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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-10150
--------------------------
STARWOOD FINANCIAL INC. *
(Exact name of registrant as specified in its charter)
MARYLAND 95-6881527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1114 AVENUE OF THE AMERICAS, 27(TH) FLOOR 10036
NEW YORK, NY 10036 (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212)930-9400
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Exchange on which registered:
COMMON STOCK, $0.001 PAR VALUE NEW YORK STOCK EXCHANGE
9.375% SERIES B CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
9.200% SERIES C CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
8.000% SERIES D CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant; (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (ii) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 15, 2000, the aggregate market value of the common stock, $0.001
par value per share of Starwood Financial Inc. ("Common Stock") held by
non-affiliates(1) of the registrant was approximately $1,462 million, based upon
the closing price of $17.19 on the New York Stock Exchange composite tape on
such date.
As of March 15, 2000, there were 85,045,936 shares of Common Stock
outstanding.
* On November 4, 1999, the registrant completed a transaction in which its
name was changed from Starwood Financial Trust to Starwood Financial Inc., it
issued Common Stock in exchange for the class A and class B shares then
outstanding, and the registrant listed its Common Stock on the New York Stock
Exchange.
(1) For purposes of this Annual Report only, includes all outstanding Common
Stock other than Common Stock held directly by the Registrant's directors
and executive officers.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's definitive proxy statement for the registrant's
2000 Annual Meeting, to be filed within 120 days after the close of the
registrant's fiscal year, are incorporated by reference into Part III of
this Annual Report on Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................ 3
Item 2. Properties.......................................... 16
Item 3. Legal Proceedings................................... 17
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 17
PART II
Item 5. Market for Registrant's Equity and Related Share
Matters................................................... 18
Item 6. Selected Financial Data............................. 20
Item 7. Management's Discussion and Analysis of Financial
Condition
and Results of Operations............................. 23
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk............................................... 29
Item 8. Financial Statements and Supplemental Data.......... 32
Item 9. Changes in and Disagreements with Accountants on
Accounting
and Financial Disclosure.................................... 81
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................ 81
Item 11. Executive Compensation............................. 81
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 81
Item 13. Certain Relationships and Related Transactions..... 81
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 81
SIGNATURES.................................................. 84
2
PART I
ITEM 1. BUSINESS
EXPLANATORY NOTE FOR PURPOSES OF THE "SAFE HARBOR PROVISIONS" OF SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Except for historical information contained herein, this Annual Report on
Form 10-K contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, which involve certain risks
and uncertainties. Forward-looking statements are included with respect to,
among other things, the Company's current business plan, business strategy and
portfolio management. The Company's actual results or outcomes may differ
materially from those anticipated. Important factors that the Company believes
might cause such differences are discussed in the cautionary statements
presented under the caption "Factors That May Affect the Company's Business
Strategy" in Item 1 of this Form 10-K or otherwise accompany the forward-looking
statements contained in this Form 10-K. In assessing forward-looking statements
contained herein, readers are urged to read carefully all cautionary statements
contained in this Form 10-K.
OVERVIEW
Starwood Financial Inc. (the "Company") is the leading publicly traded
finance company focused on the commercial real estate industry. The Company,
which is taxed as a real estate investment trust, provides structured mortgage,
mezzanine and lease financing through its origination, acquisition and servicing
platform. The Company's mission is to maximize risk-adjusted returns on equity
by providing innovative and value-added financing solutions to private and
corporate owners of commercial properties in major metropolitan markets
nationwide.
The Company's primary product lines include:
- STRUCTURED FINANCE. The Company provides senior and subordinated loans
from $20 million to $100 million to borrowers controlling institutional
quality real estate. These loans may be either fixed or floating rate and
are structured to meet the specific financing needs of the borrowers,
including the acquisition, financing, repositioning or construction of
large, high-quality real estate. The Company offers borrowers a wide range
of structured finance options, including first mortgages, second
mortgages, partnership secured loans, participating debt and
interim/bridge facilities.
- PORTFOLIO FINANCE. The Company provides funding to regional and national
borrowers who own multiple properties in a geographically diverse
portfolio. Loans are cross-collateralized to give borrowers the benefit of
all available collateral and underwritten to recognize inherent portfolio
diversification. Property types include multifamily, suburban office,
all-suite, extended stay and limited service hotels and other property
types where individual property values are less than $20 million on
average. Loan terms are structured to meet the specific requirements of
the borrower and range in size from $25 million to $150 million.
- CORPORATE LENDING. The Company provides senior and subordinated debt
capital to corporations engaged in real estate or real estate-related
businesses. Loans may be either secured or unsecured and range in size
from $20 million to $100 million.
- LOAN ACQUISITION. The Company acquires whole loans and loan participations
which present attractive risk-reward opportunities. Loans are generally
acquired at a discount to the principal balance outstanding and may be
acquired with financing provided by the seller. Loan acquisitions range
from $5 million to $100 million and are collateralized by all major
property types.
- CREDIT TENANT LEASING. The Company provides capital to owners and
borrowers who control properties leased to single creditworthy tenants.
The Company's net leased facilities are generally subject to long-term
leases with rated corporate credit tenants, and provide for all expenses
at the
3
property to be paid by the tenant on a triple net lease basis. Credit
tenant transactions range in size from $20 million to $200 million.
- SERVICING. Through its Starwood Asset Services division, the Company
provides rated servicing to third-party, institutional loan portfolios, as
well as to the Company's own portfolio.
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, the Company began its business in 1993 through private investment
funds formed to capitalize on inefficiencies in the real estate finance market.
In March 1998, these funds contributed their approximately $1.1 billion of
assets to the Company's predecessor, Starwood Financial Trust, in exchange for a
controlling interest in that company. Since that time, the Company has grown by
originating new lending and leasing transactions, as well as through corporate
acquisitions.
Specifically, in September 1998, the Company acquired the loan origination
and servicing business of a major insurance company, and in December 1998, the
Company acquired the mortgage and mezzanine loan portfolio of its largest
private competitor. Additionally, in November 1999, the Company acquired TriNet
Corporate Realty Trust, Inc., the largest publicly traded company specializing
in the net leasing of corporate office and industrial facilities. The TriNet
transaction was structured as a stock-for-stock merger of TriNet with a
subsidiary of the Company. We refer to TriNet throughout this document as the
"Leasing Subsidiary."
Concurrent with the TriNet transaction, the Company also acquired its
external advisor in exchange for shares of Common Stock and converted its
organizational form to a Maryland corporation. As part of the conversion to a
Maryland corporation, the Company replaced its dual class common share structure
with a single class of Common Stock. The Company's Common Stock began trading on
the New York Stock Exchange on November 4, 1999. Prior to this date, the
Company's common shares were traded on the American Stock Exchange.
INVESTMENT STRATEGY
The Company's investment strategy targets specific sectors of the real
estate credit markets in which it believes it can deliver value-added, flexible
financial solutions to its customers, thereby differentiating its financial
products from those offered by other capital providers.
The Company has implemented its investment strategy by:
- Focusing on the origination of large, highly structured mortgage,
mezzanine and lease financings where customers require flexible financial
solutions, and avoiding commodity businesses in which there is significant
direct competition from other providers of capital.
- Developing direct relationships with borrowers and corporate tenants as
opposed to sourcing transactions through intermediaries.
- Adding value beyond simply providing capital by offering borrowers and
corporate tenants specific lending expertise, flexibility, speed,
certainty and continuing relationships beyond the closing of a particular
financing transaction.
- Taking advantage of market anomalies in the real estate financing markets
when the Company believes credit is mispriced by other providers of
capital, such as the spread between lease yields and the yields on
corporate tenants' underlying credit obligations.
The Company intends to continue to emphasize a mix of portfolio financing
transactions to create asset diversification and single-asset financings for
properties with strong, long-term positioning. The Company's credit process will
continue to focus on:
- Building diversification by asset type, property type, obligor, loan/lease
maturity and geography.
4
- Financing high-quality commercial real estate assets in major metropolitan
markets.
- Underwriting assets using conservative assumptions regarding collateral
value and future property performance.
- Requiring adequate cash flow coverage on its investments.
- Stress testing potential investments for adverse economic and real estate
market conditions.
In June 1999, the Company announced its intention to dispose of
approximately $200 million of non-core properties held at the Leasing Subsidiary
which generally have short-term lease rollover risk or other characteristics
inconsistent with the Company's structured finance focus. Since that time, the
Leasing Subsidiary has sold or entered into agreements to sell $146.8 million of
assets.
As of December 31, 1999, based on current carrying values, the Company's
business consists of the following product lines:
PRODUCT LINE:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
STRUCTRED FINANCE 27%
Portfoloio Finance 12%
Credit Tenant Lease 47%
Corporate Lending 3%
Loan Acquisitions 11%
The Company seeks to maintain an investment portfolio which is diversified
by asset type, underlying property type and geography. As of December 31, 1999,
based on current carrying values, the Company's total investment portfolio has
the following characteristics:
ASSET TYPE: PROPERTY TYPE: GEOGRAPHY:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
FIRST MORTGAGES 30%
Second Mortgages 14%
Partnership/Corporate/Other 10%
Net Leases 46%
Hotel 12%
Mixed Use 5%
Office 52%
Industrial 8%
R&D 3%
Aparment/Residential 3%
Resort/Entertainment 5%
Retail 8%
Homebuilder/Land 4%
Southeast 11%
Mid-Atlantic 9%
Northeast 15%
North Central 2%
Central 7%
South 15%
Southwest 2%
West 35%
Northwest 4%
FINANCING STRATEGY
The Company has access to a wide range of debt and equity capital resources
to finance its investment and growth strategies. At December 31, 1999, the
Company had approximately $1.8 billion of tangible book equity capital and a
total market capitalization of approximately $4 billion. The Company believes
that its size, diversification, investor sponsorship and track record are
competitive advantages in obtaining attractive financing for its businesses.
5
The Company seeks to maximize risk-adjusted returns on equity and financial
flexibility by opportunistically accessing a variety of public and private debt
and equity capital sources, including:
- A match-funded, securitized debt program now in process.
- A combined $1.5 billion available under its revolving credit facilities
(both secured and unsecured).
- Long-term, unsecured corporate debt.
- Public and private common and preferred equity.
The Company's business model is premised on significantly lower leverage
than many other commercial finance companies. In this regard, the Company seeks
to:
- Target a maximum consolidated debt/book equity ratio of 1.5x to 2.0x.
- Maintain a minimum tangible equity base of $1.5 to $2.0 billion.
- Maintain conservative credit statistics.
- Match fund assets and liabilities.
A more detailed discussion of the Company's current capital resources is
provided in Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources".
BUSINESS
REAL ESTATE LENDING:
The Company provides structured mortgage, mezzanine and corporate financing
to leading commercial real estate owners through its origination and acquisition
platform.
Set forth below is information regarding the Company's primary real estate
lending product lines as of December 31, 1999:
CURRENT
CARRYING PERCENTAGE
VALUE OF TOTAL
-------------- ----------
(IN THOUSANDS)
Structured finance................................... $1,016,148 50.5%
Portfolio finance.................................... 447,343 22.2%
Loan acquisition..................................... 424,880 21.2%
Corporate lending.................................... 122,635 6.1%
---------- -----
Gross carrying value............................... 2,011,006 100.0%
=====
Provision for possible credit losses............... (7,500)
----------
Total carrying value, net.......................... $2,003,506
==========
As more fully discussed in Note 3 to the Company's Consolidated Financial
Statements, the Company continually monitors borrower performance and completes
a detailed loan-by-loan formal credit review on a quarterly basis. After having
originated or acquired over $3 billion of lending transactions, neither the
Company nor its private investment fund predecessors have experienced any actual
losses on their loan investments. Further, based on current reviews of its
portfolio, management is not aware of any factors relating to specific loans
which indicate that such losses may be experienced in the forseeable future.
While no losses are currently expected, the Company has considered it
prudent to establish a policy of providing reserves for potential losses in the
current portfolio which may result in the future. Accordingly,
6
since the quarter ended June 30, 1998, management has reflected quarterly
provisions for possible credit losses in its operating results.
SUMMARY OF INTEREST CHARACTERISTICS
As more fully discussed in Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
as well as "--Interest Rate Risks", the Company utilizes certain interest rate
risk management techniques, including both asset/liability matching and certain
other hedging techniques, in order to mitigate the Company's exposure to
interest rate risks.
As of December 31, 1999, the Company's Lending Business portfolio has the
following interest characteristics:
CURRENT
CARRYING PERCENTAGE
VALUE OF TOTAL
-------------- ----------
(IN THOUSANDS)
Fixed rate loans..................................... $1,268,005 63.1%
Variable rate loans.................................. 743,001 36.9%
---------- -----
Gross carrying value................................. $2,011,006 100.0%
========== =====
SUMMARY OF PREPAYMENT TERMS
The Company is exposed to risks of prepayment on its loan assets, and
generally seeks to protect itself from such risk by structuring its loans with
prepayment restrictions and/or penalties.
As of December 31, 1999, the Companys Lending Business portfolio has the
following prepayment term characteristics:
CURRENT
CARRYING PERCENTAGE
VALUE OF TOTAL
-------------- ----------
(IN THOUSANDS)
Yield maintenance.................................... $ 424,280 21.1%
Substantial lock-out for original term............... 570,688 28.4%
Fixed prepayment penalties........................... 635,509 31.6%
No significant prepayment protection................. 380,529 18.9%
---------- -----
Gross carrying value................................. $2,011,006 100.0%
========== =====
7
SUMMARY OF LOAN MATURITIES
As of December 31, 1999, the Company's Lending Business portfolio has the
following maturity term characteristics:
NUMBER OF CURRENT
LOANS CARRYING PERCENTAGE
YEAR OF LOAN MATURITY MATURING VALUE OF TOTAL
- --------------------- --------- ------------- ----------
(IN THOUSANDS)
2000...................................... 5 $ 204,295 10.2%
2001...................................... 7 295,438 14.7%
2002...................................... 8 272,601 13.6%
2003...................................... 5 261,282 13.0%
2004...................................... 11 504,852 25.1%
2005...................................... 5 86,922 4.3%
2006...................................... 2 50,763 2.5%
2007...................................... 7 255,598 12.7%
2008...................................... 3 41,208 2.0%
2009...................................... -- -- 0.0%
2010 and thereafter....................... 3 38,047 1.9%
------------- -----
Gross carrying value.................... $ 2,011,006 100.0%
============= =====
Weighted average maturity............... 3.7 years
=============
STRUCTURED FINANCE
The Company provides custom-tailored senior and subordinated loans from
$20 million to $100 million to borrowers controlling institutional quality real
estate. These loans may be either fixed or floating rate and are structured to
meet the specific financing needs of the borrowers, including financing related
to the acquisition, refinancing, repositioning or construction of large,
high-quality real estate. The Company offers borrowers a wide range of
structured finance options, including first mortgages, second mortgages,
partnership secured loans, participating debt and interim/bridge facilities.
As of December 31, 1999, the Company's structured finance investments have
the following characteristics:
WEIGHTED
CURRENT AVERAGE
# OF INITIAL CURRENT PRINCIPAL STATED
LOANS CARRYING CARRYING BALANCE PAY
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE VALUE(1) OUTSTANDING RATE
- ---------------- ------------------ -------- -------------- -------------- -------------- ----------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
First Mortgages:
Fixed....................... Residential/ 6 $188,092 $ 186,695 $ 188,201 10.78%
Resort/Mixed Use
Floating.................... Office 3 223,882 225,487 226,378 LIBOR + 2.40%
Second Mortgages:
Fixed....................... Office/Hotel/ 8 125,843 131,992 135,690 11.36%
Mixed Use/Resort
Floating.................... Office -- -- -- -- --
Partnership/Corporate/Other Loans:
Fixed....................... Office/Hotel/ 14 330,458 342,545 359,601 11.96%
Mixed Use Resort
Floating.................... Office 2 129,400 129,429 130,000 LIBOR + 4.80%
-- ---------- ----------
Total......................... 33 $1,016,148 $1,039,870
== ========== ==========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
STATED ESTIMATED CURRENT
ACCRUAL ACCOUNTING LOAN-TO-
INVESTMENT CLASS RATE YIELD(2) VALUE(3)
- ---------------- ---------------- ---------- --------
First Mortgages:
Fixed....................... 11.12% 11.24% 62%
Floating.................... LIBOR + 2.82% 9.65% 76%
Second Mortgages:
Fixed....................... 12.36% 13.95% 71%
Floating.................... -- -- --
Partnership/Corporate/Other Lo
Fixed....................... 13.80% 11.91% 78%
Floating.................... LIBOR + 4.80% 10.81% 80%
Total.........................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of current loan carrying value to underlying
collateral value using third-party collateral appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
8
PORTFOLIO FINANCE
The Company provides funding to regional and national borrowers who own
multiple properties in a geographically diverse portfolio. Loans are
cross-collateralized to give borrowers the benefit of all available collateral
and underwritten to recognize inherent diversification. Property types include
multifamily, suburban office, all-suite, extended stay and limited service
hotels and other property types where individual property values are less than
$20 million on average. Loan terms are structured to meet the specific
requirements of the borrower and range in size from $25 million to
$150 million.
As of December 31, 1999, the Company's portfolio finance investments have
the following characteristics:
CURRENT
# OF INITIAL CURRENT PRINCIPAL
LOANS CARRYING CARRYING BALANCE
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE VALUE(1) OUTSTANDING
- ---------------- ---------------------- -------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
First Mortgages:
Fixed.................... Hotel/Land/Residential 1 $ 67,840 $ 64,259 $ 64,687
Floating................. Office/Residential 3 154,479 159,258 160,160
Second Mortgages:
Fixed.................... Hotel/Office 4 115,352 114,030 111,411
Floating................. Hotel 1 29,689 39,771 40,000
Partnership/Corporate/Other Loans:
Fixed.................... -- -- -- -- --
Floating................. Hotel 1 69,856 70,025 70,500
-- ----------- -----------
Total...................... 10 $ 447,343 $ 446,758
== =========== ===========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
STATED STATED ESTIMATED CURRENT
PAY ACCRUAL ACCOUNTING LOAN-TO-
INVESTMENT CLASS RATE RATE YIELD(2) VALUE(3)
- ---------------- ---------------- ---------------- ---------- --------
First Mortgages:
Fixed.................... 18.37% 20.75% 21.75% 50%
Floating................. LIBOR + 2.54% LIBOR + 2.54% 8.47% 70%
Second Mortgages:
Fixed.................... 11.79% 12.78% 13.69% 68%
Floating................. LIBOR + 5.86% LIBOR + 5.86% 11.58% 88%
Partnership/Corporate/Other
Fixed.................... -- -- -- --
Floating................. LIBOR + 5.37% LIBOR + 5.37% 11.11% 81%
Total......................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of current loan carrying value in underlying
collateral value using third-party collateral appraisal (where applicable)
or the Company's internal collateral valuation (where no appraisal
available).
CORPORATE LENDING
The Company provides senior and subordinated debt capital to corporations
engaged in real estate or real estate-related businesses. Loans may be either
secured or unsecured and range in size from $20 million to $100 million.
Corporate loans may be either cash flow-oriented or asset-based.
9
As of December 31, 1999, the Company's corporate lending investments have
the following characteristics:
WEIGHTED
CURRENT AVERAGE
# OF INITIAL CURRENT PRINCIPAL STATED
LOANS CARRYING CARRYING BALANCE PAY
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE VALUE(1) OUTSTANDING RATE
- ---------------- -------------------- -------- -------------- -------------- -------------- ----------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Second Mortgages:
Fixed.................... Homebuilder/Land 1 $50,500 $ 53,568 $ 54,231 10.00%
Floating................. -- -- -- -- -- --
Partnership/Corporate/Other Loans:
Fixed.................... Resort Entertainment 2 45,899 44,390 43,150 12.68%
Floating................. Homebuilder/Land 1 41,250 24,677 24,677 LIBOR + 6.00%
--- ---------- ----------
Total...................... 4 $ 122,635 $ 122,058
=== ========== ==========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
STATED ESTIMATED CURRENT
ACCRUAL ACCOUNTING LOAN-TO-
INVESTMENT CLASS RATE YIELD(2) VALUE(3)
- ---------------- ---------------- ---------- ---------
Second Mortgages:
Fixed.................... 17.00% 15.64% 50%
Floating................. -- -- --
Partnership/Corporate/Other
Fixed.................... 12.68% 12.00% 73%
Floating................. LIBOR + 6.00% 12.50% 50%
Total......................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of current loan carrying value to underlying
collateral value using third-party collateral appraisal (where applicable)
or the Company's internal collateral valuation (where no appraisal
available).
