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SFI > SEC Filings for SFI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ISTAR FINANCIAL INC

Form 10-Q for ISTAR FINANCIAL INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are included with respect to, among other things, iStar Financial Inc.'s (the "Company's") current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and the uncertainties and risks described in Item 1A-"Risk Factors" in our 2011 Annual Report (as defined below), all of which could affect our future results of operations, financial condition and liquidity. For purposes of Management's Discussion and Analysis of Financial Condition and Results of Operations, the terms "we," "our" and "us" refer to iStar Financial Inc. and its consolidated subsidiaries, unless the context indicates otherwise.

The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 2011 (the "2011 Annual Report"). These historical financial statements may not be indicative of our future performance. We have reclassified certain items in our consolidated financial statements of prior periods to conform to our current financial statements presentation.

Introduction

iStar Financial Inc. is a fully-integrated finance and investment company focused on the commercial real estate industry. We provide custom-tailored investment capital to high-end private and corporate owners of real estate and invest directly across a range of real estate sectors. We are taxed as a real estate investment trust, or "REIT," and have invested more than $35 billion over the past two decades. Our primary business segments are lending, net leasing and real estate investment.

Executive Overview

For the quarter ended September 30, 2012, we recorded a net loss allocable to common shareholders of $(71.8) million, compared to a loss of $(62.2) million for the same period last year. Adjusted income (loss) allocable to common shareholders was $(26.0) million for the third quarter 2012, compared to $(19.0) million for the prior year. Both net income (loss) and adjusted income (loss) for the third quarter 2011 included $22.2 million of gains from discontinued operations. Excluding these gains, the year over year increase was due to income we are now generating from sales of residential property units, increased earnings from equity method investments, as well as a reduction in general and administrative costs. These improvements were partially offset by decreasing interest income from an overall smaller real estate finance portfolio and increased interest expense due to an elevated cost of capital which has impacted and will continue to impact earnings.

During the quarter ended September 30, 2012, we generated a total of $318.0 million in proceeds from our portfolio, comprised primarily of $157.9 million in loan principal repayments, $146.6 million from sales of OREO assets, and $13.4 million from other investments. We used proceeds from asset sales and loan repayments to repay $147.7 million on the 2011 Tranche A-1 Facility and $66.4 million on the 2012 Tranche A-1 Facility. During the quarter, we funded a total of $28.4 million in investments.

As of September 30, 2012, we had $739.3 million of cash and restricted cash reserved for the repayment of debt. Subsequent to quarter end, we repaid the remaining $460.7 million balance on our senior unsecured convertible notes due October 2012 at maturity primarily with cash reserved for the repayment of indebtedness. In addition, subsequent to quarter end, we refinanced the balance of our 2011 Secured Credit Facilities with a new $1.82 billion senior secured credit facility. This new facility improves our debt maturity profile by extending the maturity from 2013 to October 2017, significantly reduces minimum amortization requirements and has a lower effective interest rate than the facilities it refinanced.


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After giving effect to the convertible debt repayment and the refinancing of the 2011 Secured Credit Facilities subsequent to quarter end, our remaining debt maturities through 2013 total $1.04 billion. Consistent with how we have managed debt maturities in recent years, we expect to address these maturities with a combination of unrestricted cash, proceeds from asset repayments and sales and capital market transactions. We also expect to continue to strengthen our balance sheet through deleveraging and will make additional investments in our real estate portfolio to maximize its value.

