOR +2.82% to LIBOR + 5.00% |
Yes(4) |
No |
|||||||||||||
Gross Carrying Value |
$ |
3,736,110 |
$ |
3,079,592 |
|||||||||||||||||||
Provision for Loan Losses |
(33,436 |
) |
(29,250 |
) |
|||||||||||||||||||
Total, Net | $ | 3,702,674 | $ | 3,050,342 | |||||||||||||||||||
Explanatory Notes:
134
During the 12 months ended December 31, 2003 and 2002, respectively, the Company and its affiliated ventures originated or acquired an aggregate of approximately $1,735.4 million and $1,403.8 million in loans and other lending investments, funded $46.1 million and $21.6 million under existing loan commitments, and received principal repayments of $1,120.0 million and $672.0 million.
As of December 31, 2003, the Company had 18 loans with unfunded commitments. The total unfunded commitment amount was approximately $208.6 million, of which $80.2 million was discretionary and $128.4 million was non-discretionary.
A portion of the Company's loans and other lending investments are pledged as collateral under either the iStar Asset Receivables secured notes, the secured revolving credit facilities or secured term loans (see Note 7 for a description of the Company's secured and unsecured debt).
The Company has reflected provisions for loan losses of approximately $7.5 million, $8.3 million and $7.0 million in its results of operations during the years ended December 31, 2003, 2002 and 2001, respectively. These provisions represent loan 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 credit quality of the underlying collateral. During the 12 months ended December 31, 2003, the Company took a $3.3 million direct impairment on a $30.4 million partnership loan on a class A building located in Pittsburgh, Pennsylvania. In August 2003 the borrower stopped making its debt service payments due to insufficient cash flow caused by vacancies at the property. After taking the impairment charge and lowering the book value of the asset to $27.1 million, management believes there is adequate collateral to support the book value of the asset.
Changes in the Company's provision for loan losses were as follows:
Provision for loan losses, December 31, 2000 | $ | 14,000 | ||
Additional provision for loan losses | 7,000 | |||
Provision for loan losses, December 31, 2001 | 21,000 | |||
Additional provision for loan losses | 8,250 | |||
Provision for loan losses, December 31, 2002 | 29,250 | |||
Additional provision for loan losses | 7,500 | |||
Impairment on loans | (3,314 | ) | ||
Provision for loan losses, December 31, 2003 | $ | 33,436 | ||
Note 5Corporate Tenant Lease Assets
During the 12 months ended December 31, 2003 and 2002, respectively, the Company acquired an aggregate of approximately $351.4 million and $409.1 million in CTL assets and disposed of CTL assets for net proceeds of approximately $47.6 million and $3.7 million.
135
The Company's investments in CTL assets, at cost, were as follows (in thousands):
|
December 31, 2003 |
December 31, 2002 |
||||||
---|---|---|---|---|---|---|---|---|
Facilities and improvements | $ | 2,210,592 | $ | 1,959,309 | ||||
Land and land improvements | 468,708 | 428,365 | ||||||
Direct financing lease | 35,472 | 32,640 | ||||||
Less: accumulated depreciation | (178,887 | ) | (128,509 | ) | ||||
Corporate tenant lease assets, net | $ | 2,535,885 | $ | 2,291,805 | ||||
The Company's CTL assets are leased to customers with initial term expiration dates from 2004 to 2023. Future operating lease payments under non-cancelable leases, excluding customer reimbursements of expenses, in effect at December 31, 2003, are approximately as follows (in thousands):
Year |
Amount |
||
---|---|---|---|
2004 | $ | 261,913 | |
2005 | 253,886 | ||
2006 | 241,324 | ||
2007 | 219,331 | ||
2008 | 203,201 | ||
Thereafter | 1,742,962 |
Under certain leases, the Company is entitled to receive additional participating lease payments to the extent gross revenues of the corporate tenant exceed a base amount. The Company earned $0, $0 and $0.4 million of such additional participating lease payments on these leases in the 12 months ended December 31, 2003, 2002 and 2001, respectively. In addition, the Company also receives reimbursements from customers for certain facility operating expenses including common area costs, insurance and real estate taxes. Customer expense reimbursements for the 12 months ended December 31, 2003, 2002 and 2001 were approximately $28.7 million, $27.1 million and $22.9 million, respectively, and are included as a reduction of "Operating costscorporate tenant lease assets" on the Company's Consolidated Statements of Operations.
The Company is subject to expansion option agreements with two existing customers which could require the Company to fund and to construct up to 161,000 square feet of additional adjacent space on which the Company would receive additional operating lease income under the terms of the option agreements. In addition, upon exercise of such expansion option agreements, the corporate tenants would be required to simultaneously extend their existing lease terms for additional periods ranging from six to ten years.
During the 12 months ended December 31, 2003, the Company sold nine CTL assets for net proceeds of approximately $47.6 million, and realized a gain of approximately $5.2 million.
As of December 31, 2003, there was one CTL asset with a book value of $24.8 million classified as "Assets held for sale" on the Company's Consolidated Balance Sheets.
For the years ended December 31, 2003, 2002 and 2001, the results of operations from CTL assets sold through September 30, 2004 (prior to their sale) or held for sale as of September 30, 2004, are classified in "Income from discontinued operations" on the Company's Consolidated Statements of
136
Operations. Gains from CTL assets sold during the years ended 2003, 2002 and 2001, are classified as "Gain from discontinued operations" on the Company's Consolidated Statements of Operations.
On September 30, 2002, one of the Company's customers exercised an option to terminate its lease on 50.00% of the land leased from the Company. In connection with this termination, the Company realized $17.5 million in cash lease termination payments, offset by a $17.4 million impairment charge in connection with the termination, resulting in a net gain of approximately $123,000. In the fourth quarter of 2002, the customer completed a recapitalization transaction that significantly enhanced its credit. In connection with this recapitalization, the Company agreed to amend the customer's lease, effective October 1, 2002. In the lease amendment, the Company received $12.5 million in cash as prepaid lease payments and the customer agreed to fixed minimum increases on future lease payments. In exchange, the Company agreed to reduce the customer's lease obligations for a period not to exceed nine quarters. Following the reduction period, the customer is required to make additional lease payments over a 10-year period sufficient to reimburse the Company for a portion of the temporary reduction in lease payments.
On May 30, 2002, the Company sold one CTL asset for net proceeds of $3.7 million, and realized a gain of approximately $595,000. As of December 31, 2002, there were two CTL assets with a combined book value of $28.5 million classified as "Assets held for sale" on the Company's Consolidated Balance Sheets.
Note 6Joint Ventures, Unconsolidated Subsidiaries and Minority Interest
Income or loss generated from the Company's joint venture investments and unconsolidated subsidiaries is included in "Equity in (loss) earnings from joint ventures and unconsolidated subsidiaries" on the Company's Consolidated Statements of Operations.
The Company's ownership percentages, its investments in and advances to unconsolidated joint ventures and subsidiaries, the Company's pro rata share of its ventures' third-party, non-recourse debt as of December 31, 2003 and its respective income (loss) for the year ended December 31, 2003 are presented below (in thousands):
|
|
|
JV Income (Loss) for the Year Ended December 31, 2003 |
Pro Rata Share of Third-Party Non-Recourse Debt(1) |
Third-Party Debt |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Ownership % |
Equity Investment |
Interest Rate |
Scheduled Maturity Date |
|||||||||||||
Unconsolidated Joint Ventures: | |||||||||||||||||
Sunnyvale | 44.70 | % | $ | 11,815 | $ | 1,740 | $ | 10,728 | LIBOR + 1.25% | November 2004(2) | |||||||
CTC I | 50.00 | % | 8,178 | (3,903 | ) | 59,578 | 7.66% 7.87% | Various through 2011 | |||||||||
ACRE Simon | 20.00 | % | 5,026 | 144 | 6,438 | 7.61% 8.43% | Various through 2011 | ||||||||||
Unconsolidated Subsidiaries: | |||||||||||||||||
iStar Operating | 95.00 | % | N/A | (2,252 | ) | N/A | N/A | N/A | |||||||||
TMOC | 95.00 | % | N/A | (13 | ) | N/A | N/A | N/A | |||||||||
Total | $ | 25,019 | $ | (4,284 | ) | $ | 76,744 | ||||||||||
137
Explanatory Notes:
Investments in and advances to unconsolidated joint ventures: At December 31, 2003, the Company had investments in three unconsolidated 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, Trustee; (2) Corporate Technology Centre Associates, LLC ("CTC I"), whose external member is Corporate Technology Centre Partners, LLC; and (3) ACRE Simon, LLC ("ACRE"), whose external partner is William E. Simon & Sons Realty Partners, L.P. These ventures were formed for the purpose of operating, acquiring and, in certain cases, developing CTL facilities.
At December 31, 2003, the ventures comprised 12 net leased facilities. The Company's combined investment in these joint ventures at December 31, 2003 was $25.0 million. The joint ventures' carrying value for the 12 facilities owned at December 31, 2003 was $193.1 million. In aggregate, the joint ventures had total assets of $221.2 million and total liabilities of $180.6 million as of December 31, 2003, and a net loss of approximately $4.4 million for the 12 months ended December 31, 2003, respectively. The Company accounts for these investments under the equity method because the Company's joint venture partners have certain participating rights giving them shared control over the ventures.
On July 2, 2002, the Company paid approximately $27.9 million in cash to the former member of TriNet Milpitas Associates ("Milpitas") joint venture in exchange for its 50.00% ownership interest. Pursuant to the terms of the joint venture agreement, the former external member had the right to convert its interest into 984,476 shares of Common Stock of the Company at any time during the period February 1, 2002 through January 31, 2003. On May 2, 2002, the former Milpitas external member exercised this right. Upon the external member's exercise of its conversion right, the Company had the option to acquire the partner's interest for cash, instead of shares, for a payment equal to the value of 984,476 shares of Common Stock multiplied by the ten-day average closing stock price as of the transaction date. The Company made such election and, as of July 2, 2002, owns 100.00% of Milpitas, and therefore consolidates these assets for accounting purposes. The Company accounted for the acquisition of the external interest using the purchase method.
On April 1, 2002, the former Sierra Land Ventures ("Sierra") joint venture partner assigned its 50.00% ownership interest in Sierra to a wholly-owned subsidiary of the Company. There was no cash or shares exchanged in this transaction. As of April 1, 2002, the Company owns 100.00% of the CTL asset previously held by Sierra and therefore consolidates this asset for accounting purposes.
Effective September 29, 2000, iStar Sunnyvale Partners, LP, which is wholly owned by Sunnyvale, entered into an interest rate cap agreement limiting the venture's exposure to interest rate movements on its $24.0 million LIBOR-based mortgage loan to an interest rate of 9.00% through November 9, 2003. On September 29, 2003, in connection with the extension of the ventures' debt, the venture extended the cap through November 9, 2004. Currently, the limited partners of Sunnyvale have the
138
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.
Investments in and advances to unconsolidated subsidiaries: The Company has an investment in iStar Operating, a taxable subsidiary that, through a wholly-owned subsidiary, services the Company's loans and certain loan portfolios owned by third parties. The Company owns all of the non-voting preferred stock and a 95.00% economic interest in iStar Operating. The common shareholder, an entity controlled by a former director of the Company, is the owner of all the voting common stock and a 5.00% economic interest in iStar Operating. As of December 31, 2003, there have never been any distributions to the common shareholder, nor does the Company expect to make any in the future. At any time, the Company has the right to acquire all of the common stock of iStar Operating at fair market value, which the Company believes to be nominal.
iStar Operating has elected to be treated as a taxable REIT subsidiary for purposes of maintaining compliance with the REIT provisions of the Code and prior to July 1, 2003 was accounted for under the equity method for financial statement reporting purposes and was presented in "Investments in and advances to joint ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance Sheets. As of July 1, 2003, the Company consolidates this entity as a VIE (see Note 3) with no material impact. Prior to its consolidation, the Company charged an allocated portion of its general overhead expenses to iStar Operating based on the number of employees at iStar Operating as a percentage of the Company's total employees. These general overhead expenses were in addition to the direct general and administrative costs of iStar Operating. As of December 31, 2003, iStar Operating had no debt obligations.
In addition, the Company had an investment in TMOC, an entity originally formed to make a $2.0 million investment in the convertible debt securities of a real estate company which trades on the Mexican Stock Exchange. This investment was made by TriNet prior to its acquisition by the Company in 1999. Prior to March 29, 2003, the Company owned 95.00% of the outstanding voting and non-voting common stock (representing 1.00% voting power and 95.00% of the economic interest) in TMOC. The owners of the remaining TMOC stock were two executives of the Company. On March 29, 2003, the Company purchased the remaining 5.00% interest from the executives for approximately $2,000, an amount that was equal to the carrying value, which was less than their original investment. Following this purchase, the Company owned 100.00% of TMOC and therefore consolidated the entity for accounting purposes. On June 30, 2003, the $2.0 million investment was fully repaid and prior to December 31, 2003, the entity was liquidated.
Minority Interest: On September 29, 2003 the Company acquired a 96.00% interest in iStar Harborside LLC, an infinite life partnership, with the external partner holding the remaining 4.00% interest. The Company consolidates this partnership for financial statement purposes and records the minority interest of the external partner in "Minority interest in consolidated entities" on the Company's Consolidated Balance Sheets.
The Company also holds a 98.00% interest in TriNet Property Partners, L.P with the external partners holding the remaining 2.00% interest. As of August 1999, the external partners have the option to convert their partnership interest into cash; however, the Company may elect to deliver 72,819 shares of Common Stock in lieu of cash. The Company consolidates this partnership for financial statement purposes and records the minority interest of the external partner in "Minority interest in consolidated entities" on the Company's Consolidated Balance Sheets.
139
As of December 31, 2003 and 2002, the Company has debt obligations under various arrangements with financial institutions as follows (in thousands):
|
|
Carrying Value as of |
|
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Maximum Amount Available |
December 31, 2003 |
December 31, 2002 |
Stated Interest Rates(1) |
Scheduled Maturity Date |
||||||||||
Secured revolving credit facilities: | |||||||||||||||
Line of credit | $ | 700,000 | $ | 88,640 | $ | 412,550 | LIBOR + 1.75% 2.25% | March 2005 (2) | |||||||
Line of credit | 700,000 | 310,364 | 462,920 | LIBOR + 1.40% 2.15% | January 2007 (2) | ||||||||||
Line of credit | 500,000 | 117,211 | 283,884 | LIBOR + 1.75% 2.25% | August 2005 (2) (3) | ||||||||||
Line of credit | 500,000 | 180,376 | 114,400 | LIBOR + 1.50% 2.25% | September 2005 | ||||||||||
Unsecured revolving credit facilities: | |||||||||||||||
Line of credit | 300,000 | 130,000 | | LIBOR + 2.125% | July 2004 (4) | ||||||||||
Total revolving credit facilities | $ | 2,700,000 | $ | 826,591 | $ | 1,273,754 | |||||||||
Secured term loans: | |||||||||||||||
Secured by corporate tenant lease assets | 193,000 | 193,000 | LIBOR + 1.85% | July 2006 (5) | |||||||||||
Secured by corporate tenant lease assets | 140,440 | 144,114 | 7.44% | March 2009 | |||||||||||
Secured by corporate tenant lease assets | 135,000 | | LIBOR + 1.75% | October 2008 (6) | |||||||||||
Secured by corporate tenant lease assets | 92,876 | 95,074 | 6.00% 11.38% | Various through 2022 | |||||||||||
Secured by corporate lending investments | 77,938 | 79,126 | 6.55% | November 2005 | |||||||||||
Secured by corporate lending investments | 60,874 | 61,537 | 6.41% | January 2013 | |||||||||||
Secured by corporate lending investments | 60,000 | 60,000 | LIBOR + 2.50% | June 2004 (7) | |||||||||||
Secured by corporate lending investments | | 50,000 | LIBOR + 0.60% | October 2003 (8) | |||||||||||
Secured by corporate lending investments | 48,000 | | LIBOR + 2.125% | July 2008 (9) | |||||||||||
Total term loans | 808,128 | 682,851 | |||||||||||||
Less: debt discount | (128 | ) | (236 | ) | |||||||||||
Total secured term loans | 808,000 | 682,615 | |||||||||||||
iStar Asset Receivables secured notes: | |||||||||||||||
STARs Series 2002-1: | |||||||||||||||
Class A1 | 40,011 | 236,694 | LIBOR + 0.26% | June 2004 (10) | |||||||||||
Class A2 | 381,296 | 381,296 | LIBOR + 0.38% | December 2009 (10) | |||||||||||
Class B | 39,955 | 39,955 | LIBOR + 0.65% | April 2011 (10) | |||||||||||
Class C | 26,637 | 26,637 | LIBOR + 0.75% | May 2011(10) | |||||||||||
Class D | 21,310 | 21,310 | LIBOR + 0.85% | January 2012(10) | |||||||||||
Class E | 42,619 | 42,619 | LIBOR + 1.235% | January 2012(10) | |||||||||||
Class F | 26,637 | 26,637 | LIBOR + 1.335% | January 2012(10) | |||||||||||
Class G | 21,309 | 21,309 | LIBOR + 1.435% | January 2012(10) | |||||||||||
Class H | 26,637 | 26,637 | 6.35% | January 2012(10) | |||||||||||
Class J | 26,637 | 26,637 | 6.35% | May 2012(10) | |||||||||||
Class K | 26,637 | 26,637 | 6.35% | May 2012(10) | |||||||||||
Total STARs Series 2002-1 | 679,685 | 876,368 | |||||||||||||
Less: debt discount | (4,090 | ) | (4,425 | ) | |||||||||||
STARs Series 2003-1: | |||||||||||||||
Class A1 | 235,808 | | LIBOR + 0.25% | October 28, 2005(11) | |||||||||||
Class A2 | 248,206 | | LIBOR +0.35% | August 28, 2010(11) | |||||||||||
Class B | 18,452 | | LIBOR + 0.55% | July 28, 2011(11) | |||||||||||
Class C | 20,297 | | LIBOR + 0.65% | April 28, 2012(11) | |||||||||||
Class D | 12,916 | | LIBOR + 0.75% | October 28, 2012(11) | |||||||||||
Class E | 14,762 | | LIBOR + 1.05% | May 28, 2013(11) | |||||||||||
Class F | 14,762 | | LIBOR + 1.10% | June 28, 2013(11) | |||||||||||
Class G | 12,916 | | LIBOR + 1.25% | June 28, 2013(11) | |||||||||||
Class H | 12,916 | | 4.97% | June 28, 2013(11) | |||||||||||
Class J | 14,761 | | 5.07% | June 28, 2013(11) | |||||||||||
Class K | 25,833 | | 5.56% | June 28, 2013(11) | |||||||||||
Total STARS Series 2003-1 | 631,629 | | |||||||||||||
Total iStar Asset Receivables secured notes | 1.307,224 | 871,943 | |||||||||||||
Unsecured notes: | |||||||||||||||
6.00% Senior Notes (12) | 350,000 | | 6.00% | December 2010 | |||||||||||
6.50% Senior Notes (12) | 150,000 | | 6.50% | December 2013 | |||||||||||
6.75% Dealer Remarketable Securities (13)(14)(15) | | 125,000 | 6.75% | March 2013 | |||||||||||
7.00% Senior Notes (14) | 185,000 | | 7.00% | March 2008 | |||||||||||
7.70% Notes (13)(15) | 100,000 | 100,000 | 7.70% | July 2017 | |||||||||||
7.95% Notes (13)(15) | 50,000 | 50,000 | 7.95% | May 2006 | |||||||||||
8.75% Notes | 350,000 | 350,000 | 8.75% | August 2008 | |||||||||||
Total unsecured notes | 1,185,000 | 625,000 | |||||||||||||
Less: debt discount | (47,921 | ) | (11,603 | ) | |||||||||||
Plus: impact of pay-floating swap agreements(16) | 690 | 3,920 | |||||||||||||
Total unsecured notes | 1,137,769 | 617,317 | |||||||||||||
Other debt obligations | 34,148 | 15,961 | Various | Various | |||||||||||
Total debt obligations | $ | 4,113,732 | $ | 3,461,590 | |||||||||||
140
Explanatory Notes:
141
Availability of amounts under the secured revolving credit facilities are based on percentage borrowing base calculations. In addition, certain of the Company's debt obligations contain covenants. These covenants are both financial and non-financial in nature. Significant financial covenants include limitations on the Company's ability to incur indebtedness beyond specified levels, restrictions on the Company's ability to incur liens on assets and limitations on the amount and type of restricted payments, such as repurchases of its own equity securities, that the Company makes. Significant non-financial covenants include a requirement in its publicly-held debt securities that the Company offer to repurchase those securities at a premium if the Company undergoes a change of control. As of December 31, 2003, the Company believes it is in compliance with all financial and non-financial covenants on its debt obligations.
Subsequent to December 31, 2003, the Company issued $175.0 million of Senior Floating Rate Notes due 2007 which bear interest at three-month LIBOR + 1.25% and $250.0 million of 5.70% Senior Notes due 2014 (see Note 17).
In addition, on January 23, 2004, the Company issued $350.0 million of 4.875% Senior Notes due in 2009. The Notes were sold at 99.89% of their principal amount to yield 4.90%. The Notes are unsecured senior obligations of the Company. The Company used the proceeds to repay outstanding secured borrowings.
Further, on January 13, 2004, the Company closed $200.0 million of term financing with a leading financial institution that is secured by certain corporate bond investments and other lending securities. A number of these investments were previously financed under existing credit facilities. The new facility bears interest at LIBOR + 1.05%1.50% and has a final maturity date of January 2006.
On December 5, 2003, the Company issued $350.0 million of 6.00% Senior Notes due in 2010 and $150.0 million of 6.50% Senior Notes due in 2013. The Notes due 2010 were sold at 99.44% of their principal amount and the Notes due 2013 were sold at 99.23% of their principal amount. The Notes are unsecured senior obligations of the Company. The Company used the net proceeds to partially repay outstanding borrowings under its secured credit facilities.
On November 4, 2003, one of the Company's $500.0 million secured facilities was amended to include subordinate and mezzanine leanding investments as collateral at stated interest rates of LIBOR+2.15%2.25%.
On October 31, 2003, the Company's $50.0 million term loan bearing interest at LIBOR + 0.60% matured and was repaid.
On September 29, 2003, the Company closed a $135.0 million term loan secured by a CTL asset it acquired the same day. The loan has a five-year term and bears interest at LIBOR + 1.75%.
On July 24, 2003, the Company closed a $48.0 million term loan secured by a corporate lending investment it originated in the third quarter of 2003. The loan has a three-year primary term and two one-year extension options, and bears interest at LIBOR + 2.125%.