LOAN ACQUISITION
The Company acquires whole loans and loan participations which may be
performing, non-performing or sub-performing and which the Company believes
represent attractive risk-reward opportunities. Loans are generally acquired at
a discount to the principal balance outstanding and may be acquired with
financing provided by the seller. The Company restructures many of these loans
to performing status on terms favorable to the Company. In other cases, the
Company negotiates a payoff at a price above the Company's basis in the loan.
Loan acquisitions range from $5 million to $100 million and are collateralized
by all major property types.
For accounting purposes, these loans are initially reflected at the
Company's acquisition cost which represents the outstanding balance net of the
acquisition discount or premium. The Company amortizes such discounts or
premiums as an adjustment to increase or decrease the yield, respectively,
realized on these loans using the effective interest method. As such,
differences between carrying value and principle balances outstanding do not
represent embedded losses or gains as the Company generally plans to hold such
loans to maturity or negotiate a favorable restructuring of a discount loan.
10
As of December 31, 1999, the Company's loan acquisition investments have the
following characteristics:
CURRENT
# OF INITIAL CURRENT PRINCIPAL
LOANS CARRYING CARRYING BALANCE
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE VALUE(1) OUTSTANDING
- ---------------- --------------------------------- -------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
First Mortgages:
Fixed.............. Office/Retail 4 $ 205,346 $ 202,905 $ 203,905
Floating........... Office 1 93,238 94,354 97,123
Second Mortgages:
Fixed.............. Retail 2 113,627 109,825 109,796
Floating........... -- -- -- -- --
Partnership/Corporate/Other Loans:
Fixed.............. Office/Residential/Hotel/Resort 1 17,532 17,796 25,905
Floating........... -- -- -- -- --
------ ----------- -----------
Total................................................... 8 $ 424,880 $ 436,729
====== =========== ===========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
STATED STATED ESTIMATED CURRENT
PAY ACCRUAL ACCOUNTING LOAN-TO-
INVESTMENT CLASS RATE RATE YIELD(2) VALUE(3)
- ---------------- ---------------- ---------------- ---------- --------
First Mortgages:
Fixed.............. 9.84% 9.84% 9.73% 82%
Floating........... LIBOR + 1.75% LIBOR + 1.75% 8.94% 68%
Second Mortgages:
Fixed.............. 9.72% 9.72% 7.59% 59%
Floating........... -- -- -- --
Partnership/Corporate
Fixed.............. 9.97% 9.97% 11.30% 69%
Floating........... -- -- -- --
Total................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of current loan carrying value to underlying
collateral value using third-party collateral appraisal (where applicable)
or the Company's internal collateral valuation (where no appraisal
available).
LOAN SERVICING
Through its Starwood Asset Services division, the Company provides loan
servicing to third-party institutional owners of loan portfolios, as well as to
the Company's own asset base. Starwood Asset Services is currently rated "above
average" by Standard & Poor's as a master servicer. The Company's servicing
business focuses on maximizing risk-adjusted investment returns through active,
ongoing asset management with particular focus on risk management, asset
financing strategies and opportunistic responsiveness to changing
borrower/tenant needs.
In September 1998, a subsidiary of the Company acquired the loan origination
and servicing business of Phoenix Realty Services, Inc., a subsidiary of Phoenix
Home Life Insurance Company, for $2.0 million. This acquisition not only
expanded the Company's ability to service its own loans, but provided a platform
for third-party servicing and additional borrower relationships which may result
in investment opportunities in the future.
11
CREDIT TENANT LEASING:
The Company, directly and through its Leasing Subsidiary, provides capital
to corporate owners of real estate facilities. Net leased facilities are
generally subject to long-term leases to rated corporate credit tenants, and
typically provide for all expenses at the property to be paid by the tenant on a
triple net lease basis. Credit tenant lease ("CTL") transactions generally range
in size from $20 million to $200 million.
The Company pursues the origination of credit tenant lease transactions by
structuring purchase/ leasebacks and by acquiring facilities subject to existing
long-term net leases. In a typical purchase/ leaseback transaction, the Company
purchases a corporation's property and leases it back to that corporation
subject to a long-term net lease. This structure allows the corporate real
estate user to reinvest the proceeds from the sale of its real estate into its
core business while the Company capitalizes on its structured financing
expertise.
The Company generally intends to hold its net leased assets for long-term
investment. However, subject to certain tax restrictions, the Company may
dispose of an asset if it deems the disposition to be in the best interest of
the stockholders and may either reinvest the disposition proceeds, use the
proceeds to reduce debt, or distribute the proceeds to stockholders.
The Company's CTL investments primarily represent a diversified portfolio of
strategic office and industrial facilities subject to net lease agreements with
creditworthy corporate tenants. The Company generally seeks high-quality,
general-purpose real estate with residual values that represent a discount to
current market values and replacement cost. Under a typical net lease agreement,
the tenant agrees to pay a base monthly operating lease payment and all property
operating expenses (including taxes, maintenance and insurance) are the
responsibility of the tenant.
The Company generally seeks corporate tenants with the following
characteristics:
- Established companies with stable core businesses or market leaders in
rapidly growing industries.
- Investment-grade credit strength or appropriate credit enhancements if
tenant credit strength is not sufficient.
- Commitment to the facility as an important asset to their on-going
businesses.
As of December 31, 1999, the Company had more than 160 corporate tenants
operating in more than 10 industries, including aerospace, automotive, finance,
healthcare, hotel, technology and telecommunications. These tenants represent
well-recognized national and international companies, such as AlliedSignal,
Federal Express, IBM, Lucent, Microsoft, Nike, Hilton and Nokia.
As of December 31, 1999, the Company's CTL portfolio has the following
tenant credit characteristics:
ANNUALIZED
OPERATING
LEASE PERCENTAGE
PAYMENTS(2) OF TOTAL
-------------- ----------
(IN THOUSANDS)
Investment grade(1)................................ $ 85,698 44.8%
Non-investment grade............................... 29,040 15.2%
Unrated............................................ 76,592 40.0%
-------- -----
$191,330 100%
======== =====
EXPLANATORY NOTES:
- ------------------------------
(1) A tenant's credit rating is considered "Investment Grade" if it has a
published credit rating of Baa3/BBB- or above by one or more of the four
national rating agencies.
(2) Reflects annualized monthly base lease rates in effect on December 31, 1999.
12
PORTFOLIO AND ASSET MANAGEMENT STRATEGY. The Company believes that diligent
management of the CTL portfolio is an essential component of its long-term
strategy. There are several ways to optimize the performance and maximize the
value of net leases. The Company monitors its portfolio for changes that could
affect the performance of the markets, tenants and industries in which it has
invested. As part of this monitoring, the Company's asset management group
reviews market, tenant and industry data and frequently inspects its properties.
In addition, the Company attempts to develop strong relationships with its large
corporate tenants, which provide a source of information concerning the tenants'
real estate needs. These relationships allow the Company to be proactive in
obtaining early lease renewals and in conducting early marketing of assets where
the tenant has decided not to renew. The Company will seek to find a new tenant
prior to the expiration of the existing lease.
As of December 31, 1999, the Company owned 148 office and industrial
properties principally subject to net leases to more than 160 tenants,
comprising 18.5 million square feet in 25 states. The Company also has a
portfolio of 17 hotels under a long-term master lease with a single tenant.
Information regarding the Company's CTL properties as of December 31, 1999 is
set forth below:
% ANNUALIZED
# OF OPERATING LEASE %
INDUSTRY FACILITIES PAYMENTS(1) SQUARE FEET SIGNIFICANT TENANTS
- -------- ---------- --------------- ----------- -------------------------------------
Technology........................... 58 36.8% 27.8% IBM Corp., Sun Microsystems, Lucent
Technologies, 3Com Corp., Xerox Corp.
Unisys, Rational Software, Lotus
Development Corp., Computer Sciences
Corp., Microsoft.
Financial Services................... 12 11.9% 8.5% AT&T Capital, Wellpoint Health
Networks, New York Life Insurance
Co., Guardian Life Insurance Co.
Telecommunications................... 11 10.4% 6.1% ICG Holdings, Nokia, GTE
Communications, Northern Telecom
Food and Related Services............ 21 6.5% 7.0% Caterair, Welch Foods, Inc., Ralph's
Grocery Co., Shaw's Supermarkets
Automotive, Aerospace and Defense.... 11 6.0% 6.5% Volkswagen of America, Unison
Industries, Allied Signal, TRW Space
Communications, Lockheed Martin
Aerospace Corp.
Energy and Utilities................. 3 5.2% 3.2% Entergy Corp., Bay State Gas Company,
Mobil Oil Exploration
Consumer Goods....................... 10 4.7% 9.7% Lever Brothers, Rex Stores Corp.,
Sears Logistics
Manufacturing........................ 4 3.6% 7.3% Nike, Adidas America, Inc., Central
National-Gottlesman, Inc.
Transportation Services.............. 3 2.1% 1.1% Federal Express Corp.
Healthcare........................... 5 1.7% 1.5% Fresenius USA, Inc., Haemonetics
Corp., Biomerieux Vitek, Inc.
Government Services.................. 2 1.1% 0.7% Massachusetts Lottery, Cal Trans,
Consulate-General of Japan
Other 8 2.2% 5.4% San Jose State University, Guste,
Norstan
--- ----- -----
TOTAL LEASING SUBSIDIARY........... 148 92.2% 84.8%
Hotel................................ 17 7.8% 15.2% Hilton Hotels Corp.
--- ----- -----
TOTAL PARENT....................... 17 7.8% 15.2%
--- ----- -----
TOTAL COMPANY...................... 165 100.0% 100.0%
=== ===== =====
EXPLANATORY NOTE:
- ----------------------------------
(1) Reflects annualized monthly base lease rates in effect on December 31, 1999.
13
As of December 31, 1999, the Company's portfolio of lease expirations on its
CTL assets are as follows:
PERCENT OF TOTAL
NUMBER OF ANNUALIZED ANNUAL RENTS
LEASES OPERATING LEASE REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING PAYMENTS(1) EXPIRING LEASES
- ------------------------ --------- --------------- ----------------
(IN THOUSANDS)
2000.................................. 16 $ 7,477 3.91%
2001.................................. 23 18,774 9.81%
2002.................................. 27 21,861 11.43%
2003.................................. 22 23,149 12.10%
2004.................................. 29 24,669 12.89%
2005.................................. 11 9,520 4.98%
2006.................................. 19 22,840 11.94%
2007.................................. 8 12,149 6.35%
2008.................................. 9 8,544 4.46%
2009.................................. 8 8,896 4.65%
2010 and thereafter................... 22 33,451 17.48%
------ -------- ------
Total 194 $191,330 100.00%
====== ======== ======
Weighted average lease term 6.7 years
========
EXPLANATORY NOTE:
- ------------------------------
(1) Reflects annualized monthly base lease rates in effect on December 31, 1999.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
At all times, the Company intends to make investments in a manner consistent
with the requirements of the Code for the Company to qualify as a REIT unless,
because of changing circumstances or changes in the Code (or in Treasury
Regulations), the Company's Board of Directors, with the consent of the holders
of a majority of the outstanding voting shares, determines that it is no longer
in the best interests of the Company to qualify as a REIT.
INVESTMENT RESTRICTIONS OR LIMITATIONS
The Company does not have any prescribed allocation among investments or
product lines. Instead, the Company focuses on corporate and real estate credit
underwriting to develop an in-depth analysis of the risk/reward ratios in
determining the pricing and advisability of each particular transaction.
The Company believes that it is not, and intends to conduct its operations
so as not to become, regulated as an investment company under the Investment
Company Act. The Investment Company Act generally exempts entities that are
"primarily engaged in purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" (collectively, "Qualifying Interests").
The Company intends to rely on current interpretations by the staff of the
Securities and Exchange Commission in an effort to qualify for this exemption.
To comply with the exemption, the Company, among other things, must maintain at
least 55% of its assets in Qualifying Interests and also may be required to
maintain an additional 25% in Qualifying Interests or other real estate-related
assets. Generally, the Company's senior mortgages and certain of its
subordinated mortgages constitute Qualifying Interests.
The Company is restricted from making certain types of investments which may
limit its flexibility in implementing its investment policy. Specifically,
without the amendment, termination or waiver of provisions of certain
non-competition agreements between Starwood Capital Group, L.L.C. and Starwood
Hotels & Resorts Worldwide, Inc. the Company is prohibited from: (i) making
investments in loans collateralized by hotel assets where it is anticipated that
the underlying equity will be acquired by the
14
debtholder within one year from the acquisition of such debt; (ii) acquiring
equity interests in hotels (other than acquisitions of warrants, equity
participations or similar rights incidental to a debt investment by the Company
or that are acquired as a result of the exercise of remedies in respect to a
loan in which the Company has an interest); or (iii) selling or contributing to
or acquiring any interests in Starwood Hotels & Resorts Worldwide, Inc.,
including debt positions or equity interests obtained by the Company under,
pursuant to or by reason of the Company's ownership of debt positions.
Subject to the limitations on ownership of certain types of assets and the
gross income tests imposed by the Federal Tax Code, the Company also may invest
in the securities of other REITs, other entities engaged in real estate
activities or other issuers, including for the purpose of exercising control
over such entities.
COMPETITION
The Company is engaged in a competitive business. In originating and
acquiring assets, the Company competes with public and private companies,
including other finance companies, mortgage banks, pension funds, savings and
loan associations, insurance companies, institutional investors, investment
banking firms and other lenders and industry participants, as well as individual
investors. Existing industry participants and potential new entrants compete
with the Company for the available supply of investments suitable for
origination or acquisition, as well as for debt and equity capital. Certain of
the Company's competitors are larger than the Company, have longer operating
histories, may have access to greater capital and other resources, may have
management personnel with more experience than the officers of the Company, and
may have other advantages over the Company in conducting certain businesses and
providing certain services.
REGULATION
The operations of the Company are subject, in certain instances, to
supervision and regulation by state and federal governmental authorities and may
be subject to various laws and judicial and administrative decisions imposing
various requirements and restrictions, which, among other things: (i) regulate
credit granting activities; (ii) establish maximum interest rates, finance
charges and other charges; (iii) require disclosures to customers; (iv) govern
secured transactions; and (v) set collection, foreclosure, repossession and
claims-handling procedures and other trade practices. Although most states do
not regulate commercial finance, certain states impose limitations on interest
rates and other charges and on certain collection practices and creditor
remedies and require licensing of lenders and financiers and adequate disclosure
of certain contract terms. The Company is also required to comply with certain
provisions of the Equal Credit Opportunity Act that are applicable to commercial
loans.
In the judgment of management, existing statutes and regulations have not
had a material adverse effect on the business conducted by the Company. However,
it is not possible to forecast the nature of future legislation, regulations,
judicial decisions, orders or interpretations, nor their impact upon the future
business, financial condition or results of operations or prospects of the
Company.
The Company has elected and expects to continue to make an election to be
taxed as a REIT under Section 856 through 860 of the Code. As a REIT, the
Company generally will not be subject to federal income tax if it distributes at
least 95% of its taxable income for each year to its shareholders. REITs are
also subject to a number of organizational and operational requirements in order
to elect and maintain REIT status. These requirements include specific share
ownership tests and assets and gross income composition tests. If the Company
fails to qualify as a REIT in any taxable year, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate tax rates. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to state and local income taxes
and to federal income tax and excise tax on its undistributed income.
15
Although the Company did not qualify as a REIT for its fiscal years 1993
through 1997, it received a written agreement from the IRS confirming that the
Company was eligible to make an election under Section 856(c)(1) of the Code to
be taxed as a REIT for its taxable years beginning January 1, 1998.
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS STRATEGY
The implementation of the Company's business strategy and investment
policies are subject to certain risks, including the effect of economic and
other conditions on property values, the general illiquidity of real estate
investments, the risks of borrower and tenant defaults, in risks resulting from
delays in enforcing remedies or in gaining control over the real estate
collateral following a default, risks that the properties collateralizing debt
instruments held by the Company or properties which are owned by the Company
will not generate revenues sufficient to meet operating expenses and to pay
scheduled debt service, the risk that prepayment restrictions may be
insufficient to deter prepayments, the existence of junior mortgages that may
affect the Company's rights, the effect of competition from properties owned by
others, liability associated with uninsurable losses and unknown environmental
liabilities.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real estate (including, in certain
circumstances, a secured lender that succeeds to ownership or control of a
property) may become liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. Those laws
typically impose cleanup responsibility and liability without regard to whether
the owner or control party knew of or was responsible for the release or
presence of such hazardous or toxic substances. The costs of investigation,
remediation or removal of those substances may be substantial. The owner or
control party of a site may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from a site. Certain environmental laws also impose liability in connection with
the handling of or exposure to asbestos-containing materials, pursuant to which
third parties may seek recovery from owners of real properties for personal
injuries associated with asbestos-containing materials. Absent succeeding to
ownership or control of real property, a secured lender is not likely to be
subject to any of these forms of environmental liability. The Company is not
currently aware of any environmental issues which could materially affect the
Company.
EMPLOYEES
As of March 15, 2000, the Company had 111 employees and believes its
relationships with its employees to be good. The Company's employees are not
represented by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's principal executive and administrative offices are located at
1114 Avenue of the Americas New York, NY 10036, 27th floor. Its telephone
number, general facsimile number and e-mail address are (212) 930-9400,
(212) 930-9494 and starwoodfinancial.com, respectively. The lease for the
Company's primary corporate office space expires in February 2010. The Company
believes that this office space is suitable for its operations for the
foreseeable future. The Company also maintains super-regional offices in San
Francisco, California, Hartford, Connecticut, and Atlanta, Georgia, as well as
regional offices in Dallas, Texas, Denver, Colorado and New Orleans, Louisiana.
See Item 1--"Credit Tenant Leasing" for a discussion of real estate
facilities held by the Company and its Leasing Subsidiary for investment
purposes and Item 8--"Schedule III--Real Estate and Accumulated Depreciation"
for a detailed listing of such properties.
16
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation or legal proceedings,
or to the best of its knowledge, any threatened litigation or legal proceedings,
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on its results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 3, 1999, the Company held a special meeting of shareholders to
vote on the following proposals:
1. To approve the acquisition of TriNet through the merger of TriNet with a
subsidiary of the Company, with TriNet surviving the merger as a
subsidiary of the Company.
2. To approve the acquisition of 100% of the ownership interests in the
Company's external advisor, Starwood Financial Advisors L.L.C., through a
merger and a contribution of interests by the owners of the external
advisor.
3. To approve the merger of the Company into a newly-formed corporation in
order to change its form of organization from a Maryland real estate
investment trust to a Maryland corporation and eliminate its dual class
common share structure.
PROPOSAL FOR AGAINST ABSTAIN
- -------- ---------- -------- --------
First Proposal.................................. 78,078,285 3,066 3,693
Second Proposal................................. 78,077,827 3,155 4,062
Third Proposal.................................. 78,078,464 2,604 3,976
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED SHARE MATTERS
In November 1999, the Company eliminated its dual class share structure by
exchanging its outstanding class A and class B shares for shares of a single
class of Common Stock. The Company's Common Stock began trading on the New York
Stock Exchange ("NYSE") under the symbol "SFI" on November 4, 1999. Prior to
November 4, 1999, the class A shares were traded on the American Stock Exchange
under the symbol "APT," and there was no established trading market for the
class B shares.
The high and low sales prices per share of Common Stock (or class A shares
for periods prior to November 4, 1999) are set forth below for the periods
indicated.
QUARTER ENDED HIGH(1) LOW(1)
- ------------- ---------- ------------
1998
March 31, 1998.............................................. $36 3/4 $27 3/8
June 30, 1998............................................... $56 $26 1/4
September 30, 1998.......................................... $59 1/4 $35 1/2
December 31, 1998........................................... $80 1/4 $45 1/4
1999
March 31, 1999.............................................. $63 $42 1/2
June 30, 1999............................................... $66 1/2 $31 5/8
September 30, 1999.......................................... $76 $27 7/8
December 31, 1999........................................... $27 5/8 $16 11/16
EXPLANATORY NOTE:
- ------------------------------
(1) As adjusted for a one-for-six reverse stock split effective June 19, 1998.
On March 15, 2000, the closing sale price of the Common Stock as reported by
the NYSE was $17.19. The Company had approximately 1,203 holders of record of
Common Stock as of March 15, 2000.
