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SFI > SEC Filings for SFI > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for ISTAR FINANCIAL INC

Form 10-Q for ISTAR FINANCIAL INC


6-Nov-2013

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 2012 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, 2012 (the "2012 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 real estate finance, net lease, operating properties and land.
Executive Overview
We have made significant progress in strengthening our balance sheet and positioning the Company for the future. We executed several capital markets transactions across a broad spectrum of debt products that have satisfied all of our 2013 debt maturities and meaningfully extended our debt maturity profile. These transactions have included five unsecured note issuances at declining interest rates, a refinancing of our largest secured credit facility at a reduced interest rate and the issuance of convertible preferred stock. These transactions have allowed us to reduce our cost of capital while maintaining lower leverage. During the quarter ended September 30, 2013, we increased investment originations and continued to see an active pipeline of potential investments.
Within our real estate and loan portfolios, we continued to work towards resolving non-performing loans and enhancing the value of our commercial operating properties and land assets through the investment of capital and intensive asset management. We intend to continue these efforts, with the objective of having these assets contribute positively to earnings in the future. Non-performing loans, net of specific reserves, declined 53% from $503.1 million at December 31, 2012 to $235.3 million at September 30, 2013. During the quarter ended September 30, 2013, our performing loans, net lease assets and sales of our residential operating properties contributed positively to earnings. However, the performance of nonperforming loans, transitional commercial operating properties and the sizable carrying costs associated with our land assets continued to negatively impact our earnings. In addition, we realized less earnings from equity method investments as a result of the sale of our investment in LNR in the second quarter of 2013. For the quarter ended September 30, 2013, we recorded a net loss allocable to common shareholders of $(30.6) million, compared to a loss of $(71.8) million during the same period in the prior year. Adjusted income (loss) allocable to common shareholders for the third quarter of 2013 was $(7.3) million, compared to $(26.0) million for the third quarter of 2012.
With respect to liquidity, we received $346.0 million of proceeds from our portfolio during the quarter ended September 30, 2013. We originated and funded investments totaling $116.4 million during the quarter ended September 30, 2013. As of September 30, 2013, we had no debt outstanding with 2013 scheduled maturities. We ended the quarter with $735.5 million of cash, which we intend to use primarily to fund additional investment activity.


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Results of Operations for the Three Months Ended September 30, 2013 compared to the Three Months Ended September 30, 2012

                                            For the Three Months
                                            Ended September 30,
                                            2013            2012         $ Change      % Change
                                                      (in thousands)
Operating lease income                  $    60,306     $   53,029     $    7,277           14  %
Interest income                              24,235         31,171         (6,936 )        (22 )%
Other income                                 11,261          9,334          1,927           21  %
Total revenue                           $    95,802     $   93,534     $    2,268            2  %
Interest expense                        $    63,793     $   91,777     $  (27,984 )        (30 )%
Real estate expenses                         37,604         37,797           (193 )         (1 )%
Depreciation and amortization                18,969         16,551          2,418           15  %
General and administrative                   24,285         19,037          5,248           28  %
Provision for loan losses                    (9,834 )       16,834        (26,668 )      >100%
Impairment of assets                          6,261          1,734          4,527        >100%
Other expense                                 1,495          2,394           (899 )        (38 )%
Total costs and expenses                $   142,573     $  186,124     $  (43,551 )        (23 )%
Gain (loss) on early extinguishment of
debt, net                               $    (3,498 )   $   (3,694 )   $      196           (5 )%
Earnings from equity method investments       4,345         22,719        (18,374 )        (81 )%
Income tax benefit (expense)                  3,879         (1,791 )        5,670        >100%
Income (loss) from discontinued
operations                                      214         (4,534 )        4,748        >100%
Gain from discontinued operations             9,166              -          9,166        >100%
Income from sales of residential
property                                     14,075         15,584         (1,509 )        (10 )%
Net income (loss)                       $   (18,590 )   $  (64,306 )   $   45,716           71  %