On May 21, 2003, a wholly-owned subsidiary of the Company issued iStar Asset Receivables ("STARs"), Series 2003-1, the Company's proprietary match funding program, consisting of $645.8 million of investment-grade bonds secured by the subsidiary's structured finance and CTL assets, which had an aggregate outstanding carrying value of approximately $738.1 million at inception. Principal payments received on the assets will be utilized to repay the most senior class of the bonds
142
then outstanding. The maturity of the bonds match funds the maturity of the underlying assets financed under the program. The weighted average interest rate on the bonds, on an all-floating rate basis, was approximately LIBOR + 0.47% at inception. For accounting purposes, this transaction was treated as a secured financing: the underlying assets and STARs liabilities remained on the Company's Consolidated Balance Sheets, and no gain on sale was recognized.
On May 14, 2003, the Company extended the maturity on its $300.0 million unsecured facility to July 2004.
On May 8, 2003, the Company extended the maturity on its $60.0 million term loan to June 2004.
On April 9, 2003, the Company repaid the existing term loan financing a $75.0 million term preferred investment in a publicly-traded real estate company and simultaneously entered into another $50.0 million term loan with a leading financial institution. The new term loan bears interest at LIBOR + 0.60% and has a final maturity date of October 2003 with amortization payments in July 2003 and October 2003.
On April 8, 2003, the Company issued an additional $35.0 million of 7.00% Senior Notes due March 2008, bringing the aggregate principal amount of the Senior Notes to $185.0 million. The add-on Notes have identical terms to the Senior Notes issued in March 2003, although they were issued at 102.75% of their principal amount, to yield 6.34% per annum.
On March 14, 2003, the Company retired the 6.75% Dealer Remarketable Securities of its Leasing Subsidiary by exchanging those securities for newly issued $150.0 million 7.00% Senior Notes due March 2008.
On January 27, 2003, the Company extended the maturity on one of its $700.0 million secured facilities to January 2007, which includes a one-year "term-out" at the Company's option.
On December 11, 2002, the Company closed a $61.5 million term loan financing with a leading financial institution. The proceeds were used to fund a portion of an $82.1 million CTL investment. The non-recourse loan is fixed rate and bears interest at 6.412%, has a maturity date of December 2012 and amortizes over a 30-year schedule.
On September 30, 2002, the Company closed a $500.0 million secured revolving credit facility with a leading financial institution. The facility has a three-year term and bears interest at LIBOR + 1.50% to 2.25%, depending upon the collateral contributed to the borrowing base. The facility accepts a broad range of structured finance and corporate tenant assets and has a final maturity date of September 2005.
On July 2, 2002, the Company purchased the remaining interest in the Milpitas joint venture from the former Milpitas external member for $27.9 million. Upon purchase of the interest, the Milpitas joint venture became fully consolidated for accounting purposes and approximately $79.1 million of secured term debt is reflected on the Company's Consolidated Balance Sheets.
On May 28, 2002, the Company fully repaid the remaining $446.2 million of bonds outstanding under STARs, Series 2000-1. Simultaneously, a wholly-owned subsidiary of the Company issued STARs, Series 2002-1, consisting of $885.1 million of investment-grade bonds secured by the subsidiary's structured finance and CTL assets, which had an aggregate outstanding carrying value of approximately $1.1 billion at inception. Principal payments received on the assets will be utilized to repay the most
143
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 weighted average interest rate on the bonds, on an all-floating rate basis, was approximately LIBOR + 0.56% at inception. For accounting purposes, this transaction was treated as a secured financing: the underlying assets and STARs liabilities remained on the Company's Consolidated Balance Sheets, and no gain on sale was recognized.
On March 29, 2002, the Company extended the maturity of its $500.0 million secured facility to August 2005, which includes a one-year "term-out" extension at the Company's option.
On August 9, 2001, the Company issued $350.0 million of 8.75% Senior Notes due in 2008. The Notes are unsecured senior obligations of the Company. The Company used the net proceeds to repay outstanding borrowings under its secured credit facilities.
On July 27, 2001, the Company completed a $300.0 million unsecured revolving credit facility with a group of leading financial institutions. The facility has an initial maturity of July 2003, with a one-year extension at the Company's option and another one-year extension at the lenders' option. The facility replaces two prior credit facilities maturing in 2002 and 2003, and bears interest at LIBOR + 2.125%. On May 14, 2003, the Company extended the maturity of this facility to July 2004.
On July 6, 2001, the Company financed a $75.0 million structured finance asset with a $50.0 million term loan bearing interest at LIBOR + 2.50%. The loan has a maturity of July 2006, including a one-year extension at the Company's option. This investment is a $75.0 million term preferred investment in a publicly-traded real estate company. The Company's investment carries an initial current yield of 10.50%, with annual increases of 0.50% in each of the next two years. In addition, the Company's investment is convertible into the customer's common stock at a strike price of $25.00 per share. The investment is callable by the customer between months 13 and 30 of the term at a yield maintenance premium, and after month 30, at a premium sufficient to generate a 14.62% internal rate of return on the Company's investment. The investment is putable by the Company to the customer for cash after five years. On April 9, 2003, the Company repaid this term loan and simultaneously entered into another $50.0 million term loan bearing interest at LIBOR + 0.60% and with a final maturity of October 2003.
On June 14, 2001, the Company closed $193.0 million of term loan financing secured by 15 CTL assets. The variable-rate loan bears interest at LIBOR + 1.85% (not to exceed 10.00% in aggregate) and has two one-year extensions at the Company's option. The Company used these proceeds to repay a $77.8 million secured term loan maturing in June 2001 and to pay down a portion of its revolving credit facilities. In addition, the Company extended the maturity of its $500.0 million secured revolving credit facility to August 2003. On March 29, 2002, the Company again extended the final maturity of this facility to August 2005, which includes a one-year "term-out" extension at the Company's option.
On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured notes. These notes were senior unsecured obligations of the Leasing Subsidiary and ranked equally with the Leasing Subsidiary's other senior unsecured and unsubordinated indebtedness.
On February 22, 2001, the Company extended the maturity of its $350.0 million unsecured revolving credit facility to May 2002. On July 27, 2001, the Company repaid this facility and replaced it with a $300.0 million unsecured revolving credit facility.
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On January 11, 2001, the Company closed a $700.0 million secured revolving credit facility which is led by a major commercial bank. The facility has a three-year primary term and one-year "term-out" extension option, and bears interest at LIBOR + 1.40% to 2.15%, depending upon the collateral contributed to the borrowing base. The facility accepts a broad range of structured finance assets and has a final maturity of January 2005. On January 27, 2003, the Company extended the final maturity on this facility to January 2007.
During the years ended December 31, 2003, 2002 and 2001, the Company incurred an extraordinary loss of approximately $0, $12.2 million and $1.6 million, respectively, as a result of the early retirement of certain debt obligations. On January 1, 2003, in accordance with SFAS No. 145, these costs were reclassified from "Extraordinary loss on early extinguishments of debt" into income from continuing operations.
As of December 31, 2003, future expected/scheduled maturities of outstanding long-term debt obligations are as follows (in thousands)(1):
|
|
|||
---|---|---|---|---|
2004 | $ | 264,158 | ||
2005 | 702,840 | |||
2006 | 243,000 | |||
2007 | 313,216 | |||
2008 | 718,000 | |||
Thereafter | 1,923,967 | |||
Total principal maturities | 4,165,181 | |||
Net unamortized debt discounts | (52,139 | ) | ||
Impact of pay-floating swap agreement | 690 | |||
Total debt obligations | $ | 4,113,732 | ||
Explanatory Note:
Note 8Shareholders' Equity
The Company's charter 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. The Company has 2.3 million shares of 9.375% Series B Cumulative Redeemable Preferred Stock, 1.5 million shares of 9.20% Series C Cumulative Redeemable Preferred Stock, 4.6 million shares of 8.00% Series D Cumulative Redeemable Preferred Stock, 5.6 million shares of 7.875% Series E Cumulative Redeemable Preferred Stock, 4.0 million shares of 7.80% Series F Cumulative Redeemable Preferred Stock and 3.2 million shares of 7.65% Series G Cumulative Redeemable Preferred Stock. The Series B, C, D, E, F and G Cumulative Redeemable Preferred Stock are redeemable without premium at the option of the Company at their respective liquidation preferences beginning on June 15, 2001, August 15, 2001, October 8, 2002, July 18, 2008, September 29, 2008 and December 19, 2008, respectively.
In December 2003, the Company completed an underwritten public offering of 5.0 million primary shares of the Company's Common Stock. The Company received approximately $191.1 million from the offering and used these proceeds to repay a portion of its secured debt.
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In December 2003, the Company redeemed 1.6 million shares of the Company's 9.50% Series A Cumulative Redeemable Preferred Stock, having a liquidation preference of $50.00 per share by exchanging those securities for newly issued 3.2 million shares of 7.65% Series G Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning on December 19, 2008. Immediately following this transaction the Company no longer had any Series A Preferred Stock outstanding. The Company did not receive any cash proceeds from the offering.
In September 2003, the Company completed an underwritten public offering of 4.0 million shares of its 7.80% Series F Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning on September 29, 2008. The Company used the proceeds from the offering to repay a portion of its secured debt.
In July 2003, the Company redeemed 2.8 million shares of the Company's 9.50% Series A Cumulative Redeemable Preferred Stock, having a liquidation preference of $50.00 per share by exchanging those securities for newly issued 5.6 million shares of 7.875% Series E Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning on July 18, 2008. The Company did not receive any cash proceeds from the offering.
On November 14, 2002, the Company completed an underwritten public offering of 8.0 million primary shares of the Company's Common Stock. The Company received approximately $202.9 million from the offering and used these proceeds to repay a portion of its secured debt.
On December 15, 1998, the Company issued warrants to acquire 6.1 million shares of Common Stock, as adjusted for dilution, at $34.35 per share. The warrants are exercisable on or after December 15, 1999 at a price of $34.35 per share and expire on December 15, 2005.
Concentration of Shareholder Ownership On October 30, 2001, SOFI IV SMT Holdings, L.P. ("SOFI IV") and certain of its affiliates sold 18.975 million shares of Common Stock owned by them (including the subsequently-exercised 2.475 million share over-allotment option granted to the underwriters). In addition, on May 15, 2002, SOFI IV sold 10.808 million shares of Common Stock owned by them (including the subsequently-exercised 808,200 share over-allotment option granted to the underwriters). Further, on November 14, 2002, SOFI IV sold 3.5 million shares of Common Stock owned by them (including the subsequently-exercised 1.5 million over-allotment option granted to the underwriters). Lastly, on May 13, 2003, SOFI IV distributed approximately 15.9 million shares to its limited and general partners. Some of the partners then elected to sell 6.9 million of the shares distributed to them. Immediately following the secondary offerings and the distribution, SOFI IV owned approximately 3.88% of the Company's Common Stock (based on the diluted sharecount as of December 31, 2003). The Company did not sell any shares in the offerings, other than the November 2002 offering, in which the Company sold 8.0 million primary shares and received net proceeds of approximately $202.9 million.
DRIP/Stock Purchase Plan The Company maintains a dividend reinvestment and direct stock purchase plan. Under the dividend reinvestment component of the plan, the Company's shareholders may purchase additional shares of Common Stock without payment of brokerage commissions or service charges by automatically reinvesting all or a portion of their Common Stock cash dividends. Under the direct stock purchase component of the plan, the Company's shareholders and new investors may purchase shares of Common Stock directly from the Company without payment of brokerage
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commissions or service charges. All purchases of shares in excess of $10,000 per month pursuant to the direct purchase component are at the Company's sole discretion. Shares issued under the plan may reflect a discount of up to 3.00% from the prevailing market price of the Company's Common Stock. The Company is authorized to issue up to 8.0 million shares of Common Stock pursuant to the dividend reinvestment and direct stock purchase plan. During the 12 months ended December 31, 2003 and 2002, the Company issued a total of approximately 2.6 million and 1.6 million shares of its Common Stock, respectively, through the direct stock purchase component of the plan. Net proceeds during the 12 months ended December 31, 2003 and 2002 were approximately $89.1 million and $44.4 million, respectively. There are approximately 3.6 million shares available for issuance under the plan as of December 31, 2003.
Stock Repurchase ProgramThe 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 or loan repayments 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, 2003, the Company had repurchased a total of approximately 2.3 million shares at an aggregate cost of approximately $40.7 million. The Company has not repurchased any shares under the stock repurchase program since November 2000.
Note 9Risk Management and Use of Financial Instruments
Risk managementIn 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 lending investments that results from a property's, borrower's or corporate tenant's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of loans 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 CTL facilities held by the Company.
Use of derivative financial instrumentsThe 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. The Company does not use derivative instruments to hedge credit/market risk or for speculative purposes.
The Company has entered into the following cash flow and fair value hedges that are outstanding as of December 31, 2003. The net value (liability) associated with these hedges is reflected on the Company's Consolidated Balance Sheets (in thousands).
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Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
Estimated Value at December 31, 2003 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 125,000 | 2.885 | % | 1/23/03 | 6/25/06 | $ | (1,632 | ) | ||||
Pay-Fixed Swap | 125,000 | 2.838 | % | 2/11/03 | 6/25/06 | (1,486 | ) | ||||||
Pay-Fixed Swap | 75,000 | 5.580 | % | 11/4/99 | (1) | 12/1/04 | (3,227 | ) | |||||
Pay-Floating Swap | 200,000 | 4.381 | % | 12/17/03 | 12/15/10 | (1,472 | ) | ||||||
Pay-Floating Swap | 100,000 | 4.345 | % | 12/17/03 | 12/15/10 | (958 | ) | ||||||
Pay-Floating Swap | 100,000 | 3.878 | % | 11/27/02 | 8/15/08 | 2,681 | |||||||
Pay-Floating Swap | 50,000 | 3.810 | % | 11/27/02 | 8/15/08 | 1,183 | |||||||
Pay-Floating Swap | 50,000 | 4.290 | % | 12/17/03 | 12/15/10 | (649 | ) | ||||||
LIBOR Cap | 345,000 | 8.000 | % | 5/22/02 | 5/28/14 | 11,648 | |||||||
LIBOR Cap | 135,000 | 6.000 | % | 9/29/03 | 10/15/06 | 418 | |||||||
LIBOR Cap | 75,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
LIBOR Cap | 35,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
Total Estimated Value | $ | 6,506 | |||||||||||
Explanatory Note:
Between January 1, 2002 and December 31, 2003, the Company also had outstanding the following cash flow hedges that have expired or been settled (in thousands):
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
|||||
---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 125,000 | 7.058 | % | 6/15/00 | 6/25/03 | |||
Pay-Fixed Swap | 125,000 | 7.055 | % | 6/15/00 | 6/25/03 | ||||
Pay-Fixed Swap | 100,000 | 4.139 | % | 9/29/03 | 1/2/11 | ||||
Pay-Fixed Swap | 100,000 | 4.643 | % | 9/29/03 | 1/2/14 |
During 2003, the Company entered into two 90-day forward starting swaps each having a $100.0 million notional amount. These pay-fixed swaps which were effective in September 2003, had rates of 4.139% and 4.643%, had seven-year and 10-year terms, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These two swaps were settled in connection with the Company's issuance of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes. In addition, effective in September 2003, the Company entered into a $135.0 million cap with a rate of 6.00% to hedge the Company's current outstanding floating-rate debt. This cap has a three-year term. Further, the Company entered into two $125.0 million forward starting swaps. These pay-fixed swaps were effective in June 2003 and replaced the two $125.0 million pay-fixed swaps mentioned above. The two new pay-fixed swaps have a three-year term and expire on June 25, 2006.
In addition, in connection with a portion of the Company's fixed-rate corporate bonds, the Company entered into three pay-floating interest rate swaps in December 2003 struck at 4.381%, 4.345% and 4.29% with notional amounts of $200.0 million, $100.0 million and $50.0 million, respectively, and maturing on December 15, 2010 and also entered into two pay-floating interest rate swaps in November 2002 struck at 3.8775% and 3.81% with notional amounts of $100.0 million and $50.0 million, respectively, and maturing on August 15, 2008. The Company pays six-month LIBOR on
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the swaps entered into in December 2003 and one-month LIBOR on the swaps entered into in November 2002 and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes attributable to changes in LIBOR. For accounting purposes, the difference between the fixed rate received and the LIBOR rate paid on the notional amount of the swap is recorded as "Interest expense" on the Company's Consolidated Statements of Operations. In addition, the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount on a quarterly basis.
In connection with STARs, Series 2003-1 in May 2003, the Company entered into a LIBOR interest rate cap struck at 6.95% in the notional amount of $270.6 million, and simultaneously sold a LIBOR interest rate cap with the same terms. Since these instruments do not change 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 terms of these arrangements are substantially the same, the effects of a revaluation of these two instruments substantially offset one another.
In connection with STARs, Series 2002-1 in May 2002, the Company entered into a LIBOR interest rate cap struck at 8.00% in the notional amount of $345.0 million. The Company utilizes the provisions of SFAS No. 133 with respect to such instruments. SFAS No. 133 provides that the up-front fees paid on option-based products such as caps should be expensed into earnings based on the allocation of the premium to the affected periods as if the agreement were a series of "caplets." These allocated premiums are then reflected as a charge to income (as part of interest expense) in the affected period. On May 28, 2002, in connection with the STARs, Series 2002-1 transaction, the Company paid a premium of $13.7 million for this interest rate cap. Using the "caplet" methodology discussed above, amortization of the cap premium is dependent upon the actual value of the caplets at inception.
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 term loan bears interest at 7.44% per annum, payable monthly, and amortizes over an approximately 22-year schedule. The 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 term loan over its effective ten-year term.
Credit risk concentrationsConcentrations of credit risks arise when a number of borrowers or customers related to the Company's investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of credit risks. Management believes the current credit risk portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.
All of the Company's CTL assets (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 10.00%) as of December 31, 2003 in California (19.39%) and New York (11.99%). As of December 31, 2003, the Company's investments also contain greater than 10.00%
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concentrations in the following asset types: office-CTL (27.48%), office-lending (17.16%), industrial (13.99%) and hotel-lending (12.06%).
The Company underwrites the credit of prospective borrowers and customers and often requires them to provide some form of credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although the Company's loans and other lending investments and corporate customer lease assets are geographically diverse and the borrowers and customers operate in a variety of industries, to the extent the Company has a significant concentration of interest or operating lease revenues from any single borrower or customer, the inability of that borrower or customer to make its payment could have an adverse effect on the Company. As of December 31, 2003, the Company's five largest borrowers or corporate tenants collectively accounted for approximately 15.51% of the Company's aggregate annualized interest and operating lease revenue of which no single customer accounts for more than 3.84%.
Note 10Stock-Based Compensation Plans and Employee Benefits
The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to provide incentive compensation for officers, other key employees and directors of the Company. The Plan provides for awards of stock options and shares of restricted stock and other performance awards. The maximum number of shares of Common Stock available for awards under the Plan is 9.00% of the outstanding shares of Common Stock, calculated on a fully diluted basis, from time to time; provided that the number of shares of Common Stock reserved for grants of options designated as incentive stock options is 5.0 million, subject to certain antidilution provisions in the Plan. All awards under the Plan, other than automatic awards to non-employee directors, are at the discretion of the Board or a committee of the Board. At December 31, 2003, a total of approximately 10.1 million shares of Common Stock were available for awards under the Plan, of which options to purchase approximately 2.9 million shares of Common Stock were outstanding and approximately 422,000 shares of restricted stock were outstanding. A total of 1.9 million shares remain available for awards under the Plan as of December 31, 2003.
In March 1998, the Company issued approximately 2.5 million (as adjusted) fully vested and immediately exercisable options to purchase shares of Common Stock at $14.72 per share (as adjusted) to its former advisor with a term of ten years. The former advisor granted a portion of these options to its employees and the remainder was allocated to an affiliate. Upon the Company's acquisition of its former advisor, 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.
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Changes in options outstanding during each of fiscal 2001, 2002 and 2003 are as follows:
|
Number of Shares |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Weighted Average Strike Price |
|||||||||
|
Employees |
Non-Employee Directors |
Other |
|||||||
Options outstanding, December 31, 2000 | 3,259,761 | 520,432 | 946,168 | $ | 18.97 | |||||
Granted in 2001 | 1,617,401 | 90,000 | 100,000 | $ | 20.31 | |||||
Exercised in 2001 | (1,131,595 | ) | (26,900 | ) | (149,492 | ) | $ | 16.48 | ||
Forfeited in 2001 | (100,509 | ) | | | $ | 27.27 | ||||
Options outstanding, December 31, 2001 | 3,645,058 | 583,532 | 896,676 | $ | 18.98 | |||||
Granted in 2002 | | 80,000 | | $ | 27.83 | |||||
Exercised in 2002 | (488,674 | ) | (190,650 | ) | (164,683 | ) | $ | 18.63 | ||
Forfeited in 2002 | (16,907 | ) | (4,600 | ) | | $ | 24.87 | |||
Options outstanding, December 31, 2002 | 3,139,477 | 468,282 | 731,993 | $ | 18.77 | |||||
Granted in 2003 | 15,500 | | | $ | 14.72 | |||||
Exercised in 2003 | (843,624 | ) | (235,746 | ) | (389,594 | ) | $ | 18.99 | ||
Forfeited in 2003 | (2,300 | ) | (13,850 | ) | | $ | 26.14 | |||
Transferred in 2003(1) | | (63,692 | ) | 63,692 | $ | 27.15 | ||||
Options outstanding, December 31, 2003 | 2,309,053 | 154,994 | 406,091 | $ | 18.59 | |||||
Explanatory Note:
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The following table summarizes information concerning outstanding and exercisable options as of December 31, 2003:
|
OPTIONS OUTSTANDING |
OPTIONS EXERCISABLE |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Exercise Price Range |
Options Outstanding |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Currently Exercisable |
Weighted Average Exercise Price |
|||||||
$14.72$15.00(1) | 657,493 | 4.93 | $ | 14.72 | 641,993 | $ | 14.72 | |||||
$16.69$16.88 | 477,071 | 6.01 | $ | 16.88 | 477,071 | $ | 16.88 | |||||
$17.38$17.56 | 151,068 | 6.21 | $ | 17.38 | 151,068 | $ | 17.38 | |||||
$19.63$19.69 | 1,308,522 | 7.10 | $ | 19.69 | 754,929 | $ | 19.69 | |||||
$20.00$21.44 | 50,333 | 6.68 | $ | 20.94 | 50,333 | $ | 20.94 | |||||
$23.32$23.64 | 28,499 | 0.36 | $ | 23.53 | 28,499 | $ | 23.53 | |||||
$24.13$24.94 | 67,566 | 6.77 | $ | 24.86 | 67,233 | $ | 24.86 | |||||
$25.10$26.09 | 13,800 | 2.41 | $ | 26.09 | 13,800 | $ | 26.09 | |||||
$26.30$26.97 | 8,900 | 2.02 | $ | 26.45 | 8,234 | $ | 26.41 | |||||
$27.00 | 25,000 | 7.48 | $ | 27.00 | 16,667 | $ | 27.00 | |||||
$28.54$29.82 | 76,792 | 8.05 | $ | 29.71 | 76,792 | $ | 29.71 | |||||
$55.39 | 5,094 | 5.42 | $ | 55.39 | 5,094 | $ | 55.39 | |||||
2,870,138 | 6.28 | $ | 18.59 | 2,291,713 | $ | 18.32 | ||||||
Explanatory Note:
In the third quarter 2002 (with retroactive application to the beginning of the calendar year), the Company adopted the fair value method for accounting for options issued to employees or directors, as allowed under Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." Accordingly, the Company recognizes a charge equal to the fair value of these options at the date of grant multiplied by the number of options issued. This charge will be amortized over the related remaining vesting terms to individual employees as additional compensation. There were 15,500 options issued during the 12 months ended December 31, 2003 with a strike price of $14.72.