On June 12, 1998, the Frank Russell Company announced that the Company would
be included in the Russell 1000 and Russell 3000 equity indices. The Company
believes that index funds who were required to mirror the Russell indices'
performance purchased a large number of the Company's class A shares in the
public float. As a result of those purchases, and the limited availability of
the shares in the public float at that time, the "market" price for the class A
shares dramatically increased shortly after the June 12 announcement. From the
time of the Company's inclusion in the Russell indices through the announcement
that the Company had agreed to acquire TriNet, the reported stock price of the
Company was highly volatile and trading volume relatively low due to the very
limited number of shares available for trading at that time.
At December 31, 1999, the Company had four series of preferred stock
outstanding: Series A Preferred Stock (which currently pays dividends at the
rate of 9.50% per annum), 9.375% Series B Preferred Stock, 9.20% Series C
Preferred Stock and 8.00% Series D Preferred Stock. Each of the Series B, C, D
preferred stock was issued in connection with the TriNet acquisition and is
publicly traded.
On January 4, 5 and 6, 1999 the Company issued 37,776, 1,512 and 8,945
class A shares, respectively, upon exercise of stock options issued to employees
of the Company's external advisor. On March 15, 1999, the Company issued 15,000
class A shares upon exercise of stock options issued to an employee of the
Company's external advisor. The exercise price of the options was $15.00 per
share. As required by the Company's charter as in effect at that time, in
connection with those option exercises, 31,616 class B shares were issued to the
holders of the class B shares at par value.
The Board of Directors approved, and the Company has implemented, a stock
repurchase program under which the Company is authorized to repurchase up to
5.0 million shares of its Common Stock from
18
time to time, primarily using proceeds from the disposition of assets and excess
cash flow from operations, but also using borrowings under its credit facilities
if the Company determines that it is advantageous to do so. As of December 31,
1999, the Company had repurchased approximately 2.3 million shares at an
aggregate cost of approximately $40.4 million.
DIVIDENDS
The Company's management expects that any taxable income remaining after the
distribution of preferred dividends and the regular quarterly or other dividends
will be distributed annually to the holders of the Common Stock on or prior to
the date of the first regular quarterly divided payment date of the following
taxable year. The dividend policy with respect to the Common Stock is subject to
revision by the Board of Directors. All distributions in excess of dividends on
preferred stock or those required for the Company to maintain its REIT status
will be made by the Company at the sole discretion of the Board of Directors and
will depend on the taxable earnings of the Company, the financial condition of
the Company, and such other factors as the Board of Directors deems relevant.
The Board of Directors has not established any minimum distribution level. In
order to maintain its qualifications as a REIT, the Company intends to make
regular quarterly dividends to its shareholders that, on an annual basis, will
represent at least 95% of its taxable income (which may not necessarily equal
net income as calculated in accordance with generally accepted accounting
principles), determined without regard to the deduction for dividends paid and
excluding any net capital gains.
Holders of Common Stock will be entitled to receive distributions if, as and
when the Board of Directors authorizes and declares distributions. However,
rights to distributions may be subordinated to the rights of holders of
preferred stock, when preferred stock is issued and outstanding. In any
liquidation, dissolution or winding up of the Company each outstanding share of
Common Stock will entitle its holder to a proportionate share of the assets that
remain after the Company pays its liabilities and any preferential distributions
owed to preferred stockholders.
The following table sets forth the dividends paid or declared by the Company
on its Common Stock (or class A shares for periods prior to November 4, 1999):
STOCKHOLDER DIVIDEND/
QUARTERLY PERIOD ENDED RECORD DATE SHARE
- ---------------------- ----------------- ---------
1998
June 30, 1998.................................. June 30, 1998 $0.35
September 30, 1998............................. October 15, 1998 $0.38
December 31, 1998.............................. December 31, 1998 $0.41(1)
1999
March 31, 1999................................. April 15, 1999 $0.42
June 30, 1999.................................. July 15, 1999 $0.43
September 30, 1999............................. October 15, 1999 $0.44
December 31, 1999.............................. December 31, 1999 $0.57(2)
EXPLANATORY NOTES:
- ------------------------------
(1) A portion of this quarterly dividend (approximately $0.29 per share) was
treated as income to shareholders of record in 1998, and the remainder was
treated as 1999 income.
(2) A portion of this quarterly dividend (approximately $0.47 per share) was
treated as income to stockholders of record in 1999, and the remainder will
be treated as 2000 income.
In November 1999, the Company declared and paid a dividend of a total of one
million shares of Common Stock pro rata to all holders of record of Common Stock
as of the close of business on November 3, 1999. The Company also declared
dividends aggregating $20.9 million for the Series A preferred stock, which was
outstanding for the entire year ended December 31, 1999. In addition, the
Company also
19
declared dividends of $1.2 million, $0.7 million and $2.0 million on its
Series B, C and D preferred stock, respectively, for the year ended
December 31, 1999. The amounts for the Series B, C and D preferred stock
represent only fourth quarter dividends which were payable by the Company as a
result of its acquisition of TriNet. There are no dividend arrearages on any of
the series of preferred stock currently outstanding. Further, it declared and
paid dividends aggregating $0.2 million per quarter to the holders of class B
shares in connection with the March 31, June 30 and September 30 quarterly
dividends to the holders of the class A shares. As previously described, the
former class A and class B shares were converted into shares of Common Stock on
November 4, 1999. The Company did not declare any dividends for the period from
November 19, 1993 through the quarter ended March 31, 1998, representing its
partial first quarter of operations after the completion of the Recapitalization
Transactions.
Distributions to shareholders will generally be taxable as ordinary income,
although a portion of such dividends may be designated by the Company as capital
gain or may constitute a tax-free return of capital. The Company annually
furnishes to each of its shareholders a statement setting forth the
distributions paid during the preceding year and their characterization as
ordinary income, capital gain or return of capital.
The Company intends to continue to declare quarterly distributions on its
Common Stock. No assurance, however, can be given as to the amounts or timing of
future distributions, as such distributions are subject to the Company's
earnings, financial condition, capital requirements, and such other factors as
the Company's Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data on a consolidated
historical basis for the Company. However, prior to the recapitalization of the
Company in March 1998, discussed more fully in Note 4 to the Company's
Consolidated Financial Statements (the "Recapitalization Transactions"), the
Company did not have substantial capital resources or operations. Prior to the
Recapitalization Transactions, the Company's structured finance operations were
conducted by two investment partnerships affiliated with Starwood Capital Group,
L.L.C., which contributed substantially all their structured finance assets to
the Company in the Recapitalization Transactions in exchange for cash and shares
of the Company.
Further, on November 4, 1999, as more fully discussed in Note 4 to the
Company's Consolidated Financial Statements, the Company acquired TriNet, which
substantially increased the size of the Company's operations, and also acquired
its external advisor. Operating results for the year ended December 31, 1999
reflect only the effects of these transactions subsequent to their consummation.
Accordingly, the historical balance sheet information as of and prior to
December 31, 1998, as well as the results of operations for the Company for all
periods reflected below, do not reflect the current operations of the Company as
a well capitalized, internally-managed finance company operating in the
commercial real estate industry. For these reasons, the Company believes that
the information contained in the following tables relating to the 1995 through
1997 periods is not indicative of the Company's current
20
business and should be read in conjunction with the discussions set forth in
Item 7--"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Interest income........................................... $ 209,848 $ 112,914 $ 896 $ 478 $ 145
Operating lease/rental income............................. 42,186 12,378 -- -- --
Other income.............................................. 12,763 2,804 991 10 3
----------- ----------- --------- -------- --------
Total revenue......................................... 264,797 128,096 1,887 488 148
----------- ----------- --------- -------- --------
Interest expense.......................................... 91,184 44,697 -- 272 --
Property operating costs.................................. 2,246 -- -- -- --
Depreciation and amortization............................. 10,340 4,287 -- -- --
General and administrative expense........................ 6,269 2,583 461 639 283
Advisory fees............................................. 16,193 7,837 -- -- --
Provision for possible credit losses...................... 4,750 2,750 -- -- --
Stock option compensation expense(1)...................... 412 5,985 -- -- --
Costs incurred in acquiring external advisor(2)........... 94,476 -- -- -- --
----------- ----------- --------- -------- --------
Total expenses........................................ 225,870 68,139 461 911 283
----------- ----------- --------- -------- --------
Income (loss) before minority interest.................... 38,927 59,957 1,426 (423) (135)
Minority interest(3)...................................... (41) (54) (1,415) (154) --
----------- ----------- --------- -------- --------
Net income (loss)......................................... $ 38,886 $ 59,903 $ 11 $ (577) $ (135)
Preferred dividend requirements........................... (23,843) (944) -- -- --
----------- ----------- --------- -------- --------
Net income allocable to common shareholders............... $ 15,043 $ 58,959 $ 11 $ (577) $ (135)
=========== =========== ========= ======== ========
Basic earnings (loss) per common share(4)................. $ 0.25 $ 1.40 $ 0.01 $ (1.36) $ (0.32)
=========== =========== ========= ======== ========
Diluted earnings (loss) per common share.................. $ 0.25 $ 1.36 $ 0.00 $ (1.36) $ (0.32)
=========== =========== ========= ======== ========
Dividends declared per common share(10)................... $ 1.86 $ 1.14 $ 0.00 $ 0.00 $ 0.00
=========== =========== ========= ======== ========
SUPPLEMENTAL DATA:
Dividends declared on preferred shares.................... $ 24,819 $ 929 $ -- $ -- $ --
Dividends declared on common shares....................... 116,813 60,343 -- -- --
Adjusted earnings allocable to common shareholders(7)..... 127,798 66,615 11 (577) (135)
Adjusted earnings per common
share--basic............................................ 2.19 1.59 0.01 (1.36) (0.32)
Adjusted earnings per common
share--diluted.......................................... 2.07 1.53 0.00 (1.36) (0.32)
Funds from operations allocable to common
shareholders(5)(6)...................................... 121,666 63,261 1,426 (423) (135)
Cash flows from:
Operating activities.................................. 122,549 54,915 1,271 (227) (184)
Investing activities.................................. (143,911) (1,271,309) (6,013) (522) 175
Financing activities.................................. 45,660 1,226,208 4,924 -- --
Pro Forma ratio of EBITDA to interest expense............. 2.83 2.84 -- -- --
Pro Forma ratio of EBITDA to combined fixed charges(8).... 2.23 2.44 -- -- --
Weighted average common shares outstanding--basic(9)...... 57,749 41,607 1,258 425 425
Weighted average common shares outstanding--diluted(9).... 60,393 43,460 2,562 425 425
BALANCE SHEET DATA:
Real estate loans and net lease investments, net.......... $ 3,717,790 $ 2,013,703 $ -- $ -- $ --
Total assets.............................................. 3,813,552 2,059,616 13,441 5,674 2,194
Debt obligations.......................................... 1,901,204 1,055,719 -- -- --
Minority interest in consolidated entities(3)............. 2,565 -- 5,175 3,917 --
Shareholders' equity...................................... 1,801,343 970,728 6,351 1,578 2,155
SUPPLEMENTAL DATA:
Total debt to shareholders' equity........................ 1.1x 1.1x -- -- --
21
EXPLANATORY NOTES:
- ------------------------------
(1) Historical stock option expense represents the option value of approximately
2.5 million fully-vested options to acquire class A shares which were issued
to the Company's external advisor upon consummation of the March 18, 1998
capitalization of the Company. A portion of those options were then
regranted to employees of the advisor subject to vesting periods which were
typically three years from the date of grant. The remainder of those options
were regranted on a fully-vested basis to an affiliate of Starwood Capital
Group L.L.C., which then further regranted those options to certain of its
employees subject to vesting restrictions.
(2) As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, this amount represents a non-recurring charge of approximately
$94.5 million relating to the acquisition of the Company's external advisor.
(3) Historical minority interest for the Company for fiscal 1998, 1997 and 1996
represents a minority interest in APMT Limited Partnership which was
converted into class A shares on March 18, 1998, the date the partnership
was liquidated and terminated. Minority interests in fiscal 1999 also
reflects minority interests in certain of the Leasing Subsidiary's
consolidated ventures.
(4) Earnings per common share excludes 1% of net income allocable to the
Company's class B shares prior to November 4, 1999. These class B shares
were exchanged for Common Stock in connection with the TriNet acquisition
and other related transactions on November 4, 1999. As a result, the Company
now has a single class of Common Stock outstanding.
(5) Management generally considers funds from operations, or FFO, to be one
measure of the financial performance which provides a relevant basis for
comparison among REITs. FFO is presented to assist investors in analyzing
the performance of REITs. In 1995, the National Association of Real Estate
Investment Trusts, or NAREIT, established new guidelines clarifying its
definition of FFO and requested that REITs adopt this new definition
beginning in 1996. FFO, as defined by NAREIT, is income (loss) before
minority interest (determined in accordance with generally accepted
accounting principles), excluding gains (losses) from debt restructuring and
sales of property, plus real estate-related depreciation and amortization
and after adjustments for unconsolidated partnerships and joint ventures.
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs. FFO should not
be considered an alternative to net income as an indication of financial
performance nor an alternative to cash flows from operating, investing, and
financing activities as measures of liquidity.
(6) Because of certain non-cash or non-recurring items included in income for
generally accepted accounting purposes, which are not adjusted for or
eliminated under the NAREIT definition of FFO, FFO may differ from actual
cash available for distribution to shareholders. These items include
amortization of premiums or discounts on loan investments, provisions for
possible credit losses, gains from sales of assets, deferred interest
arising from differences between loan accrual and payment rates, non-cash
rental revenues and capital expenditures. Accordingly, FFO is not
necessarily indicative of cash available to fund cash needs or to pay
dividends to shareholders.
(7) Adjusted earnings represent GAAP net income before depreciation and
amortization and, for the year ended December 31, 1999, exclude the
non-recurring cost incurred in acquiring the Company's external advisor (see
Note 4 to the Company's Consolidated Financial Statements).
(8) Combined fixed charges are comprised of interest expense, capitalized
interest, amortization of loan costs and preferred stock dividend
requirements.
(9) As adjusted for one-for-six reverse stock split effected by the Company on
June 19, 1998.
(10) The Company generally declares common and preferred dividends in the month
subsequent to the end of the quarter.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, on March 18, 1998, the Company completed the Recapitalization
Transactions which, among other things, substantially recapitalized the Company
and modified its investment policy. Effective June 18, 1998, the Company (which
was organized under California law) changed its domicile to Maryland by merging
with a newly-formed subsidiary organized under Maryland law, and issued new
shares of the subsidiary to the Company's shareholders in exchange for their
shares in the Company. Concurrently, the Company consummated a one-for-six
reverse stock split.
Immediately prior to the consummation of the Recapitalization Transactions,
the Company's assets primarily consisted of approximately $11.0 million in
short-term, liquid real estate investments, cash and cash equivalents.
On December 15, 1998, the Company sold $220.0 million of preferred shares
and warrants to purchase class A shares to a group of investors affiliated with
Lazard Freres. Concurrent with the sale of the preferred shares and warrants,
the Company purchased $280.3 million in real estate loans and participation
interests from a group of investors also affiliated with Lazard Freres. These
transactions are referred to collectively as the "Lazard Transaction."
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, on November 3, 1999, the Company's shareholders approved a series of
transactions including: (i) the acquisition of TriNet; (ii) the acquisition of
the Company's external advisor; and (iii) the reorganization of the Company from
a trust to a corporation and the exchange of the class A and class B shares for
Common Stock. Pursuant to the TriNet acquisition, TriNet merged with and into a
subsidiary of the Company, with TriNet surviving as a wholly-owned subsidiary of
the Company. In the acquisition, each share of common stock of TriNet was
converted into 1.15 shares of Common Stock. Each share of TriNet Series A,
Series B and Series C Cumulative Redeemable Preferred Stock was converted into a
share of Series B, Series C or Series D (respectively) Cumulative Redeemable
Preferred Stock of the Company. The Company's preferred stock issued to the
former TriNet preferred stockholders has substantially the same terms as the
TriNet preferred stock, except that the new Series B, C, and D preferred stock
have additional voting rights not associated with the TriNet preferred stock.
The Company's Series A Preferred Stock remained outstanding with the same rights
and preferences as existed prior to the TriNet acquisition. As a consequence of
the acquisition of its external advisor, the Company is now self-advised and
will no longer pay external advisory fees.
The transactions described above and other related transactions have
materially impacted the historical operations of the Company and will continue
to impact the Company's future operations. Accordingly, the reported historical
financial information for periods prior to these transactions is not believed to
be fully indicative of the Company's future operating results or financial
condition.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
During fiscal year 1999, total revenue increased by approximately
$136.7 million over total revenue for fiscal year 1998. This increase is a
result of the interest generated by the loans and other investments contributed
in the Recapitalization Transactions, as well as approximately $663.4 million of
other loan investments newly-originated or acquired by the Company during 1999,
an additional $46.4 million funded under existing loan commitments, and
approximately $26.8 million in operating lease income generated from net lease
assets acquired in the TriNet acquisition. The increase was partially offset by
principal repayments of approximately $561.9 million made to the Company during
fiscal year 1999. Included in other income for fiscal year 1999 is a fee
associated with the repayment of a construction loan of
23
approximately $1.9 million, yield maintenance payments of approximately
$8.1 million resulting from the repayment of three loans, and approximately
$1.0 million in additional revenue from certain cash flow participation features
on five of the Company's loan investments.
The Company's total costs and expenses during fiscal 1999 increased by
approximately $157.7 million compared to fiscal 1998. These increases were
generally the result of the increased scope of the Company's operations as a
result of the Recapitalization Transactions, costs associated with additional
lending operations, the TriNet acquisition and the acquisition of the Company's
external advisor.
The Company's interest expense increased by $46.5 million as a result of
higher interest rates and higher average borrowings by the Company on its credit
facilities and other term loans, the proceeds of which were used to fund
additional loan origination and acquisition activities. Further, interest
expense includes interest incurred by the Leasing Subsidiary subsequent to its
acquisition.
Property operating costs represent unreimbursed property operating expenses
incurred by the Leasing Subsidiary subsequent to its acquisition. All costs of
this kind were borne directly by the tenant on the Company's pre-existing credit
tenant leasing portfolio.
Depreciation and amortization increased as a result of a full year's
depreciation on the Company's pre-existing credit tenant leasing portfolio,
which it acquired in the Recapitalization Transactions, as well as depreciation
on the Leasing Subsidiary's net leased assets subsequent to its acquisition.
General and administrative costs increased by approximately $3.7 million as
a result of additional costs incurred subsequent to the acquisition of the
Company's external advisor, as well as additional administrative expenses
associated with the Leasing Subsidiary subsequent to its acquisition.
Base advisory fees increased by approximately $5.3 million as a result of
fees being incurred from June 16, 1999 through year end in the prior year and
through November 4, 1999 in fiscal 1999. Further, as a result of the Company's
expanded operations, incentive fees paid under the prior advisory contract
increased from $2.3 million in 1998 to $5.4 million in 1999. Subsequent to the
acquisition of the Company's external advisor, the Company is now
internally-managed and no further advisory fees will be incurred.
The Company's charge for provision for possible credit losses increased by
approximately $2.0 million as a result of expanded lending operations as well as
additional seasoning of the Company's existing lending portfolio. As more fully
discussed in Note 5 to the Company's Consolidated Financial Statements, the
Company has not realized any actual losses on any of its loan investments to
date.
Stock compensation expense declined by approximately $5.6 million as a
result of the non-recurring charge relating to the original grant of stock
options to the Company's external advisor in fiscal 1998 concurrently with the
consummation of the Recapitalization Transactions.
Finally, as more fully discussed in Note 4 to the Company's Consolidated
Financial Statements, included in fiscal 1999 costs and expenses is a
non-recurring charge of approximately $94.5 million relating to the acquisition
of the Company's external advisor.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During fiscal year 1998, total revenue increased by approximately
$126.2 million over total revenue for fiscal year 1997. This increase is a
result of the interest generated by the loans and other investments contributed
in the Recapitalization Transactions, as well as approximately $1.0 billion of
other loan investments newly-originated or acquired by the Company during 1998,
and an additional $16.5 million funded under existing loan commitments. The
increase was partially offset by principal repayments of approximately
$103.9 million made to the Company during fiscal year 1998. Included in other
income for fiscal year 1998 are fees associated with the repayment of two first
mortgage loans aggregating approximately $1.2 million, a gain of approximately
$0.9 million resulting from the repayment of a $2.8 million loan participation
which had been acquired at a discount, and approximately $0.6 million in
additional
24
revenue from certain cash flow participation features on two of the Company's
loan investments. In 1997, a gain of approximately $1.0 million was recognized
in other income on the early repayment of a loan acquired at a discount.