Revenue-Operating lease income, which included income from net lease assets and commercial operating properties, increased to $60.3 million during the three months ended September 30, 2013 from $53.0 million for the same period in 2012. Operating lease income from commercial operating properties increased to $24.2 million during the three months ended September 30, 2013 from $15.6 million for the same period in 2012. We acquired title to additional commercial operating properties at the end of 2012, which contributed $5.8 million in operating lease income for the three months ended September 30, 2013. The impact of new leases and other leasing related activities within the portfolio also contributed $3.3 million to the increase period over period. As of September 30, 2013, commercial operating properties, excluding hotels and multifamily properties, were 62.3% leased compared to 45.5% leased as of September 30, 2012.
Operating lease income from net lease assets decreased to $36.1 million during the three months ended September 30, 2013 from $37.4 million for the same period in 2012 primarily due to lease expirations since 2012. As of September 30, 2013, net lease assets were 94.6% leased compared to 94.8% leased as of September 30, 2012. For the three months ended September 30, 2013, the net lease portfolio generated an unleveraged weighted average effective yield of 7.36% compared to 7.44% during the same period in 2012 based on gross carrying value. Interest income for the three months ended September 30, 2013 declined to $24.2 million as compared to $31.2 million for the three months ended September 30, 2012 primarily due to a decrease in the average balance of performing loans to $1.16 billion from $1.59 billion for the same period in 2012. The decrease in performing loans was primarily due to loan repayments received during the period. Offsetting the decline were new investment originations that increased our weighted average effective yield. For the three months ended September 30, 2013, performing loans generated a weighted average effective yield of 8.0% as compared to 7.5% in 2012.
Other income increased to $11.3 million for the three months ended September 30, 2013 as compared to $9.3 million for the three months ended September 30, 2012. The increase was due primarily to loan prepayment penalties received of $1.0 million and a $1.3 million increase in ancillary loan income earned during the quarter ended September 30, 2013.