Prior to the third quarter 2002, the Company had elected to use the intrinsic method for accounting for options issued to employees or directors, as allowed under SFAS No. 123 and, accordingly, recognized no expense in connection with these options to the extent that the options' exercise prices equaled or exceeded the quoted prices of the Company's shares of Common Stock on the grant or investment dates. However, in connection with the acquisition of the Company's former external advisor, the Company recognized a deferred stock-based compensation charge of approximately $5.1 million. This deferred charge represents the difference between the Company's closing stock price on the date it acquired its former external advisor (which was $20.25), and the strike price of $14.72 per share (as adjusted) for the unvested portion of the options granted to the former external advisor's employees, who are now employees of the Company. This deferred charge is being
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amortized over the related remaining vesting terms to the individual employees as an additional expense under "General and administrativestock-based compensation" on the Company's Consolidated Statements of Operations.
If the Company's compensation costs had 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 prior to 2002, the Company's net income for the fiscal years ended December 31, 2003, 2002 and 2001, would have been reduced on a pro forma basis by approximately $289,000, $565,000 and $705,000, respectively. This would not have significantly impacted the Company's earnings per share.
The fair value of each significant option grant is estimated on the date of grant (January 10, 2003 for the 2003 options) using the Black-Scholes model. For the above SFAS No. 123 calculation, the following assumptions were used for the Company's fair value calculations of stock options:
|
2003 |
2002 |
2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Expected life (in years) | 5 | 5 | 5 | |||||||
Risk-free interest rate | 3.13 | % | 4.38 | % | 4.96 | % | ||||
Volatility | 17.64 | % | 16.23 | % | 20.83 | % | ||||
Dividend yield | 9.57 | % | 8.45 | % | 12.00 | % | ||||
Weighted average grant date fair value | $ | 5.26 | $ | 1.38 | $ | 0.76 |
Future charges may be taken to the extent of additional option grants, which are at the discretion of the Board of Directors.
During the 12 months ended December 31, 2003, the Company granted 40,050 restricted shares to employees that vest proportionately over three years on the anniversary date of the initial grant of which 35,675 remain outstanding.
During the year ended December 31, 2002, the Company granted 199,350 restricted shares to employees. Of these shares, 44,350 will vest proportionately over three years on the anniversary date of the initial grant. Of the 44,350 shares granted, 22,382 remain outstanding as of December 31, 2003. The balance of 155,000 restricted shares granted to several employees will vest on March 31, 2004 if: (1) the employee remains employed until that date; and (2) the 60-day average closing price of the Company's Common Stock equals or exceeds a set floor price as of such date. Dividends will be paid on the restricted shares as dividends are paid on shares of the Company's Common Stock. Assuming the shares become fully vested on March 31, 2004 and the market price of the stock is $38.90 (which was the market price of the Common Stock on December 31, 2003), the Company would incur a one-time charge to earnings at that time of approximately $6.0 million (the fair market value of the 155,000 shares at $38.90 per share). During the year ended December 31, 2002, the Company also granted 208,980 restricted shares to its Chief Financial Officer (see detailed information below).
During the year ended December 31, 2001, the Company granted 94,943 restricted shares to employees in lieu of cash bonuses for the year ended December 31, 2000 at the employees' election. These restricted shares were immediately vested on the date of grant and were not transferable for a period of one year following vesting.
For accounting purposes, the Company measures compensation costs for these shares, not including the contingently issuable shares, as of the date of the grant and expenses such amounts
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against earnings, either at the grant date (if no vesting period exists) or ratably over the respective vesting/service period. Such amounts appear on the Company's Consolidated Statements of Operations under "General and administrativestock-based compensation expense."
During the year ended December 31, 2002, the Company entered into a three-year employment agreement with its new Chief Financial Officer. Under the agreement, the Chief Financial Officer receives an annual base salary of $225,000. She may also receive a bonus, which is targeted to be $325,000, subject to an annual review for upward or downward adjustment. In addition, the Company granted the Chief Financial Officer 108,980 contingently vested restricted stock awards. These awards become vested on December 31, 2005 if the executive's employment with the Company has not terminated before such date. Dividends will be paid on the restricted shares as dividends are paid on shares of the Company's Common Stock. These dividends are accounted for in a manner consistent with the Company's Common Stock dividends, as a reduction to retained earnings. For accounting purposes, the Company will take a total charge of approximately $3.0 million related to the restricted stock awards, which will be amortized over the period from November 6, 2002 through December 31, 2005. This charge is reflected on the Company's Consolidated Statements of Operations under "General and administrativestock-based compensation."
Further, the Company granted the Chief Financial Officer 100,000 restricted shares which vest in whole or in part if the Company's shareholders realize certain total rates of return (dividends since November 6, 2002 plus share price appreciation since January 2, 2003), as of January 31, 2004. Vested shares would be subject to forfeiture if the executive's employment with the Company terminated under certain circumstances. The shares became fully vested on January 31, 2004 and the market price of the stock was $40.02, therefore; the Company will incur a one-time charge to earnings during the first quarter 2004 of approximately $4.0 million (the fair market value of the 100,000 shares at $40.02 per share). For accounting purposes, the employment arrangement described above is treated as a contingent, variable plan until January 31, 2004.
During the year ended December 31, 2001, the Company entered into a three-year employment agreement with its Chief Executive Officer. Under the agreement, the Chief Executive Officer receives an annual base salary of $1.0 million. He may also receive a bonus, which is targeted to be an amount equal to his base salary, if the Company achieves certain performance targets set by the Compensation Committee. The bonus award may be increased or reduced from the target depending upon the degree to which the performance goals are exceeded or are not met, and may not exceed 200.00% of his base salary. The bonus is reduced by the amount of any dividends paid to the Chief Executive Officer in respect of phantom shares (described below) which are awarded to him and have contingently vested. The Chief Executive Officer received approximately $2.1 million in such dividends in 2002 and $4.4 million in 2003. As such, no additional bonus was paid in either year. As part of this agreement, the Company confirmed a prior grant of 750,000 stock options made to the executive on March 2, 2001 with an exercise price of $19.69, which represented the market price at the date of the original contingent grant. However, because the grant required further approval by the Compensation Committee and the Board of Directors, no measurement date occurred for accounting purposes until such approvals were made, at which point the market price of the Company's Common Stock was $24.90. Accordingly, an aggregate charge of approximately $3.9 million is being recognized with respect to these options over the term of this agreement and is reflected on the Company's Consolidated Statements of Operations under "General and administrativestock-based compensation." These
154
options will vest in three equal annual installments of 250,000 shares in each successive January beginning in January 2002.
The Company also granted the executive 2.0 million unvested phantom shares, each of which represents one share of the Company's Common Stock. These shares will vest in installments of 350,000 shares, 650,000 shares, 600,000 shares and 400,000 shares on a contingent basis if the average closing price of the Company's Common Stock for a 60 calendar day period achieves thresholds of $25.00, $30.00, $34.00 and $37.00, respectively. As of December 31, 2003 all thresholds have been attained, and a total of 2.0 million of these shares have contingently vested. Assuming that the market price of the Common Stock on March 30, 2004 is $38.90 (which was the market price of the Common Stock on December 31, 2003), the Company would incur a one-time charge to earnings in March 2004 of approximately $77.8 million (the fair market value of the 2.0 million shares at $38.90 per share). Shares that have contingently vested generally will not become fully vested until March 2004, except upon certain termination or change of control events. Further, if the average stock price drops below certain specified levels for a 60-day period prior to such date, such phantom shares would not fully vest and would be forfeited. If the Company is not authorized to issue shares to the executive upon full vesting of the phantom shares, then the vesting will be settled through a cash payment based upon the market price of the Common Stock during a recent trading period. The executive will receive dividends on shares that have contingently or fully vested and have not been forfeited under the terms of the agreement, if and when the Company declares and pays dividends on its Common Stock. Because no shares have been issued, dividends received on these phantom shares, if any, will be reflected as compensation expense by the Company. For accounting purposes, this arrangement will be treated as a contingent, variable plan and no additional compensation expense will be recognized until the shares, in whole or in part, become irrevocably vested, whereupon the Company will reflect a charge equal to the then fair value of the shares irrevocably vested.
In addition, during the year ended December 31, 2001, the Company entered into a three-year employment agreement with its former President. Under the agreement, in lieu of salary and bonus, the Company granted the executive 500,000 restricted shares. These shares became fully-vested on September 30, 2002 as a result of the Company achieving a 60.00% total shareholder rate of return (dividends plus share price appreciation) since January 1, 2001. Upon the restricted shares becoming fully vested, the Company withheld 250,000 of such shares from the executive to cover the tax obligations associated with the vesting of such shares. These shares are reflected as "Treasury stock", at a cost of approximately $7.4 million, on the Company's Consolidated Statements of Changes in Shareholders' Equity. For accounting purposes, the employment arrangement described above was treated as a contingent, variable plan until the April 29, 2002 contingent vesting date. The Company incurred a total charge of approximately $15.0 million related to the vesting of the shares, recognized ratably over the period from April 29, 2002 through September 30, 2002. The executive received dividends on the share grant from the date of the agreement as and when the Company declared and paid dividends on its Common Stock. For financial statement purposes, such dividends were accounted for in a manner consistent with the Company's normal Common Stock dividends, as a reduction to retained earnings.
Certain affiliates of SOFI IV and the Company's Chief Executive Officer have agreed to reimburse the Company for the value of restricted shares awarded to the former President in excess of 350,000 shares, net of tax benefits realized by the Company or its shareholders on account of compensation expense deductions. The reimbursement obligation arose once the restricted share award became fully
155
vested on September 30, 2002. The Company's Chief Executive Officer fulfilled his reimbursement obligation through the delivery of shares of the Company's Common Stock owned by him. In the case of the SOFI IV affiliates, the reimbursement payment must be made through the delivery of approximately $2.4 million in cash or 131,250 shares of Common Stock. As of December 31, 2003, the SOFI IV affiliates have paid approximately $506,000 in cash. The approximately $1.9 million remaining balance of the SOFI IV affiliates' reimbursement obligation is due on or before March 31, 2004. These reimbursement payments are reflected as "Additional paid-in capital" on the Company's Consolidated Balance Sheets, and not as an offset to the charge referenced above.
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. As of December 31, 2003, iStar Venture Direct Holdings, LLC had written off all of its investments. The profits interests have three-year vesting schedules, and are subject to forfeiture in the event of termination of employment for cause or a voluntary resignation. The Company currently estimates that the profits interests have no value.
High Performance Unit Program
In May 2002, the Company's shareholders approved the iStar Financial High Performance Unit ("HPU") Program. The program, as more fully described in the Company's annual proxy statement dated April 8, 2002, is a performance-based employee compensation plan that only has material value to the participants if the Company provides superior returns to its shareholders. The program entitles the employee participants ("HPU holders") to receive cash distributions in the nature of common stock dividends if the total rate of return on the Company's Common Stock (share price appreciation plus dividends) exceeds certain performance levels.
Initially, there were three plans within the program: the 2002 plan, the 2003 plan, and the 2004 plan. Each plan has 5,000 shares of High Performance Common Stock associated with it. Each share of High Performance Common Stock carries 0.25 votes per share.
For these three plans, the Company's performance is measured over a one-, two-, or three-year valuation period, beginning on January 1, 2002 and ending on December 31, 2002, December 31, 2003 and December 31, 2004, respectively. The end of the valuation period (i.e., the "valuation date") will be accelerated if there is a change in control of the Company. The High Performance Common Stock has a nominal value unless the total rate of shareholder return for the relevant valuation period exceeds the greater of: (1) 10.00%, 20.00%, or 30.00% for the 2002 plan, the 2003 plan and the 2004 plan, respectively; and (2) a weighted industry index total rate of return consisting of equal weightings of the Russell 1000 Financial Index and the Morgan Stanley REIT Index for the relevant period.
If the total rate of return on the Company's Common Stock exceeds the threshold performance levels for a particular plan, then distributions will be paid on the shares of High Performance Common Stock related to that plan in the same amounts and at the same times as distributions are paid on a number of shares of the Company's Common Stock equal to the following: 7.50% of the Company's excess total rate of return (over the higher of the two threshold performance levels) multiplied by the weighted average market value of the Company's common equity capitalization during the measurement period, all as divided by the average closing price of a share of the Company's Common Stock for the 20 trading days immediately preceding the applicable valuation date.
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If the total rate of return on the Company's Common Stock does not exceed the threshold performance levels for a particular plan, then the shares of High Performance Common Stock related to that plan will have only nominal value. In this event, each of the 5,000 shares will be entitled to dividends equal to 0.01 times the dividend paid on a share of Common Stock, if and when dividends are declared on the Common Stock.
Regardless of how much the Company's total rate of return exceeds the threshold performance levels, the dilutive impact to the Company's shareholders resulting from distributions on High Performance Common Stock in each plan is limited to the equivalent of 1.00% of the average monthly number of fully diluted shares of the Company's Common Stock outstanding during the valuation period.
The employee participants have purchased their interests in High Performance Common Stock through a limited liability company at purchase prices approved by the Company's Board of Directors. The Company's Board has established the prices of the High Performance Common Stock based upon, among other things, an independent valuation from a major securities firm. The aggregate initial purchase prices were set on June 25, 2002 and were approximately $2.8 million, $1.8 million and $1.3 million for the 2002, 2003 and 2004 plans, respectively. No employee is permitted to exchange his or her interest in the LLC for shares of High Performance Common Stock prior to the applicable valuation date.
The total shareholder return for the valuation period under the 2002 plan was 21.94%, which exceeded both the fixed performance threshold of 10.00% and the industry index return of (5.83%). As a result of this superior performance, the participants in the 2002 plan are entitled to receive cash distributions equivalent to the amount of cash dividends payable on 819,254 shares of the Company's Common Stock, as and when such dividends are paid. Such dividend payments began with the first quarter 2003 dividend. The Company will pay dividends on the 2002 plan shares in the same amount per equivalent share and on the same distribution dates that shares of the Company's Common Stock are paid. The Company has the right, but not the obligation, to repurchase at cost 50.00% of the interests earned by an employee in the 2002 plan if the employee breaches certain non-competition, non-solicitation and confidentiality covenants through January 1, 2005.
The total shareholder return for the valuation period under the 2003 plan was 78.29%, which exceeded the fixed performance threshold of 20.00% and the industry index return of 24.66%. The plan was fully funded and was limited to 1.00% of the average monthly number of fully diluted shares of the Company's Common Stock during the valuation period. As a result of the Company's superior performance, the participants in the 2003 plan are entitled to receive cash distributions equivalent to the amount of cash dividends payable on 987,149 shares of the Company's Common Stock, as and when such dividends are paid. Such dividend payments will begin with the first quarter 2004 dividend. The Company will pay dividends on the 2003 plan shares in the same amount per equivalent share and on the same distribution dates that shares of the Company's Common Stock are paid.
A new 2005 plan has been established with a three-year valuation period ending December 31, 2005. Awards under the 2005 plan were approved on January 14, 2003. The 2005 plan has 5,000 shares of High Performance Common Stock with an aggregate initial purchase price of $573,000. The purchase price of the High Performance Common Stock was established by the Company's Board based upon, among other things, an independent valuation from a major securities firm. The provisions of the 2005 plan are substantially the same as the prior plans.
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A new 2006 plan has been established with a three-year valuation period ending December 31, 2006. Awards under the 2006 plan were approved on January 23, 2004. The 2006 plan had 5,000 shares of High Performance Common Stock with an aggregate initial puchase price of $714,700. The purchase price of the High Performance Common Stock was established by the Company's Board based upon, among other things, an independent valuation from a major securities firm. The provisions of the 2006 plan are substantially the same as the prior plans.
The additional equity from the issuance of the High Performance Common Stock is recorded as a separate class of stock and included within shareholders' equity on the Company's Consolidated Balance Sheets. Net income allocable to common shareholders will be reduced by the HPU holders' share of dividends paid and undistributed earnings, if any.
401(k) Plan
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 three months of continuous service with the Company. Each participant may contribute on a pretax basis up to the maximum percentage of compensation and dollar amount permissible under Section 402(g) of the Internal Revenue Code not to exceed the limits of Code Sections 401(k), 404 and 415. At the discretion of the Board of Directors, the Company may make matching contributions on the participant's behalf of up to 50.00% of the first 10.00% of the participant's annual compensation. The Company made gross contributions of approximately $424,000, $356,000, and $320,000 to the 401(k) Plan for the years ended December 31, 2003, 2002 and 2001, respectively.
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Note 11Earnings Per Share
The following table presents a reconciliation of the numerators and denominators of the basic and diluted EPS calculations for the years ended December 31, 2003, 2002 and 2001, respectively (in thousands, except per share data):
|
2003 |
2002 |
2001 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Numerator: | |||||||||||
Net income from continuing operations | $ | 272,936 | $ | 199,065 | $ | 213,609 | |||||
Preferred dividend requirements | (36,908 | ) | (36,908 | ) | (36,908 | ) | |||||
Net income allocable to common shareholders and HPU holders before income from discontinued operations and gain from discontinued operations(1) | 236,028 | 162,157 | 176,701 | ||||||||
Income from discontinued operations | 14,054 | 15,488 | 15,158 | ||||||||
Gain from discontinued operations | 5,167 | 717 | 1,145 | ||||||||
Net income allocable to common shareholders and HPU holders(1) | $ | 255,249 | $ | 178,362 | $ | 193,004 | |||||
Denominator: | |||||||||||
Weighted average common shares outstanding for basic earnings per common share | 100,314 | 89,886 | 86,349 | ||||||||
Add: effect of assumed shares issued under treasury stock method for stock options, restricted shares and warrants | 1,897 | 1,645 | 1,680 | ||||||||
Add: effect of contingent shares | 1,667 | 1,118 | 205 | ||||||||
Add: effect of joint venture shares | 223 | | | ||||||||
Weighted average common shares outstanding for diluted earnings per common share | 104,101 | 92,649 | 88,234 | ||||||||
Basic earnings per common share: | |||||||||||
Net income allocable to common shareholders before income from discontinued operations and gain from discontinued operations(2) | $ | 2.33 | $ | 1.80 | $ | 2.05 | |||||
Income from discontinued operations | 0.14 | 0.17 | 0.18 | ||||||||
Gain from discontinued operations | 0.05 | 0.01 | 0.01 | ||||||||
Net income allocable to common shareholders(2) | $ | 2.52 | $ | 1.98 | $ | 2.24 | |||||
Diluted earnings per common share: | |||||||||||
Net income allocable to common shareholders before income from discontinued operations and gain from discontinued operations(2)(3) | $ | 2.25 | $ | 1.75 | $ | 2.00 | |||||
Income from discontinued operations | 0.13 | 0.17 | 0.18 | ||||||||
Gain from discontinued operations | 0.05 | 0.01 | 0.01 | ||||||||
Net income allocable to common shareholders(2)(3) | $ | 2.43 | $ | 1.93 | $ | 2.19 | |||||
Explanatory Notes:
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There were approximately 5,000, 167,000 and 261,000 stock options, 0, 6.1 million and 6.1 million warrants and 0, 371,000 and 373,000 joint venture shares that were antidilutive for the 12 months ended December 31, 2003, 2002 and 2001, respectively.
Note 12Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" 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 $295.5, $228.1 million and $214.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. The primary components of comprehensive income other than net income consist of amounts attributable to the adoption and continued application of SFAS No. 133, to the Company's cash flow and fair value hedges and changes in the fair value of the Company's available-for-sale investments.
For the years ended December 31, 2003, 2002 and 2001, the change in fair market value of the Company's unrealized gains (losses) on available-for-sale investments and cash flow and fair value hedges was an increase of $3.3 million, an increase of $12.8 million and a decrease of $15.1 million, respectively, and was recorded as an adjustment to other comprehensive income. The reconciliation to other comprehensive income is as follows (in thousands):
|
For the Years Ended December 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2003 |
2002 |
2001 |
|||||||
Net income | $ | 292,157 | $ | 215,270 | $ | 229,912 | ||||
Other comprehensive income: | ||||||||||
Reclassification of gains on securities into earnings upon realization | (12,031 | ) | | | ||||||
Unrealized gains on available-for-sale investments | 8,103 | 7,601 | 5,709 | |||||||
Cumulative effect of change in accounting principle (SFAS No. 133) on other comprehensive income | | | (9,445 | ) | ||||||
Unrealized gains (losses) on cash flow and fair value hedges | 7,237 | 5,190 | (11,336 | ) | ||||||
Comprehensive income | $ | 295,466 | $ | 228,061 | $ | 214,840 | ||||
Unrealized gains (losses) on available-for-sale investments and cash flow and fair value hedges are recorded as adjustments to shareholders' equity through "Accumulated other comprehensive income (losses)" on the Company's Consolidated Balance Sheets and are not included in adjusted earnings or net income unless realized.
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As of December 31, 2003 and 2002, accumulated other comprehensive income reflected in the Company's shareholders' equity is comprised of the following (in thousands):
|
As of December 31, |
||||||
---|---|---|---|---|---|---|---|
|
2003 |
2002 |
|||||
Unrealized gains on available-for-sale investments | $ | 9,362 | $ | 13,290 | |||
Unrealized losses on cash flow and fair value hedges | (8,354 | ) | (15,591 | ) | |||
Accumulated other comprehensive income (losses) | $ | 1,008 | $ | (2,301 | ) | ||
Over time, the unrealized gains and losses held in other comprehensive income will be reclassified to earnings in the same period(s) in which the hedged items are recognized in earnings. The current balance held in other comprehensive income is expected to be reclassified to earnings over the lives of the current hedging instruments, or for the realized losses on forecasted debt transactions, over the related term of the debt obligation, as applicable. The Company expects that $6.6 million will be reclassified into earnings as an increase in interest expense over the next 12 months.
Note 13Dividends
For the year ended December 31, 2003, total dividends declared by the Company aggregated $267.8 million, or $2.65 per share on Common Stock consisting of quarterly dividends of $0.6625 per share which were declared on April 1, 2003, July 1, 2003, October 1, 2003 and December 1, 2003. The Company also declared dividends aggregating $14.3 million, $4.7 million, $3.0 million, $8.0 million, $4.9 million, $1.7 million and $170,000, respectively, on its Series A, B, C, D, E, F and G preferred stock, respectively, for the year ended December 31, 2003. There are no divided arrearages on any of the preferred shares currently outstanding.