Results of Operations for the Three Months Ended September 30, 2012 compared to the Three Months Ended September 30, 2011

                                              For the Three Months Ended September 30,
                                          2012            2011         $ Change       % Change
                                                    (in thousands)
Interest income                      $    31,171      $   45,851     $  (14,680 )         (32 )%
Operating lease income                    38,582          38,322            260             1  %
Other income                              16,494          10,140          6,354            63  %
Total revenue                        $    86,247      $   94,313     $   (8,066 )          (9 )%
Interest expense                     $    91,777      $   90,659     $    1,118             1  %
Operating costs-net lease assets           5,548           4,845            703            15  %
Operating costs-REHI and OREO             24,454          19,792          4,662            24  %
Depreciation and amortization             16,787          13,953          2,834            20  %
General and administrative                19,037          26,978         (7,941 )         (29 )%
Provision for loan losses                 16,834           9,232          7,602            82  %
Impairment of assets                       6,542           9,912         (3,370 )         (34 )%
Other expense                              2,394           3,974         (1,580 )         (40 )%
Total costs and expenses             $   183,373      $  179,345     $    4,028             2  %
Gain (loss) on early extinguishment
of debt, net                              (3,694 )        (3,207 )         (487 )          15  %
Earnings from equity method
investments                               22,719          10,817         11,902         >100%
Income tax expense                        (1,791 )        (1,354 )         (437 )          32  %
Income (loss) from discontinued
operations                                     2           1,917         (1,915 )       <100%
Gain from discontinued operations              -          22,198        (22,198 )        (100 )%
Income from sales of residential
property                                  15,584               -         15,584           100  %
Net income (loss)                    $   (64,306 )    $  (54,661 )   $   (9,645 )          18  %

Revenue-The decrease in interest income was primarily due to a decline in the average balance of performing loans to $1.59 billion for the three months ended September 30, 2012 from $2.42 billion for the same period in 2011. The decrease in performing loans was primarily due to loan repayments and sales as well as performing loans moving to non-performing status (see Risk Management below). For the three months ended September 30, 2012, performing loans generated a weighted average effective yield of 7.51% as compared to 7.15% in 2011.

As of September 30, 2012, net lease assets were 91.3% leased compared to 88.7% leased as of September 30, 2011. For the three months ended September 30, 2012, total net lease assets generated a weighted average effective yield of 8.6% compared to 8.5% during the same period in 2011.

Within other income, revenue from REHI assets increased to $14.3 million during the three months ended September 30, 2012 from $8.2 million in the same period of 2011 due to an increase in the amount of REHI assets during the last 12 months.

Costs and expenses-Provisions for loan losses recorded during the three months ended September 30, 2012 included higher specific reserves on non-performing loans relative to the prior year; however, these were offset by a reduction in the general reserve primarily due to a reduction in the balance of performing loans outstanding during the current quarter.


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Operating costs for REHI and OREO assets were greater during the three months ended September 30, 2012, primarily due to an increase in the number of properties held during the respective periods. In addition, due to the increase in REHI properties held, depreciation and amortization expense increased period to period.

Interest expense increased primarily due to a higher weighted average cost of debt resulting from our 2012 Secured Credit Facility as well as our $275.0 million of 9.0% senior unsecured notes issued in May 2012, which refinanced debt with lower interest rates. Our weighted average effective cost of debt increased to 6.52% for the three months ended September 30, 2012 as compared to 5.79% during the same period in 2011. The increase was offset by a lower average outstanding balance of our debt which declined to $5.50 billion for the three months ended September 30, 2012 from $6.21 billion for the three months ended September 30, 2011.

General and administrative expenses decreased primarily due to lower payroll and employee related costs resulting from staffing reductions as well as $3.6 million of lower stock-based compensation expense. Stock-based compensation expense was higher in 2011 due to the incremental expense associated with the July 2011 modification of our restricted stock units originally awarded on December 19, 2008.

Impairments of assets for the three months ended September 30, 2012 primarily consisted of a $3.6 million impairment on an individual net lease asset. Impairment of assets for the three months ended September 30, 2011 primarily consisted of $9.3 million on OREO assets.

Gain on early extinguishment of debt, net-During the three months ended September 30, 2012, we recorded a net loss on early extinguishment of debt of $3.7 million, related to the write-off of unamortized deferred financing fees resulting from repayments made on the A-1 Tranches of the 2011 and 2012 Secured Credit Facilities, as well as repurchases of our senior unsecured convertible notes. Losses related to the write-off of deferred financing fees were slightly lower during 2011 due to fewer early repayments of debt in that quarter.