The increase in the Company's total costs and expenses during fiscal year
1998 compared to fiscal year 1997 is primarily due to increased interest expense
on the Company's borrowings used to fund its asset growth as well as the expense
associated with the issuance to the Advisor of options to acquire approximately
2.5 million of the Company's class A shares (see Note 11 to the Company's
Consolidated Financial Statements). Additionally, general and administrative
costs associated with the implementation of the Company's business plan and
advisory fee expenses increased the Company's total costs and expenses during
fiscal 1998.
The Company believes that because of the significant expansion of the scope
of its operations following the Recapitalization Transactions which occurred on
March 18, 1998, prior periods are not necessarily indicative of the Company's
future operating results or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to fund its investment origination and
acquisition activities and operating expenses. 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.
As a result of the Recapitalization Transactions, the Lazard Transaction,
the TriNet acquisition, the acquisition of the Company's external advisor, and
other transactions completed by the Company, the Company has significant access
to capital resources to fund its existing business plan, which includes the
expansion of its real estate lending and credit tenant leasing businesses.
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 restrict
the Company's ability to retain earnings and thereby replenish capital committed
to its operations. However, the Company believes that its significant capital
resources and access to financing will provide it with financial flexibility and
market responsiveness at levels sufficient to meet current and anticipated
capital requirements, including expected new lending and leasing transactions.
The Company's ability to meet its long-term (i.e., beyond one year)
liquidity requirements is subject to the renewal of its credit lines and/or
obtaining other sources of financing, including issuing additional debt or
equity from time to time. Any decision by the Company's lenders and investors to
enter into such transactions with the Company will depend upon a number of
factors, such as compliance with the terms of its existing credit arrangements,
the Company's financial performance, industry or market trends, the general
availability of and rates applicable to financing transactions, such lenders'
and investors' resources and policies concerning the terms under which they make
such capital commitments and the relative attractiveness of alternative
investment or lending opportunities.
Based on its monthly interest and other expenses, monthly cash receipts,
existing investment commitments and funding plans, the Company believes that its
existing sources of funds will be adequate to purposes of meeting its short- and
long-term liquidity needs. Material increases in monthly interest expense or
material decreases in monthly cash receipts would negatively impact the
Company's liquidity. On the other hand, material decreases in monthly interest
expense would positively affect the Company's liquidity.
As more fully discussed in Note 7 to the Company's consolidated financial
statements, at December 31, 1999, the Company had existing fixed-rate borrowings
of approximately $153.6 million secured by real estate under operating leases
which mature in 2009, an aggregate of approximately $254.3 million in
LIBOR-based, variable-rate loans secured by various senior and subordinate
mortgage investments which
25
mature in fiscal 2000, fixed-rate corporate debt obligations aggregating
approximately $353.6 million which mature between 2001 and 2017, and other
variable- and fixed-rate secured debt obligations aggregating approximately
$151.6 million which mature at various dates through 2010.
In addition, the Company has entered into LIBOR-based secured revolving
credit facilities of $675.0 and $500.0 million which expire in fiscal 2001 and
2000 respectively. (Subsequent to December 31, 1999, the Company extended the
maturity of its $500.0 million facility to 2002). As of December 31, 1999, the
Company had drawn approximately $593.0 million and $170.0 million under these
facilities. Availability under these facilities is based on collateral provided
under a borrowing base calculation. In addition, the Leasing Subsidiary has an
agreement with a group of 13 banks led by Bank of America, N.A. which provides
it with a $350.0 million unsecured revolving credit facility. This facility
matures on May 31, 2001 and has a one-year extension period at the Company's
option. Interest incurred on the facility is LIBOR-based with a margin dependent
on the Company's credit ratings. Facility fees under the credit facility are
also tied to its credit ratings. All of the available commitment under the
facility may be borrowed for general corporate and working capital needs of the
Leasing Subsidiary, as well as for investments. Under the terms of this
facility, the Leasing Subsidiary is generally permitted to make cash
distributions to the Company in an amount equal to 85% of cash flow from
operations in any rolling four-quarter period. The facility requires
interest-only payments until maturity, at which time outstanding borrowings are
due and payable. As of December 31, 1999, the Company had $186.7 million drawn
and $163.3 million available under this facility.
The Company has entered into LIBOR interest rate caps struck at 9.00%, 7.50%
and 7.50% in notional amounts of $300.0 million, $40.4 million and
$38.3 million, respectively, which expire in March 2001, January 2001 and June
2001, respectively. At December 31, 1999, the fair value appreciation of the
Company's interest rate caps was $2.2 million.
The Company has originated or acquired certain assets using proceeds from
LIBOR-based borrowings. In connection with such borrowings, the Company entered
into approximately $205.2 million of interest rate swaps to effectively fix the
interest rate on such obligations. In addition, in connection with the TriNet
acquisition, the Company acquired an interest rate swap which, together with
certain existing interest rate cap agreements, effectively fix the interest rate
on $75.0 million of the Leasing Subsidiary's LIBOR-based borrowings at 5.58%
plus the applicable margin through December 1, 2004. Management expects that it
will have aggregate LIBOR based borrowings at the Leasing Subsidiary in excess
of the notional amount for the duration of the swap. The actual borrowing cost
to the Company with respect to indebtedness covered by the swap will depend upon
the applicable margin over LIBOR for such indebtedness, which will be determined
by the terms of the relevant debt instruments. At December 31, 1999, the fair
value appreciation of the Company's interest rate swaps was $3.4 million.
The Company is currently pursuing or has consummated certain anticipated
long-term fixed-rate borrowings and had entered into certain derivative
instruments based on U.S. Treasury securities to hedge the potential effects of
interest rate movements on these transactions. Under these agreements, the
Company would generally receive additional cash flow at settlement if interest
rates rise and pay cash if interest rates fall. The effects of such receipts or
payments will be deferred and amortized over the term of the specific related
fixed-rate borrowings. During the year ended December 31, 1999, the Company
settled an aggregate notional amount of approximately $63.0 million that was
outstanding under such agreements, resulting in a receipt of approximately
$0.6 million to be amortized over the term of the anticipated borrowing.
During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented one of the forecasted transactions for which the Company
had previously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the
26
settlement of such hedges has been deferred and will be amortized as an increase
to the effective financing costs of the new term loan over its 10-year term.
In the event that, in the opinion of management, it is no longer probable
that the remaining forecasted transactions will occur under terms substantially
equivalent to those projected, the Company will cease recognizing such
transactions as hedges and immediately recognize related gains or losses based
on actual settlement or estimated settlement value. No such gains or losses have
been recognized by the company.
STOCK REPURCHASE PROGRAM: The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets and excess cash
flow from operations, but also using borrowings under its credit facilities if
the Company determines that it is advantageous to do so. As of December 31,
1999, the Company had repurchased approximately 2.3 million shares, at an
aggregate cost of approximately $40.4 million.
YEAR 2000
The statements in the following section include Year 2000 readiness
disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act. The Company intends such statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Reform Act of 1995, and is including this statement for purposes of
complying with these safe harbor provisions. Forward-looking statements, which
are based on certain assumptions and describe future plans, strategies and
expectations of the Company are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Although the Company
believes that the expectations reflected in such forward-looking statements are
based on reasonable assumptions, the Company's actual costs progress and
expenses with respect to its plan to address Year 2000 issues could differ
materially from those set forth in the forward-looking statements. Factors which
could have a material adverse effect on the Company's results and progress
include, but are not limited to , changes in the expense of or delays, in: the
identification and upgrade or replacement by the Company of computer systems
that do not relate to information technology but include embedded technology;
and the Year 2000 compliance of vendors (including vendors of the Company's
computer information systems) or third-party service providers (including the
Company's primary bank and payroll processor). These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
The term "Year 2000 issue" is a general term used to describe various
problems that may result from the improper processing by computer systems of
dates after 1999. These problems could results in a system failure or
miscalculations causing disruptions of operations. The term "Year 2000
compliant" is used in this discussion to mean that the system or device in
question will perform its essential functions in the Year 2000 without
significant operational problems.
PARENT: The Company implemented a plan in 1999 to assess, test and correct,
to the extent necessary, potential Year 2000 issues. Additionally, the Company
assessed the potential impacts from outside parties and developed contingency
plans for business interruptions after the date rollover. The costs involved in
performing this internally managed plan were not significant to the Company's
financial position or results of operations in 1998 and 1999. Since January 1,
2000, the Company has not experienced any material adverse impacts due to the
Year 2000 issue. While the primary risk to the Company with respect to the Year
2000 issue continues to be the inability of external parties to provide services
in a timely and accurate manner, to date, the Company is not aware of any such
disruption. As a result, the Company does not expect any remaining Year 2000
risk to have a material adverse impact to the Company.
27
LEASING SUBSIDIARY: The Leasing Subsidiary recognized that the Year 2000
may result in risk and implemented a plan in 1998 to prepare for potential Year
2000 issues. The Leasing Subsidiary's efforts to address potential Year 2000
issues were focused in the following four areas: (i) reviewing and taking any
necessary steps to correct the Leasing Subsidiary's computer information systems
(i.e., software applications and hardware platforms); (ii) evaluating and making
any necessary modifications to other computer systems that do not relate to
information technology but include embedded technology at its properties, such
as security, heating, ventilation, and air conditioning, elevator, fire and
safety systems; (iii) communicating with certain significant third-party service
providers to determine whether there will be any interruption in their systems
that could affect the Leasing Subsidiary; and (iv) developing contingency plans
for business interruptions after the date rollover. The Leasing Subsidiary's
Year 2000 compliance program is substantially complete.
The cost involved in performing this internally managed plan were not
significant to the Leasing Subsidiary's financial position or results of
operations. The Leasing Subsidiary expects that a substantial portion of these
costs will be passed back to tenants through recoveries of operating expense and
that the remaining costs of addressing the Year 2000 issues will be funded
through operating cash flows.
Since the date rollover on January 1, 2000, the Leasing Subsidiary has not
experienced any material adverse impact due to the Year 2000 issue. While the
primary risk to the Leasing Subsidiary, with respect to the Year 2000 issue, is
the ability of certain third party service providers to continue to provide
services in a timely and accurate manner, to date, the Leasing Subsidiary is not
aware of any such disruption. While the Leasing Subsidiary's efforts to address
its Year 2000 issues may involve additional costs, the Leasing Subsidiary
believes, based on available information, that these costs will not have a
material adverse effect on its business, financial condition or results of
operations.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131") effective for
financial statements issued for periods beginning after December 15, 1997. SFAS
No. 131 requires disclosures about segments of an enterprise and related
information regarding the different types of business activities in which an
enterprise engages and the different economic environments in which it operates.
The Company adopted the requirements of this pronouncement in its financial
statements beginning with its reporting for fiscal 1999. As of December 31,
1999, the Company is currently segmented between its lending and credit tenant
lease businesses.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). On June 23, 1999 the FASB voted to defer the effectiveness of
SFAS 133 for one year. SFAS 133 is now effective for fiscal years beginning
after June 15, 2000, but earlier application is permitted as of the beginning of
any fiscal quarter subsequent to June 15, 1998. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as: (i) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment; (ii) a hedge of the exposure to variable cash flows of a forecasted
transaction; or (iii) in certain circumstances a hedge of a foreign currency
exposure. The Company currently plans to adopt this pronouncement as required
effective January 1, 2001. The adoption of SFAS 133 is not expected to have a
material financial impact on the financial position or results of operations of
the Company.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. In
pursuing its business plan, the primary market risk to which the Company is
exposed is interest rate risk. Consistent with its election to qualify as a
REIT, the Company has implemented an interest rate risk management policy based
on match funding, with the objective that floating-rate assets be primarily
financed by floating-rate liabilities and fixed-rate assets be primarily
financed by fixed-rate liabilities.
The Company's operating results will depend in part on the difference
between the interest and related income earned on its assets and the interest
expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of real estate financing may lead to a decrease
in the interest rate earned on the Company's interest-bearing assets, which the
Company may not be able to offset by obtaining lower interest costs on its
borrowings. Changes in the general level of interest rates prevailing in the
financial markets may affect the spread between the Company's interest-earning
assets and interest-bearing liabilities. Any significant compression of the
spreads between interest-earning assets and interest-bearing liabilities could
have a material adverse effect on the Company. In addition, an increase in
interest rates could, among other things, reduce the value of the Company's
interest-bearing assets and its ability to realize gains from the sale of such
assets, and a decrease in interest rates could reduce the average life of the
Company's interest-earning assets.
A substantial portion of the Company's loan investments are subject to
significant prepayment protection in the form of lock-outs, yield maintenance
provisions or other prepayment premiums which provide substantial yield
protection to the Company. Those assets generally not subject to prepayment
penalties include: (i) variable-rate loans based on LIBOR, originated or
acquired at par, which would not result in any gain or loss upon repayment; and
(ii) discount loans and loan participations acquired at discounts to face
values, which would result in gains upon repayment. Further, while the Company
generally seeks to enter into loan investments which provide for substantial
prepayment protection, in the event of declining interest rates, the Company
could receive such prepayments and may not be able to reinvest such proceeds at
favorable returns. Such prepayments could have an adverse effect on the spreads
between interest-earning assets and interest-bearing liabilities.
While the Company has not experienced any significant credit losses, in the
event of a significant rising interest rate environment and/or economic
downturn, defaults could increase and result in credit losses to the Company
which adversely affect its liquidity and operating results. Further, such
delinquencies or defaults could have an adverse effect on the spreads between
interest-earning assets and interest-bearing liabilities.
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
conditions, and other factors beyond the control of the Company. As more fully
discussed in Note 9 to the Company's Consolidated Financial Statements, the
Company employs match funding-based hedging strategies to limit the effects of
changes in interest rates on its operations, including engaging in interest rate
caps, floors, swaps, futures and other interest rate-related derivative
contracts. These strategies are specifically designed to reduce the Company's
exposure, on specific transactions or on a portfolio basis, to changes in cash
flows as a result of interest rate movements in the market. The Company does not
enter into derivative contracts for speculative purposes nor as a hedge against
changes in credit risk of its borrowers or of the Company itself.
Each interest rate cap or floor agreement is a legal contract between the
Company and a third party (the "counterparty"). When the Company purchases a cap
or floor contract, the Company makes an up-front payment to the counterparty and
the counterparty agrees to make payments to the Company in the future should the
reference rate (typically one- or three-month LIBOR) rise above (cap agreements)
29
or fall below (floor agreements) the "strike" rate specified in the contract.
Each contract has a notional face amount. Should the reference rate rise above
the contractual strike rate in a cap, the Company will earn cap income. Should
the reference rate fall below the contractual strike rate in a floor, the
Company will earn floor income. Payments on an annualized basis will equal the
contractual notional face amount multiplied by the difference between actual
reference rate and the contracted strike rate. The cost of the up-front payment
is amortized over the term of the contract.
Interest rate swaps are agreements in which a series of interest rate flows
are exchanged over a prescribed period. The notional amount on which swaps are
based is not exchanged. In general, the Company's swaps are "pay fixed" swaps
involving the exchange of floating-rate interest payments from the counterparty
for fixed interest payments from the Company.
Interest rate futures are contracts, generally settled in cash, in which the
seller agrees to deliver on a specified future date the cash equivalent of the
difference between the specified price or yield indicated in the contract and
the value of that of the specified instrument (e.g., U.S. Treasury securities)
upon settlement. The Company generally uses such instruments to hedge forecasted
fixed-rate borrowings. Under these agreements, the Company will generally
receive additional cash flow at settlement if interest rates rise and pay cash
if interest rates fall. The effects of such receipts or payments will be
deferred and amortized over the term of the specific related fixed-rate
borrowings. In the event that, in the opinion of management, it is no longer
probable that a forecasted transaction will occur under terms substantially
equivalent to those projected, the Company will cease recognizing such
transactions as hedges and immediately recognize related gains or losses based
on actual settlement or estimated settlement value. No such gains or losses have
been recognized by the Company.
While a REIT may freely utilize the types of derivative instruments
discussed above to hedge interest rate risk on its liabilities, the use of
derivatives for other purposes, including hedging asset-related risks such as
credit, prepayment or interest rate exposure on the Company's loan assets, could
generate income which is not qualified income for purposes of maintaining REIT
status. As a consequence, the Company may only engage in such instruments to
hedge such risks on a limited basis.
There can be no assurance that the Company's profitability will not be
adversely affected during any period as a result of changing interest rates. In
addition, hedging transactions using derivative instruments involve certain
additional risks such as counterparty credit risk, legal enforceability of
hedging contracts and the risk that unanticipated and significant changes in
interest rates will cause a significant loss of basis in the contract. With
regard to loss of basis in a hedging contract, indices upon which contracts are
based may be more or less variable than the indices upon which the hedged assets
or liabilities are based, thereby making the hedge less effective. The
counterparties to these contractual arrangements are major financial
institutions with which the Company and its affiliates may also have other
financial relationships. The Company is potentially exposed to credit loss in
the event of nonperformance by these counterparties. However, because of their
high credit ratings, the Company does not anticipate that any of the
counterparties will fail to meet their obligations. There can be no assurance
that the Company will be able to adequately protect against the foregoing risks
and that the Company will ultimately realize an economic benefit from any
hedging contract it enters into which exceeds the related costs incurred in
connection with engaging in such hedges.
The following table quantifies the potential changes in net investment
income and net fair value of financial instruments should interest rates
increase or decrease 200 basis points, assuming no change in the shape of the
yield curve (i.e., relative interest rates). Net investment income is calculated
as revenue from loans and other lending investments and operating leases (as of
December 31, 1999), less related interest expense and property operating costs,
for the year ended December 31, 1999, on a pro forma basis for the TriNet
acquisition. Net fair value of financial instruments is calculated as the sum of
the value of off-balance sheet instruments and the present value of cash
in-flows generated from interest-earning assets, less cash out-flows in respect
of interest-bearing liabilities as of December 31, 1999. The cash flows
30
associated with the Company's assets are calculated based on management's best
estimate of expected payments for each loan based on loan characteristics such
as loan-to-value ratio, interest rate, credit history, prepayment penalty, term
and property type. Most of the Company's loans are protected from prepayment as
a result of prepayment penalties and contractual terms which prohibit
prepayments during specified periods. However, for those loans where prepayments
are not currently precluded by contract, declines in interest rates may increase
prepayment speeds. The base interest rate scenario assumes interest rates as of
December 31, 1999. Actual results could differ significantly from those
estimated in the table.
ESTIMATED PERCENTAGE CHANGE IN
PRO FORMA
NET INVESTMENT NET FAIR VALUE OF
CHANGE IN INTEREST RATES INCOME FINANCIAL INSTRUMENTS (1)
- ------------------------ -------------- -------------------------
- -200 Basis Points 2.17% 7.80%
- -100 Basis Points 1.08% 4.00%
Base Interest Rate 0.0% 0.0%
+100 Basis Points (1.08%) (3.90%)
+200 Basis Points (1.97%) (7.20%)
EXPLANATORY NOTE:
- ------------------------------
(1) Amounts exclude fair values of non-financial investments, primarily assets
under long-term operating leases and preferred limited partnership
interests.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Financial Statements
PAGE
--------
Financial Statements:
Report of Independent Accountants......................... 33
Consolidated Balance Sheets at December 31, 1999 and
1998.................................................... 34
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1999....... 35
Consolidated Statement of Changes in Shareholders' Equity
for each of the three years in the period ended December
31, 1999................................................ 36
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1999....... 37
Notes to Consolidated Financial Statements................ 38
Financial Statement Schedules:
For the period ended December 31, 1999:
Schedule II--Valuation and Qualifying Accounts and
Reserves................................................ 66
Schedule III--Real Estate and Accumulated Depreciation.... 67
Schedule IV--Mortgage Loans on Real Estate................ 80
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
Financial statements of nine owned companies or joint ventures accounted for
under the equity method have been omitted because the Company's proportionate
share of the income from continuing operations before income taxes is less than
20% of the respective consolidated amount and the investments in and advances to
each company are less than 20% of consolidated total assets.