The Series A preferred stock has a liquidation preference of $50.00 per share and carries an initial dividend yield of 9.50% per annum. The dividend rate on the preferred shares will increase 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. As of December 31, 2003, all Series A preferred shares have been exchanged for either Series E preferred stock or Series G preferred stock and therefore the Company will no longer pay dividends on the Series A preferred stock.
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.
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Holders of shares of the Series C preferred stock are entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative preferential cash dividends at the rate of 9.20% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $2.30 per share. The remaining terms relating to dividends of the Series C preferred stock are substantially identical to the terms of the Series B preferred stock described above.
Holders of shares of the Series D preferred stock are entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative preferential cash dividends at the rate of 8.00% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $2.00 per share. The remaining terms relating to dividends of the Series D preferred stock are substantially identical to the terms of the Series B preferred stock described above.
Holders of shares of the Series E 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 7.875% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.97 per share. The remaining terms relating to dividends of the Series E preferred stock are substantially identical to the terms of the Series B preferred stock described above.
Holders of shares of the Series F 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 7.80% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.95 per share. The remaining terms relating to dividends of the Series F preferred stock are substantially identical to the terms of the Series B preferred stock described above.
Holders of shares of the Series G 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 7.65% per annum of the $25.00 liquidation preference, equivalent to a fixed annual rate of $1.91 per share. The remaining terms relating to dividends of the Series G preferred stock are substantially identical to the terms of the Series B preferred stock described above.
The 2002 and 2003 High Performance Unit Program reached their valuation dates on December 31, 2002 and 2003, respectively. Based on the Company's 2002 and 2003 total rate of return, the participants are entitled to receive cash dividends on 819,254 shares and 987,149 shares, respectively, of the Company's Common Stock. The Company will pay dividends on these units in the same amount per equivalent share and on the same distribution dates as shares of the Company's Common Stock. Such dividend payments for the 2002 plan began with the first quarter 2003 dividend and such dividends for the 2003 plan will begin with the first quarter 2004 dividend. All dividends to HPU holders will reduce net income allocable to common shareholders when paid. Additionally, net income allocable to common shareholders will be reduced by the HPU holders' share of undistributed earnings, if any.
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The exact amount of future quarterly dividends to common shareholders will be determined by the Board of Directors based on the Company's actual and expected operations for the fiscal year and the Company's overall liquidity position.
Note 14Fair 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 CTL assets.
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 instrumentsThe 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 investmentsFor 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 securitiesSecurities 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 instrumentsThe 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 obligationsA 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, 2003 and 2002 to maturity using estimated current market rates at which the Company could enter into similar financing arrangements.
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Interest rate protection agreementsThe fair value of interest rate protection agreements such as interest rate caps, floors, collars and swaps used for hedging purposes (see Note 9) is the estimated amount the Company would receive or pay to terminate these agreements at the reporting date, taking into account current interest rates and current creditworthiness of the respective counterparties.
The book and fair values of financial instruments as of December 31, 2003 and 2002 were (in thousands):
|
2003 |
2002 |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Book Value |
Fair Value |
Book Value |
Fair Value |
||||||||||
Financial assets: | ||||||||||||||
Loans and other lending investments | $ | 3,736,110 | $ | 3,978,715 | $ | 3,079,592 | $ | 3,301,452 | ||||||
Marketable securities | 20,265 | 20,265 | 35 | 35 | ||||||||||
Provision for loan losses | (33,436 | ) | (33,436 | ) | (29,250 | ) | (29,250 | ) | ||||||
Financial liabilities: | ||||||||||||||
Debt obligations | 4,113,732 | 4,253,279 | 3,461,590 | $ | 3,500,927 | |||||||||
Interest rate protection agreements | 6,506 | 6,506 | 3,145 | 3,145 |
Note 15Segment Reporting
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131") establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected financial information about operating segments in interim financial reports issued to shareholders.
The Company has two reportable segments: Real Estate Lending and Corporate Tenant Leasing. The Company does not have any 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 more than 3.51% of revenues (see Note 9 for other information regarding concentrations of credit risk).
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The Company evaluates performance based on the following financial measures for each segment:
|
Real Estate Lending |
Corporate Tenant Leasing |
Corporate/ Other(1) |
Company Total |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(In thousands) |
||||||||||||
2003: | |||||||||||||
Total revenues(2): | $ | 338,946 | $ | 250,164 | $ | (137 | ) | $ | 588,973 | ||||
Equity in (loss) earnings from joint ventures and unconcolidated subsidiaries: | | (2,019 | ) | (2,265 | ) | (4,284 | ) | ||||||
Total operating and interest expense(3): | 90,648 | 122,130 | 98,726 | 311,504 | |||||||||
Net operating income(4): | 248,298 | 126,015 | (101,128 | ) | 273,185 | ||||||||
Total long-lived assets(5): | 3,702,674 | 2,535,885 | N/A | 6,238,559 | |||||||||
Total assets: | 3,810,679 | 2,729,716 | 120,195 | 6,660,590 | |||||||||
2002: | |||||||||||||
Total revenues(2): | $ | 279,159 | $ | 229,842 | $ | (324 | ) | $ | 508,677 | ||||
Equity in (loss) earnings from joint ventures and unconsolidated subsidiaries: | | 5,081 | (3,859 | ) | 1,222 | ||||||||
Total operating and interest expense(3): | 94,273 | 100,466 | 115,933 | 310,672 | |||||||||
Net operating income(4): | 184,886 | 134,457 | (120,116 | ) | 199,227 | ||||||||
Total long-lived assets(5): | 3,050,342 | 2,291,805 | N/A | 5,342,147 | |||||||||
Total assets: | 3,126,219 | 2,442,087 | 43,391 | 5,611,697 | |||||||||
2001: | |||||||||||||
Total revenues(2): | $ | 282,802 | $ | 173,837 | $ | (371 | ) | $ | 456,268 | ||||
Equity in (loss) earnings from joint ventures and unconsolidated subsidiaries: | | 9,617 | (2,256 | ) | 7,361 | ||||||||
Total operating and interest expense(3): | 109,569 | 72,488 | 67,463 | 249,520 | |||||||||
Net operating income(4): | 173,233 | 110,966 | (70,090 | ) | 214,109 | ||||||||
Total long-lived assets(5): | 2,377,763 | 1,781,565 | N/A | 4,159,328 | |||||||||
Total assets: | 2,448,493 | 1,889,879 | 42,268 | 4,380,640 |
Explanatory Notes:
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Note 16Quarterly Financial Information (Unaudited)
The following table sets forth the selected quarterly financial data for the Company (in thousands, except per share amounts).
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Quarter Ended |
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December 31, |
September 30, |
June 30, |
March 31, |
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2003: | ||||||||||||
Revenue | $ | 159,851 | $ | 147,633 | $ | 143,807 | $ | 137,682 | ||||
Net income | 79,580 | 74,878 | 69,746 | 67,953 | ||||||||
Net income allocable to common shares | 68,835 | 66,082 | 60,025 | 58,241 | ||||||||
Net income per common share-basic | $ | 0.67 | $ | 0.66 | $ | 0.60 | $ | 0.59 | ||||
Weighted average common shares outstanding-basic | 102,603 | 100,687 | 99,445 | 98,472 | ||||||||
2002: |
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Revenue | $ | 135,991 | $ | 130,151 | $ | 127,212 | $ | 115,323 | ||||
Net income | 62,976 | 52,670 | 42,513 | 57,111 | ||||||||
Net income allocable to common shares | 53,749 | 43,443 | 33,286 | 47,884 | ||||||||
Net income per common share-basic | $ | 0.57 | $ | 0.49 | $ | 0.38 | $ | 0.55 | ||||
Weighted average common shares outstanding-basic | 93,671 | 89,431 | 88,656 | 87,724 |
Note 17Subsequent Events
Financing TransactionsOn January 13, 2004, the Company closed $200.0 million of term financing with a leading financial institution that is secured by certain corporate bond investments and other lending securities. A number of these investments were previously financed under existing credit facilities. The new facility bears interest at LIBOR + 1.05%-1.50% and has a final maturity date of January 2006.
Hedging TransactionsOn March 11, 2004, the Company entered into $635.0 million of pay-fixed interest rate swaps at a weighted average fixed rate of 1.14% and maturing September 2004.
On January 23, 2004, in connection with the Company's fixed-rate corporate bonds, the Company entered into four pay-floating interest rate swaps struck at 3.678%, 3.713%, 3.686% and 3.684% with notional amounts of $105.0 million, $100.0 million, $100.0 million and $45.0 million, respectively, and maturing on January 15, 2009. The Company pays six-month LIBOR and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of five-year Senior Notes attributable to changes in LIBOR.
In addition, on January 15, 2004, the Company entered into three forward starting swaps all with 10-year terms and rates of 4.484%, 4.502% and 4.500% and notional amounts of $100.0 million, $50.0 million and $50.0 million, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These three swaps were settled in connection with the Company's issuance of $250.0 million of 10-year Senior Notes in March 2004 (see discussion below).
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Capital Market TransactionsOn March 12, 2004, the Company issued $175.0 million of Senior Floating Rate Notes due 2007. The Notes will bear interest at three-month LIBOR + 1.25%. The Company used the net proceeds to repay secured indebtedness.
On March 2, 2004, the Company issued $250.0 million of 5.70% Senior Notes due 2014. The Notes were sold at 99.66% of their principal amount to yield 5.75%. The Notes are unsecured senior obligations of the Company. The Company used the proceeds for general corporate purposes, including to repay secured indebtedness and to fund investment activity.
On February 25, 2004, the Company completed an underwritten public offering of 5.0 million shares of its 7.50% Series I Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and a redemption date beginning March 1, 2009. The Company will use the net proceeds from the offering of $121.0 million to redeem approximately $110.0 million aggregate principal amount of its outstanding 8.75% Senior Notes due 2008 at a price of 108.75% of their principal amount plus accrued interest to the redemption date.
On January 23, 2004, the Company issued $350.0 million of 4.875% Senior Notes due in 2009. The Notes were sold at 99.89% of their principal amount to yield 4.90%. The Notes are unsecured senior obligations of the Company. The Company used the proceeds to repay outstanding secured borrowings.
On January 22, 2004, the Company completed a private placement of 3.3 million shares of its Series H Variable Rate Cumulative Redeemable Preferred Stock, having a liquidation preference of $25.00 per share and redeemable at par at any time from the purchase date through the first four months. The dividends on the Series H Preferred Stock will accrue at 7.65%, 8.15%, 8.65%, 9.15% and 9.65% for month one, two, three, four, five and thereafter, respectively. The Company specifically used the proceeds from this offering to redeem the Series B and C Cumulative Redeemable Preferred Stock on February 23, 2004. On January 27, 2004, the Company redeemed all Series H Preferred Stock using excess liquidity from its secured credit facilities.
New CEO Employment AgreementThe March 2001 employment agreement with the Company's Chief Executive Officer expires on March 30, 2004. Subsequent to December 31, 2003, the Company entered into a new employment agreement with its Chief Executive Officer which will take effect upon the expiration of the old agreement. The new agreement has an initial term of three years and provides for the following compensation:
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In addition, the Chief Executive Officer will purchase an 80.00% interest in the Company's 2006 high performance unit program for directors and executive officers. This performance program was approved by the Company's shareholders in 2003 and is described in detail in the Company's 2003 annual proxy statement. The purchase price to be paid by the Chief Executive Officer will be based upon a valuation prepared by an independent investment-banking firm. The interests purchased by the Chief Executive Officer will have no value to him unless the Company achieves total shareholder returns in excess of those achieved by peer group indices, all as more fully described in the Company's 2003 annual proxy statement.
Note 18Other Events
The Company is revising its historical financial statements in connection with its application of SFAS No. 144 to certain transactions that occurred in 2004. During 2004, the Company sold certain properties and classified others as held for sale. In compliance with SFAS No. 144, the Company has reclassified the reported revenues and expenses from these properties as income from discontinued operations in its financial statements for each of the periods presented herein even though those financial statements relate to a period prior to the transactions giving rise to the reclassification. In addition to the financial statements themselves, certain disclosures contained in Note 5, Note 11, Note 15 and Note 16 have been modified to reflect the effects of these reclassifications.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
The Company is in the business of providing custom-tailored financing solutions to private and corporate owners of real estate nationwide. Depending upon market conditions and the Company's views about the United States economy generally and the real estate markets specifically, the Company will adjust its investment focus from time to time and emphasize certain products, industries and geographic markets over others.
The Company began its business in 1993 through private investment funds formed to take advantage of the lack of well-capitalized lenders capable of servicing the needs of customers in its markets. In March 1998, the private investment funds contributed their approximately $1.1 billion of assets to the Company's predecessor in exchange for a controlling interest in that public company. In November 1999, the Company acquired its leasing subsidiary, TriNet Corporate Realty Trust, Inc. ("TriNet" or the "Leasing Subsidiary"), which was then the largest publicly-traded company specializing in corporate sale/leaseback for office and industrial facilities (the "TriNet Acquisition"). Concurrent with the TriNet Acquisition, the Company also acquired its former external advisor in exchange for shares of its Common Stock and converted its organizational form to a Maryland corporation. The Company's Common Stock began trading on the New York Stock Exchange under the symbol "SFI" in November 1999.
The Company has experienced significant growth since its first quarter as a public company in 1998. Transaction volume for the fiscal year ended December 31, 2003 was $2.2 billion, compared to $1.7 billion in 2002 and $1.1 billion in 2001. The Company completed 60 financing commitments in 2003, compared to 41 in 2002 and 35 in 2001. Repeat customer business has become a key source of transaction volume for the Company, accounting for approximately 55.00% of the Company's cumulative volume through the end of 2003. Based upon feedback from its customers, the Company believes that greater recognition of the Company and its reputation for completing highly structured transactions in an efficient manner have also contributed to increases in its transaction volume. The benefits of higher investment volumes were mitigated to an extent by the extremely low interest rate environment in 2002 and 2003. Low interest rates benefit the Company in that its borrowing costs decrease, but similarly, earnings on its variable-rate lending investments also decrease.
During the difficult economic and real estate market conditions of 2002 and 2003, the Company focused its investment activity on lower risk investments such as first mortgages and corporate tenant lease transactions that met its risk adjusted return standards. The Company has experienced minimal losses on its lending investments. In 2003, the Company also focused on re-leasing space at its corporate tenant lease facilities under longer term leases in an effort to reduce the impact of lease expirations on the Company's earnings.
The Company has continued to broaden its sources of capital and was particularly active in the capital markets in 2003. The Company's strong performance and the low interest rate environment enabled the Company to issue equity and debt securities in 2003 (and in early 2004) on attractive pricing terms. The Company used the proceeds from the issuances to repay secured indebtedness and to refinance higher cost capital. The Company made significant progress in 2003 in migrating its debt obligations from secured debt towards unsecured debt. While the Company considers it prudent to have a broad array of sources of capital, including secured financing arrangements, the Company will continue to seek to reduce its use of secured debt and increase its use of unsecured debt.
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Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Interest incomeInterest income increased by $48.8 million to $304.4 million for the 12 months ended December 31, 2003 from $255.6 million for the same period in 2002. This increase was primarily due to $102.3 million of interest income on new originations or additional fundings, offset by a $51.2 million decrease from the repayment of loans and other lending investments. This increase was partially offset by a decrease in interest income on the Company's variable-rate lending investments as a result of lower average one-month LIBOR rates of 1.21% in 2003, compared to 1.77% in 2002.
Operating lease incomeOperating lease income increased by $22.8 million to $247.9 million for the 12 months ended December 31, 2003 from $225.1 million for the same period in 2002. Of this increase, $33.8 million was attributable to new CTL investments. This increase was partially offset by $7.0 million of lower operating lease income due to vacancies on certain CTL assets.
Other incomeOther income generally consists of prepayment penalties and realized gains from the early repayment of loans and other lending investments, financial advisory and asset management fees, lease termination fees, mortgage servicing fees, loan participation payments and dividends on certain investments. During the 12 months ended December 31, 2003, other income included realized gains on sale of lending investments of $16.3 million, income from loan repayments and prepayment penalties of $17.3 million, asset management, mortgage servicing and other fees of approximately $2.6 million and other miscellaneous income such as dividend payments of $489,000.
During the 12 months ended December 31, 2002, other income included prepayment penalties and realized gains on loan repayments of $12.6 million, asset management, mortgage servicing, and other fees of approximately $9.0 million, lease termination fees of $2.9 million, loan participation payments of $3.3 million and other miscellaneous income such as dividend payments and insurance claims of $994,000.
Interest expenseFor the 12 months ended December 31, 2003, interest expense increased by $7.4 million to $192.3 million from $184.9 million for the same period in 2002. This increase was primarily due to higher average borrowings on the Company's debt obligations, term loans and secured notes. This increase was partially offset by lower average one-month LIBOR rates, which averaged 1.21% in 2003 compared to 1.77% in 2002 on the unhedged portion of the Company's variable-rate debt and by a $4.5 million decrease in amortization of deferred financing costs on the Company's debt obligations in 2003 compared to the same period in 2002.
Operating costscorporate tenant lease assetsFor the 12 months ended December 31, 2003, operating costs increased by approximately $4.8 million from $12.8 million to $17.6 million for the same period in 2002. This increase is primarily related to new CTL investments and higher unrecoverable operating costs due to vacancies on certain CTL assets.
Depreciation and amortizationDepreciation and amortization increased by $8.2 million to $52.3 million for the 12 months ended December 31, 2003 from $44.1 million for the same period in 2002. This increase is primarily due to depreciation on new CTL investments.
General and administrativeFor the 12 months ended December 31, 2003, general and administrative expenses increased by $7.8 million to $38.2 million, compared to $30.4 million for the same period in 2002. This increase is primarily due to the consolidation of iStar Operating and the result of compensation expense recognized for dividends paid on the Chief Executive Officer's contingently vested phantom shares (see Note 10 to the Company's Consolidated Financial Statements).
General and administrativestock-based compensationGeneral and administrative-stock-based compensation decreased by $14.4 million for the 12 months ended December 31, 2003 compared to the same period in 2002. In 2002, the Company recognized a charge of approximately $15.0 million related
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to the performance-based vesting of 500,000 restricted shares granted under the Company's long-term incentive plan in 2002 (see Note 10 to the Company's Consolidated Financial Statements).
Provision for loan lossesThe Company's charge for provision for loan losses decreased to $7.5 million for the 12 months ended December 31, 2003 compared to $8.3 million in the same period in 2002. As more fully discussed in Note 4 to the Company's Consolidated Financial Statements, the Company has experienced minimal actual losses on its loan investments to date. The Company considers it prudent to reflect provisions for loan losses on a portfolio basis based upon the Company's assessment of general market conditions, the Company's internal risk management policies and credit risk rating system, industry loss experience, the Company's assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments. Accordingly, since its first full quarter operating its current business as a public company (the quarter ended June 30, 1998), management has reflected quarterly provisions for loan losses in its operating results.
Loss on early extinguishment of debtDuring the 12 months ended December 31, 2003, the Company had no losses on early extinguishment of debt.
During the 12 months ended December 31, 2002, the Company had $12.2 million of losses on early extinguishment of debt associated with the prepayment penalties and amortization of deferred financing fess related to the repayment of the STARs, Series 2000-1 bonds. This loss of $12.2 million represented approximately $8.2 million in unamortized deferred financing costs and approximately $4.0 million in prepayment penalties. In accordance with SFAS No. 145 these costs were reclassified from "Extraordinary loss on early extinguishment of debt" into continuing operations for comparative purposes for financial statements for periods after January 1, 2003.
Equity in (loss) earnings from joint ventures and unconsolidated subsidiariesFor the 12 months ended December 31, 2003, equity in (loss) earnings from joint ventures and unconsolidated subsidiaries decreased by $5.5 million to $(4.3) million from $1.2 million for the same period in 2002. This decrease is primarily due to certain lease terminations in one of the Company's CTL joint venture investments. (see Note 6 to the Company's Consolidated Financial Statements).
Income from discontinued operationsFor the 12 months ended December 31, 2003 and 2002, operating income earned by the Company on CTL assets sold through September 30, 2004 (prior to their sale) and assets held for sale as of September 30, 2004, of approximately $14.1 million and $15.5 million, respectively, is classified as "discontinued operations."
Gain from discontinued operationsDuring 2003, the Company disposed of nine CTL assets for net proceeds of $47.6 million, and recognized a gain of approximately $5.2 million.
During 2002, the Company disposed of one CTL asset for net proceeds of $3.7 million, and recognized a gain of approximately $595,000. In addition, one of the Company's customers exercised an option to terminate its lease on 50.00% of the land leased from the Company. In connection with this termination, the Company realized $17.5 million in cash lease termination payments, offset by a $17.4 million impairment change in connection with the termination, resulting in a net gain of approximately $123,000.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Interest incomeInterest income increased by $1.5 million to $255.6 million for the 12 months ended December 31, 2002 from $254.1 million for the same period in 2001. This increase was primarily due to $72.5 million of interest income on new originations or additional fundings, offset by a $50.5 million decrease from the repayment of loans and other lending investments. This increase was partially offset by a decrease in interest income on the Company's variable-rate lending investments as the result of lower average one-month LIBOR rates of 1.77% in 2002, compared to 3.88% in 2001.
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Operating lease incomeOperating lease income increased by $54.0 million to $225.1 million for the 12 months ended December 31, 2002 from $171.1 million for the same period in 2001. Of this increase, $57.7 million was attributable to new CTL investments. This increase was partially offset by CTL dispositions and lower operating lease income due to vacancies on certain CTL assets.
Other incomeOther income generally consists of prepayment penalties and realized gains from the early repayment of loans and other lending investments, financial advisory and asset management fees, lease termination fees, mortgage servicing fees, loan participation payments and dividends on certain investments. During the 12 months ended December 31, 2002, other income included prepayment penalties and realized gains on loan repayments of $12.6 million, asset management, mortgage servicing and other fees of approximately $9.0 million, lease termination fees of $2.9 million, loan participation payments of $3.3 million, and other miscellaneous income such as dividend payments and insurance claims of $994,000.
During the 12 months ended December 30, 2001, other income included loan participation payments of $13.1 million, prepayment penalties and gains on loan repayments of $13.0 million and financial advisory, lease termination, asset management and mortgage servicing fees of $5.3 million.
Interest expenseFor the 12 months ended December 31, 2002, interest expense increased by $15.3 million to $184.9 million from $169.6 million for the same period in 2001. This increase was primarily due to the higher average borrowings on the Company's debt obligations, term loans and secured notes, and by approximately $2.7 million due to additional amortization of deferred financing costs on the Company's debt obligations in 2002 compared to the same period in 2001. This increase was partially offset by lower average one-month LIBOR rates on the Company's variable-rate debt of 1.77% in 2002, compared to 3.88% in 2001.
Operating costscorporate tenant lease assetsFor the 12 months ended December 31, 2002, operating costs increased by approximately $1.4 million from $11.4 million to $12.8 million for the same period in 2001. This increase is primarily related to new CTL investments and higher operating costs on certain CTL assets, partially offset by CTL dispositions.