Earnings from equity method investments-Earnings from equity method investments during the three months ended September 30, 2012, includes $4.0 million of equity in earnings resulting from income from sales of residential property units recorded by one of our OREO investments where we hold an equity interest. The remaining increase was due to improved performance at certain of our strategic investments, primarily LNR and the Madison Funds.

Discontinued operations-During the three months ended September 30, 2011, we realized a $22.2 million gain from discontinued operations previously deferred as part of the June 2010 sale of 32 net lease assets.

Income from sales of residential property-During the three months ended September 30, 2012, we sold OREO assets with a carrying value of $131.3 million. A portion of the properties sold were residential property units for which we recorded income of $15.6 million.


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Results of Operations for the Nine Months Ended September 30, 2012 compared to the Nine Months Ended September 30, 2011

                                              For the Nine Months Ended September 30,
                                         2012           2011         $ Change       % Change
                                                   (in thousands)
Interest income                      $  104,822     $  186,805     $  (81,983 )         (44 )%
Operating lease income                  114,990        114,076            914             1  %
Other income                             55,125         26,412         28,713         >100%
Total revenue                        $  274,937     $  327,293     $  (52,356 )         (16 )%
Interest expense                     $  271,595     $  255,505     $   16,090             6  %
Operating costs-net lease assets         13,676         13,515            161             1  %
Operating costs-REHI and OREO            68,952         55,582         13,370            24  %
Depreciation and amortization            50,263         43,777          6,486            15  %
General and administrative               61,674         77,077        (15,403 )         (20 )%
Provision for loan losses                60,865         30,462         30,403           100  %
Impairment of assets                     29,541         14,165         15,376         >100%
Other expense                             6,754          7,156           (402 )          (6 )%
Total costs and expenses             $  563,320     $  497,239     $   66,081            13  %
Gain (loss) on early extinguishment
of debt, net                             (6,858 )      102,348       (109,206 )       <100%
Earnings from equity method
investments                              75,925         54,881         21,044            38  %
Income tax expense                       (6,540 )       (9,731 )        3,191           (33 )%
Income (loss) from discontinued
operations                                1,532          3,470         (1,938 )         (56 )%
Gain from discontinued operations        27,257         22,198          5,059            23  %
Income from sales of residential
property                                 35,583              -         35,583           100  %
Net income (loss)                    $ (161,484 )   $    3,220     $ (164,704 )       <100%

Revenue-The decrease in interest income is primarily due to a decline in the average balance of performing loans to $1.74 billion for the nine months ended September 30, 2012 from $2.73 billion for the same period in 2011. The decrease in performing loans was primarily due to loan repayments and sales as well as performing loans moving to non-performing status (see Risk Management below). For the nine months ended September 30, 2012, performing loans generated a weighted average effective yield of 7.50% as compared to 7.49% in 2011. Additionally, during the nine months ended September 30, 2011, we recorded $26.3 million of interest income related to certain nonperforming loans that were resolved, including interest not previously recorded due to the loans being on non-accrual status.

As of September 30, 2012, net lease assets were 91.3% leased compared to 88.7% leased as of September 30, 2011. For the nine months ended September 30, 2012, total net lease assets generated a weighted average effective yield of 8.7% compared to 8.3% during the same period in 2011.

Within other income, revenue from REHI assets increased to $43.4 million during the nine months ended September 30, 2012 from $22.4 million in the same period of 2011 due to an increase in the amount of REHI assets during the last 12 months. In addition, during the nine months ended September 30, 2012, we recorded income of $6.4 million related to the sale of loans.

Costs and expenses-Provisions for loan losses recorded during the nine months ended September 30, 2012 included higher specific reserves on non-performing loans relative to the prior year as well as a reduction in the general reserve primarily due to a reduction in the balance of performing loans outstanding during that year.