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Starwood Financial Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Starwood Financial Inc. and its subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, NY
March 6, 2000
33
STARWOOD FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31,
-----------------------
1999 1998*
---------- ----------
ASSETS
Loans and other lending investments, net.................... $2,003,506 $1,823,761
Real estate subject to operating leases, net................ 1,714,284 189,942
Cash and cash equivalents................................... 34,408 10,110
Restricted cash............................................. 10,195 5,699
Marketable securities....................................... 4,344 5,406
Accrued interest and rent receivable........................ 17,358 13,122
Deferred expenses and other assets.......................... 29,074 11,054
Investment in Starwood Operating, Inc....................... 383 522
---------- ----------
Total assets.............................................. $3,813,552 $2,059,616
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities.... $ 54,773 $ 10,536
Dividends payable........................................... 53,667 22,633
Debt obligations............................................ 1,901,204 1,055,719
---------- ----------
Total liabilities......................................... 2,009,644 1,088,888
---------- ----------
Commitments and contingencies............................... -- --
Minority interests in consolidated entities................. 2,565 --
Shareholders' equity:
Series A Preferred Stock, $0.001 and $0.01 par value at
December 31, 1999 and 1998, respectively, liquidation
preference $50.00 per share, 4,400,000 shares authorized
and outstanding at December 31, 1999 and December 31,
1998, respectively........................................ 4 44
Series B Preferred Stock, $0.001 par value at December 31,
1999, liquidation preference $50,000, 2,000,000 shares
issued and outstanding at December 31, 1999............... 2 --
Series C Preferred Stock, $0.001 par value at December 31,
1999, liquidation preference $32,500, 1,300,000 shares
issued and outstanding at December 31, 1999............... 1 --
Series D Preferred Stock, $0.001 par value at December 31,
1999, liquidation preference $100,000, 4,000,000 shares
issued and outstanding at December 31, 1999............... 4 --
Common Stock, $0.001 par value at December 31, 1999,
200,000,000 shares authorized, 84,985,392 shares issued
and outstanding at December 31, 1999...................... 85 --
Class A shares $1.00 par value, 70,000,000 shares
authorized, 52,407,718 shares issued and outstanding at
December 31, 1998, none authorized at December 31, 1999... -- 52,408
Class B shares, $0.01 par value, 35,000,000
shares authorized, 26,203,859 shares issued and
outstanding at December 31, 1998, none authorized at
December 31, 1999......................................... -- 262
Warrants and options........................................ 17,935 18,904
Accumulated other comprehensive income (losses)............. (229) (23)
Additional paid in capital.................................. 1,953,972 901,592
Retained earnings (deficit)................................. (129,992) (2,459)
Treasury stock (at cost).................................... (40,439) --
---------- ----------
Total shareholders' equity................................ 1,801,343 970,728
---------- ----------
Total liabilities and shareholders' equity................ $3,813,552 $2,059,616
========== ==========
EXPLANATORY NOTE:
- --------------------------
* RECLASSIFIED TO CONFORM TO 1999 PRESENTATION
The accompanying notes are an integral part of the financial statements.
34
STARWOOD FINANCIAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998* 1997*
--------- --------- ---------
REVENUE:
Interest income........................................... $209,848 $112,914 $ 896
Operating lease income.................................... 42,186 12,378 --
Other income.............................................. 12,763 2,804 991
-------- -------- -------
Total revenue........................................... 264,797 128,096 1,887
-------- -------- -------
COSTS AND EXPENSES:
Interest expense.......................................... 91,184 44,697 --
Property operating costs.................................. 2,246 -- --
Depreciation and amortization............................. 10,340 4,287 --
General and administrative................................ 6,269 2,583 461
Advisory fees............................................. 16,193 7,837 --
Provision for possible credit losses...................... 4,750 2,750 --
Stock option compensation expense......................... 412 5,985 --
Costs incurred in acquiring external advisor.............. 94,476 -- --
-------- -------- -------
Total costs and expenses................................ 225,870 68,139 461
-------- -------- -------
Income before minority interest............................. 38,927 59,957 1,426
Minority interest........................................... (41) (54) (1,415)
-------- -------- -------
Net income.................................................. $ 38,886 $ 59,903 $ 11
======== ======== =======
Preferred dividend requirements............................. $(23,843) $ (944) $ --
======== ======== =======
Net income allocable to common shareholders................. $ 15,043 $ 58,959 $ 11
======== ======== =======
Basic earnings per common share(1)(2)....................... $ 0.25 $ 1.40 $ 0.01
======== ======== =======
Diluted earnings per common share(1)(2)..................... $ 0.25 $ 1.36 $ 0.00
======== ======== =======
EXPLANATORY NOTES:
- ------------------------
* RECLASSIFIED TO CONFORM TO 1999 PRESENTATION.
(1) Net income per basic common share excludes 1% of net income allocable to the
Company's class B shares prior to November 4, 1999. These shares were
exchanged for Common Stock in connection with the TriNet acquisition and
related transactions on November 4, 1999. As a result, the Company now has a
single class of Common Stock outstanding.
(2) As adjusted for one-for-six reverse stock split effective June 19, 1998.
The accompanying notes are an integral part of the financial statements.
35
STARWOOD FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON SHARES
SERIES A SERIES B SERIES C SERIES D COMMON AT PAR
PREFERRED PREFERRED PREFERRED PREFERRED STOCK --------------------
STOCK STOCK STOCK STOCK AT PAR CLASS A CLASS B
--------- --------- --------- --------- -------- --------- --------
Balance at January 1, 1997*............ -- -- -- -- -- $ 2,550 $ 13
Exercise of warrants................... -- -- -- -- -- 5,000 25
Net unrealized losses.................. -- -- -- -- -- -- --
Net income of the period............... -- -- -- -- -- -- --
---- ---- ---- ---- ---- --------- -------
Balance at December 31, 1997........... -- -- -- -- -- 7,550 38
Recapitalization Transactions.......... -- -- -- -- -- 306,796 1,534
Issuance of options to Advisor......... -- -- -- -- -- -- --
Effects of reorganization (1).......... -- -- -- -- -- (261,956) (1,310)
Exercise of options.................... -- -- -- -- -- 18 --
Issuance of Preferred Shares and
Warrants............................. 44 -- -- -- -- -- --
Dividends declared-preferred........... -- -- -- -- -- -- --
Dividends declared-common.............. -- -- -- -- -- -- --
Net income for the period.............. -- -- -- -- -- -- --
Change in net unrealized gains (losses)
on investments....................... -- -- -- -- -- -- --
---- ---- ---- ---- ---- --------- -------
Balance at December 31, 1998*.......... $ 44 -- -- -- -- 52,408 262
Exercise of options.................... -- -- -- -- -- 63 --
Dividends declared-preferred........... -- -- -- -- -- -- --
Dividends declared-common.............. -- -- -- -- -- -- --
Effects of Incorporation Merger........ (40) -- -- -- 53 (52,471) (262)
Acquisition of TriNet.................. -- 2 1 4 29 -- --
Issuance of shares of Common Stock
through conversion of joint venture
partners interest.................... -- -- -- -- -- -- --
Advisor transaction.................... -- -- -- -- 4 -- --
Special stock dividend................. -- -- -- -- 1 -- --
Purchase of treasury stock............. -- -- -- -- (2) -- --
Net income for the period.............. -- -- -- -- -- -- --
Change in accumulated other
comprehensive income................. -- -- -- -- -- -- --
---- ---- ---- ---- ---- --------- -------
Balance at December 31, 1999........... $ 4 $ 2 $ 1 $ 4 $ 85 $ -- $ --
==== ==== ==== ==== ==== ========= =======
ACCUMULATED
WARRANTS ADDITIONAL RETAINED OTHER
AND PAID-IN EARNINGS COMPREHENSIVE TREASURY
OPTIONS CAPITAL (DEFICIT) INCOME STOCK TOTAL
--------- ---------- --------- -------------- -------- ----------
Balance at January 1, 1997*............ $ 101 -- $ (1,086) -- -- $ 1,578
Exercise of warrants................... (101) -- -- -- -- 4,924
Net unrealized losses.................. -- -- -- (162) -- (162)
Net income of the period............... -- -- 11 -- -- 11
------- ---------- --------- ----- -------- ----------
Balance at December 31, 1997........... -- -- (1,075) (162) -- 6,351
Recapitalization Transactions.......... -- 432,084 -- -- -- 740,414
Issuance of options to Advisor......... 5,985 -- -- -- -- 5,985
Effects of reorganization (1).......... -- 262,786 -- -- -- (480)
Exercise of options.................... (270) 537 -- -- -- 285
Issuance of Preferred Shares and
Warrants............................. 13,189 206,170 -- -- -- 219,403
Dividends declared-preferred........... -- 15 (944) -- -- (929)
Dividends declared-common.............. -- -- (60,343) -- -- (60,343)
Net income for the period.............. -- -- 59,903 -- -- 59,903
Change in net unrealized gains (losses)
on investments....................... -- -- -- 139 -- 139
------- ---------- --------- ----- -------- ----------
Balance at December 31, 1998*.......... 18,904 901,592 (2,459) (23) -- 970,728
Exercise of options.................... (969) 1,853 -- -- -- 947
Dividends declared-preferred........... -- 330 (25,149) -- -- (24,819)
Dividends declared-common.............. -- -- (116,813) -- -- (116,813)
Effects of Incorporation Merger........ -- 52,720 -- -- -- --
Acquisition of TriNet.................. -- 868,933 -- -- -- 868,969
Issuance of shares of Common Stock
through conversion of joint venture
partners interest.................... -- 6,226 -- -- -- 6,226
Advisor transaction.................... -- 97,862 -- -- -- 97,866
Special stock dividend................. -- 24,456 (24,457) -- -- --
Purchase of treasury stock............. -- -- -- -- (40,439) (40,441)
Net income for the period.............. -- -- 38,886 -- -- 38,886
Change in accumulated other
comprehensive income................. -- -- -- (206) -- (206)
------- ---------- --------- ----- -------- ----------
Balance at December 31, 1999........... $17,935 $1,953,972 $(129,992) $(229) $(40,439) $1,801,343
======= ========== ========= ===== ======== ==========
EXPLANATORY NOTE:
- ------------------------------
* RECLASSIFIED TO CONFORM TO 1999 PRESENTATION.
(1) As adjusted for one-for-six reverse stock split effective June 19, 1998.
The accompanying notes are an integral part of the financial statements.
36
STARWOOD FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998* 1997*
--------- ----------- --------
Cash flows from operating activities:
Net income.................................................. $ 38,886 $ 59,903 $ 11
Adjustments to reconcile net income to cash flows provided
by operating activities:
Minority interest......................................... 41 54 1,415
Non-cash expense for options issued to Advisor............ 412 5,985 --
Non-cash expense for Advisor Transaction.................. 94,476 -- --
Equity in earnings of unconsolidated joint ventures and
subsidiaries............................................ (234) (96) --
Depreciation and amortization............................. 15,932 7,662 --
Amortization of discounts/premiums and deferred
interest................................................ (25,493) (17,750) --
Distributions from operating joint venture................ 470 -- --
Straight-line rent adjustments............................ (1,597) -- --
Realized gain on securities............................... (11) -- --
Provision for possible credit losses...................... 4,750 2,750 --
Changes in assets and liabilities:
Increase (decrease) in restricted cash.................. 2,924 (5,699) --
(Increase) decrease in accrued interest and rent
receivable............................................ (3,089) (5,613) 4
Decrease in deferred expenses and other assets.......... (1,212) (902) (1,895)
Increase in accounts payable, accrued expenses and other
liabilities........................................... (3,706) 8,621 1,736
--------- ----------- --------
Cash flows provided by operating activities............... 122,549 54,915 1,271
--------- ----------- --------
Cash flows from investing activities:
Net cash outflow for the Recapitalization Transactions (Note
3)........................................................ -- (334,964) --
Net cash outflow for TriNet acquisition (Note 3)............ (23,723) -- --
New loan or investment originations/acquisitions............ (640,757) (975,670) (31,346)
Principal fundings on existing loan commitments............. (45,916) (16,500) --
Investment in Starwood Operating, Inc....................... -- (426) --
Proceeds from sale of investment securities................. -- -- 21,546
Repayments of and principal collections from loans and other
investments............................................... 520,768 103,926 3,787
Net investments (in) and advances to unconsolidated joint
ventures.................................................. 46,988 (47,675) --
Other capital expenditures.................................. (1,271) -- --
--------- ----------- --------
Cash flows used in investing activities................... (143,911) (1,271,309) (6,013)
--------- ----------- --------
Cash flows from financing activities:
Net borrowings under revolving credit facilities............ 168,592 640,945 --
Net borrowings under term loans............................. 39,234 368,683 --
Borrowings under repurchase agreements...................... (7,331) 46,091 --
Mortgage note repayments.................................... (150) -- --
Dividends paid.............................................. (110,600) (38,638) --
Payment for deferred financing costs........................ (4,593) (11,615) --
Proceeds from issuance of class B shares.................... -- 1,534 --
Costs incurred in reorganization............................ -- (480) --
Purchase of treasury stock.................................. (40,439) -- --
Proceeds from exercise of options........................... 947 285 --
Proceeds from issuance of preferred stock and warrants...... -- 219,403 4,924
--------- ----------- --------
Cash flows provided by financing activities............... 45,660 1,226,208 4,924
--------- ----------- --------
Increase in cash and cash equivalents....................... 24,298 9,814 182
Cash and cash equivalents at beginning of period............ 10,110 296 114
--------- ----------- --------
Cash and cash equivalents at end of period.................. $ 34,408 $ 10,110 $ 296
========= =========== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 85,835 $ 38,006 $ --
========= =========== ========
EXPLANATORY NOTE:
- ------------------------------
* RECLASSIFIED TO CONFORM TO 1999 PRESENTATION.
The accompanying notes are an integral part of the financial statements.
37
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS
ORGANIZATION--Starwood Financial Inc.(1) (the "Company") began its business
in 1993 through private investment funds (collectively, the "Starwood
Investors") formed to capitalize on inefficiencies in the real estate finance
market. In March 1998, these funds contributed their approximately $1.1 billion
of assets to the Company's predecessor, Starwood Financial Trust, in exchange
for a controlling interest in that company. Since that time, the Company has
grown by originating new lending and leasing transactions, as well as through
corporate acquisitions. Specifically, in September 1998, the Company acquired
the loan origination and servicing business of a major insurance company, and in
December 1998, the Company acquired the mortgage and mezzanine loan portfolio of
its largest private competitor. Additionally, in November 1999, the Company
acquired TriNet Corporate Realty Trust, Inc. ("TriNet"), the largest publicly
traded company specializing in the net leasing of corporate office and
industrial facilities. The TriNet acquisition was structured as a
stock-for-stock merger of TriNet with a subsidiary of the Company. Concurrent
with the TriNet acquisition, the Company also acquired its external advisor (the
"Advisor Transaction") in exchange for shares of common stock, $0.001 par value,
of the Company (the "Common Stock"), and converted its organizational form to a
Maryland corporation (the "Incorporation Merger"). As part of the conversion to
a Maryland corporation, the Company replaced its dual class common share
structure with a single class of Common Stock. The Company's Common Stock began
trading on the New York Stock Exchange under the symbol "SFI" in November 1999.
During 1993 through 1997, the Company did not qualify as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). However, pursuant to a closing agreement with the Internal Revenue
Service (the "IRS") obtained in March 1998, the Company was eligible and elected
to be taxed as a REIT for the taxable year beginning January 1, 1998.
BUSINESS--The Company believes it is the largest publicly traded finance
company in the United States focused on the commercial real estate industry. The
Company, which is taxed as a real estate investment trust, provides structured
mortgage, mezzanine and lease financing through its origination, acquisition and
servicing platform. The Company's investment strategy targets specific sectors
of the real estate credit markets in which 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: (i) focusing on the
origination of large, highly structured mortgage, mezzanine and lease financings
where customers require flexible financial solutions, and avoiding commodity
businesses in which there is significant direct competition from other providers
of capital; (ii) developing direct relationships with borrowers and corporate
tenants as opposed to sourcing transactions through intermediaries;
(iii) adding value beyond simply providing capital by offering borrowers and
corporate tenants specific lending expertise, flexibility, speed, certainty and
continuing relationships beyond the closing of a particular financing
transaction; and (iv) taking advantage of market anomalies in the real estate
financing markets when the Company believes credit is mispriced by other
providers of capital such as the spread between lease yields and the yields on
corporate tenants' underlying credit obligations.
The Company intends to continue to emphasize a mix of portfolio financing
transactions to create built-in diversification and single-asset financings for
properties with strong, long-term positioning.
EXPLANATORY NOTE:
- ------------------------------
(1) As more fully discussed in Note 4, on November 4, 1999, the Company changed
its form and became a corporation under Maryland law and changed its name
from Starwood Financial Trust to Starwood Financial Inc.
38
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BASIS OF PRESENTATION
The accompanying audited Consolidated Financial Statements have been
prepared in conformity with generally accepted accounting principles ("GAAP").
The Consolidated Financial Statements include the accounts of the Company, its
qualified REIT subsidiaries, and its majority-owned and controlled partnership.
Certain third-party mortgage servicing operations are conducted through Starwood
Operating, Inc. ("Starwood Operating"), a taxable corporation which is not
consolidated with the Company for financial reporting or income tax purposes.
The Company owns all of the preferred stock and a 95% economic interest in
Starwood Operating, which is accounted for under the equity method for financial
reporting purposes. In addition, the Company has an investment in TriNet
Management Operating Company, Inc. ("TMOC"), a taxable noncontrolled subsidiary
of the Company, which is also accounted for under the equity method. Further,
certain other investments in partnerships or joint ventures which the Company
does not control are also accounted for under the equity method. All significant
intercompany balances and transactions have been eliminated in consolidation.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LOANS AND OTHER LENDING INVESTMENTS, NET--As described in Note 5 "Loans and
Other Lending Investments," includes the following investments: senior
mortgages, subordinate mortgages, partnership loans/ unsecured notes, loan
participations and other lending investments. In general, management considers
its investments in this category as held-to-maturity and, accordingly, reflects
such items at amortized historical cost.
REAL ESTATE AND DEPRECIATION--Real estate is generally recorded at cost.
Certain improvements and replacements are capitalized when they extend the
useful life, increase capacity or improve the efficiency of the asset. Repairs
and maintenance items are expensed as incurred. The Company capitalizes interest
costs incurred during the land development or construction period on qualified
development projects including investments in joint ventures accounted for under
the equity method. Depreciation is computed using the straight line method of
cost recovery over estimated useful lives of 40.0 years for buildings, seven
years for furniture and equipment, the shorter of the remaining lease term or
expected life for tenant improvements, and the remaining life of the building
for building improvements.
Real estate assets to be disposed of are reported at the lower of their
carrying amount or fair value less cost to sell. The Company also periodically
reviews long-lived assets to be held and used for an impairment in value
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. In management's opinion, real estate assets
to be held and used are not carried at amounts in excess of their estimated
recoverable amounts.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash held in
banks or invested in money market funds with original maturity terms of less
than 90 days.
NON-CASH ACTIVITY--During the year ended December 31, 1998, the Company had
significant non-cash activity including: (i) conversion of units in APMT Limited
Partnership (shown as "minority interest" in the consolidated financial
statements) to class A shares of the Company (see Note 4); (ii) issuance of
options to Starwood Financial Advisors, L.L.C. (the "Advisor") to acquire
class A shares of the Company (see Note 11); and (iii) issuance of new class A
shares in exchange for a portion of the acquisition of loans and related
investments as part of the Recapitalization Transactions (see Note 4).
39
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cash portion of the Recapitalization Transactions is summarized as
follows (in thousands):
Acquisition of loans and other investments.................. $(1,061,006)
Acquired accrued interest and rent receivable............... (7,451)
Conversion of minority interest............................. (5,387)
Par value of class A shares issued.......................... 306,796
Additional paid in capital on class A shares issued......... 432,084
-----------
Net cash outflow for the Recapitalization Transactions...... $ (334,964)
===========
During 1999, the Company acquired TriNet (see Note 4). The following is a
summary of the effects of this transaction on the Company's consolidated
financial position (in thousands):
ACQUISITION OF
TRINET
--------------
Fair value of:
Assets acquired........................................... $(1,589,714)
Liabilities assumed....................................... 676,936
Minority interest......................................... 2,524
Stock issued.............................................. 875,195
-----------
Cash paid................................................. (35,059)
Less cash acquired........................................ 11,336
-----------
Net cash outflow for TriNet acquisition................... $ (23,723)
===========
MARKETABLE SECURITIES--The Company has certain investments in marketable
securities such as those issued by the Government National Mortgage Association
(GNMA), Federal National Mortgage Association (FNMA), and Federal Home Loan
Mortgage Corporation (FHLMC). Although the Company generally intends to hold
such investments for long-term investment purposes, it may, from time to time,
sell any of its investments in these securities as part of its management of
liquidity. Accordingly, the Company considers such investments as
"available-for-sale" and reflects such investments at fair market value with
changes in fair market value reflected as a component of shareholders equity.