Depreciation and amortizationDepreciation and amortization increased by $11.9 million to $44.1 million for the 12 months ended December 31, 2002 from $32.2 million for the same period in 2001. This increase is primarily due to new CTL investments.
General and administrativeFor the 12 months ended December 31, 2002, general and administrative expenses increased by $6.2 million to $30.4 million, compared to $24.2 million for the same period in 2001. This increase is primarily the result of an increase in personnel and related costs.
General and administrativestock-based compensationGeneral and administrative-stock-based compensation increased by $14.4 million primarily due to a charge related to the performance-based vesting of 500,000 restricted shares granted under the Company's long-term incentive plan and tied to overall shareholder performance (see Note 10 to the Company's Consolidated Financial Statements).
Provision for loan lossesThe Company's charge for provision for loan losses increased to $8.3 million for the 12 months ended December 31, 2002 compared to $7.0 million for the same period in 2001. As more fully discussed in Note 4 to the Company's Consolidated Financial Statements, the Company has experienced minimal actual losses on its loan investments to date. The Company considers it prudent to reflect provisions for loan losses on a portfolio basis based upon the Company's assessment of general market conditions, the Company's internal risk management policies and credit risk rating system, industry loss experience, the Company's assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments. Accordingly, since its first full quarter operating its current business as a public company (the quarter ended June 30, 1998), management has reflected quarterly provisions for loan losses in its operating results.
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Loss on early extinguishment of debtDuring the 12 months ended December 31, 2002, the Company had $12.2 million of losses on early extinguishment of debt associated with the prepayment penalties and amortization of deferred financing fess related to the repayment of the STARs, Series 2000-1 bonds. This loss of $12.2 million, represented approximately $8.2 million in unamortized deferred financing costs and approximately $4.0 million in prepayment penalties. In accordance with SFAS No. 145 these costs were reclassified from "Extraordinary loss on early extinguishment of debt" into continuing operations for comparative purposes for financial statements for periods after January 1, 2003.
During the 12 months ended December 31, 2001, the Company repaid a secured term loan, which had an original maturity date of December 2004. In addition, the Company prepaid an unsecured revolving credit facility, which had an original maturity date of May 2002. In connection with these prepayments, the Company expensed the remaining unamortized deferred financing costs and incurred certain prepayment penalties, which resulted in a loss of approximately $1.6 million. In accordance with SFAS No. 145 these costs were reclassified from "Extraordinary loss on early extinguishment of debt" into continuing operations for comparative purposes for financial statements for periods after January 1, 2003.
Equity in (loss) earnings from joint ventures and unconsolidated subsidiariesDuring the 12 months ended December 31, 2002, equity in (loss) earnings from joint ventures and unconsolidated subsidiaries decreased by approximately $6.2 million to $1.2 million from $7.4 million for the same period in 2001. This decrease is primarily due to the consolidation of one of the Company's CTL joint venture investments (see Note 6 to the Company's Consolidated Financial Statements).
Income from discontinued operationsFor the 12 months ended December 31, 2002 and 2001, operating income earned by the Company on CTL assets sold through September 30, 2004 (prior to their sale) and assets held for sale as of September 30, 2004, of approximately $15.5 million and $15.2 million, respectively, is classified as "discontinued operations."
Gain from discontinued operationsDuring 2002, the Company disposed of one CTL asset for net proceeds of $3.7 million, and recognized a gain of approximately $595,000. In addition, one of the Company's customers exercised an option to terminate its lease on 50.00% of the land leased from the Company. In connection with this termination, the Company realized $17.5 million in cash lease termination payments, offset by a $17.4 million impairment change in connection with the termination, resulting in a net gain of approximately $123,000.
During 2001, the Company disposed of four CTL assets for net proceeds of $26.3 million, and recognized net gains of $1.1 million.
Adjusted Earnings
Adjusted earnings represents net income allocable to common shareholders and HPU holders computed in accordance with GAAP, before depreciation, amortization, gain from discontinued operations, extraordinary items and cumulative effect of change in accounting principle. Adjustments for unconsolidated partnerships and joint ventures reflect the Company's share of adjusted earnings calculated on the same basis.
The Company believes that adjusted earnings is a helpful measure to consider, in addition to net income, because this measure helps the Company to evaluate how its commercial real estate finance business is performing compared to other commercial finance companies, without the effects of certain GAAP adjustments that are not necessarily indicative of current operating performance. The most significant GAAP adjustments that the Company excludes in determining adjusted earnings are depreciation and amortization. As a commercial finance company that focuses on real estate lending and corporate tenant leasing, the Company records significant depreciation on its real estate assets and
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amortization of deferred financing costs associated with its borrowings. These items do not affect the Company's daily operations, but they do impact financial results under GAAP. By measuring its performance using adjusted earnings and net income, the Company is able to evaluate how its business is performing both before and after giving effect to recurring GAAP adjustments such as depreciation and amortization and, in the case of adjusted earnings, after including earnings from its joint venture interests on the same basis and excluding gains or losses from the sale of assets that will no longer be part of its continuing operations.
Adjusted earnings is not an alternative or substitute for net income in accordance with GAAP as a measure of the Company's performance. Rather, the Company believes that adjusted earnings is an additional measure that helps analyze how its business is performing. This measure is also used to track compliance with covenants in the Company's borrowing arrangements because several of its material borrowing arrangements have covenants based upon this measure. Adjusted earnings should not be viewed as an alternative measure of either the Company's liquidity or funds available for its cash needs or for distribution to its shareholders. In addition, the Company may not calculate adjusted earnings in the same manner as other companies that use a similarly titled measure.
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For the Years Ended December 31, |
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2003 |
2002 |
2001 |
2000 |
1999 |
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(In thousands) (Unaudited) |
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Adjusted earnings: | |||||||||||||||||
Net income allocable to common shareholders and HPU holders | $ | 255,249 | $ | 178,362 | $ | 193,004 | $ | 180,678 | $ | 15,043 | |||||||
Add: Joint venture income | 593 | 991 | 965 | 937 | 1,603 | ||||||||||||
Add: Depreciation | 55,905 | 48,041 | 35,642 | 34,514 | 11,016 | ||||||||||||
Add: Joint venture depreciation and amortization | 7,417 | 4,433 | 4,044 | 3,662 | 365 | ||||||||||||
Add: Amortization of deferred financing costs | 27,180 | 31,676 | 21,303 | 13,528 | 6,121 | ||||||||||||
Less: Gains from discontinued operations | (5,167 | ) | (717 | ) | (1,145 | ) | (2,948 | ) | | ||||||||
Add: Cumulative effect of change in accounting principle(1) | | | 282 | | | ||||||||||||
Less: Net income allocable to class B shares(2) | | | | | (826 | ) | |||||||||||
Add: Cost incurred in acquiring former external advisor | | | | | 94,476 | ||||||||||||
Adjusted diluted earnings allocable to common shareholders and HPU holders(3)(4)(5) | $ | 341,177 | $ | 262,786 | $ | 254,095 | $ | 230,371 | $ | 127,798 | |||||||
Weighted average diluted common shares outstanding(6) | 104,248 | 93,020 | 88,606 | 86,523 | 61,750 | ||||||||||||
Explanatory Notes:
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First Dollar and Last Dollar ExposureOne component of the Company's risk management assessment is an analysis of the Company's first and last dollar loan-to-value percentage with respect to the facilities or companies the Company finances. First dollar loan-to-value represents the weighted average beginning point for the Company's lending exposure in the aggregate capitalization of the underlying facilities or companies it finances. Last dollar loan-to-value represents the weighted average ending point for the Company's lending exposure in the aggregate capitalization of the underlying facilities or companies it finances.
Non-Accrual LoansThe Company transfers loans to non-accrual status at such time as: (1) management believes that the potential risk exists that scheduled debt service payments will not be met within the coming 12 months; (2) the loan becomes 90 days delinquent; (3) management determines the borrower is incapable of, or ceased efforts toward, curing the cause of an impairment; or (4) the net realizable value of the loan's underlying collateral approximates the Company's carrying value of such loan. Interest income is recognized only upon actual cash receipt for loans on non-accrual status. As of December 31, 2003, the Company had three assets on non-accrual status with an aggregate carrying value of $40.3 million, or 0.62% of the gross book value of the Company's investments. Management believes there is adequate collateral to support the book values of the assets.
The first non-accrual loan is a $12.8 million junior participation in a first mortgage loan secured by a hotel facility in New York, New York. This loan bears interest at a fixed rate of 7.91% and matures in June 2006. The borrower remains current on all of its debt service payments to the Company and has continued to invest additional equity to fund on-going capital improvements at the facility. Management believes there is adequate collateral to support the book value of the asset. However, due to poor operating performance, this loan was transferred to non-accrual effective July 1, 2003.
The second non-accrual loan is a partnership loan with a balance of $349,000 as of December 31, 2003. The loan is presently secured by a partnership interest in a partnership owning facilities in Colorado leased to the U.S. Government. The loan bears interest at LIBOR + 3.50%, with a LIBOR floor of 3.00%. The loan matured on March 29, 2003 and therefore is currently in default. In April 2003 and November 2003, the Company received $1.2 million and $4.2 million of principal repayments, respectively. The borrower remains current on its regular interest obligations to the Company. However, as a result of the maturity default and the uncertainty surrounding the timing of the completion, sale or refinancing of the facilities, the loan remains on non-accrual status.
The third non-accrual loan is a $27.1 million, 90.00% participating interest in a loan secured by a class A office building located in Pittsburgh, Pennsylvania. The loan was acquired at a premium to its principal balance as a part of the Company's acquisition of Lazard Freres' structured finance portfolio in 1998. Lazard continues to retain a 10.00% interest in the loan. The loan matures in March 2008 and bears interest at 17.50%, 11.00% of which is due currently and 6.50% of which is accrued. In August 2003 the borrower stopped making debt service payments due to insufficient cash flow caused by vacancies at the facility. Management believes the underlying collateral value supports its basis in the outstanding principal balance of the loan. During the third quarter of 2003, management determined that an acquisition premium on the loan with an unamortized balance of $3.3 million was impaired. As a result in the third quarter of 2003, the Company took a $3.3 million impairment charge against its loan loss reserve, bringing the carrying value of the loan to $27.1 million.
Watch List AssetsThe Company conducts a quarterly comprehensive credit review, resulting in an individual risk rating being assigned to each asset. This review is designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis as an "early warning system." As of December 31, 2003, the Company has five loans that are on its credit watch list, including the three non-accrual loans mentioned above.
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One of the watch list loans not on non-accrual is a $35.8 million junior interest in a $103.1 million first mortgage loan secured by a super regional mall in Chicago, Illinois. The whole loan bears interest at 8.88%. Cash flow at the mall has been negatively impacted by the departure of an anchor tenant; however, mall management has been actively negotiating to reconfigure the space for an existing anchor. To provide for the repositioning of the center and ultimate refinancing of the loan, the maturity of the loan was extended for two years to January 1, 2006. The loan is not open for prepayment until January 1, 2005, at which time it may be repaid in full at a 3.00% premium for six months and then may be repaid at par for the six months prior to maturity. The borrower has made significant equity investments in the facility, with over $19.0 million invested in the past three years. The borrower remains current on all of its debt service payments. Management believes the collateral value remains adequate to support the book value of the asset.
The other watch list loan not on non-accrual is a $27.2 million first mortgage secured by an office facility in Louisville, Kentucky. The whole loan bears interest at LIBOR + 4.50% and matures in April, 2004. On October 14, 2003, the Company acquired the senior trust certificate from a financial institution. The facility is experiencing near-term tenant rollover in a soft local real estate market; however, management believes its last dollar exposure is below replacement cost, and the loan remains current through December 31, 2003. Management believes that there is adequate collateral to support the book value of the asset.
The table below summarizes the Company's loans and other lending investments that are more than 60-days past due in scheduled payments and details the provision for loan losses associated with the Company's lending investments for the 12 months ended December 31, 2003 and 2002 (in thousands):
|
As of December 31, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2003 |
2002 |
|||||||||
|
$ |
% |
$ |
% |
|||||||
Carrying value of loans past due 60 days or more/ As a percentage of loans and other lending investments |
$ | 27,480 | 0.74 | % | $ | | | ||||
Provision for loan losses/ As a percentage of loans and other lending investments |
33,436 |
0.89 |
% |
29,250 |
0.95 |
% |
|||||
Net charge-offs/ As a percentage of loans and other lending investments |
3,314 |
0.09 |
% |
|
|
Liquidity and Capital Resources
The Company requires significant capital to fund its investment activities and operating expenses. The Company has sufficient 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 or increase capital committed to its operations. However, the Company believes that its access to significant capital resources and financing will enable the Company to meet current and anticipated capital requirements.
The Company believes that its existing sources of funds will be adequate for purposes of meeting its short- and long-term liquidity needs. The Company's ability to meet its long-term (i.e., beyond one
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year) liquidity requirements is subject to obtaining additional debt and equity financing. Any decision by the Company's lenders and investors to provide the Company with financing will depend upon a number of factors, such as the Company's 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 capital commitments and the relative attractiveness of alternative investment or lending opportunities.
The following table outlines the contractual obligations related to the Company's long-term debt agreements and operating lease obligations. There are no other long-term liabilities of the Company that would constitute a contractual obligation.
|
|
Principal Payments Due By Period(1) |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total |
Less Than 1 Year |
2 - 3 Years |
4 - 5 Years |
6 - 10 Years |
After 10 Years |
|||||||||||||
|
|
(In thousands) |
|||||||||||||||||
Long-Term Debt Obligations: | |||||||||||||||||||
Secured revolving credit facilities | $ | 696,591 | $ | | $ | 386,227 | $ | 310,364 | $ | | $ | | |||||||
Unsecured revolving credit facilities | 130,000 | 130,000 | | | | | |||||||||||||
Secured term loans | 808,128 | 60,000 | 273,805 | 185,852 | 236,847 | 51,624 | |||||||||||||
iStar Asset Receivables secured notes(2) | 1,311,314 | 40,010 | 235,808 | | 1,035,496 | | |||||||||||||
Unsecured notes | 1,185,000 | | 50,000 | 535,000 | 500,000 | 100,000 | |||||||||||||
Other debt obligations | 34,148 | 34,148 | | | | | |||||||||||||
Total | 4,165,181 | 264,158 | 945,840 | 1,031,216 | 1,772,343 | 151,624 | |||||||||||||
Operating Lease Obligations:(3) | 16,067 | 2,879 | 5,878 | 4,761 | 2,549 | | |||||||||||||
Total | $ | 4,181,248 | $ | 267,037 | $ | 951,718 | $ | 1,035,977 | $ | 1,774,892 | $ | 151,624 | |||||||
Explanatory Notes:
The Company has four LIBOR-based secured revolving credit facilities with an aggregate maximum capacity of $2.4 billion, of which $696.6 million was drawn as of December 31, 2003 (see Note 7 to the Company's Consolidated Financial Statements). Availability under these facilities is based on collateral provided under a borrowing base calculation. At December 31, 2003, the Company also had an unsecured credit facility totaling $300.0 million which bears interest at LIBOR + 2.125% per annum and matures in July 2004. At December 31, 2003, the Company had drawn $130.0 million under this facility.
Unencumbered Assets/Unsecured DebtThe Company has made and will continue to make progress in migrating its balance sheet towards more unsecured debt, which results in a corresponding reduction of secured debt and an increase in unencumbered assets. The exact timing in which the Company will issue or borrow unsecured debt will be subject to market conditions. The following table shows the ratio of unencumbered assets to unsecured debt at December 31, 2003 and 2002 (in thousands):
|
As of December 31, |
|||||
---|---|---|---|---|---|---|
|
2003 |
2002 |
||||
Total Unencumbered Assets | $ | 2,167,388 | $ | 1,366,909 | ||
Total Unsecured Debt(1) | $ | 1,315,000 | $ | 625,000 | ||
Unencumbered Assets/Unsecured Debt(2) | 165% | 219% |
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Explanatory Notes:
Capital Markets FinancingsThe Company was an active issuer in the capital markets in 2003 and the beginning of 2004. The continued strength of the Company's stock price and the low interest rate environment provided the Company with the opportunity to issue equity and debt securities on attractive pricing terms. In 2003 and through March 15, 2004, the Company issued $1,285.0 million aggregate principal amount of fixed-rate Senior Notes bearing interest at annual rates ranging from 4.875% to 7.00% and maturing between 2008 and 2014 and $175.0 million aggregate principal amount of floating-rate Senior Notes bearing interest at annual rates of three-month LIBOR+1.25% and maturing in 2007. The Company issued 21.1 million shares of preferred stock in five series with cumulative annual dividend rates ranging from 7.50% to 7.875%. All of the shares of preferred stock have a liquidation preference of $25.00 per share. The Company also issued 5.0 million shares of Common Stock in 2003 at a price to the public of $38.50 per share.
The Company primarily used the proceeds from the issuances of securities described above to repay secured indebtedness as it migrates its balance sheet towards more unsecured debt and to refinance higher yielding obligations. In 2003 and January 2004, the Company retired all of its 4.0 million shares of 9.50% Series A Cumulative Redeemable Preferred Stock, its 3.3 million shares of Series H Variable Rate Cumulative Redeemable Preferred Stock and the 6.75% Dealer Remarketable Securities of its Leasing Subsidiary. The Company called for redemption all of its 2.0 million shares of 9.375% Series B Cumulative Redeemable Preferred Stock and all of its 1.3 million shares of 9.20% Series C Cumulative Redeemable Preferred Stock.
On November 14, 2002, the Company completed an underwritten public offering of 8.0 million primary shares of the Company's Common Stock. The Company received approximately $202.9 million from the offering and used these proceeds to repay a portion of its secured debt.
On August 9, 2001, the Company issued $350.0 million of 8.75% Senior Notes due in 2008. The Notes are unsecured senior obligations of the Company. The Company used the net proceeds to partially repay outstanding borrowings under its secured credit facilities.
Other Financing ActivitiesSubsequent to year-end, on January 13, 2004, the Company closed $200.0 million of term financing with a leading financial institution that is secured by certain corporate bond investments and other lending securities. A number of these investments were previously financed under existing credit facilities. The new facility bears interest at LIBOR + 1.05%1.50% and has a final maturity date of January 2006.
On November 4, 2003, one of the Company's $500.0 million secured facilities was amended to include subordinate and mezzanine lending investments as collateral at stated interest rates of LIBOR + 2.15%2.25%.
On October 31, 2003, the Company's $50.0 million term loan bearing interest at LIBOR + 0.60% matured and was repaid.
On September 29, 2003, the Company closed a $135.0 million term loan secured by a CTL asset it acquired the same day. The loan has a five-year term and bears interest at LIBOR + 1.75%.
On July 24, 2003, the Company closed a $48.0 million term loan secured by a corporate lending investment it originated in the third quarter of 2003. The loan has a three-year primary term and two one-year extension options, and bears interest at LIBOR + 2.125%.
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On May 21, 2003, a wholly-owned subsidiary of the Company issued iStar Asset Receivables ("STARs"), Series 2003-1, the Company's proprietary match funding program, consisting of $645.8 million of investment-grade bonds secured by the subsidiary's structured finance and CTL assets, which had an aggregate carrying value of approximately $738.1 million 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 weighted average interest rate on the bonds, on an all-floating rate basis, was approximately LIBOR + 0.47% at inception. For accounting purposes, this transaction was treated as a secured financing: the underlying assets and STARs liabilities remained on the Company's Consolidated Balance Sheets, and no gain on sale was recognized.
On May 14, 2003, the Company extended the maturity on its $300.0 million unsecured facility to July 2004.
On May 8, 2003, the Company extended the maturity on its $60.0 million term loan to June 2004.
On April 9, 2003, the Company repaid the existing term loan financing a $75.0 million term preferred investment in a publicly-traded real estate company and simultaneously entered into another $50.0 million term loan with a leading financial institution. The new term loan bears interest at LIBOR + 0.60% and has a final maturity date of October 2003 with amortization payments in July 2003 and October 2003.
On January 27, 2003, the Company extended the maturity on one of its $700.0 million secured facilities to January 2007, which includes a one-year "term-out" at the Company's option.
On December 11, 2002, the Company closed a $61.5 million term loan financing with a leading financial institution. The proceeds were used to fund a portion of an $82.1 million CTL investment. The non-recourse loan is fixed rate and bears interest at 6.412%, has a maturity date of December 2012 and amortizes over a 30-year schedule.
On September 30, 2002, the Company closed a $500.0 million secured revolving credit facility with a leading financial institution. The facility has a three-year term and bears interest at LIBOR + 1.50% to 2.25%, depending upon the collateral contributed to the borrowing base. The facility accepts a broad range of structured finance and corporate tenant assets and has a final maturity date of September 2005.
On July 2, 2002, the Company purchased the remaining interest in the Milpitas joint venture from the former Milpitas external member for $27.9 million. Upon purchase of the interest, the Milpitas joint venture became fully consolidated for accounting purposes and approximately $79.1 million of secured term debt is reflected on the Company's Consolidated Balance Sheets.
On May 28, 2002, the Company repaid the then remaining $446.2 million of bonds outstanding under its STARs, Series 2000-1 financing. Simultaneously, a wholly-owned subsidiary of the Company issued STARs, Series 2002-1, consisting of $885.1 million of investment-grade bonds secured by the subsidiary's structured finance and CTL assets, which had an aggregate outstanding carrying value of approximately $1.1 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 weighted average interest rate on the bonds, on an all-floating rate basis, is approximately LIBOR + 0.56% at inception. For accounting purposes, this transaction was treated as a secured financing: the underlying assets and STARs liabilities remained on the Company's Consolidated Balance Sheets, and no gain on sale was recognized.
On March 29, 2002, the Company extended the maturity of its $500.0 million secured facility to August 2005, which includes a one-year "term-out" extension at the Company's option.
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On July 27, 2001, the Company completed a $300.0 million unsecured revolving credit facility with a group of leading financial institutions. The facility has an initial maturity of July 2003, with a one-year extension at the Company's option and another one-year extension at the lenders' option. This facility replaces two prior credit facilities maturing in 2002 and 2003, and bears interest at LIBOR + 2.125%. On May 14, 2003, the Company extended the maturity of this facility to July 2004.
On July 6, 2001, the Company financed a $75.0 million structured finance asset with a $50.0 million term loan bearing interest at LIBOR + 2.50%. The loan has a maturity of July 2006, including a one-year extension at the Company's option. This investment is a $75.0 million term preferred investment in a publicly-traded real estate company. The Company's investment carries an initial current yield of 10.50%, with annual increases of 0.50% in each of the next two years. In addition, the Company's investment is convertible into the customer's common stock at a strike price of $25.00 per share. The investment is callable by the customer between months 13 and 30 of the term at a yield maintenance premium, and after month 30, at a premium sufficient to generate a 14.62% internal rate of return on the Company's investment. The investment is putable by the Company to the customer for cash after five years. On April 9, 2003, the Company repaid this term loan and simultaneously entered into another $50.0 million term loan bearing interest at LIBOR + 0.60% and with a final maturity of October 2003.