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Costs and expenses-Interest expense decreased 30% to $63.8 million for the three months ended September 30, 2013 as compared to $91.8 million for the same period in 2012 due to a lower average outstanding debt balance and a lower weighted average cost of debt. The average outstanding balance of our debt declined to $4.35 billion for the three months ended September 30, 2013 from $5.50 billion for the three months ended September 30, 2012. Our weighted average effective cost of debt decreased to 5.74% for the three months ended September 30, 2013 from 6.52% during the quarter ended September 30, 2012. The decline is a result of the refinancing of our largest senior secured credit facility at a lower interest rate during the first quarter of 2013 as well as the repayment of higher interest rate senior unsecured notes with the proceeds from the issuance of lower interest rate senior unsecured notes during the second quarter of 2013. Real estate expenses remained steady at $37.6 million for the three months ended September 30, 2013 as compared to $37.8 million for the same period in 2012. Expenses associated with unsold residential units declined to $5.4 million for the three months ended September 30, 2013 from $6.2 million for the same period in 2012 due to continued unit sales, which reduced our homeowners association fees and other related expenses. Operating expenses for net lease assets decreased to $5.2 million for the three months ended September 30, 2013 from $6.7 million for the same period in 2012 due primarily to improvements in collectability of receivables. The decreases were offset by an increase in expenses for commercial operating properties, which were $19.8 million for the three months ended September 30, 2013 as compared to $18.2 million for the same period in 2012, primarily driven by additional properties to which we took title. Additionally, carrying costs and other expenses on our land assets increased to $7.2 million for the three months ended September 30, 2013 from $6.7 million for the same period in 2012, primarily related to increased pre-development activities.
Depreciation and amortization increased to $19.0 million for the three months ended September 30, 2013 as compared to $16.6 million for the same period in 2012 primarily due to the acquisition of additional operating properties. General and administrative expenses increased to $24.3 million for the three months ended September 30, 2013 as compared to $19.0 million for the same period in 2012 due to an increase in compensation related costs pertaining to annual performance based bonuses.
The net recovery of loan loss reserves was $9.8 million during the three months ended September 30, 2013 as compared to a provision for loan losses of $16.8 million during the same period in 2012. Included in the provision for the three months ended September 30, 2013 were recoveries of previously recorded loan loss reserves of $44.1 million offset by specific reserves totaling $38.8 million which were established on non-performing loans during the period. During the three months ended September 30, 2013, we recorded $6.8 million of impairments on real estate assets, including $0.5 million recorded in discontinued operations. For the three months ended September 30, 2012, we recorded impairments of $5.0 million on real estate assets and $1.5 million on cost method investments, including $4.8 million recorded in discontinued operations for real estate assets.
Other expense decreased to $1.5 million for the three months ended September 30, 2013 as compared to $2.4 million for the same period in 2012 due primarily to declining legal costs associated with loan resolutions.
Gain (loss) on early extinguishment of debt, net-During the three months ended September 30, 2013, we made repayments on our February 2013 Secured Credit Facility and our March 2012 Secured Credit Facilities, which resulted in $3.5 million of net losses on the early extinguishment of debt due to accelerated amortization of discounts and fees.
During the same period in 2012, we made repayments on the A-1 Tranches of the 2011 and 2012 Secured Credit Facilities and repurchases of our senior unsecured convertible notes, which resulted in $3.7 million of net losses on early extinguishments of debt due to accelerated amortization of discounts and fees. Earnings from equity method investments-Earnings from equity method investments decreased to $4.3 million during the three months ended September 30, 2013 as compared to $22.7 million for the same period in 2012 primarily due to lower income from LNR, which was sold in April 2013, and lower income from sales of residential property units recorded by one of our real estate equity investments for a building that is approaching complete sell-out.
Income tax benefit /expense-There was a decrease in income tax expense for the three months ended September 30, 2013 due primarily to the sale of our interest in LNR, which was sold in April 2013.
Discontinued operations-During the three months ended September 30, 2013, we sold two commercial operating properties with a carrying value of $27.4 million which resulted in a gain of $9.1 million and one net lease asset with a carrying value of $2.3 million which resulted in an impairment loss of $0.5 million. There were no sales during the three months ended September 30, 2012 impacting discontinued operations.


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Income (loss) from discontinued operations includes operating results from net lease assets and commercial operating properties held for sale or sold as of September 30, 2013. For the three months ended September 30, 2012, income (loss) from discontinued operations includes impairment of assets of $4.8 million. Income from sales of residential property-During the three months ended September 30, 2013 and 2012, we sold 107 and 131 condominium units, respectively, that resulted in income from sales of residential properties totaling $14.1 million and $15.6 million, respectively.
Results of Operations for the Nine Months Ended September 30, 2013 compared to

the Nine Months Ended September 30, 2012
                                            For the Nine Months
                                            Ended September 30,
                                            2013           2012         $ Change      % Change
                                                      (in thousands)
Operating lease income                  $  175,638     $  159,670     $   15,968           10  %
Interest income                             78,584        104,822        (26,238 )        (25 )%
Other income                                35,778         36,696           (918 )         (3 )%
Total revenue                           $  290,000     $  301,188     $  (11,188 )         (4 )%
Interest expense                        $  204,516     $  271,594     $  (67,078 )        (25 )%
Real estate expenses                       112,437        111,048          1,389            1  %
Depreciation and amortization               53,639         49,378          4,261            9  %
General and administrative                  67,008         61,674          5,334            9  %
Provision for loan losses                    5,392         60,865        (55,473 )        (91 )%
Impairment of assets                         6,261          8,632         (2,371 )        (27 )%
Other expense                                7,266          6,754            512            8  %
Total costs and expenses                $  456,519     $  569,945     $ (113,426 )        (20 )%
Gain (loss) on early extinguishment of
debt, net                               $  (28,282 )   $   (6,858 )   $  (21,424 )      >100%
Earnings from equity method investments     34,346         75,925        (41,579 )        (55 )%
Income tax expense                            (625 )       (6,540 )        5,915           90  %
Income (loss) from discontinued
operations                                   1,256        (18,094 )       19,350        >100%
Gain from discontinued operations           22,488         27,257         (4,769 )        (17 )%
Income from sales of residential
property                                    72,092         35,583         36,509        >100%
Net income (loss)                       $  (65,244 )   $ (161,484 )   $   96,240           60  %