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Interest expense increased primarily due to a higher weighted average cost of debt resulting from our 2011 and 2012 Secured Credit Facilities as well as the $275.0 million of 9.0% senior unsecured notes issued in May 2012, which refinanced debt with lower interest rates. This increase was partially offset by lower average outstanding borrowings. Our weighted average effective cost of debt increased to 6.32% for the nine months ended September 30, 2012 as compared to 5.12% during the same period in 2011. The average outstanding balance of debt declined to $5.67 billion for the nine months ended September 30, 2012 from $6.65 billion for the nine months ended September 30, 2011.

Impairments of assets for the nine months ended September 30, 2012 primarily consisted of $23.3 million of impairments on net lease assets, driven primarily by changes in business strategy for these assets and $5.3 million on OREO assets. For the nine months ended September 30, 2011 impairments consisted primarily of $12.6 million on OREO assets.

Operating costs for REHI and OREO were greater during the nine months ended September 30, 2012 primarily due to an increase in the number of properties held during the respective periods. In addition, due to the increase in REHI assets held, depreciation and amortization expense increased period to period.

General and administrative expenses decreased primarily due to lower payroll and employee related costs resulting from staffing reductions as well as $4.0 million of lower stock-based compensation expense. Stock-based compensation expense was higher in 2011 due to the incremental expense associated with the July 2011 modification of our restricted stock units originally awarded on December 19, 2008.

Gain on early extinguishment of debt, net-During the nine months ended September 30, 2012, net loss on early extinguishment of debt was primarily related to the write-off of deferred financing fees from repayments made on the A-1 Tranches of the 2011 and 2012 Secured Credit Facilities and repurchases of the senior unsecured convertible notes.

During the same period in 2011, we fully redeemed the $312.3 million remaining principal amount of 10% senior secured notes due June 2014 and recorded a $109.0 million gain on early extinguishment of debt. This was partially offset by losses on extinguishment of debt primarily related to the write-off of unamortized deferred financing fees resulting from repayments of our secured credit facilities and the 2011 Tranche A-1 facility.

Earnings from equity method investments-Earnings from equity method investments increased during the nine months ended September 30, 2012, primarily due to $22.2 million of equity in earnings resulting from income from sales of residential property units recorded by one of our OREO investments where we hold an equity interest. Earnings from certain of our other strategic investments increased due to better overall market performance. These increases were offset by the sale of our interests in Oak Hill Advisors, L.P. and related entities in October of 2011, which generated $8.8 million of earnings during the nine months ended September 30, 2011.

Income tax expense-Income tax expense for the nine months ended September 30, 2012 declined from the same period in the prior year primarily due to our ability in the current year to utilize net operating loss carry forwards to offset much of the income generated by our taxable REIT subsidiaries.

Discontinued operations-During the nine months ended September 30, 2012, we sold net lease assets with a carrying value of $115.5 million and recorded a gain of $27.3 million. During the nine months ended September 30, 2011, we realized a $22.2 million gain from discontinued operations previously deferred as part of the June 2010 sale of a portfolio of 32 net lease assets. Income (loss) from discontinued operations includes operating results from net lease assets sold prior to September 30, 2012.

Income from sales of residential property-During the nine months ended September 30, 2012, we sold OREO assets with a carrying value of $281.0 million, primarily comprised of sales of residential property units for which we recorded income of $35.6 million.


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Adjusted income and Adjusted EBITDA

In addition to net income (loss), we use Adjusted income and Adjusted EBITDA to measure our operating performance. Adjusted income represents net income allocable to common shareholders, prior to the effect of depreciation and amortization, provision for loan losses, impairment of assets, stock-based compensation, and the gain (loss) on early extinguishment of debt. Adjusted EBITDA represents net income (loss) plus the sum of interest expense, income taxes, depreciation and amortization, provision for loan losses, impairment of assets and stock-based compensation expense, less the gain/loss on early extinguishment of debt.