On June 14, 2001, the Company closed $193.0 million of term loan financing secured by 15 CTL assets. The variable-rate loan bears interest at LIBOR + 1.85% (not to exceed 10.00% in aggregate) and has two one-year extensions at the Company's option. The Company used these proceeds to repay a $77.8 million secured term loan maturing in June 2001 and to pay down a portion of its revolving credit facilities. In addition, the Company extended the maturity of its $500.0 million secured revolving credit facility to August 2003. On March 29, 2002, the Company again extended the final maturity of this facility to August 2005, which includes a one-year "term-out" extension at the Company's option.
On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured notes. These notes were senior unsecured obligations of the Leasing Subsidiary and ranked equally with the Leasing Subsidiary's other senior unsecured and unsubordinated indebtedness.
On February 22, 2001, the Company extended the maturity of its $350.0 million unsecured revolving credit facility to May 2002. On July 27, 2001, the Company repaid this facility and replaced it with a new $300.0 million unsecured revolving credit facility.
On January 11, 2001, the Company closed a $700.0 million secured revolving credit facility which is led by a major commercial bank. The facility has a three-year primary term and one-year "term-out" extension option, and bears interest at LIBOR + 1.40% to 2.15%, depending upon the collateral contributed to the borrowing base. This facility accepts a broad range of structured finance assets and has a final maturity of January 2005. On January 27, 2003, the Company extended the final maturity on this facility to January 2007.
Hedging ActivitiesThe Company has variable-rate lending assets and variable-rate debt obligations. These assets and liabilities create a natural hedge against changes in variable interest rates. This means that as interest rates increase, the Company earns more on its variable-rate lending assets and pays more on its variable-rate debt obligations and, conversely, as interest rates decrease, the Company earns less on its variable-rate lending assets and pays less on its variable-rate debt obligations. When the amount of the Company's variable-rate debt obligations exceeds the amount of its variable-rate lending assets, the Company utilizes derivative instruments to limit the impact of changing interest rates on its net income. The Company does not use derivative instruments to hedge assets or for speculative purposes. The derivative instruments the Company uses are typically in the form of interest rate swaps and interest rate caps. Interest rate swaps effectively change variable-rate debt obligations to fixed-rate debt obligations. Interest rate caps effectively limit the maximum interest rate on variable-rate debt obligations.
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In addition, when appropriate the Company enters into interest rate swaps that convert fixed-rate debt to variable rate in order to mitigate the risk of changes in fair value of the fixed-rate debt obligations.
The primary risks from the Company's use of derivative instruments is the risk that a counterparty to a hedging arrangement could default on its obligation and the risk that the Company may have to pay certain costs, such as transaction fees or breakage costs, if a hedging arrangement is terminated by the Company. As a matter of policy, the Company enters into hedging arrangements with counterparties that are large, creditworthy financial institutions typically rated at least "A" by Standard & Poor's ("S&P") and "A2" by Moody's Investors Service ("Moody's"). The Company's hedging strategy is approved and monitored by the Company's Audit Committee on behalf of its Board of Directors and may be changed by the Board of Directors without stockholder approval.
The Company has entered into the following cash flow and fair value hedges that are outstanding as of December 31, 2003. The net value (liability) associated with these hedges is reflected on the Company's Consolidated Balance Sheets (in thousands).
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
Estimated Value at December 31, 2003 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 125,000 | 2.885 | % | 1/23/03 | 6/25/06 | $ | (1,632 | ) | ||||
Pay-Fixed Swap | 125,000 | 2.838 | % | 2/11/03 | 6/25/06 | (1,486 | ) | ||||||
Pay-Fixed Swap | 75,000 | 5.580 | % | 11/4/99 | (1) | 12/1/04 | (3,227 | ) | |||||
Pay-Floating Swap | 200,000 | 4.381 | % | 12/17/03 | 12/15/10 | (1,472 | ) | ||||||
Pay-Floating Swap | 100,000 | 4.345 | % | 12/17/03 | 12/15/10 | (958 | ) | ||||||
Pay-Floating Swap | 100,000 | 3.878 | % | 11/27/02 | 8/15/08 | 2,681 | |||||||
Pay-Floating Swap | 50,000 | 3.810 | % | 11/27/02 | 8/15/08 | 1,183 | |||||||
Pay-Floating Swap | 50,000 | 4.290 | % | 12/17/03 | 12/15/10 | (649 | ) | ||||||
LIBOR Cap | 345,000 | 8.000 | % | 5/22/02 | 5/28/14 | 11,648 | |||||||
LIBOR Cap | 135,000 | 6.000 | % | 9/29/03 | 10/15/06 | 418 | |||||||
LIBOR Cap | 75,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | | ||||||
LIBOR Cap | 35,000 | 7.750 | % | 11/4/99 | (1) | 12/1/04 | |
||||||
Total Estimated Value | 6,506 |
Explanatory Note:
Between January 1, 2002 and December 31, 2003, the Company also had outstanding the following cash flow hedges that have expired or been settled (in thousands):
Type of Hedge |
Notional Amount |
Strike Price or Swap Rate |
Trade Date |
Maturity Date |
|||||
---|---|---|---|---|---|---|---|---|---|
Pay-Fixed Swap | $ | 125,000 | 7.058 | % | 6/15/00 | 6/25/03 | |||
Pay-Fixed Swap | 125,000 | 7.055 | % | 6/15/00 | 6/25/03 | ||||
Pay-Fixed Swap | 100,000 | 4.139 | % | 9/29/03 | 1/2/11 | ||||
Pay-Fixed Swap | 100,000 | 4.643 | % | 9/29/03 | 1/2/14 |
During 2003, the Company entered into two 90-day forward starting swaps each having a $100.0 million notional amount. These pay-fixed swaps which were effective in September 2003, had rates of 4.139% and 4.643%, had seven-year and 10-year terms, respectively, and were used to lock-in swap rates related to a portion of planned future corporate unsecured fixed-rate bond issuances. These two swaps were settled in connection with the Company's issuance of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes. In addition, effective in September 2003, the Company entered into a $135.0 million cap with a rate of 6.00% to hedge the Company's current
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outstanding floating-rate debt. This cap has a three-year term. Further, the Company entered into two $125.0 million forward starting swaps. These pay-fixed swaps were effective in June 2003 and replaced the two $125.0 million pay-fixed swaps mentioned above. The two new pay-fixed swaps have a three-year term and expire on June 25, 2006.
In addition, in connection with a portion of the Company's fixed-rate corporate bonds, the Company entered into three pay-floating interest rate swaps in December 2003 struck at 4.381%, 4.345% and 4.29% with notional amounts of $200.0 million, $100.0 million and $50.0 million, respectively, and maturing on December 15, 2010 and entered into two pay-floating interest rate swaps in November 2002 struck at 3.8775% and 3.81% with notional amounts of $100.0 million and $50.0 million, respectively, and maturing on August 15, 2008. The Company pays six-month LIBOR on the swaps entered into in December 2003 and one-month LIBOR on the swaps entered into in November 2002 and receives the stated fixed rate in return. These swaps mitigate the risk of changes in the fair value of $350.0 million of seven-year Senior Notes and $150.0 million of 10-year Senior Notes attributable to changes in LIBOR. For accounting purposes, the difference between the fixed rate received and the LIBOR rate paid on the notional amount of the swap is recorded as "Interest expense" on the Company's Consolidated Statements of Operations. In addition, the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount on a quarterly basis.
In connection with STARs, Series 2003-1 in May 2003, the Company entered into a LIBOR interest rate cap struck at 6.95% in the notional amount of $270.6 million, and simultaneously sold a LIBOR interest rate cap with the same terms. Since these instruments do not change 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 terms of these arrangements are substantially the same, the effects of a revaluation of these two instruments substantially offset one another.
In connection with STARs, Series 2002-1 in May 2002, the Company entered into a LIBOR interest rate cap struck at 8.00% in the notional amount of $345.0 million. The Company utilizes the provisions of SFAS No. 133 with respect to such instruments. SFAS No. 133 provides that the up-front fees paid on option-based products such as caps should be expensed into earnings based on the allocation of the premium to the affected periods as if the agreement were a series of "caplets." These allocated premiums are then reflected as a charge to income (as part of interest expense) in the affected period. On May 28, 2002, in connection with the STARs, Series 2002-1 transaction, the Company paid a premium of $13.7 million for this interest rate cap. Using the "caplet" methodology discussed above, amortization of the cap premium is dependent upon the actual value of the caplets at inception.
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 term loan bears interest at 7.44% per annum, payable monthly, and amortizes over an approximately 22-year schedule. The 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 term loan over its effective ten-year term.
Certain of the Company's CTL joint ventures, have hedging activities which are more fully described in Note 6 to the Company's Consolidated Financial Statements.
Off-Balance Sheet TransactionsThe Company is not dependent on the use of any off-balance sheet financing arrangements for liquidity. As of December 31, 2003, the Company had investments in three CTL joint ventures accounted for under the equity method, which had total debt obligations outstanding of approximately $175.3 million. The Company's pro rata share of the ventures' third-party debt was approximately $76.7 million (see Note 6 to the Company's Consolidated Financial
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Statements). These ventures were formed for the purpose of operating, acquiring and in certain cases, developing CTL facilities. The debt obligations of these joint ventures are non-recourse to the ventures and the Company, and mature between fiscal years 2004 and 2011. As of December 31, 2003, the debt obligations consisted of six term loans bearing fixed rates per annum ranging from 7.61% to 8.43% and one variable-rate term loan with a rate of LIBOR + 1.25% per annum.
The Company's STARs securitizations are all on-balance sheet financings.
The Company has certain discretionary and non-discretionary unfunded commitments related to its loans and other lending investments that it may need to, or choose to, fund in the future. Discretionary commitments are those under which the Company has sole discretion with respect to future funding. Non-discretionary commitments are those under which the Company is generally obligated to fund at the request of the borrower or upon the occurrence of events outside of the Company's direct control. As of December 31, 2003, the Company had 18 loans with unfunded commitments totaling $208.6 million, of which $80.2 million was discretionary and $128.4 million was non-discretionary.
Ratings TriggersOn July 27, 2001, the Company completed a $300.0 million unsecured revolving credit facility with a group of leading financial institutions. The facility has an initial maturity of July 2003 with a one-year extension at the Company's option and another one-year extension at the lenders' option. On May 14, 2003, the Company extended the final maturity to July 2004. This facility replaces two prior credit facilities maturing in 2002 and 2003, and bears interest at LIBOR + 2.125% per annum based on the Company's senior unsecured credit ratings of BB+ from S&P, Ba1 from Moody's and BBB- from Fitch Ratings. If the Company achieves a higher rating from either S&P or Moody's, the facility's interest rate will improve to LIBOR + 2.00% per annum. If the Company's credit rating is downgraded by any of the rating agencies (regardless of how far), the facility's interest rate will increase to LIBOR + 2.25% per annum. In the event the Company receives two credit ratings that are not equivalent, the spread over LIBOR shall be determined by the lower of the two such ratings. As of December 31, 2003, $130.0 million was outstanding on this facility. Accordingly, management does not believe any rating changes would have a material adverse impact on the Company's results of operations. There are no other ratings triggers in any of the Company's debt instruments or other operating or financial agreements.
On July 30, 2002, the Company's senior unsecured credit rating was upgraded to an investment grade rating of BBB- from BB+ by Fitch Ratings. In addition, Moody's and S&P raised their ratings outlook for the Company's senior unsecured credit rating to "positive." On October 22, 2003, Moody's confirmed its rating of Ba1 and its ratings outlook of "positive" for the Company. On November 20, 2003, S&P also reaffirmed its rating of BB+ and its ratings outlook of "positive" for the Company.
Transactions with Related PartiesThe Company has an investment in iStar Operating Inc. ("iStar Operating"), a taxable subsidiary that, through a wholly-owned subsidiary, services the Company's loans and certain loan portfolios owned by third parties. The Company owns all of the non-voting preferred stock and a 95.00% economic interest in iStar Operating. The common shareholder, an entity controlled by a former director of the Company, is the owner of all the voting common stock and a 5.00% economic interest in iStar Operating. As of December 31, 2003, there have never been any distributions to the common shareholder, nor does the Company expect to make any in the future. At any time, the Company has the right to acquire all of the common stock of iStar Operating at fair market value, which the Company believes to be nominal.
iStar Operating has elected to be treated as a taxable REIT subsidiary for purposes of maintaining compliance with the REIT provisions of the Code and prior to July 1, 2003 was accounted for under the equity method for financial statement reporting purposes and was presented in "Investments in and advances to joint ventures and unconsolidated subsidiaries" on the Company's Consolidated Balance Sheets. As of July 1, 2003, the Company consolidates this entity as a VIE (see Note 3 to the Company's Consolidated Financial Statements) with no material impact. Prior to its consolidation, the
183
Company charged an allocated portion of its general overhead expenses to iStar Operating based on the number of employees at iStar Operating as a percentage of the Company's total employees. These general overhead expenses were in addition to the direct general and administrative costs of iStar Operating. As of December 31, 2003, iStar Operating had no debt obligations.
In addition, the Company had an investment in TriNet Management Operating Company, Inc. ("TMOC"), an entity originally formed to make a $2.0 million investment in the convertible debt securities of a real estate company which trades on the Mexican Stock Exchange. This investment was made by TriNet prior to its acquisition by the Company in 1999. Prior to March 29, 2003, the Company owned 95.00% of the outstanding voting and non-voting common stock (representing 1.00% voting power and 95.00% of the economic interest) in TMOC. The owners of the remaining TMOC stock were two executives of the Company. On March 29, 2003, the Company purchased the remaining 5.00% interest from the executives for approximately $2,000, an amount that was equal to the carrying value, which was less than their original investment. Following this purchase, the Company owned 100.00% of TMOC and therefore consolidated the entity for accounting purposes. On June 30, 2003, the $2.0 million investment was fully repaid and prior to December 31, 2003, the entity was liquidated.
The Company entered into an employment agreement with its Chief Executive Officer as of March 31, 2001. In addition to the salary and bonus provisions of the agreement, the agreement provides for an award of 2.0 million phantom units to the executive, each of which notionally represents one share of the Company's Common Stock. Portions of these phantom units will vest on a contingent basis if the average closing price of the Company's Common Stock achieves certain levels (ranging from $25.00 to $37.00 per share) for 60 consecutive calendar days. The total rate of return (share price appreciation plus the reinvestment of dividends at market price on the date of distribution) from December 31, 2000 through December 31, 2003 was 155.10%. Contingently vested units will become fully vested, meaning that they are no longer subject to forfeiture, if the executive remains employed through March 30, 2004, or earlier upon certain change of control and termination events. When and if contingently vested phantom units become fully vested units, the Company must deliver to the executive either a number of shares of Common Stock equal to the number of fully vested units or an amount of cash equal to the then fair market value of that number of shares of Common Stock. If shares were unavailable under the Company's then long-term incentive plans, this obligation could require the Company to make a substantial cash payment to the executive. See "Critical Accounting Policies-Executive Compensation" below for a discussion of the accounting treatment applicable to the compensation awarded to the Chief Executive Officer under this agreement.
As more fully described in Note 10 to the Company's Consolidated Financial Statements certain affiliates of SOF IV and the Company's Executive Officer have agreed to reimburse the Company for the value of restricted shares awarded to the former President in excess of 350,000 shares.
DRIP/Stock Purchase PlanThe Company maintains a dividend reinvestment and direct stock purchase plan. Under the dividend reinvestment component of the plan, the Company's shareholders may purchase additional shares of Common Stock without payment of brokerage commissions or service charges by automatically reinvesting all or a portion of their Common Stock cash dividends. Under the direct stock purchase component of the plan, the Company's shareholders and new investors may purchase shares of Common Stock directly from the Company without payment of brokerage commissions or service charges. All purchases of shares in excess of $10,000 per month pursuant to the direct purchase component are at the Company's sole discretion. Shares issued under the plan may reflect a discount of up to 3.00% from the prevailing market price of the Company's Common Stock. The Company is authorized to issue up to 8.0 million shares of Common Stock pursuant to the dividend reinvestment and direct stock purchase plan. During the 12 months ended December 31, 2003 and 2002, the Company issued a total of approximately 2.6 million and 1.6 million shares of its Common Stock, respectively, through the direct stock purchase component of the plan. Net proceeds during the 12 months ended December 31, 2003 and 2002 were approximately $89.1 million and
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$44.4 million, respectively. There are approximately 3.6 million shares available for issuance under the plan as of December 31, 2003.
Stock Repurchase ProgramThe 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 or loan repayments 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, 2003, the Company had repurchased a total of approximately 2.3 million shares at an aggregate cost of approximately $40.7 million. The Company has not repurchased any shares under the stock repurchase program since November 2000.
Critical Accounting Policies
The Company's Consolidated Financial Statements include the accounts of the Company and all majority-owned and controlled subsidiaries. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe that there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Management has the obligation to ensure that its policies and methodologies are in accordance with GAAP. During 2003, management reviewed and evaluated its critical accounting policies and believes them to be appropriate. The Company's accounting policies are described in Note 3 to the Company's Consolidated Financial Statements. Management believes the more significant of these to be as follows:
Revenue RecognitionThe most significant sources of the Company's revenue come from its lending operations and its CTL operations. For its lending operations, the Company reflects income using the effective yield method, which recognizes periodic income over the expected term of the investment on a constant yield basis. For CTL assets, the Company recognizes income on the straight-line method, which effectively recognizes contractual lease payments to be received by the Company evenly over the term of the lease. Management believes the Company's revenue recognition policies are appropriate to reflect the substance of the underlying transactions.
Provision for Loan LossesThe Company's accounting policies require that an allowance for estimated credit losses be reflected in the financial statements based upon an evaluation of known and inherent risks in its private lending assets. While the Company and its private predecessors have experienced minimal actual losses on their lending investments, management considers it prudent to reflect provisions for loan losses on a portfolio basis based upon the Company's assessment of general market conditions, the Company's internal risk management policies and credit risk rating system, industry loss experience, the Company's assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments. Actual losses, if any, could ultimately differ from these estimates.
Allowance for doubtful accountsThe Company's accounting policy requires a reserve on the Company's accrued operating lease income receivable balances and on the deferred operating lease income receivable balances. The reserve covers asset specific problems (e.g., bankruptcy) as they arise, as well as, a portfolio reserve based on management's evaluation of the credit risks associated with these receivables.
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Impairment of Long-Lived AssetsCTL assets represent "long-lived" assets for accounting purposes. The Company periodically reviews long-lived assets to be held and used in its leasing operations for impairment in value whenever any events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In management's opinion, based on this analysis, CTL assets to be held and used are not carried at amounts in excess of their estimated recoverable amounts.
Risk Management and Financial InstrumentThe Company has historically utilized derivative financial instruments only as a means to help to manage its interest rate risk exposure on a portion of its variable-rate debt obligations (i.e., as cash flow hedges). The instruments utilized are generally either pay-fixed swaps or LIBOR-based interest rate caps which are widely used in the industry and typically with major financial institutions. The Company's accounting policies generally reflect these instruments at their fair value with unrealized changes in fair value reflected in "Accumulated other comprehensive income (losses)" on the Company's Consolidated Balance Sheets. Realized effects on the Company's cash flows are generally recognized currently in income.
However, when appropriate the Company enters into interest rate swaps that convert fixed-rate debt to variable rate in order to mitigate the risk of changes in fair value of its fixed-rate debt obligations. The Company reflects these instruments at their fair value and adjusts the carrying amount of the hedged liability by an offsetting amount.
Income TaxesThe Company's financial results generally do not reflect provisions for current or deferred income taxes. Management believes that the Company has and intends to continue to operate in a manner that will continue to allow it to be taxed as a REIT and, as a result, does not expect to pay substantial corporate-level taxes. Many of these requirements, however, are highly technical and complex. If the Company were to fail to meet these requirements, the Company would be subject to Federal income tax.
Executive CompensationThe Company's accounting policies generally provide cash compensation to be estimated and recognized over the period of service. With respect to stock-based compensation arrangements, as of July 1, 2002 (with retroactive application to the beginning of the calendar year), the Company has adopted the fair value method allowed under SFAS No. 123 on a prospective basis, which values options on the date of grant and recognizes an expense equal to the fair value of the option multiplied by the number of options granted over the related service period. Prior to the third quarter 2002, the Company elected to use APB 25 accounting, which measured the compensation charges based on the intrinsic value of such securities when they become fixed and determinable, and recognized such expense over the related service period. These arrangements are often complex and generally structured to align the interests of management with those of the Company's shareholders. See Note 10 to the Company's Consolidated Financial Statements for a detailed discussion of such arrangements and the related accounting effects.
During 2001, the Company entered into three-year employment agreements with its Chief Executive Officer and its former President. In addition, during 2002 the Company entered into a three-year employment agreement with its Chief Financial Officer. See Note 10 to the Company's Consolidated Financial Statements for a more detailed description of these employment agreements.
The following is a hypothetical illustration of the effects on the Company's net income and adjusted earnings of the full vesting of phantom units under the employment agreement with the Chief Executive Officer. During the 12 months ended December 31, 2003, 2.0 million of the phantom shares awarded to the Chief Executive Officer were contingently vested. Absent an earlier change of control or termination of employment, these 2.0 million shares will not become fully vested until March 30, 2004. Assuming that the market price of the Common Stock on March 30, 2004 is $38.90 (which was the market price of the Common Stock on December 31, 2003), the Company would incur a one-time charge to earnings at that time of approximately $77.8 million (the fair market value of the 2.0 million
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shares at $38.90 per share) subject to the availability of 2.0 million shares under the Company's 1996 Long-Term Incentive Plan.
On April 29, 2002, the 500,000 unvested restricted shares awarded to the President became contingently vested as the total shareholder return exceeded 60.00% and became fully vested on September 30, 2002 as all employment contingencies were met. The Company incurred a charge of approximately $15.0 million related to these vested shares, recognized ratably over the service period from the date of contingent vesting through September 30, 2002.
New CEO Employment AgreementThe March 2001 employment agreement with the Company's Chief Executive Officer expires on March 30, 2004. Subsequent to December 31, 2003, the Company entered into a new employment agreement with its Chief Executive Officer which will take effect upon the expiration of the old agreement. The new agreement has an initial term of three years and provides for the following compensation:
In addition, the Chief Executive Officer will purchase an 80.00% interest in the Company's 2006 High Performance Unit Program for directors and executive officers. This performance program was approved by the Company's shareholders in 2003 and is described in detail in the Company's 2003 annual proxy statement. The purchase price to be paid by the Chief Executive Officer will be based upon a valuation prepared by an independent investment-banking firm. The interests purchased by the Chief Executive Officer will only have nominal value to him unless the Company achieves total shareholder returns in excess of those achieved by peer group indices, all as more fully described in the Company's 2003 annual proxy statement.