REPURCHASE AGREEMENTS--The Company may enter into sales of securities or
loans under agreements to repurchase the same security or loan. The amounts
borrowed under repurchase agreements are carried on the balance sheet as part of
debt obligations at the amount advanced plus accrued interest. Interest incurred
on the repurchase agreements is reported as interest expense.
REVENUE RECOGNITION--The Company's revenue recognition policies are as
follows:
LOANS AND OTHER LENDING INVESTMENTS: The Company generally intends to hold
all of its loans and other lending investments to maturity. Accordingly, it
reflects all of these investments at amortized cost less allowance for loan
losses, acquisition premiums or discounts, deferred loan fees and undisbursed
loan funds. The Company may acquire loans at either premiums or discounts based
on the credit characteristics of such loans. These premiums or discounts are
recognized as yield adjustments over the lives of the related loans. If loans
that were acquired at a premium or discount are prepaid, the Company immediately
40
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognizes the unamortized premium or discount as a decrease or increase in the
prepayment gain or loss, respectively. Loan origination or exit fees, as well as
direct loan origination costs, are also deferred and recognized over the lives
of the related loans as a yield adjustment. Interest income is recognized using
the effective interest method applied on a loan-by-loan basis.
Certain of the Company's loans provide for accrual of interest at specified
rates which differ from current payment terms. Interest is recognized on such
loans at the accrual rate subject to management's determination that accrued
interest and outstanding principal are ultimately collectible, based on the
underlying collateral and operations of the borrower.
Prepayment penalties or yield maintenance payments from borrowers are
recognized as additional income when received. Certain of the Company's loan
investments provide for additional interest based on the borrower's operating
cash flow or appreciation of the underlying collateral. Such amounts are
considered contingent interest and are reflected as income only upon certainty
of collection.
LEASING INVESTMENTS: Operating lease revenue is recognized on the
straight-line method of accounting from the later of the date of the origination
of the lease or the date of acquisition of the facility subject to existing
leases. Accordingly, contractual lease payment increases are recognized evenly
over the term of the lease. The difference between lease revenue recognized
under this method and actual cash receipts is recorded as a deferred rent
receivable on the balance sheet.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's accounting policies
require that an allowance for estimated credit losses be maintained at a level
that management, based upon an evaluation of known and inherent risks in the
portfolio, considers adequate to provide for possible credit losses. Specific
valuation allowances are established for impaired loans in the amount by which
the carrying value, before allowance for estimated losses, exceeds the fair
value of collateral less disposition costs on an individual loan basis.
Management considers a loan to be impaired when, based upon current information
and events, it believes that it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
on a timely basis. Management measures these impaired loans at the fair value of
the loans' underlying collateral less estimated disposition costs. Impaired
loans may be left on accrual status during the period the Company is pursuing
repayment of the loan, however, these loans are placed on non-accrual status at
such time that the loans either: (i) become 90 days delinquent; or
(ii) management determines the borrower is incapable of, or has ceased efforts
toward, curing the cause of the impairment. While on non-accrual status,
interest income is recognized only upon actual receipt. Impairment losses are
recognized as direct write-downs of the related loan with a corresponding charge
to the provision for possible credit losses. Charge-offs occur when loans, or a
portion thereof, are considered uncollectible and of such little value that
further pursuit of collection is not warranted. Management's periodic evaluation
of the allowance for possible credit losses is based upon an analysis of the
portfolio, historical and industry loss experience, economic conditions and
trends, collateral values and quality and other relevant factors.
INCOME TAXES--The Company did not qualify as a REIT from 1993 through 1997;
however, it did not incur any material tax liabilities as a result of its
operations. See Note 10 to the consolidated financial statements for more
information.
As confirmed in a closing agreement with the IRS obtained in March 1998, the
Company was eligible and elected to be taxed as a REIT for its tax year
beginning January 1, 1998. As a REIT, the Company will be subject to federal
income taxation at corporate rates on its REIT taxable income; however, the
41
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company is allowed a deduction for the amount of dividends paid to its
stockholders, thereby subjecting the distributed net income of the Company to
taxation at the shareholder level only. Starwood Operating and TMOC are not
consolidated for federal income tax purposes and are taxed as corporations. For
financial reporting purposes, current and deferred taxes are provided for in the
portion of earnings recognized by the Company with respect to its interest in
Starwood Operating and TMOC.
NET INCOME ALLOCABLE TO COMMON SHARES--Net income allocable to common shares
excludes 1% of net income allocable to the class B shares prior to November 4,
1999. The class A and class B shares were exchanged for Common Stock in
connection with the TriNet acquisition, as more fully described in Note 4.
EARNINGS (LOSS) PER COMMON SHARES--In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128") effective for periods
ending after December 15, 1997. SFAS No. 128 simplifies the standard for
computing earnings per share and makes them comparable with international
earnings per share standards. The statement replaces primary earnings per share
with basic earnings per share ("Basic EPS") and fully-diluted earnings per share
with diluted earnings per share ("Diluted EPS").
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS--In June 1997, the FASB issued Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131") effective for financial statements issued for periods beginning after
December 15, 1997. SFAS No. 131 requires disclosures about segments of an
enterprise and related information regarding the different types of business
activities in which an enterprise engages and the different economic
environments in which it operates. The Company adopted the requirements of this
pronouncement in its financial statements beginning with its reporting for
fiscal 1999. As of December 31, 1999, the Company is currently segmented between
its lending and credit tenant lease businesses.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). On June 23, 1999 the FASB voted to defer the effectiveness of
SFAS 133 for one year. SFAS 133 is now effective for fiscal years beginning
after June 15, 2000, but earlier application is permitted as of the beginning of
any fiscal quarter subsequent to June 15, 1998. SFAS No. 13 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments as fair value. If certain conditions are met, a derivative may
be specifically designated as: (i) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment; (ii) a hedge of the exposure to variable cash flows of a forecasted
transaction; or (iii) in certain circumstances a hedge of a foreign currency
exposure. The Company currently plans to adopt this pronouncement as required
effective January 1, 2001. The adoption of SFAS 133 is not expected to have a
material financial impact on the financial position or results of operations of
the Company.
42
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS
TRANSACTIONS WITH AFFILIATES--In November 1993, the Company was notified
that SAHI, Inc. (one of the Starwood Investors) had acquired all of the
Company's 212,500 outstanding class B shares. Subsequent to the acquisition of
the class B shares, SAHI Partners (another Starwood Investor) purchased the
class B shares from SAHI, Inc. and accumulated 40,683 class A shares, or 9.60%
of the total class A shares then outstanding.
On March 15, 1994, the Company announced that it had entered into an
agreement with SAHI Partners and SAHI, Inc. for the sale of a warrant for the
right to purchase 833,333 class A shares at a price of $6.00 per share (the
"Class A Warrant") and 416,667 class B shares at a price of $0.06 per share (the
"Class B Warrant"). SAHI Partners and SAHI, Inc. purchased the warrants for
$101,000, which amount was applied against the purchase price for the initial
class A and class B shares purchased pursuant to the warrants. On March 28,
1996, the Class A Warrant was assigned to Starwood Mezzanine Investors, L.P.
("Starwood Mezzanine").
On September 26, 1996, the Company became sole general partner of APMT
Limited Partnership by contributing $400,000 in cash in exchange for an 8.05%
interest in that partnership. Starwood Mezzanine became the 91.95% limited
partner by contributing to the partnership its entire interest in the
participation certificates in a mortgage note relating to the Warwick Hotel,
valued by the Company at approximately $4.6 million as of September 30, 1996.
Starwood Mezzanine's interest in the partnership was evidenced by units, which
were convertible into cash, class A shares or a combination of both pursuant to
an exchange rights agreement. As described below, the units were converted to
class A shares in the first quarter of 1998.
On January 22, 1997, Starwood Mezzanine exercised its rights under the
Class A Warrant to acquire 833,333 class A shares. After its exercise of the
Class A Warrant, Starwood Mezzanine beneficially owned 833,333 class A shares
and 761,491 units. In addition, SAHI, Inc. exercised its rights under the
Class B Warrant to acquire 416,667 class B shares. After its exercise of the
Class B Warrant, SAHI Inc. beneficially owned 1,009,911 class B shares and
40,683 class A shares. Upon exercise of the Class A and Class B Warrants, SAHI
Partners, SAHI, Inc. and Starwood Mezzanine jointly owned 69.46% of the
outstanding class A shares and, with the voting interest of the class B shares,
controlled 79.64% of the voting interests of the Company. The Company increased
its capital by approximately $5.0 million, and the resulting funds were used to
purchase qualified short-term government securities.
During the quarter ended March 31, 1998, the Company consummated certain
transactions and entered into agreements which significantly recapitalized and
expanded the capital resources of the Company as well as modified future
operations, including those described herein below in "Recapitalization
Transactions" and "Advisor Transaction".
RECAPITALIZATION TRANSACTIONS--As more fully discussed above, pursuant to a
series of transactions beginning in March 1994 and including the exercise of the
Class A and Class B Warrants in January 1997, the Starwood Investors acquired
joint ownership of 69.46% and 100% of the outstanding class A shares and
class B shares of the Company, respectively, through which they controlled
approximately 79.64% of the voting interests in the Company as of December 31,
1997. Prior to the consummation of these transactions (collectively, the
"Recapitalization Transactions"), Starwood Mezzanine also owned 761,491 units
which represented the remaining 91.95% of APMT Limited Partnership not held by
the Company. Those units were convertible into cash, an additional 761,491
class A shares of the Company, or a combination of the two, as determined by the
Company.
43
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
On March 18, 1998, each outstanding unit held by Starwood Mezzanine was
exchanged for one class A share of the Company and, concurrently, the
partnership was liquidated through a distribution of its net assets to the
Company, its then sole partner.
Simultaneously, Starwood Mezzanine contributed various real estate loan
investments to the Company in exchange for 9,191,333 class A shares and
$25.5 million in cash, as adjusted. Starwood Opportunity Fund IV, L.P., one of
the Starwood Investors ("SOF IV"), contributed real estate loans and related
investments, $17.9 million in cash and certain letters of intent in exchange for
41,179,133 class A shares of the Company and a cash payment of $324.3 million.
Concurrently, the holders of the class B shares who were affiliates of the
Starwood Investors acquired 25,565,979 additional class B shares sufficient to
maintain existing voting preferences pursuant to the Company's Amended and
Restated Declaration of Trust. Immediately after these transactions, the
Starwood Investors owned approximately 99.27% of the outstanding class A shares
of the Company and 100% of the class B shares. Assets acquired from Starwood
Mezzanine have been reflected using step acquisition accounting at predecessor
basis adjusted to fair value to the extent of post-transaction third-party
ownership. Assets acquired from SOF IV have been reflected at their fair market
value.
ADVISORY AGREEMENT--In connection with the Recapitalization Transactions,
the Company and the Advisor, an affiliate of the Starwood Investors, entered
into an Advisory Agreement (the "Advisory Agreement") pursuant to which the
Advisor managed the affairs of the Company, subject to the Company's purpose and
investment policy, the investment restrictions and the directives of the Board
of Directors. The services provided by the Advisor included the following:
(i) identifying investment opportunities for the Company; (ii) advising the
Company with respect to and effecting acquisitions and dispositions of the
Company's investments; (iii) monitoring, managing and servicing the Company's
loan portfolio; and (iv) arranging debt financing for the Company. The Advisor
was prohibited from acting in a manner inconsistent with the express direction
of the Board of Directors, and reported to the Board of Directors and the
officers of the Company with respect to its activities.
The Company paid the Advisor a quarterly base management fee of 0.3125%
(1.25% per annum) of the "Book Equity Value" of the Company determined as of the
last day of each quarter but estimated and paid in advance subject to
recomputation. "Book Equity Value" was generally defined as the excess of the
book value of the assets of the Company over all liabilities of the Company.
In addition, the Company paid the Advisor a quarterly incentive fee of 5.00%
of the Company's "Adjusted Net Income" during each quarter that the Adjusted Net
Income for such quarter (restated and annualized as a rate of return on the
Company's Book Equity Value for such quarter) equaled or exceeded the "Benchmark
BB Rate." "Adjusted Net Income" was generally defined as the Company's gross
income less the Company's expenses for the applicable quarter (including the
base fee for such quarter but not the incentive fee for such quarter). In
calculating both Book Equity Value and Adjusted Net Income, real estate-related
depreciation and amortization (other than amortization of financing costs and
other prepaid expenses to the extent such costs and prepaid expenses have
previously been booked as an asset of the Company) were not deducted. The
Advisor was also reimbursed for certain expenses it incured on behalf of the
Company.
Because payment of both the base fee and the incentive fee commenced
90 days after the consummation of the Recapitalization Transactions, fees were
recognized ratably over the period from March 18,
44
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
1998 through December 31, 1998. The operating results of the Company for such
period were greater than they would have been had the advisory fee not been
deferred.
The Advisory Agreement had an initial term of three years subject to
automatic renewal for one-year periods unless the Company had been liquidated or
a Termination Event (as defined in the Advisory Agreement and which generally
included violations of the Advisory Agreement by the Advisor, a bankruptcy event
of the Advisor or the imposition of a material liability on the Company as a
result of the Advisor's bad faith, willful misconduct, gross negligence or
reckless disregard of duties) had occurred and was continuing. In addition, the
Advisor could have terminated the Advisory Agreement on 60 days' written notice
to the Company and the Company could have terminated the Advisory Agreement upon
60 days' written notice if a Termination Event had occurred or if the decision
to terminate were based on affirmative vote of the holders of two thirds or more
of the voting shares of the Company at the time outstanding.
Prior to the transactions described below through which, among other things,
the Company became self-advised, the Company was dependent on the services of
the Advisor and its officers and employees for the successful execution of its
business strategy.
1999 TRANSACTIONS--On November 3, 1999, consistent with previously announced
terms, the Company's shareholders approved a series of transactions including:
(i) the acquisition, through a merger, of TriNet; (ii) the acquisition, through
a merger and a contribution of interests, of 100% of the ownership interests in
the Advisor; and (iii) the change in form, through a merger, of the Company's
organization into a Maryland corporation. TriNet stockholders also approved the
TriNet acquisition on November 3, 1999. These transactions were consummated on
November 4, 1999. As part of these transactions, the Company also changed its
name to Starwood Financial Inc. and replaced its dual class common share
structure with a single class of Common Stock.
TRINET ACQUISITION--TriNet merged with and into a subsidiary of the Company,
with TriNet surviving as a wholly-owned subsidiary of the Company (the "Leasing
Subsidiary"). In the TriNet acquisition, each share of TriNet common stock was
converted into 1.15 shares of Common Stock, resulting in an aggregate issuance
of 28.9 million shares of Common Stock. Each share of TriNet Series A, Series B
and Series C Cumulative Redeemable Preferred Stock was converted into a share of
Series B, Series C or Series D (respectively) Cumulative Redeemable Preferred
Stock of the Company. The Company's preferred stock issued to the former TriNet
preferred stockholders has substantially the same terms as the TriNet preferred
stock, except that the new Series B, C, and D preferred stock has additional
voting rights not associated with the TriNet preferred stock. The holders of the
Company's Series A Preferred Stock will retain the same rights and preferences
as existed prior to the TriNet acquisition.
The TriNet acquisition was accounted for as a purchase. Because the
Company's stock prior to the transaction was largely held by the Starwood
Investors, and, as a result, the stock was not widely traded relative to the
amount of shares outstanding, the pro forma financial information presented
below was prepared utilizing a stock price of $28.14 per TriNet share, which was
the average stock price of TriNet during the five-day period before and after
the TriNet acquisition was agreed to and announced.
ADVISOR TRANSACTION--Contemporaneously with the consummation of the TriNet
acquisition, the Company acquired 100% of the interests in the Advisor in
exchange for total consideration of four million shares of Common Stock. For
accounting purposes, the Advisor Transaction was not considered the
45
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
acquisition of a "business" in applying Accounting Principles Board Opinion
No. 16, "Business Combinations" and, therefore, the market value of the Common
Stock issued in excess of the fair value of the net tangible assets acquired of
approximately $94.5 million has been charged to operating income as a one-time
item in the fourth quarter of 1999, rather than capitalized as goodwill.
INCORPORATION MERGER--Prior to the consummation of the TriNet acquisition
and the Advisor Transaction, the Company changed its form from a Maryland trust
to a Maryland corporation in the Incorporation Merger, which technically
involved a merger of the Company with a wholly-owned subsidiary formed solely to
effect such merger. In the Incorporation Merger, the class B shares were
converted into shares of Common Stock on a 49-for-one basis (the same ratio at
which class B shares were previously convertible into class A shares), and the
class A shares were converted into shares of Common Stock on a one-for-one
basis. As a result, the Company no longer has multiple classes of common shares.
The Incorporation Merger was treated as a transfer of assets and liabilities
under common control. Accordingly, the assets and liabilities transferred from
Starwood Financial Trust to Starwood Financial Inc. were reflected at their
predecessor basis and no gain or loss was recognized.
The Company declared and paid a special dividend of one million shares of
its Common Stock payable pro rata to all holders of record of its Common Stock
following completion of the Incorporation Merger, but prior to the effective
time of the TriNet acquisition and the Advisor Transaction.
PRO FORMA INFORMATION--The summary unaudited pro forma consolidated
statement of operations for the years ended December 31, 1999 and 1998 are
presented as if the following transactions, consummated in November 1999, had
occurred on January 1, 1998: (i) the TriNet acquisition; (ii) the Advisor
Transaction; and (iii) the borrowing necessary to consummate the aforementioned
transactions, and as if the following transactions consummated in March 1998,
had occurred on January 1, 1998: (i) the Recapitalization Transactions;
(ii) the exchange of each outstanding unit in the APMT Limited Partnership held
by holders other than the Company for one class A share; (iii) the liquidation
and termination of the partnership; and (iv) the borrowings necessary to
consummate the aforementioned transactions. The unaudited pro forma information
is based upon the historical consolidated results of operations of the Company
and TriNet for the years ended December 31, 1999 and 1998, after giving effect
to the events described above.
46
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(UNAUDITED)
REVENUE:
Interest income........................................... $218,359 $140,261
Operating lease/rental income............................. 186,776 169,196
Other income.............................................. 21,000 9,776
-------- --------
Total revenue........................................... 426,135 319,233
-------- --------
EXPENSES:
Interest expense.......................................... 135,795 99,138
Property operating costs.................................. 12,601 7,651
Depreciation and amortization............................. 36,423 35,053
General and administrative................................ 21,716 20,770
Stock option compensation expense......................... 2,474 5,985
Provision for possible credit losses...................... 4,750 2,750
-------- --------
Total expenses.......................................... 213,759 171,347
-------- --------
Income before minority interest........................... $212,376 147,886
Minority interest......................................... (164) (128)
-------- --------
Net income................................................ $212,212 $147,758
Preferred dividend requirements........................... (36,906) (16,622)
-------- --------
Net income allocable to common shareholders............... $175,306 $131,136
======== ========
BASIC EARNINGS PER SHARE:
Basic earnings per common share........................... $ 2.01 $ 1.50
======== ========
Weighted average number of common shares outstanding...... 87,073 87,193
======== ========
Investments and dispositions are assumed to have taken place as of
January 1, 1998; however, loan originations and acquisitions are not reflected
in these pro forma numbers until the actual origination or acquisition date by
the Company. The pro forma information above excludes the charge of
approximately $94.5 million taken by the Company in fiscal 1999 to reflect the
costs incurred in acquiring the Advisor as such charge is non-recurring. The pro
forma information also excludes certain non-recurring historical charges
recorded by TriNet of $3.4 million in 1999 for a provision for a real estate
write-down and $3.0 million in 1998 for a special charge for an expected
reduction in TriNet's investment activity. General and administrative costs
represent estimated expense levels as an internally-managed Company.
The pro forma financial information is not necessarily indicative of what
the consolidated results of operations of the Company would have been as of and
for the periods indicated, nor does it purport to represent the results of
operations for future periods.