We believe Adjusted income and Adjusted EBITDA are useful measures to consider, in addition to net income (loss), as they may help investors evaluate our core operating performance prior to certain non-cash items.

Adjusted income and Adjusted EBITDA should be examined in conjunction with net income (loss) as shown in our Consolidated Statements of Operations. Adjusted income and Adjusted EBITDA should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), as an indicator of our performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor are Adjusted income and Adjusted EBITDA indicative of funds available to fund our cash needs or available for distribution to shareholders. Rather, Adjusted income and Adjusted EBITDA are additional measures for us to use to analyze how our business is performing. It should be noted that our manner of calculating Adjusted income and Adjusted EBITDA may differ from the calculations of similarly-titled measures by other companies.

                                             For the Three Months          For the Nine Months
                                             Ended September 30,           Ended September 30,
                                             2012            2011           2012          2011
                                                              (in thousands)
Adjusted income
Net income (loss) allocable to common
shareholders                             $   (71,784 )   $  (62,231 )   $ (185,573 )   $ (27,117 )
Add: Depreciation and amortization (1)        16,787         15,077         51,205        47,142
Add: Provision for loan losses                16,834          9,232         60,865        30,462
Add: Impairment of assets (2)                  6,542          9,912         30,061        14,140
Add: Stock-based compensation expense          3,512          7,153         11,625        15,622
Less: (Gain)/loss on early
extinguishment of debt, net                    3,694          3,207          6,858      (102,348 )
Less: HPU/Participating Security
allocation                                    (1,555 )       (1,394 )       (5,264 )        (152 )
Adjusted income (loss) allocable to
common shareholders                      $   (25,970 )   $  (19,044 )   $  (30,223 )   $ (22,251 )

Explanatory Notes:


(1) For the nine months ended September 30, 2012, depreciation and amortization includes $943 of depreciation and amortization reclassified to discontinued operations. For the three and nine months ended September 30, 2011, depreciation and amortization includes $1,124 and $3,366, respectively, of depreciation and amortization reclassified to discontinued operations.

(2) For the nine months ended September 30, 2012 and 2011, impairment of assets includes $520 and $(25), respectively, of impairment of assets reclassified to discontinued operations.


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                                            For the Three Months           For the Nine Months
                                            Ended September 30,            Ended September 30,
                                            2012            2011           2012           2011
                                                              (in thousands)
Adjusted EBITDA
Net income (loss)                       $   (64,306 )   $  (54,661 )   $ (161,484 )   $    3,220
Add: Interest expense(1)                     91,777         91,777        272,659        258,183
Add: Income tax expense                       1,791          1,354          6,540          9,731
Add: Depreciation and amortization(2)        16,787         15,077         51,205         47,142
EBITDA                                  $    46,049     $   53,547     $  168,920     $  318,276
Add: Provision for loan losses               16,834          9,232         60,865         30,462
Add: Impairment of assets(3)                  6,542          9,912         30,061         14,140
Add: Stock-based compensation expense         3,512          7,153         11,625         15,622
Less: (Gain)/loss on early
extinguishment of debt, net                   3,694          3,207          6,858       (102,348 )
Adjusted EBITDA                         $    76,631     $   83,051     $  278,329     $  276,152

Explanatory Notes:


(1) For the nine months ended September 30, 2012, interest expense includes $1,064 of interest expense reclassified to discontinued operations. For the three and nine months ended September 30, 2011, interest expense includes $1,118 and $2,678, respectively, of interest expense reclassified to discontinued operations.

(2) For the nine months ended September 30, 2012, depreciation and amortization includes $943 of depreciation and amortization reclassified to discontinued operations. For the three and nine months ended September 30, 2011, depreciation and amortization includes $1,124 and $3,366, respectively, of depreciation and amortization reclassified to discontinued operations.

(3) For the nine months ended September 30, 2012 and 2011, impairment of . . .

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