New Accounting Standards
In December 2003, the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition" which supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21. The Company adopted the provisions of this statement immediately, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," issued during the third quarter of 2003, provides guidance on revenue recognition for revenues derived from a single contract that contain multiple products or services. EITF 00-21 also provides additional requirements to determine when these revenues may be recorded separately for accounting purposes. The Company adopted EITF 00-21 on July 1, 2003, as required, and it did not have a significant impact on the Company's Consolidated Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and
187
Equity." This standard requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatorily redeemable financial instruments, (2) obligations to repurchase the issuer's equity shares by transferring assets; and (3) certain obligations to issue a variable number of shares. The FASB recently issued FASB Staff Position ("FSP") 150-3, which defers the provisions of paragraphs 9 and 10 of SFAS No. 150 indefinitely as they apply to mandatorily redeemable noncontrolling interests associated with finite-lived entities. The Company adopted the provisions of this statement, as required, on July 1, 2003, and it did not have a significant financial impact on the Company's Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," an interpretation of ARB 51. FIN 46 provides guidance on identifying entities for which control is achieved through means other than through voting rights (a "variable interest entity" or "VIE"), and how to determine when and which business enterprise should consolidate a VIE. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The transitional disclosure requirements took effect immediately and were required for all financial statements initially issued or modified after January 31, 2003. Immediate consolidation is required for VIEs entered into or modified after February 1, 2003 in which the Company is deemed the primary beneficiary. For VIEs in which the Company entered into prior to February 1, 2003 the FASB recently issued FSP to defer FIN 46 for those older entities to the reporting period ending after March 15, 2004. The adoption of the additional consolidation provisions of FIN 46 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based CompensationTransition and Disclosure," an amendment of FASB Statement No. 123 ("SFAS No. 123"). This statement provides alternative transition methods for a voluntary change to the fair value basis of accounting for stock-based employee compensation. However, this Statement does not permit the use of the original SFAS No. 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation, description of transition method utilized and the effect of the method used on reported results. The Company adopted SFAS No. 148 with retroactive application to grants made subsequent to January 1, 2002 with no material effect on the Company's Consolidated Financial Statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," an interpretation of Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies," Statement of Financial Accounting Standards No. 57, "Related Party Disclosures," Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" and rescinds FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others, an Interpretation of SFAS No. 5." It requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee regardless if the Company receives separately identifiable consideration (e.g., a premium). The disclosure requirements are effective December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company's Consolidated Financial Statements, nor is it expected to have a material impact in the future.
In September 2002, the FASB issued Statement of Financial Accounting Standards No. 147 ("SFAS No. 147"), "Acquisitions of Certain Financial Institutions," an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9. SFAS No. 147 provides guidance on the accounting for the acquisitions of financial institutions, except those acquisitions between two or more mutual
188
enterprises. SFAS No. 147 removes acquisitions of financial institutions from the scope of both FASB No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, "When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method," and requires that those transactions be accounted for in accordance with SFAS No. 141 and SFAS No. 142. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term, customer-relationship intangible assets of financial institutions such as depositor-relationship and borrower-relationship intangible assets and credit cardholder intangible assets. The Company adopted the provisions of this statement, as required, on October 1, 2002, and it did not have a significant financial impact on the Company's Consolidated Financial Statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Exit or Disposal Activities," to address significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also includes: (1) costs related to terminating a contract that is not a capital lease; and (2) termination benefits received by employees involuntarily terminated under the terms of a one-time benefit arrangement that is not an on-going benefit arrangement or an individual deferred-compensation contract. The Company adopted the provisions of SFAS 146 on December 31, 2002, as required, and it did not have a material effect on the Company's Consolidated Financial Statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds both FASB Statements No. 4 ("SFAS No. 4"), "Reporting Gains and Losses from Extinguishment of Debt," and the amendment to SFAS No. 4, FASB Statement No. 64 ("SFAS No. 64"), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through this rescission, SFAS No. 145 eliminates the requirement (in both SFAS No. 4 and SFAS No. 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. An entity is not prohibited from classifying such gains and losses as extraordinary items, so long as they meet the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30 ("APB 30"), "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"; however, due to the nature of the Company's operations, such treatment may not be available to the Company. Any gains or losses on extinguishments of debt that were previously classified as extraordinary items in prior periods presented that do not meet the criteria in APB 30 for classification as an extraordinary item will be reclassified to income from continuing operations. The provisions of SFAS No. 145 are effective for financial statements issued for fiscal years beginning after May 15, 2002. The Company adopted the provisions of this statement, as required, on January 1, 2003. For the years ended December 31, 2002 and 2001, the Company reclassified $12.2 million and $1.6 million, respectively from "Extraordinary loss from early extinguishment of debt" into "Loss on early extinguishment of debt" in income from continuing operations on the Company's Consolidated Statements of Operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of, and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 requires that current operations prior to the disposition of CTL assets and prior period results of such operations be
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presented in discontinued operations in the Company's Consolidated Statements of Operations. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and must be applied at the beginning of a fiscal year. The Company adopted the provisions of this statement on January 1, 2002, as required, and it did not have a significant financial impact on the Company.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also addresses the initial recognition and measurement of goodwill and other intangible assets acquired in business combinations and requires intangible assets to be recognized apart from goodwill if certain tests are met. SFAS No. 142 requires that goodwill not be amortized but instead be measured for impairment at least annually, or when events indicate that there may be an impairment. The Company adopted the provisions of both statements for transactions initiated after June 30, 2001, as required, and the adoption did not have a significant impact on the Company.
In July 2001, the SEC released Staff Accounting Bulletin No. 102 ("SAB 102"), "Selected Loan Loss Allowance and Documentation Issues." SAB 102 summarizes certain of the SEC's views on the development, documentation and application of a systematic methodology for determining allowances for loan and lease losses. Adoption of SAB 102 by the Company did not have a significant impact on the Company.
In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
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Description |
Balance at Beginning of Period |
Charged to Costs and Expenses |
Additions Charges to Other Accounts |
Deductions |
Balance at End of Period |
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For the Year Ended December 31, 2001 | ||||||||||||||||
Provision for loan losses(1) | $ | 14,000 | $ | 7,000 | $ | | $ | | $ | 21,000 | ||||||
Allowance for doubtful accounts(2) | 165 | 158 | | | 323 | |||||||||||
$ | 14,165 | $ | 7,158 | $ | | $ | | $ | 21,323 | |||||||
For the Year Ended December 31, 2002 | ||||||||||||||||
Provision for loan losses(1) | $ | 21,000 | $ | 8,250 | $ | | $ | | $ | 29,250 | ||||||
Allowance for doubtful accounts(2) | 323 | 284 | | | 607 | |||||||||||
$ | 21,323 | $ | 8,534 | $ | | $ | | $ | 29,857 | |||||||
For the Year Ended December 31, 2003 | ||||||||||||||||
Provision for loan losses(1) | $ | 29,250 | $ | 7,500 | $ | | $ | (3,314 | ) | $ | 33,436 | |||||
Allowance for doubtful accounts(2) | 607 | 193 | | | 800 | |||||||||||
$ | 29,857 | $ | 7,693 | $ | | $ | (3,314 | ) | $ | 34,236 |
Explanatory Notes:
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iStar Financial Inc.
Schedule IIICorporate Tenant Lease Assets and Accumulated Depreciation
As of December 31, 2003
(Dollars in thousands)
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Encumbrances |
Land |
Building and Improvements |
Land |
Building and Improvements |
Total |
Accumulated Depreciation |
Date Acquired |
Depreciable Life (Years) |
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OFFICE FACILITIES: | ||||||||||||||||||||||||||||||
Tempe | AZ | $ | | $ | 1,512 | $ | 9,731 | $ | | $ | 1,512 | $ | 9,731 | $ | 11,243 | $ | 1,014 | 1999 | 40.0 | |||||||||||
Tempe | AZ | | 1,033 | 6,652 | | 1,033 | 6,652 | 7,685 | 693 | 1999 | 40.0 | |||||||||||||||||||
Tempe | AZ | | 1,033 | 6,652 | 205 | 1,033 | 6,857 | 7,890 | 698 | 1999 | 40.0 | |||||||||||||||||||
Tempe | AZ | | 1,033 | 6,652 | | 1,033 | 6,652 | 7,685 | 693 | 1999 | 40.0 | |||||||||||||||||||
Tempe | AZ | 3,534 | 701 | 4,339 | | 701 | 4,339 | 5,040 | 452 | 1999 | 40.0 | |||||||||||||||||||
Anaheim | CA | 12,879 | 3,512 | 13,379 | 45 | 3,512 | 13,424 | 16,936 | 1,398 | 1999 | 40.0 | |||||||||||||||||||
Commerce | CA | 9,693 | 3,454 | 12,915 | | 3,454 | 12,915 | 16,369 | 1,345 | 1999 | 40.0 | |||||||||||||||||||
Cupertino | CA | 17,093 | 7,994 | 19,037 | 2 | 7,994 | 19,039 | 27,033 | 1,983 | 1999 | 40.0 | |||||||||||||||||||
Dublin | CA | 69,066 | 17,040 | 84,549 | | 17,040 | 84,549 | 101,589 | 3,982 | 2002 | 40.0 | |||||||||||||||||||
Fremont | CA | | 880 | 4,846 | | 880 | 4,846 | 5,726 | 505 | 1999 | 40.0 | |||||||||||||||||||
Milpitas | CA | 8,516 | 9,526 | 11,655 | 785 | 9,526 | 12,440 | 21,966 | 792 | 2002 | 40.0 | |||||||||||||||||||
Milpitas | CA | 5,418 | 4,139 | 5,064 | 529 | 4,139 | 5,593 | 9,732 | 509 | 2002 | 40.0 | |||||||||||||||||||
Milpitas | CA | 19,939 | 9,802 | 12,116 | 115 | 9,802 | 12,231 | 22,033 | 856 | 2002 | 40.0 | |||||||||||||||||||
Mountain View | CA | | 12,834 | 28,158 | | 12,834 | 28,158 | 40,992 | 2,933 | 1999 | 40.0 | |||||||||||||||||||
Mountain View | CA | | 5,798 | 12,720 | | 5,798 | 12,720 | 18,518 | 1,325 | 1999 | 40.0 | |||||||||||||||||||
Palo Alto | CA | 9,011 | | 19,168 | 37 | | 19,205 | 19,205 | 1,999 | 1999 | 40.0 | |||||||||||||||||||
Redondo Beach | CA | 8,331 | 2,598 | 9,212 | | 2,598 | 9,212 | 11,810 | 960 | 1999 | 40.0 | |||||||||||||||||||
San Diego | CA | 3,572 | 1,530 | 3,060 | | 1,530 | 3,060 | 4,590 | 319 | 1999 | 40.0 | |||||||||||||||||||
Thousand Oaks | CA | 16,991 | 4,563 | 24,911 | | 4,563 | 24,911 | 29,474 | 2,595 | 1999 | 40.0 | |||||||||||||||||||
Aurora | CO | 2,928 | 580 | 3,677 | | 580 | 3,677 | 4,257 | 184 | 2001 | 40.0 | |||||||||||||||||||
Englewood | CO | | 1,757 | 16,930 | 619 | 1,757 | 17,549 | 19,306 | 1,883 | 1999 | 40.0 | |||||||||||||||||||
Englewood | CO | | 2,967 | 15,008 | 7 | 2,967 | 15,015 | 17,982 | 1,563 | 1999 | 40.0 | |||||||||||||||||||
Englewood | CO | | 8,536 | 27,428 | 7,596 | 8,536 | 35,024 | 43,560 | 3,222 | 1999 | 40.0 | |||||||||||||||||||
Ft. Collins | CO | 12,323 | | 16,752 | | | 16,752 | 16,752 | 737 | 2002 | 40.0 | |||||||||||||||||||
Westminster | CO | | 307 | 3,524 | | 307 | 3,524 | 3,831 | 367 | 1999 | 40.0 | |||||||||||||||||||
Westminster | CO | | 616 | 7,290 | | 616 | 7,290 | 7,906 | 759 | 1999 | 40.0 | |||||||||||||||||||
Jacksonville | FL | | 1,384 | 3,911 | | 1,384 | 3,911 | 5,295 | 407 | 1999 | 40.0 | |||||||||||||||||||
Jacksonville | FL | 2,323 | 877 | 2,237 | 445 | 877 | 2,682 | 3,559 | 259 | 1999 | 40.0 | |||||||||||||||||||
Jacksonville | FL | 6,279 | 2,366 | 6,072 | 1,095 | 2,366 | 7,167 | 9,533 | 692 | 1999 | 40.0 | |||||||||||||||||||
Plantation | FL | | 7,118 | 23,648 | | 7,118 | 23,648 | 30,766 | 2 | 2003 | 40.0 | |||||||||||||||||||
Tampa | FL | 11,367 | 1,920 | 18,435 | | 1,920 | 18,435 | 20,355 | 909 | 2002 | 40.0 | |||||||||||||||||||
Alpharetta | GA | | 905 | 6,744 | 18 | 905 | 6,762 | 7,667 | 707 | 1999 | 40.0 | |||||||||||||||||||
Atlanta | GA | 36,243 | 5,709 | 49,091 | 6,932 | 5,709 | 56,023 | 61,732 | 6,159 | 1999 | 40.0 | |||||||||||||||||||
Duluth | GA | 7,612 | 1,655 | 14,484 | 48 | 1,655 | 14,532 | 16,187 | 1,513 | 1999 | 40.0 | |||||||||||||||||||
Lisle | IL | | 6,153 | 14,993 | | 6,153 | 14,993 | 21,146 | 1,562 | 1999 | 40.0 | |||||||||||||||||||
Vernon Hills | IL | 8,999 | 1,400 | 12,597 | | 1,400 | 12,597 | 13,997 | 1,312 | 1999 | 40.0 |
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iStar Financial Inc.
Schedule IIICorporate Tenant Lease Assets and Accumulated Depreciation (Continued)
As of December 31, 2003
(Dollars in thousands)
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Initial Cost to Company |
|
|
|
|
|||||||||||||||
|
|
|
Cost Capitalized Subsequent to Acquisition |
|
|
|
||||||||||||||||
Location |
State |
Encumbrances |
Land |
Building and Improvements |
Land |
Building and Improvements |
Total |
Accumulated Depreciation |
Date Acquired |
Depreciable Life (Years) |
||||||||||||
OFFICE FACILITIES (Continued): | ||||||||||||||||||||||
New Orleans | LA | | 1,427 | 24,252 | 1,905 | 1,427 | 26,157 | 27,584 | 3,014 | 1999 | 40.0 | |||||||||||
New Orleans | LA | 52,439 | 1,665 | 16,653 | 2,539 | 1,665 | 19,192 | 20,857 | 2,084 | 1999 | 40.0 | |||||||||||
Andover | MA | | 639 | 7,176 | 9 | 639 | 7,185 | 7,824 | 748 | 1999 | 40.0 | |||||||||||
Andover | MA | | 1,787 | 8,486 | | 1,787 | 8,486 | 10,273 | 884 | 1999 | 40.0 | |||||||||||
Braintree | MA | | 792 | 4,929 | 44 | 792 | 4,973 | 5,765 | 517 | 1999 | 40.0 | |||||||||||
Braintree | MA | | 2,225 | 7,403 | 148 | 2,225 | 7,551 | 9,776 | 777 | 1999 | 40.0 | |||||||||||
Canton | MA | | 742 | 3,155 | 103 | 742 | 3,258 | 4,000 | 336 | 1999 | 40.0 | |||||||||||
Canton | MA | | 1,409 | 3,890 | 41 | 1,409 | 3,931 | 5,340 | 408 | 1999 | 40.0 | |||||||||||
Canton | MA | | 1,077 | 2,746 | 80 | 1,077 | 2,826 | 3,903 | 297 | 1999 | 40.0 | |||||||||||
Chelmsford | MA | 20,451 | 1,600 | 21,947 | 24 | 1,600 | 21,971 | 23,571 | 966 | 2002 | 40.0 | |||||||||||
Concord | MA | 11,019 | 1,656 | | 8,476 | 1,656 | 8,476 | 10,132 | 839 | 1999 | 40.0 | |||||||||||
Concord | MA | 8,218 | 1,852 | 10,839 | 622 | 2,303 | 11,010 | 13,313 | 1,139 | 1999 | 40.0 | |||||||||||
Concord | MA | 5,828 | 1,302 | 7,864 | 281 | 1,302 | 8,145 | 9,447 | 836 | 1999 | 40.0 | |||||||||||
Concord | MA | 7,984 | 1,834 | 10,483 | 146 | 1,834 | 10,629 | 12,463 | 1,103 | 1999 | 40.0 | |||||||||||
Concord | MA | | 1,928 | 8,218 | 1,251 | 1,928 | 9,469 | 11,397 | 954 | 1999 | 40.0 | |||||||||||
Foxborough | MA | 2,852 | 1,218 | 3,756 | 1 | 1,218 | 3,757 | 4,975 | 391 | 1999 | 40.0 | |||||||||||
Mansfield | MA | 719 | 584 | 1,443 | 42 | 584 | 1,485 | 2,069 | 153 | 1999 | 40.0 | |||||||||||
Norwell | MA | | 1,140 | 1,658 | 32 | 1,140 | 1,690 | 2,830 | 176 | 1999 | 40.0 | |||||||||||
Norwell | MA | 1,797 | 506 | 2,277 | 522 | 506 | 2,799 | 3,305 | 369 | 1999 | 40.0 | |||||||||||
Quincy | MA | 13,118 | 3,562 | 23,420 | 290 | 3,562 | 23,710 | 27,272 | 2,460 | 1999 | 40.0 | |||||||||||
Rockland | MA | | 2,011 | 11,761 | 83 | 2,011 | 11,844 | 13,855 | 1,229 | 1999 | 40.0 | |||||||||||
Westborough | MA | 7,265 | 1,651 | 10,758 | | 1,651 | 10,758 | 12,409 | 1,121 | 1999 | 40.0 | |||||||||||
Lanham | MD | 10,435 | 2,486 | 12,047 | 164 | 2,486 | 12,211 | 14,697 | 1,271 | 1999 | 40.0 | |||||||||||
Largo | MD | 18,851 | 1,800 | 18,706 | 21 | 1,800 | 18,727 | 20,527 | 742 | 2002 | 40.0 | |||||||||||
Arden Hills | MN | | 719 | 6,541 | 236 | 719 | 6,777 | 7,496 | 703 | 1999 | 40.0 | |||||||||||
Roseville | MN | 3,533 | 1,113 | 4,452 | 157 | 1,113 | 4,609 | 5,722 | 480 | 1999 | 40.0 | |||||||||||
Jersey City | NJ | 135,000 | 15,667 | 162,583 | 2 | 15,667 | 162,585 | 178,252 | 1,041 | 2003 | 40.0 | |||||||||||
Mt. Laurel | NJ | 60,874 | 7,726 | 74,429 | 10 | 7,726 | 74,439 | 82,165 | 1,976 | 2002 | 40.0 | |||||||||||
Parsippany | NJ | 26,640 | 8,242 | 31,758 | | 8,242 | 31,758 | 40,000 | 610 | 2003 | 40.0 | |||||||||||
Las Vegas (1) | NV | 26,249 | 2,103 | 32,640 | 729 | 2,103 | 33,369 | 35,472 | | 2002 | | |||||||||||
Columbus | OH | 8,433 | 1,275 | 10,326 | 13 | 1,275 | 10,339 | 11,614 | 584 | 2001 | 40.0 | |||||||||||
Harrisburg | PA | 17,261 | 690 | 26,098 | | 690 | 26,098 | 26,788 | 1,489 | 2001 | 40.0 | |||||||||||
Spartanburg | SC | 7,067 | 800 | 11,192 | 5 | 800 | 11,197 | 11,997 | 573 | 2001 | 40.0 | |||||||||||
Memphis | TN | 17,387 | 2,702 | 25,129 | | 2,702 | 25,129 | 27,831 | 2,618 | 1999 | 40.0 | |||||||||||
Dallas | TX | 4,467 | 1,918 | 4,632 | | 1,918 | 4,632 | 6,550 | 483 | 1999 | 40.0 |
193
iStar Financial Inc.