47
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND OTHER LENDING INVESTMENTS
The following is a summary description of the Company's loans and other
lending investments (in thousands):
CARRYING VALUE
# OF ORIGINAL PRINCIPAL AS OF DECEMBER 31,
BORROWERS COMMITMENT BALANCES -----------------------
TYPE OF INVESTMENT UNDERLYING PROPERTY TYPE IN CLASS AMOUNT OUTSTANDING 1999 1998*
- ---------------------------- ---------------------------- --------- ------------ ----------- ---------- ----------
Senior Mortgages Office/Hotel/Mixed Use/ 19 $959,595 $ 923,810 $ 938,040 $ 752,104
Apartment/Retail/Resort
Subordinated Mortgages (4) Office/Hotel/Mixed 17 581,335 557,494 540,441 499,780
Use/Retail/ Conference
Center
Partnership Loans/Unsecured Office/Hotel/Residential/Land 12 325,773 310,229 309,768 293,963
Notes
Loan Participations Office/Retail 4 168,747 152,857 152,782 140,441
Other Lending Investments Real Estate-Related N/A N/A N/A 69,975 140,223
Securities
---------- ----------
Gross Carrying Value $2,011,006 $1,826,511
Provision for Possible )
Credit Losses (7,500 (2,750
---------- ----------
Total, Net $2,003,506 $1,823,761
========== ==========
EFFECTIVE PRINCIPAL PARTICI-
MATURITY CONTRACTUAL INTEREST CONTRACTUAL INTEREST AMORTIZ- PATION
TYPE OF INVESTMENT DATES PAYMENT RATES(1) ACCRUAL RATES(3) ATION FEATURES
- ---------------------------- ------------- ----------------------- ----------------------- --------- --------
Senior Mortgages 2000 to 2009 Fixed: 7.28% to 18.00% Fixed: 7.28% to 20.00% Yes (2) Yes (3)
Variable: LIBOR + 1.25% Variable: LIBOR + 1.25%
to 5.00% to 5.00%
Subordinated Mortgages (4) 2000 to 2007 9.53% to 15.25% 9.53% to 17.00% Yes (2) Yes (3)
Variable: LIBOR + 4.50% Variable: LIBOR + 4.00%
to 5.80% to 5.80%
Partnership Loans/Unsecured 2000 to 2028 8.00% to 15.00% 8.50% to 17.50% Yes Yes (3)
Notes Variable: LIBOR + 5.37% Variable: LIBOR + 5.37%
to 7.50% to 7.50%
Loan Participations 2000 to 2005 Fixed: 10.00% to 13.60% Fixed: 10.00% to 13.60% No Yes (3)
Variable: LIBOR + 4.00% Variable: LIBOR + 4.00%
to 6.00% to 6.00%
Other Lending Investments 2002 and 2007 Fixed: 12.50% to 12.75% Fixed: 12.50% to 12.75% No No
Gross Carrying Value
Provision for Possible
Credit Losses
Total, Net
EXPLANATORY NOTES:
- ----------------------------------
* RECLASSIFIED TO CONFORM TO 1999 PRESENTATION.
(1) Substantially all variable-rate loans are based on 30-day LIBOR and reprice
monthly.
(2) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity. In addition, one of the loans permits additional
annual prepayments of principal of up to $1.3 million without penalty at the
borrower's option.
(3) Under some of these loans, the lender receives additional payments
representing additional interest from participation in available cash flow
from operations of the property and the proceeds, in excess of a base
amount, arising from a sale or refinancing of the property.
(4) As of December 31, 1999 and 1998, the unfunded committment amount on one of
the Company's construction loans, included in subordinated mortgages, was
$16.2 million and $36.7 million, respectively.
48
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LOANS AND OTHER LENDING INVESTMENTS
During the years ended December 31, 1999 and 1998, respectively, the Company
and its affiliated ventures originated or acquired an aggregate of approximately
$663.4 million and $1.0 billion in loans and other lending investments, funded
$46.4 million and $16.5 million under existing loan commitments and received
principal repayments of $561.9 million and $103.9 million.
The Company has reflected additional provisions for possible credit losses
of approximately $4.8 million and $2.8 million in its results of operations
during the years ended December 31, 1999 and 1998. No provisions were reflected
in year ended December 31, 1997 as the Company had no significant lending
operations prior to the Recapitalization Transactions. There was no other
activity in the Company's reserve balances during this period. These provisions
represent portfolio reserves based on management's evaluation of general market
conditions, the Company's and industry loss experience, likelihood of
delinquencies or defaults and the underlying collateral. No direct impairment
reserves on specific loans were considered necessary. Management may transfer
reserves between general and specific reserves as considered necessary.
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES
The Company's investments in real estate subject to operating leases, at
cost, were as follows:
DECEMBER 31,
---------------------
1999 1998
---------- --------
Buildings and improvements............................ $1,390,933 $156,663
Land and land improvements............................ 277,872 37,566
Less accumulated depreciation......................... (14,627) (4,287)
---------- --------
1,654,178 189,942
Investments in unconsolidated joint ventures.......... 60,106 --
---------- --------
Real estate subject to operating leases, net.... $1,714,284 $189,942
========== ========
The Company's net lease facilities are leased to tenants with initial term
expiration dates from 2000 to 2020. Future rentals under non-cancelable
operating leases, excluding tenant reimbursements of expenses in effect at
December 31, 1999, are approximately as follows (in thousands):
YEAR AMOUNT
- ---- ------
2000........................................................ $172,527
2001........................................................ 163,431
2002........................................................ 146,753
2003........................................................ 134,423
2004........................................................ 117,044
Thereafter.................................................. 622,501
Under certain leases, the Company receives additional participating rent to the
extent gross revenues of the tenant exceed a base amount. The Company earned
$0.5 million and $0.6 million of such additional participating rent in the years
ended December 31, 1999 and 1998, respectively.
At December 31, 1999, the Company had investments in five joint ventures:
(i) TriNet Sunnyvale Partners L.P. ("Sunnyvale") whose external partners are
John D. O'Donnell, Trustee, John W. Hopkins,
49
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
and Donald S. Grant; (ii) Corporate Technology Associates LLC ("CTC I") whose
external member is Corporate Technology Centre Partners LLC; (iii) Sierra Land
Ventures ("Sierra"), whose external joint venture partner is Sierra-LC Land,
Ltd.; (iv) Corporate Technology Centre Associates II LLC ("CTC II") whose
external joint venture member is Corporate Technology Centre Partners II LLC;
and (v) TriNet Milpitas Associates, LLC ("Milpitas") whose external member is
The Prudential Insurance Company of America, for the purpose of operating,
acquiring and in certain cases, developing properties. Effective November 22,
1999, the joint venture partners, who are affiliates of Whitehall Street Real
Estate Limted Partnership, IX and The Goldman Sachs Group L.P. (the "Whitehall
Group") in W9/TriNet Poydras, LLC ("Poydras") elected to exercise their right
under the parntership agreement, which was accelerated as a result of the TriNet
acqusition, to exchange all of their membership units for 350,746 shares of
Common Stock of the Company and a $767,000 distribution of available cash. As a
consequence, Poydras is now wholly owned and is reflected on a consolidated
basis in these financial statements.
At December 31, 1999, the ventures comprised 22 net leased facilities
totaling 1.5 million square feet, four properties under development totaling
312,400 square feet and 40.4 acres of land held for sale and development. The
Company's combined investment, including advances, in these joint ventures at
December 31, 1999 was $84.8 million. In the aggregate, the joint ventures had
total assets of $332.8 million, total liabilities of $251.9 million, and net
income of $0.5 million. The Company accounts for these investments under the
equity method because the Company's joint venture partners have certain
participating rights which limit the Company's control. The Company's
investments in and advances to unconsolidated joint ventures, its percentage
ownership interests, its respective income and the Company's pro rata share of
its ventures' third party debt as of December 31, 1999 are presented below (in
thousands):
ACCRUED JOINT
UNCONSOLIDATED OWNERSHIP EQUITY NOTES INTEREST TOTAL VENTURE INTEREST TOTAL
JOINT VENTURE % INVESTMENT RECEIVABLE RECEIVABLE INVESTMENT INCOME INCOME INCOME
- ----------------------- ---------- ---------- ---------- ---------- ---------- -------- -------- --------
Operating:
Sunnyvale............ 44.7% $13,589 $ -- $ -- $13,589 $ 203 $ -- $ 203
CTC II............... 50.0% 4,594 20,674 4,098 29,366 (198) 849 651
Milpitas............. 50.0% 20,729 -- -- 20,729 449 -- 449
Development:
Sierra............... 50.0% 5,136 -- -- 5,136 (111) -- (111)
CTC I................ 50.0% 15,936 -- -- 15,936 29 -- 29
------- ------- ------- ------- ------ ------ --------
$59,984 $20,674 $ 4,098 $84,756 $ 372 $ 849 $ 1,221
======= ======= ======= ======= ====== ====== ========
PRO RATA
SHARE OF
UNCONSOLIDATED THIRD PARTY
JOINT VENTURE DEBT
- ----------------------- -----------
Operating:
Sunnyvale............ $ 7,447
CTC II............... 8,288
Milpitas............. 41,130
Development:
Sierra............... 2,588
CTC I................ 31,923
--------
$ 91,376
========
At December 31, 1999, the Company was the guarantor for 50% of CTC I's
$63.8 million construction loan. Additionally, if the Company agrees with its
joint venture partner to commence the development of phase II of the project, it
will have additional commitments to fund further development costs. The amount
of these additional commitments are estimated to be $11.1 million. This amount
will vary depending upon the amount of senior third party financing obtained.
Currently, the limited partners of the Sunnyvale partnership have the option
to convert their partnership interest into cash; however, the Company may elect
to deliver 297,728 shares of Common Stock in lieu of cash. Additionally,
commencing in February 2002, subject to acceleration under certain
circumstances, partnership units held by certain partners of Milpitas may be
converted into 984,476 shares of Common Stock.
50
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS
As of December 31, 1999, the Company has debt obligations under various
arrangements with financial institutions as follows (in thousands):
MAXIMUM CARRYING CARRYING STATED SCHEDULED
AMOUNT VALUE VALUE INTEREST MATURITY
AVAILABLE 1999 1998 RATES DATE
---------- ---------- ---------- ------------------------ ----------------------
SECURED REVOLVING CREDIT FACILITIES:
Line of credit..................... $ 675,000 $ 592,984 $ 554,907 LIBOR + 1.50% March 2001
Line of credit..................... 500,000 169,952 86,038 LIBOR + 1.00 - 1.25% (1) August 2000 (1)
---------- ---------- ----------
Total secured revolving credit 1,175,000 762,936 640,945
facilities........................
UNSECURED REVOLVING CREDIT FACILITIES:
Line of credit..................... 350,000 186,700 -- LIBOR + 1.55% May 2001
---------- ---------- ----------
Total revolving credit $1,525,000 949,636 640,945
facilities........................
==========
SECURED TERM LOANS:
Secured by real estate under operating 153,618 125,000 7.44% March 2009
leases........................................
Secured by senior and subordinate mortgage 109,398 112,927 LIBOR + 1.00% August 2000
investments...................................
Secured by senior mortgage investment.......... 90,902 89,991 LIBOR + 1.00% August 2000
Secured by real estate under operating 78,610 -- LIBOR + 1.38% June 2001
leases........................................
Secured by real estate under operating 73,279 -- Fixed: 6.00% + 11.30% (3)
leases........................................ Variable: LIBOR + 1.00%
Secured by senior mortgage investment.......... 54,000 -- LIBOR + 1.75% (2) May 2000
Secured by senior mortgage investment.......... -- 40,765 LIBOR + 1.00% N/A
---------- ----------
Total term loans............................... 559,807 368,683
Less debt discounts............................ (521) --
---------- ----------
Total secured term loans....................... 559,286 368,683
UNSECURED NOTES:
6.75% Dealer Remarketable Securities (4)....... 125,000 -- 6.75% March 2013
7.30% Notes.................................... 100,000 -- 7.30% March 2001
7.70% Notes.................................... 100,000 -- 7.70% July 2017
7.95% Notes.................................... 50,000 -- 7.95% May 2006
---------- ----------
Total unsecured notes.......................... 375,000 --
Less debt discount (5)......................... (21,481) --
---------- ----------
Total unsecured notes.......................... 353,519 --
OTHER DEBT OBLIGATIONS............................. 38,763 46,091 Various Various
---------- ----------
TOTAL DEBT OBLIGATIONS............................. $1,901,204 $1,055,719
========== ==========
EXPLANATORY NOTES:
- ----------------------------------
(1) Subsequent to year end, the Company extended the term of its $500.0 million
facility to August 2002 and increased pricing under the facility to LIBOR +
1.50% to 1.75%.
(2) Based on a 12-month LIBOR contract currently at 5.317%, repricing in May
2000.
(3) Other mortgage loans mature at various dates through 2010.
(4) Subject to mandatory tender on March 31, 2003, to either the Dealer or the
Leasing Subsidiary. The initial coupon of 6.75% applies to first five-year
term through the mandatory tender date. If tendered to the Dealer, the notes
must be remarketed. The rates reset upon remarketing.
(5) These obligations were assumed as part of the TriNet acquisition. As part of
the accounting for the purchase, these fixed rate obligations were
considered to have stated interest rates which were below the then
prevailing market rates at which the Leasing Subsidiary could issue new debt
obligations and, accordingly, the Company ascribed a market discount to each
obligation. Such discounts will be amortized as an adjustment to interest
expense using the effective interest method over the related term of the
obligations. As adjusted, the effective annual interest rates on these
obligations were 8.81%, 8.75%, 9.51% and 9.04%, for the 6.75% Dealer
Remarketable Securities, 7.30% Notes, 7.70% Notes and 7.95% Notes,
respectively.
51
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEBT OBLIGATIONS (CONTINUED)
Availability of amounts under the secured revolving credit facilities are
based on percentage borrowing base calculations. Except as indicated above, all
debt obligations are based on 30-day LIBOR and reprice monthly.
Certain of the Leasing Subsidiary's debt obligations contain financial
covenants pertaining to the subsidiary. Such obligations also establish
restrictions on certain inter-company transactions between the Leasing
Subsidiary and other Company affiliates. Further, such obligations also provide
for a limit on distributions from the Leasing Subsidiary at 85% of cash flow
from operations on a rolling four-quarter basis.
Subsequent to year end, the Company closed a new unsecured revolving credit
facility. The facility is led by a major commercial bank, which has committed
$50.0 million of the facility amount and intends to upsize the facility to
$100.0 million through syndication. The new facility has a two-year primary term
and a one-year extension at the Company's option, and bears interest at LIBOR
plus 2.00% to 2.25%, depending upon certain conditions.
In addition, subsequent to year end, the Company extended the term of its
existing $500.0 million secured credit facility. The Company extended the
original August 2000 maturity date to August 2002, through a one-year extension
to the facility's draw period and an additional one-year "term out" period
during which outstanding principal amortizes 25% per quarter. In connection with
the extension, the Company and the facility lender also expanded the range of
assets that the lender would accept as collateral under the facility. In
exchange for the extension and expansion, the Company agreed to increase the
facility's interest rate from LIBOR plus 1.25% to 1.50%, to a revised rate of
LIBOR plus 1.50% to 1.75%, depending upon certain conditions.
Future maturities of outstanding long-term debt, as adjusted for the
subsequent term extension of the Company's $500.0 million secured credit
facility discussed above, is as follows (in thousands):
2000........................................................ $ 296,969
2001........................................................ 958,294
2002........................................................ 185,293
2003........................................................ 125,000
2004........................................................ 44,426
Thereafter.................................................. 313,224
------------
Total principal maturities.................................. 1,923,206
Net unamortized debt (discounts)/premiums................... (22,002)
------------
Total debt obligations...................................... $ 1,901,204
============
NOTE 8--STOCKHOLDERS' EQUITY
Prior to November 4, 1999, the Company was authorized to issue
105.0 million shares, representing 70.0 million class A shares and 35.0 million
class B shares, with a par value of $1.00 and $0.01 per share, respectively.
Class B shares were required to be issued by the Company in an amount equal to
one half of the number of class A shares outstanding. Class A and class B shares
were each entitled to one vote per share with respect to the election of
directors and other matters. Pursuant to the Declaration of Trust, the class B
shares were convertible at the option of the class B shareholders into class A
shares on the basis of
52
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
49 class B shares for one class A share. However, the holder of class B shares
had agreed with the Company that it would not convert the class B shares into
class A shares without the approval of a majority of directors that were not
affiliated with such holder. All distributions of cash were made 99% to the
holders of class A shares and 1% to the holders of class B shares.
On December 15, 1998, for an aggregate purchase price of $220.0 million, the
Company issued 4.4 million Series A Preferred Shares and warrants to acquire
6.1 million class A shares, as adjusted for dilution, at $35.00 per share. The
warrants are exercisable on or after December 15, 1999 at a price of $35.00 per
share and expire on December 15, 2005. The proceeds were allocated between the
two securities issued based on estimated relative fair values.
As more fully described in Note 4, the Company consummated a series of
transactions on November 4, 1999, in which its class A and class B shares were
exchanged into a single class of Common Stock. The Company's charter now
provides for the issuance of up to 200.0 million shares of Common Stock, par
value $0.001 per share, and 30.0 million shares of preferred stock. As part of
these transactions, the Company adopted articles supplementary creating four
series of preferred stock designated as 9.5% Series A Cumulative Redeemable
Preferred Stock, consisting of 4.4 million shares, 9.375% Series B Cumulative
Redeemable Preferred Stock, consisting of 2.3 million shares, 9.20% Series C
Cumulative Redeemable Preferred Stock, consisting of 1.5 million shares, and
8.0% Series D Cumulative Redeemable Preferred Stock, consisting of 4.6 million
shares. The Series B, C and D Cumulative Redeemable Preferred Stock were issued
in the TriNet acquisition in exchange for similar issuances of TriNet stock then
outstanding. The Series A, B, C and D Cumulative Redeemable Preferred Stock are
redeemable without premium at the option of the Company at their respective
liquidation preferences beginning on December 15, 2003, June 15, 2001,
August 15, 2001 and October 8, 2002, respectively.
STOCK REPURCHASE PROGRAM: The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets and excess cash
flow from operations, but also using borrowings under its credit facilities if
the Company determines that it is advantageous to do so. As of December 31,
1999, the Company had repurchased approximately 2.3 million shares, at an
aggregate cost of approximately $40.4 million.
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
RISK MANAGEMENT--In the normal course of its on-going business operations,
the Company encounters economic risk. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or different bases, than its
interest-earning assets. Credit risk is the risk of default on the Company's
loan assets that results from a property's, borrower's or tenant's inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of loans, securities available for sale and purchased
mortgage servicing rights 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 real estate held by the
Company.
USE OF DERIVATIVE FINANCIAL INSTRUMENTS--The Company's use of derivative
financial instruments is primarily limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposure. The
principal objective of such arrangements is to minimize the risks and/or costs
associated
53
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
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. Prior to the Recapitalization Transactions, the Company did not
significantly utilize derivative financial instruments.
The Company has entered into LIBOR interest rate caps struck at 9.00%, 7.50%
and 7.50% in notional amounts of $300.0 million, $40.4 million and $38.3
million, respectively, which expire in March 2001, January 2001 and June 2001,
respectively. At December 31, 1999, the fair value appreciation of the Company's
interest rate caps was $2.2 million.
The Company has entered into approximately $205.2 million of interest rate
swaps to effectively fix the interest rate on a portion of the Company's
floating-rate term loan obligations. In addition, in connection with the TriNet
acquisition, the Company acquired an interest rate swap agreement which,
together with certain existing interest rate cap agreements, effectively fix the
interest rate on $75.0 million of the Leasing Subsidiary's LIBOR-based
borrowings at 5.58% plus the applicable margin through December 1, 2004.
Management expects that it will have aggregate LIBOR-based borrowings at the
Leasing Subsidiary in excess of the notional amount for the duration of the
swap. The actual borrowing cost to the Company with respect to indebtedness
covered by the swap will depend upon the applicable margin over LIBOR for such
indebtedness, which will be determined by the terms of the relevant debt
instruments. At December 31, 1999, the fair value appreciation of the Company's
interest rate swaps was $3.4 million.
The Company is currently pursuing or recently consummated certain
anticipated long-term fixed rate borrowings and had entered into certain
derivative instruments based on U.S. Treasury securities to hedge the potential
effects of interest rate movements on these transactions. Under these
agreements, the Company would generally receive additional cash flow at
settlement if interest rates rise and pay cash if interest rates fall. The
effects of such receipts or payments will be deferred and amortized over the
term of the specific related fixed-rate borrowings. During the year ended
December 31, 1999, the Company settled an aggregate notional amount of
approximately $63.0 million that was outstanding under such agreements,
resulting in a receipt of approximately $0.6 million to be amortized over the
term of the anticipated borrowing.