Revenue-Operating lease income, which included income from net lease assets and commercial operating properties, increased to $175.6 million during the nine months ended September 30, 2013 from $159.7 million for the same period in 2012. Operating lease income from commercial operating properties increased to $66.8 million during the nine months ended September 30, 2013 from $48.3 million for the same period in 2012. We acquired title to additional commercial operating properties at the end of 2012, which contributed $13.8 million in operating lease income for the nine months ended September 30, 2013. The impact of new leases and other leasing related activities within the portfolio also contributed $5.9 million to the increase period over period. As of September 30, 2013, commercial operating properties, excluding hotels and multifamily properties, were 62.3% leased compared to 45.5% leased as of September 30, 2012. Operating lease income from net lease assets decreased to $108.8 million during the nine months ended September 30, 2013 from $111.4 million for the same period in 2012 primarily due to lease expirations. As of September 30, 2013, net lease assets were 94.6% leased compared to 94.8% leased as of September 30, 2012. For the nine months ended September 30, 2013, the net lease portfolio generated an unleveraged weighted average effective yield of 7.32% compared to 7.40% during the same period in 2012 based on gross carrying value.
Interest income for the nine months ended September 30, 2013 declined to $78.6 million as compared to $104.8 million for the nine months ended September 30, 2012 primarily due to a decrease in the average balance of performing loans to $1.20 billion from $1.74 billion for the same period in 2012. The decrease in performing loans was primarily due to loan repayments received during the period. For the nine months ended September 30, 2013 and 2012, performing loans generated a weighted average