Schedule IIICorporate Tenant Lease Assets and Accumulated Depreciation (Continued)
As of December 31, 2003
(Dollars in thousands)
|
|
|
|
|
|
Gross Amount Carried at Close of Period |
|
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Initial Cost to Company |
|
|
|
|
|||||||||||||||
|
|
|
Cost Capitalized Subsequent to Acquisition |
|
|
|
||||||||||||||||
Location |
State |
Encumbrances |
Land |
Building and Improvements |
Land |
Building and Improvements |
Total |
Accumulated Depreciation |
Date Acquired |
Depreciable Life (Years) |
||||||||||||
OFFICE FACILITIES (Continued): | ||||||||||||||||||||||
Houston | TX | 19,595 | 2,500 | 25,743 | | 2,500 | 25,743 | 28,243 | 1,288 | 2001 | 40.0 | |||||||||||
Irving | TX | | 6,083 | 42,016 | | 6,083 | 42,016 | 48,099 | 4,377 | 1999 | 40.0 | |||||||||||
Irving | TX | | 1,364 | 10,628 | 1,007 | 2,371 | 10,628 | 12,999 | 1,107 | 1999 | 40.0 | |||||||||||
Irving | TX | | 1,804 | 5,815 | 547 | 1,804 | 6,362 | 8,166 | 633 | 1999 | 40.0 | |||||||||||
Irving | TX | 17,307 | 3,363 | 21,376 | | 3,363 | 21,376 | 24,739 | 2,227 | 1999 | 40.0 | |||||||||||
Richardson | TX | | 1,233 | 15,160 | 36 | 1,233 | 15,196 | 16,429 | 1,296 | 1999 | 40.0 | |||||||||||
Richardson | TX | | 2,932 | 31,235 | | 2,932 | 31,235 | 34,167 | 3,254 | 1999 | 40.0 | |||||||||||
Richardson | TX | | 1,230 | 5,660 | 256 | 1,230 | 5,916 | 7,146 | 598 | 1999 | 40.0 | |||||||||||
Salt Lake City | UT | | 1,179 | 12,861 | | 1,179 | 12,861 | 14,040 | 1,340 | 1999 | 40.0 | |||||||||||
Dulles | VA | 9,867 | 2,647 | 14,817 | | 2,647 | 14,817 | 17,464 | 282 | 2003 | 40.0 | |||||||||||
McLean | VA | 106,558 | 20,110 | 125,516 | 95 | 20,110 | 125,611 | 145,721 | 5,123 | 2002 | 40.0 | |||||||||||
Reston | VA | | 4,436 | 22,362 | 1,859 | 4,436 | 24,221 | 28,657 | 2,354 | 1999 | 40.0 | |||||||||||
Milwaukee | WI | 10,833 | 1,875 | 13,914 | | 1,875 | 13,914 | 15,789 | 1,449 | 1999 | 40.0 | |||||||||||
Subtotal | 904,164 | 263,836 | 1,498,387 | 40,254 | 265,294 | 1,537,183 | 1,802,477 | 105,987 | ||||||||||||||
INDUSTRIAL FACILITIES: | ||||||||||||||||||||||
Burlingame | CA | | 1,219 | 3,470 | | 1,219 | 3,470 | 4,689 | 361 | 1999 | 40.0 | |||||||||||
City of Industry | CA | | 5,002 | 11,766 | | 5,002 | 11,766 | 16,768 | 1,226 | 1999 | 40.0 | |||||||||||
East Los Angeles | CA | | 9,334 | 12,501 | | 9,334 | 12,501 | 21,835 | 1,302 | 1999 | 40.0 | |||||||||||
Millbrae | CA | | 741 | 2,107 | | 741 | 2,107 | 2,848 | 219 | 1999 | 40.0 | |||||||||||
Fremont | CA | | 1,086 | 7,964 | | 1,086 | 7,964 | 9,050 | 830 | 1999 | 40.0 | |||||||||||
Fremont | CA | | 654 | 4,591 | | 654 | 4,591 | 5,245 | 478 | 1999 | 40.0 | |||||||||||
Milpitas | CA | 6,537 | 5,051 | 6,170 | 328 | 5,051 | 6,498 | 11,549 | 456 | 2002 | 40.0 | |||||||||||
Milpitas | CA | 8,572 | 6,856 | 8,378 | | 6,856 | 8,378 | 15,234 | 587 | 2002 | 40.0 | |||||||||||
Milpitas | CA | 2,213 | 2,633 | 3,219 | 279 | 2,633 | 3,498 | 6,131 | 245 | 2002 | 40.0 | |||||||||||
Milpitas | CA | 3,676 | 4,119 | 5,034 | | 4,119 | 5,034 | 9,153 | 350 | 2002 | 40.0 | |||||||||||
Milpitas | CA | 2,664 | 3,044 | 3,716 | 590 | 3,044 | 4,306 | 7,350 | 484 | 2002 | 40.0 | |||||||||||
Milpitas | CA | 9,227 | 4,095 | 8,323 | 567 | 4,095 | 8,890 | 12,985 | 889 | 1999 | 40.0 | |||||||||||
Milpitas | CA | 9,815 | 5,617 | 6,877 | 618 | 5,617 | 7,495 | 13,112 | 562 | 2002 | 40.0 | |||||||||||
Milpitas | CA | | 4,880 | 12,367 | 1,498 | 4,880 | 13,865 | 18,745 | 1,906 | 1999 | 40.0 | |||||||||||
Milpitas | CA | 7,530 | 4,600 | 5,627 | 201 | 4,600 | 5,828 | 10,428 | 443 | 2002 | 40.0 | |||||||||||
Milpitas | CA | 3,057 | 3,000 | 3,669 | | 3,000 | 3,669 | 6,669 | 260 | 2002 | 40.0 | |||||||||||
San Jose | CA | | 9,677 | 23,288 | 661 | 9,677 | 23,949 | 33,626 | 2,429 | 1999 | 40.0 | |||||||||||
Walnut Creek | CA | 8,175 | 808 | 8,306 | 552 | 808 | 8,858 | 9,666 | 958 | 1999 | 40.0 | |||||||||||
Walnut Creek | CA | | 571 | 5,874 | | 571 | 5,874 | 6,445 | 612 | 1999 | 40.0 | |||||||||||
Jacksonville | FL | | 2,310 | 5,435 | | 2,310 | 5,435 | 7,745 | 566 | 1999 | 40.0 | |||||||||||
Miami | FL | | 3,048 | 8,676 | | 3,048 | 8,676 | 11,724 | 904 | 1999 | 40.0 |
194
iStar Financial Inc.
Schedule IIICorporate Tenant Lease Assets and Accumulated Depreciation (Continued)
As of December 31, 2003
(Dollars in thousands)
|
|
|
|
|
|
Gross Amount Carried at Close of Period |
|
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Initial Cost to Company |
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|
|
|
|||||||||||||||
|
|
|
Cost Capitalized Subsequent to Acquisition |
|
|
|
||||||||||||||||
Location |
State |
Encumbrances |
Land |
Building and Improvements |
Land |
Building and Improvements |
Total |
Accumulated Depreciation |
Date Acquired |
Depreciable Life (Years) |
||||||||||||
INDUSTRIAL FACILITIES (Continued): | ||||||||||||||||||||||
Miami | FL | | 1,394 | 3,967 | | 1,394 | 3,967 | 5,361 | 413 | 1999 | 40.0 | |||||||||||
Miami | FL | | 1,612 | 4,586 | | 1,612 | 4,586 | 6,198 | 478 | 1999 | 40.0 | |||||||||||
Orlando | FL | | 1,475 | 4,198 | | 1,475 | 4,198 | 5,673 | 437 | 1999 | 40.0 | |||||||||||
McDonough | GA | 12,059 | 1,900 | 14,318 | | 1,900 | 14,318 | 16,218 | 724 | 2001 | 40.0 | |||||||||||
Stockbridge | GA | 14,681 | 1,350 | 18,393 | | 1,350 | 18,393 | 19,743 | 929 | 2001 | 40.0 | |||||||||||
DeKalb | IL | 22,021 | 1,600 | 28,015 | | 1,600 | 28,015 | 29,615 | 1,416 | 2001 | 40.0 | |||||||||||
Dixon | IL | 13,620 | 519 | 15,363 | | 519 | 15,363 | 15,882 | 97 | 2003 | 40.0 | |||||||||||
Lincolnshire | IL | | 3,192 | 7,508 | | 3,192 | 7,508 | 10,700 | 782 | 1999 | 40.0 | |||||||||||
Marion | IN | 2,581 | 131 | 4,254 | | 131 | 4,254 | 4,385 | 443 | 1999 | 40.0 | |||||||||||
Seymour | IN | 16,376 | 550 | 22,240 | 120 | 550 | 22,360 | 22,910 | 1,680 | 2000 | 40.0 | |||||||||||
South Bend | IN | | 140 | 4,640 | | 140 | 4,640 | 4,780 | 483 | 1999 | 40.0 | |||||||||||
Wichita | KS | | 213 | 3,189 | | 213 | 3,189 | 3,402 | 332 | 1999 | 40.0 | |||||||||||
Campbellsville | KY | 15,027 | 400 | 17,219 | 45 | 400 | 17,264 | 17,664 | 477 | 2002 | 40.0 | |||||||||||
Lakeville | MA | 4,328 | 1,012 | 4,048 | | 1,012 | 4,048 | 5,060 | 422 | 1999 | 40.0 | |||||||||||
Randolph | MA | 2,247 | 615 | 3,471 | | 615 | 3,471 | 4,086 | 362 | 1999 | 40.0 | |||||||||||
Baltimore | MD | 5,740 | 1,535 | 9,324 | 124 | 1,535 | 9,448 | 10,983 | 979 | 1999 | 40.0 | |||||||||||
Bloomington | MN | | 403 | 1,147 | | 403 | 1,147 | 1,550 | 119 | 1999 | 40.0 | |||||||||||
O'Fallon | MO | | 1,388 | 12,700 | | 1,388 | 12,700 | 14,088 | 1,323 | 1999 | 40.0 | |||||||||||
Reno | NV | | 248 | 707 | | 248 | 707 | 955 | 74 | 1999 | 40.0 | |||||||||||
Astoria | NY | | 897 | 2,555 | | 897 | 2,555 | 3,452 | 266 | 1999 | 40.0 | |||||||||||
Astoria | NY | | 1,796 | 5,109 | | 1,796 | 5,109 | 6,905 | 532 | 1999 | 40.0 | |||||||||||
Garden City | NY | 11,100 | 8,400 | 6,430 | | 8,400 | 6,430 | 14,830 | 40 | 2003 | 40.0 | |||||||||||
Lockbourne | OH | 14,366 | 2,000 | 17,320 | | 2,000 | 17,320 | 19,320 | 875 | 2001 | 40.0 | |||||||||||
Richfield | OH | 11,775 | 2,327 | | 12,210 | 2,327 | 12,210 | 14,537 | 678 | 2000 | 40.0 | |||||||||||
Philadelphia | PA | | 620 | 1,765 | | 620 | 1,765 | 2,385 | 184 | 1999 | 40.0 | |||||||||||
York | PA | 24,957 | 2,850 | 30,713 | | 2,850 | 30,713 | 33,563 | 1,552 | 2001 | 40.0 | |||||||||||
Spartanburg | SC | | 943 | 16,836 | | 943 | 16,836 | 17,779 | 1,754 | 1999 | 40.0 | |||||||||||
Memphis | TN | 15,495 | 1,486 | 23,279 | 100 | 1,486 | 23,379 | 24,865 | 2,426 | 1999 | 40.0 | |||||||||||
Allen | TX | | 1,238 | 9,224 | | 1,238 | 9,224 | 10,462 | 961 | 1999 | 40.0 | |||||||||||
Farmers Branch | TX | 6,935 | 1,314 | 8,903 | 18 | 1,314 | 8,921 | 10,235 | 928 | 1999 | 40.0 | |||||||||||
Richardson | TX | 6,803 | 858 | 8,556 | | 858 | 8,556 | 9,414 | 891 | 1999 | 40.0 | |||||||||||
Terrell | TX | 16,778 | 400 | 22,163 | | 400 | 22,163 | 22,563 | 1,120 | 2001 | 40.0 | |||||||||||
Seattle | WA | | 828 | 2,355 | | 828 | 2,355 | 3,183 | 245 | 1999 | 40.0 | |||||||||||
Subtotal | 278,355 | 123,979 | 491,853 | 17,911 | 123,979 | 509,764 | 633,743 | 40,489 | ||||||||||||||
195
iStar Financial Inc.
Schedule IIICorporate Tenant Lease Assets and Accumulated Depreciation (Continued)
As of December 31, 2002
(Dollars in thousands)
|
|
|
|
|
|
Gross Amount Carried at Close of Period |
|
|
|
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Initial Cost to Company |
|
|
|
|
|||||||||||||||||||||||
|
|
|
Cost Capitalized Subsequent to Acquisition |
|
|
|
||||||||||||||||||||||||
Location |
State |
Encumbrances |
Land |
Building and Improvements |
Land |
Building and Improvements |
Total |
Accumulated Depreciation |
Date Acquired |
Depreciable Life (Years) |
||||||||||||||||||||
GROUND LEASE: | ||||||||||||||||||||||||||||||
San Jose | CA | | 82,212 | | (41,106 | ) | 41,106 | | 41,106 | | 2000 | |||||||||||||||||||
LAND: |
||||||||||||||||||||||||||||||
Concord | MA | | 1,267 | | | 1,267 | | 1,267 | | 1999 | ||||||||||||||||||||
Irving | TX | | 5,243 | | | 5,243 | | 5,243 | | 2002 | ||||||||||||||||||||
Subtotal | | | 6,510 | | | 6,510 | | 6,510 | ||||||||||||||||||||||
PARKING GARAGE: | ||||||||||||||||||||||||||||||
New Orleans | LA | | 4,241 | 6,462 | 4 | 4,241 | 6,466 | 10,707 | 677 | 1999 | 40.0 | |||||||||||||||||||
ENTERTAINMENT: |
||||||||||||||||||||||||||||||
San Diego | CA | | | 18,000 | | | 18,000 | 18,000 | 101 | 2003 | 40.0 | |||||||||||||||||||
Quincy | WA | | 1,500 | 6,500 | | 1,500 | 6,500 | 8,000 | 37 | 2003 | 40.0 | |||||||||||||||||||
Subtotal | | 1,500 | 24,500 | | 1,500 | 24,500 | 26,000 | 138 | ||||||||||||||||||||||
HOTEL: | ||||||||||||||||||||||||||||||
Sacramento | CA | 140,440 | 1,281 | 9,809 | | 1,281 | 9,809 | 11,090 | 1,804 | 1998 | 40.0 | |||||||||||||||||||
San Diego | CA | | 4,394 | 27,030 | | 4,394 | 27,030 | 31,424 | 5,112 | 1998 | 40.0 | |||||||||||||||||||
Sonoma | CA | | 3,308 | 20,623 | | 3,308 | 20,623 | 23,931 | 3,893 | 1998 | 40.0 | |||||||||||||||||||
Durango | CO | | 1,242 | 7,865 | | 1,242 | 7,865 | 9,107 | 1,482 | 1998 | 40.0 | |||||||||||||||||||
Boise | ID | | 968 | 6,405 | | 968 | 6,405 | 7,373 | 1,199 | 1998 | 40.0 | |||||||||||||||||||
Missoula | MT | | 210 | 1,607 | | 210 | 1,607 | 1,817 | 296 | 1998 | 40.0 | |||||||||||||||||||
Astoria | OR | | 269 | 2,043 | | 269 | 2,043 | 2,312 | 376 | 1998 | 40.0 | |||||||||||||||||||
Bend | OR | | 233 | 1,726 | | 233 | 1,726 | 1,959 | 319 | 1998 | 40.0 | |||||||||||||||||||
Coos Bay | OR | | 404 | 3,049 | | 404 | 3,049 | 3,453 | 562 | 1998 | 40.0 | |||||||||||||||||||
Eugene | OR | | 361 | 2,721 | | 361 | 2,721 | 3,082 | 501 | 1998 | 40.0 | |||||||||||||||||||
Medford | OR | | 609 | 4,668 | | 609 | 4,668 | 5,277 | 858 | 1998 | 40.0 | |||||||||||||||||||
Pendleton | OR | | 556 | 4,245 | | 556 | 4,245 | 4,801 | 781 | 1998 | 40.0 | |||||||||||||||||||
Salt Lake City | UT | | 5,620 | 32,695 | | 5,620 | 32,695 | 38,315 | 6,233 | 1998 | 40.0 | |||||||||||||||||||
Kelso | WA | | 502 | 3,779 | | 502 | 3,779 | 4,281 | 696 | 1998 | 40.0 | |||||||||||||||||||
Seattle | WA | | 5,101 | 32,080 | | 5,101 | 32,080 | 37,181 | 6,048 | 1998 | 40.0 | |||||||||||||||||||
Vancouver | WA | | 507 | 3,981 | | 507 | 3,981 | 4,488 | 730 | 1998 | 40.0 | |||||||||||||||||||
Wenatchee | WA | | 513 | 3,825 | | 513 | 3,825 | 4,338 | 706 | 1998 | 40.0 | |||||||||||||||||||
Subtotal | 140,440 | 26,078 | 168,151 | | 26,078 | 168,151 | 194,229 | 31,596 | ||||||||||||||||||||||
Total corporate tenant lease assets | $ | 1,322,959 | $ | 508,356 | $ | 2,189,353 | $ | 17,063 | $ | 468,708 | $ | 2,246,064 | $ | 2,714,772 | $ | 178,887 | ||||||||||||||
Explanatory Note:
196
iStar Financial Inc.
Notes to Schedule III
December 31, 2003
(Dollars in thousands)
1. Reconciliation of Corporate Tenant Lease Assets:
The following table reconciles CTL assets from January 1, 2001 to December 31, 2003:
|
2003 |
2002 |
2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1 | $ | 2,420,314 | $ | 1,861,786 | $ | 1,639,062 | ||||
Additions | 335,776 | 606,653 | 248,804 | |||||||
Dispositions | (41,318 | ) | (3,106 | ) | (26,080 | ) | ||||
Assets classified as held for sale | | (45,019 | ) | | ||||||
Balance at December 31 | $ | 2,714,772 | $ | 2,420,314 | $ | 1,861,786 | ||||
2. Reconciliation of Accumulated Depreciation:
The following table reconciles Accumulated Depreciation from January 1, 2001 to December 31, 2003:
|
2003 |
2002 |
2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1 | $ | (128,509 | ) | $ | (80,221 | ) | $ | (46,975 | ) | |
Additions | (53,777 | ) | (48,615 | ) | (33,898 | ) | ||||
Dispositions | 3,399 | 131 | 652 | |||||||
Assets classified as held for sale | | 196 | | |||||||
Balance at December 31 | $ | (178,887 | ) | $ | (128,509 | ) | $ | (80,221 | ) | |
197
iStar Financial Inc.
Schedule IV-Loans and Other Lending Investments
As of December 31, 2003
(Dollars in thousands)
Type of Loan/Borrower |
Description/Location |
Interest Accrual Rates |
Interest Payment Rates |
Final Maturity Date |
Periodic Payment Terms(1) |
Prior Liens(2) |
Face Amount of Loans |
Carrying Amount of Loans |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Senior Mortgages: | |||||||||||||||||||||
Borrower A(3) | Office, Detroit, MI | 7.03% | 7.03% | 9/11/09 | P&I | $ | | $ | 174,881 | $ | 160,410 | ||||||||||
All other senior mortgages individually < 3% | | 1,968,445 | 1,946,381 | ||||||||||||||||||
| 2,143,326 | 2,106,791 | |||||||||||||||||||
Subordinate Mortgages: | |||||||||||||||||||||
Subordinate mortgages individually < 3% | 1,924,773 | 551,634 | 550,572 | ||||||||||||||||||
1,924,773 | 551,634 | 550,572 | |||||||||||||||||||
Corporate/Partnership Loans: |
|||||||||||||||||||||
Borrower A(3) | Office, Detroit, MI | 12.67% | 12.67% | 9/11/09 | IO | | 6,729 | 6,617 | |||||||||||||
Borrower B(3) | Residential, Various States | LIBOR + 5.00% | LIBOR + 5.00% | 3/01/05 | IO | 672,720 | 30,716 | 30,716 | |||||||||||||
All other corporate/partnership loans individually < 3% | 3,627,366 | 703,084 | 673,136 | ||||||||||||||||||
4,300,086 | 740,529 | 710,469 | |||||||||||||||||||
Other Lending Investments-Loans: | |||||||||||||||||||||
Other lending investments-loans individually < 3% | 63,000 | 26,096 | 23,767 | ||||||||||||||||||
63,000 | 26,096 | 23,767 | |||||||||||||||||||
Other Lending Investments-Securities: |
|||||||||||||||||||||
Borrower B(3) | Residential, Various States | 10.00% | 10.00% | 8/15/05 | IO | | 150,000 | 138,189 | |||||||||||||
All other lending investments-securities individually < 3% | 4,908,669 | 214,050 | 206,322 | ||||||||||||||||||
4,908,669 | 364,050 | 344,511 | |||||||||||||||||||
Subtotal | 11,196,528 | 3,825,635 | 3,736,110 | ||||||||||||||||||
Provision for Loan Losses | | & | #151; | (33,436 | ) | ||||||||||||||||
Total: | $ | 11,196,528 | $ | 3,825,635 | $ | 3,702,674 | |||||||||||||||
Explanatory Notes:
198
Exhibit 99.3
Computation of Ratio of EBITDA to interest expense
|
For the 12 Months Ended December 31, |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2003 |
2002 |
2001 |
2000 |
1999 |
||||||||||||
EBITDA: | |||||||||||||||||
Net income | $ | 292,157 | $ | 215,270 | $ | 229,912 | $ | 217,586 | $ | 38,886 | |||||||
Add: Interest expense | 192,295 | 184,933 | 169,586 | 173,143 | 91,044 | ||||||||||||
Add: Depreciation and amortization | 52,338 | 44,117 | 32,170 | 31,114 | 9,977 | ||||||||||||
Total EBITDA | $ | 536,790 | $ | 444,320 | $ | 431,668 | $ | 421,843 | $ | 139,907 | |||||||
Interest expense |
$ |
192,295 |
$ |
184,933 |
$ |
169,586 |
$ |
173,143 |
$ |
91,044 |
|||||||
EBITDA/Interest expense |
2.79 |
x |
2.40 |
x |
2.55 |
x |
2.44 |
x |
1.54 |
x |
1
Exhibit 99.4
Computation of Ratio of EBITDA to combined fixed charges
|
For the 12 Months Ended December 31, |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2003 |
2002 |
2001 |
2000 |
1999 |
||||||||||||
EBITDA: | |||||||||||||||||
Net income | $ | 292,157 | $ | 215,270 | $ | 229,912 | $ | 217,586 | $ | 38,886 | |||||||
Add: Interest expense | 192,295 | 184,933 | 169,586 | 173,143 | 91,044 | ||||||||||||
Add: Depreciation and amortization | 52,338 | 44,117 | 32,170 | 31,114 | 9,977 | ||||||||||||
Total EBITDA | $ | 536,790 | $ | 444,320 | $ | 431,668 | $ | 421,843 | $ | 139,907 | |||||||
Combined fixed charges: |
|||||||||||||||||
Interest expense |
$ |
192,295 |
$ |
184,933 |
$ |
169,586 |
$ |
173,143 |
$ |
91,044 |
|||||||
Preferred dividends | 36,908 | 36,908 | 36,908 | 36,908 | 23,843 | ||||||||||||
Total Combined fixed charges: | $ | 229,203 | $ | 221,841 | $ | 206,494 | $ | 210,051 | $ | 114,887 | |||||||
EBITDA/Combined fixed charges |
2.34 |
x |
2.00 |
x |
2.09 |
x |
2.01 |
x |
1.22 |
x |
Exhibit 99.5
Computation of Ratio of Earnings to fixed charges and
Earnings to fixed charges and prefered stock dividends
|
For the 12 Months Ended December 31, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2003 |
2002 |
2001 |
2000 |
1999 |
|||||||||||
Earnings: | ||||||||||||||||
Net income before equity in (loss) earnings from joint ventures and unconsolidated subsidiaries, minority interest and other items |
$ |
277,469 |
$ |
198,005 |
$ |
206,748 |
197,581 |
36,442 |
||||||||
Add: Interest expense | 194,999 | 185,362 | 170,121 | 173,891 | 91,184 | |||||||||||
Add: Implied interest component on the Company's rent obligations | 824 | 678 | 572 | 568 | 68 | |||||||||||
Add: Distributions from operations of joint ventures | 2,839 | 5,802 | 4,802 | 4,511 | 470 | |||||||||||
Total earnings | $ | 476,131 | $ | 389,847 | $ | 382,243 | $ | 376,551 | $ | 128,164 | ||||||
Fixed charges: |
||||||||||||||||
Interest expense | $ | 194,999 | $ | 185,362 | $ | 170,121 | $ | 173,891 | $ | 91,184 | ||||||
Implied interest component on the Company's rent obligations | 824 | 678 | 572 | 568 | 68 | |||||||||||
Capitalized interest | | 70 | 1,010 | 513 | 377 | |||||||||||
Fixed charges | $ | 195,823 | $ | 186,110 | $ | 171,703 | $ | 174,972 | $ | 91,629 | ||||||
Preferred dividend requirements | 36,908 | 36,908 | 36,908 | 36,908 | 23,843 | |||||||||||
Fixed charges and prefered stock dividends | $ | 232,731 | $ | 223,018 | $ | 208,611 | $ | 211,880 | $ | 115,472 | ||||||
Earnings to fixed charges |
2.43x |
2.09x |
2.23x |
2.15x |
1.40x |
|||||||||||
Earnings to fixed charges and preferred stock dividends |
2.05x |
1.75x |
1.83x |
1.78x |
1.11x |