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effective yield of 7.50%. The decrease in interest income was partially offset by $8.0 million of interest income recorded during the nine months ended September 30, 2013, which related to a non-performing loan that was resolved and includes interest not previously recognized due to the loan being on non-accrual status.
Other income decreased to $35.8 million for the nine months ended September 30, 2013 as compared to $36.7 million for the nine months ended September 30, 2012. Other income includes revenue related to hotel properties included in the operating property portfolio, which decreased to $22.7 million for the nine months ended September 30, 2013 from $25.0 million for the same period in 2012 due primarily to a reduction in ancillary revenue related to a hotel property of $2.2 million. In addition, there was a decline of $3.2 million in loan related income. The declines are offset by $4.0 million received for the settlement of a property-related lawsuit.
Costs and expenses-Interest expense decreased 25.0% to $204.5 million for the nine months ended September 30, 2013 as compared to $271.6 million for the same period in 2012 due to a lower average outstanding debt balance and a lower weighted average cost of debt. The average outstanding balance of our debt declined to $4.52 billion for the nine months ended September 30, 2013 from $5.67 billion for the nine months ended September 30, 2012. Our weighted average effective cost of debt was lower at 5.97% for the nine months ended September 30, 2013 as compared to 6.30% during the nine months ended September 30, 2012. The decline is a result of the refinancing of our largest senior secured credit facility at a lower interest rate during the first quarter of 2013 as well as the repayment of higher interest rate senior unsecured notes with the issuance of lower interest rate senior unsecured notes during the second quarter of 2013.
Real estate expenses increased to $112.4 million for the nine months ended September 30, 2013 as compared to $111.0 million for the same period in 2012. Expenses for commercial operating properties increased to $60.3 million for the nine months ended September 30, 2013 from $54.9 million for the same period in 2012, primarily driven by a property to which we took title, offset by a reduction in ancillary expenses related to a hotel property. Carrying costs and other expenses on our land assets increased to $20.2 million for the nine months ended September 30, 2013 from $16.2 million for the same period in 2012, primarily related to increased pre-development activities. The increases were offset by a decrease in costs associated with residential units to $15.4 million for the nine months ended September 30, 2013 from $21.2 million for the same period in 2012 due to continued unit sales, which reduced our homeowners association fees and other related expenses. Additionally, operating expenses for net lease assets decreased to $16.5 million for the nine months ended September 30, 2013 from $18.7 million for the same period in 2012 due primarily to improvements in collectability of receivables.
Depreciation and amortization increased to $53.6 million for the nine months ended September 30, 2013 from $49.4 million primarily due to the acquisition of additional operating properties.
General and administrative expenses increased to $67.0 million for the nine months ended September 30, 2013 as compared to $61.7 million for the same period in 2012 due to an increase in compensation related costs pertaining to annual performance based bonuses.
Provisions for loan losses declined $55.5 million to $5.4 million during the nine months ended September 30, 2013 as compared to $60.9 million during the same period in 2012 as less specific reserves were required on a lower balance of non-performing loans. Included in the provision for the nine months ended September 30, 2013 were specific reserves totaling $65.8 million which were established on non-performing loans offset by recoveries of previously recorded loan loss reserves of $55.1 million.
During the nine months ended September 30, 2013, we recorded $7.2 million of impairments on real estate assets, including $0.9 million recorded in discontinued operations. For the nine months ended September 30, 2012, we recorded impairments of $29.1 million on real estate assets and $0.9 million on other investments, including $21.4 million recorded in discontinued operations for real estate assets.
Other expense increased to $7.3 million for the nine months ended September 30, 2013 as compared to $6.8 million for the same period in 2012 due primarily to $4.4 million of third party expenses incurred in connection with the refinancing of our October 2012 Secured Credit Facility with our February 2013 Secured Credit Facility (see Liquidity and Capital Resources below) during the first quarter of 2013 and $1.5 million of foreign exchange losses. During the nine months ended September 30, 2012, we recognized $2.3 million more in legal costs associated with loan resolutions than during the same period in 2013 and costs related to a shareholder litigation settlement of $2.0 million.
Gain (loss) on early extinguishment of debt, net-During the nine months ended September 30, 2013, we incurred losses on the early extinguishment of debt due to accelerated amortization of discounts and fees of $7.7 million relating to the refinancing of our October 2012 Secured Credit Facility and $11.1 million relating to accelerated amortization of discount and fees associated with the repayments on our 2012 and 2013 Secured Credit Facilities. We also redeemed our $448.5 million 5.95% senior unsecured


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notes due October 2013 prior to maturity and incurred $9.5 million of losses related to a prepayment penalty and the acceleration of amortization of discounts (see Liquidity and Capital Resources below).
During the same period in 2012, we made repayments on the A-1 Tranches of the 2011 and 2012 Secured Credit Facilities and repurchases of our senior unsecured convertible notes, which resulted in $6.9 million of net losses on early extinguishments of debt due to accelerated amortization of discounts and fees. Earnings from equity method investments-Earnings from equity method investments decreased to $34.3 million during the nine months ended September 30, 2013 as compared to $75.9 million for the same period in 2012. For one of our real estate equity investments, our equity in earnings decreased to $4.1 million for the nine months ended September 30, 2013 from $20.8 million for the same period in 2012 due to lower income from sales of residential property units for a building that is approaching complete sell-out. For LNR, which was sold in April 2013, our equity in earnings increased to $57.5 million for the nine months ended September 30, 2013 from $36.0 million for the same period in 2012 due primarily to a gain recognized on the sale of an LNR subsidiary. Our equity in . . .

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