During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented one of the 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 the related interest rate hedges has been
deferred and will be amortized as an increase to the effective financing cost of
the new term loan over its effective 10-year term.
In the event that, in the opinion of management, it is no longer probable
that the remaining forecasted transaction will occur under terms substantially
equivalent to those projected, the Company will cease recognizing such
transactions as hedges and immediately recognize related gains or losses based
on
54
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
actual settlement or estimated settlement value of the underlying derivative
contract. No such gains or losses have been recognized by the Company.
CREDIT RISK CONCENTRATIONS--Concentrations of credit risks arise when a
number of borrowers or tenants related to the Company's investments are engaged
in similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations, including those to the Company, to be similarly
affected by changes in economic conditions. The Company regularly monitors
various segments of its portfolio to assess potential concentrations of credit
risks. Management believes the current credit risk portfolio is reasonably well
diversified and does not contain any unusual concentration of credit risks.
Substantially all of the Company's real estate subject to operating leases
(including those held by joint ventures), loans and other lending investments
are collateralized by properties located in the United States, with significant
concentrations (i.e., greater than 10%) as of December 31, 1999 in California
(26.4%) and Texas (11.8%). As of December 31, 1999, the Company's investments
also contain significant concentrations in the following asset/collateral types:
office (52%), hotel/resorts (12%), retail (8%) and industrial (8%).
The Company underwrites the credit of prospective borrowers and tenants and
often requires them to provide some form of credit support such as corporate
guarantees or letters of credit. Although the Company's loans and other lending
investments and net lease assets are geographically diverse and the borrowers
and tenants operate in a variety of industries, to the extent the Company has a
significant concentration of interest or operating lease revenues from any
single borrower or tenant, the inability of that borrower or tenant to make its
payment could have an adverse effect on the Company. As of December 31, 1999,
the Company's five largest borrowers or tenants collectively accounted for
approximately 15.0% of the Company's annualized interest and operating lease
revenue.
NOTE 10--INCOME TAXES
Although originally formed to qualify as a REIT under the Code for the
purpose of making and acquiring various types of mortgage and other loans,
during 1993 through 1997, the Company failed to qualify as a REIT. As confirmed
by a closing agreement with the Internal Revenue Service (the "IRS") obtained in
March 1998, the Company was eligible and elected to be taxed as a REIT for the
tax years commencing on January 1, 1998. The Company did not incur any material
tax liabilities as a result of its operations during such years.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and income tax purposes, as well as operating loss and tax credit carry
forwards. A valuation allowance is recorded if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
income tax asset will not be realized. Given the limited nature of the Company's
operations and assets and liabilities from 1993 through 1997, the only deferred
tax assets are net operating loss carry forwards ("NOL's") of approximately
$4.0 million, which arose during such periods. Since the Company has elected to
be treated as a REIT for its tax years beginning January 1, 1998, the NOL's have
expired unutilized. Accordingly, no net deferred tax asset value, after
consideration of a 100% valuation allowance, has been reflected in these
financial statements as of December 31, 1999 and 1998 nor a net tax provision
for any of the fiscal years ended December 31, 1999, 1998 or 1997.
55
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS
The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to
provide incentive compensation for officers, other key employees and directors
of the Company. The Plan provides for awards of stock options and restricted
stock and other performance awards. The maximum number of shares of Common Stock
available for awards under the Plan is 9% of the outstanding shares of Common
Stock, calculated on a fully diluted basis, from time to time; provided that,
the number of shares of Common Stock reserved for grants of options designated
as incentive stock options is 4.9 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, 1999, a total of approximately 7.7 million shares of
Common Stock were available for awards under the Plan, of which options to
purchase approximately 3.9 million shares of Common Stock were outstanding.
Concurrently with the Recapitalization Transactions, the Company issued
approximately 2.5 million fully vested (as adjusted) and immediately exercisable
options to purchase class A shares at $15.00 per share to the Advisor with a
term of ten years. The Advisor granted a portion of these options to its
employees and the remainder allocated to an affiliate. In general, the grants to
the Advisor's employees provided for scheduled vesting over a predefined service
period of three to five years and in some cases provided for accelerated vesting
based on a change in control of the Advisor or completion of certain liquidity
transactions. These options expire concurrently with the original option grant
to the Advisor. Upon consummation of the Advisor Transaction these individuals
became employees of the Company.
In connection with the TriNet acquisition, outstanding options to purchase
TriNet stock under TriNet's stock option plans were converted into options to
purchase shares of Common Stock on substantially the same terms, except that
both the exercise price and number of shares issuable upon exercise of the
TriNtet options were adjusted to give effect to the merger exchange ratio of
1.15 shares of Common Stock for each share of TriNet common stock. In addition,
options held by the directors of TriNet and certain executive officers became
fully vested as a result of the transaction.
The TriNet directors received a number of options of the Company to purchase
Common Stock on a fully vested basis on substantially the same terms as the
TriNet options, in each case giving effect to the 1.15 exchange ratio for their
options.
Also, as a result of the TriNet acquisition, TriNet terminated its dividend
equivalent rights program. The program called for immediate vesting and cash
redemption of all dividend equivalent rights upon a change of control of 50% or
more of the voting common stock. Concurrent with the TriNet acquisition, all
dividend equivalent rights were vested and amounts due to former TriNet
employees of approximately $8.3 million were paid by the Company. Such payments
were included as part of the purchase price paid by the Company to acquire
TriNet for financial reporting purposes.
56
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
Changes in options outstanding during each of fiscal 1997, 1998 and 1999 are
as follows:
NUMBER OF SHARES
--------------------------------------- AVERAGE
NON-EMPLOYEE STRIKE
EMPLOYEES DIRECTORS OTHER PRICE
---------- ------------ ----------- --------
OPTIONS OUTSTANDING, DECEMBER 31, 1996......... -- 333 -- $ 8.28
Granted in 1997.............................. -- 1,000 -- $15.00
Exercised in 1997............................ -- -- -- $ --
Forfeited in 1997............................ -- -- -- $ --
--------- ------- -----------
OPTIONS OUTSTANDING, DECEMBER 31, 1997......... -- 1,333 -- $13.32
Granted in 1998.............................. -- 9,996 2,493,842 $15.06
Exercised in 1998............................ -- (687) (18,000) $15.00
Forfeited in 1998............................ -- (646) -- $15.00
--------- ------- -----------
OPTIONS OUTSTANDING, DECEMBER 31, 1998......... -- 9,996 2,475,842 $15.07
Granted in 1999.............................. -- 4,998 -- $57.50
Exercised in 1999............................ -- -- (63,233) $15.00
Forfeited in 1999............................ -- -- (4,166) $15.00
Assumed in TriNet acquisition................ 1,311,547 167,900 -- $25.65
Reclassification for Advisor
Transaction(1)............................. 1,658,443 -- (1,658,443) $15.00
Adjustment for dilution...................... 31,280 283 14,146 $15.00
--------- ------- -----------
OPTIONS OUTSTANDING, DECEMBER 31, 1999......... 3,001,270 183,177 764,146 $19.08
========= ======= ===========
EXPLANATORY NOTE:
- ------------------------
(1) Represents the reclassification of stock options originally granted to the
Advisor and regranted to its employees who became employees of the Company
upon consummation of the Advisor Transaction (see Note 4).
57
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE CURRENTLY EXERCISE
EXERCISE PRICE RANGE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------- ----------- ----------- -------- ----------- --------
$15.00 2,453,869 8.20 $15.00 1,243,431(1) $15.00
$21.09-$21.417 106,950 3.60 $21.15 106,950 $21.15
$22.45 149,500 9.07 $22.45 -- $ --
$23.32 167,325 4.46 $23.32 -- $ --
$23.64 168,475 4.56 $23.64 -- $ --
$24.13-$24.57 251,275 6.11 $24.37 216,488 $24.34
$24.67-$26.85 178,222 5.21 $26.25 174,772 $26.27
$27.88-$28.37 138,000 2.61 $28.33 76,763 $28.33
$29.63 10,185 8.50 $30.18 10,185 $29.63
$30.33 309,350 3.56 $30.33 94,588 $30.33
$33.15-$33.70 10,350 2.83 $33.39 7,475 $33.49
$57.50 5,092 9.65 $58.58 5,092 $57.50
--------- ---- ------ --------- ------
3,948,593 7.04 $19.30 1,935,744 $18.94
========= ==== ====== ========= ======
EXPLANATORY NOTE:
- ------------------------------
(1) Includes approximately 764,000 options which were granted, on a fully
exercisable basis, in connection with the Recapitalization Transactions to
Starwood Capital Group, and were subsequently regranted by that entity to
its employees subject to vesting requirements. As a result of those vesting
requirements less than 2,000 of these options are currently exercisable by
the beneficial owners. In the event that these employees forfeit such
options they revert to Starwood Capital Group, who may regrant them at its
discretion.
The Company has elected to use the intrinsic method for accounting for
options issued to employees or directors, as allowed under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS 123") and, accordingly, recognizes no compensation charge in connection
with these options to the extent that the options exercise price equals or
exceeds the quoted price of the Company's common shares at the date of grant or
measurement date. In connection with the Advisor Transaction, as part of the
computation of the one-time charge to earnings, the Company calculated a
deferred compensation charge of approximately $5.1 million. This deferred charge
represents the difference of the closing sales price of the shares of Common
Stock on the date of the Advisor Transaction of $20.25 over the strike price of
the options of $15.00 for the unvested portion of the options granted to former
employees of the Advisor who are now employees of the Company. This deferred
charge will be amortized over the related remaining vesting terms to the
individual employees as additional compensation expense.
In connection with the original grant of options to the Advisor, the Company
utilized the option value method as required by SFAS 123 to account for the
initial grant of options to the Advisor. An independent financial advisory firm
estimated the value of these options at date of grant to be approximately $2.40
per share using a Black-Scholes valuation model. In the absence of comparable
historical market information
58
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
for the Company, the advisory firm utilized assumptions consistent with activity
of a comparable peer group of companies including an estimated option life of
five years, a 27.5% volatility rate and an estimated annual dividend rate of
8.5%. The resulting charge to earnings was calculated as the number of options
allocated to the Advisor multiplied by the estimated value at consummation. A
charge of approximately $6.0 million has been reflected in the Company's first
quarter 1998 financial results for this original grant.
Had the Company's compensation costs been determined using the fair value
method of accounting for stock options issued under the Plan to employees and
directors prescribed by SFAS 123, the Company's net income and earnings per
share for the fiscal year ended December 31, 1999 would have been reduced on a
pro forma basis by approximately $141,000, which would not have significantly
impacted earnings per share. As the Company had no employees prior to the
consummation of the Advisor Transaction, no pro forma adjustment is necessary to
reflect in the results of operations for fiscal 1998 and 1997 as if the option
value were utilized.
For the above SFAS 123 calculation, the Company utilized the following
assumptions; a 33.63% volatility rate (derived from a group of comparable
companies), a risk free rate of 5.91% and an estimated annual dividend rate of
11.85%.
Future charges may be taken to the extent of additional option grants, which
are at the discretion of the Board of Directors.
Effective November 4, 1999, the Company implemented a savings and retirement
plan (the "401 (k) Plan"), which is a voluntary, defined contribution plan. All
employees are eligible to participate in the 401 (k) Plan following completion
of six months of continuous service with the Company. Each participant may
contribute on a pretax basis between 2% and 15% of such participant's
compensation. At the discretion of the Board of Directors, the Company may make
matching contributions on the participant's behalf up to 50% of the first 10% of
the participant's annual contribution. The Company made contributions of
approximately $0.02 million to the 401 (k) Plan for the year ended December 31,
1999.
NOTE 12--EARNINGS PER SHARE
Prior to November 4, 1999, basic EPS was computed based on the income
allocable to class A shares (net income reduced by accrued dividends on
preferred shares and by 1% allocated to class B shares) divided by the weighted
average number of class A shares outstanding during the period. Diluted EPS was
based on the net earnings allocable to class A shares plus dividends on class B
shares which were convertible into class A shares, divided by the weighted
average number of class A shares and dilutive potential class A shares that were
outstanding during the period. Dilutive potential class A shares included the
class B shares, which were convertible into class A shares at a rate of 49
class B shares for one class A share, and potentially dilutive options to
purchase class A shares issued to the Advisor and the Company's directors and
warrants to acquire class A shares.
As more fully described in Note 4, in the Incorporation Merger, the class B
shares were converted into shares of Common Stock on a 49-for-one basis (the
same ratio at which class B shares were previously convertible into class A
shares), and the class A shares were converted into shares of Common Stock on a
one-for-one basis. As a result, the Company no longer has multiple classes of
common shares. Basic and
59
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EARNINGS PER SHARE (CONTINUED)
diluted earnings per share are based upon the following weighted average shares
outstanding during the years ended December 31, 1999, 1998 and 1997,
respectively.
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Weighted average common shares outstanding for basic
earnings per common share.......................... 57,749 41,607 1,258
Add effect of assumed shares issued under treasury
stock method for stock options..................... 1,500 1,311 542
Add effects of conversion of class B shares
(49-for-one)....................................... 450 445 762
Add effects of assumed warrants exercised under
treasury stock method for stock options............ 694 97 --
------ ------ -----
Weighted average common shares outstanding for
diluted earnings per common share.................. 60,393 43,460 2,562
====== ====== =====
As previously indicated, effective June 19, 1998, the Company consummated a
one-for-six reverse stock split for its shares. Historical earnings per share
have been retroactively restated to reflect the reverse split for comparative
purposes.
NOTE 13--COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") effective for fiscal years beginning after
December 15, 1997. The statement changes the reporting of certain items
currently reported as changes in the shareholders equity section of the balance
sheet and establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 requires that all components of comprehensive income shall be
reported in the financial statements in the period in which they are recognized.
Furthermore, a total amount for comprehensive income shall be displayed in the
financial statement where the components of other comprehensive income are
reported. The Company was not previously required to present comprehensive
income or its components under generally accepted accounting principles. The
Company has adopted this standard effective January 1, 1998. Total comprehensive
income (loss) was $38.7 million, $59.9 million and $(0.2) million for the years
ended December 31, 1999, 1998 and 1997 respectively. The primary component of
comprehensive income other than net income was the change in value of certain
investments in marketable securities classified as available-for-sale.
NOTE 14--DIVIDENDS
In order to maintain its election to qualify as a real estate investment
trust, the Company must distribute, at a minimum, an amount equal to 95% of its
taxable income and must distribute 100% of its taxable income to avoid paying
corporate federal income taxes. Accordingly, the Company anticipates it will
distribute all of its taxable income to its shareholders. Because taxable income
differs from cash flow from operations due to non-cash revenues or expenses, in
certain circumstances, the Company may be required to borrow to make sufficient
dividend payments to meet this anticipated dividend threshold.
60
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--DIVIDENDS (CONTINUED)
On November 4, 1999, the class A shares were converted into shares of Common
Stock on a one-for-one basis. Total dividends declared by the Company aggregated
$116.1 million, or $1.86 per common share, for the year ended December 31, 1999.
On November 29, 1999, the Company declared a dividend of approximately
$48.4 million, or $0.57 per common share applicable to the fourth quarter and
payable to shareholders of record on December 31, 1999. For the year ended
December 31, 1999, total dividends declared by the Company aggregated
$59.7 million, or $1.14 per common share. The Company also declared dividends
aggregating $20.9 million, $1.2 million, $0.7 million, and $2.0 million,
respectively, on its Series A, B, C and D preferred stock, respectively, for the
year ended December 31, 1999. The Series B, C, and D preferred stock was issued
in connection with the TriNet acquisition and the amounts above represent only
fourth quarter dividends. There are no dividend arrearages on any of the
preferred shares currently outstanding. Further, it declared and paid dividends
aggregating $0.2 million per quarter to the holders of the class B shares in
connection with the March 31, June 30, and September 30 quarterly dividends to
the holders of the class A shares.
In November 1999, the Company declared and paid a dividend of a total of one
million shares of Common Stock pro rata to all holders of record of Common Stock
as of the close of business on November 3, 1999.
The Series A preferred stock has a liquidation preference of $50.00 per
share, carry an initial dividend yield of 9.50% per annum. The dividend rate on
the preferred shares will increase to 9.75% on December 15, 2005, to 10.00% on
December 15, 2006 and to 10.25% on December 15, 2007 and thereafter. Dividends
on the Series A preferred shares are payable quarterly in arrears and are
cumulative.
Holders of shares of the Series B preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.375% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.34 per share. Dividends are cumulative from the date of
original issue and are payable quarterly in arrears on or before the 15th day of
each March, June, September and December or, if not a business day, the next
succeeding business day. Any dividend payable on the Series B preferred stock
for any partial dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends will be payable to holders of
record as of the close of business on the first day of the calendar month in
which the applicable dividend payment date falls or on another date designated
by the Board of Directors of the Company for the payment of dividends that is
not more than 30 nor less than 10 days prior to the dividend payment date.
Holders of shares of the Series C preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.20% of the $25.00 liquidation preference per year, equivalent to a fixed
annual rate of $2.30 per share.
Holders of shares of the Series D preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 8.00% of the $25.00 liquidation preference per year, equivalent to a fixed
annual rate of $2.00 per share.
The exact amount of future quarterly dividends to common shareholders will
be determined by the Board of Directors based on the Company's actual and
expected operations for the fiscal year and the Company's overall liquidity
position.
61
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
("SFAS 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 107 do not require the disclosure of the fair value of
non-financial instruments, including intangible assets or the Company's real
estate assets under operating leases.
In addition, the estimates are only indicative of the value of individual
financial instruments and should not be considered an indication of the fair
value of the Company as an operating business.
SHORT-TERM FINANCIAL INSTRUMENTS--The carrying values of short-term
financial instruments including cash and cash equivalents and short-term
investments approximate the fair values of these instruments. These financial
instruments generally expose the Company to limited credit risk and have no
stated maturities, or have an average maturity of less than 90 days and carry
interest rates which approximate market.
LOANS AND OTHER LENDING INVESTMENTS--For the Company's interests in loans
and other lending investments, the fair values were estimated by discounting the
future contractual cash flows (excluding participation interests in the sale or
refinancing proceeds of the underlying collateral) using estimated current
market rates at which similar loans would be made to borrowers with similar
credit ratings for the same remaining maturities.
MARKETABLE SECURITIES--Securities held for investment, securities available
for sale, loans held for sale, trading account instruments, long-term debt and
trust preferred securities traded actively in the secondary market have been
valued using quoted market prices.
OTHER FINANCIAL INSTRUMENTS--The carrying value of other financial
instruments including, restricted cash, accrued interest receivable, accounts
payable, accrued expenses and other liabilities approximate the fair values of
the instruments.
DEBT OBLIGATIONS--A substantial portion of the Company's existing debt
obligations bear interest at fixed margins over LIBOR. Such margins or spreads
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, 1999 or 1998 to maturity
using estimated current market rates at which the Company could enter into
similar financing arrangements.
INTEREST RATE PROTECTION AGREEMENTS--The fair value of interest rate
protection agreements such as interest rate caps, floors, collars and swaps used
for hedging purposes (see Note 9) is the estimated amount the Company would
receive or pay to terminate these agreements at the reporting date, taking into
account current interest rates and current creditworthiness of the respective
counterparties.
62
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The book and fair values of financial instruments as of December 31, 1999
and 1998 were (in thousands):
1999 1998
----------------------- -----------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
FINANCIAL ASSETS:
Loans and other lending
investments............... $2,011,006 $2,031,065 $1,826,511 $1,924,037
Marketable securities....... 4,344 4,344 5,406 5,406
Allowance for credit
losses.................... (7,500) (7,500) (2,750) (2,750)
FINANCIAL LIABILITIES:
Debt obligations............ 1,901,204 1,885,797 1,055,719 1,039,771
Interest rate protection
agreements................ 117 5,556 577 (17,719)
NOTE 16--SEGMENT REPORTING
Statement of Financial Accounting Standard No. 131 ("SFAS 131") establishes
standards for the way the public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected financial information about operating segments in
interim financial reports issued to stockholders.
The Company has two reportable segments: Real Estate Lending and Credit
Tenant Leasing. The Company does not have substantial foreign operations. The
accounting policies of the segments are the same as those described in Note 3.
The Company has no single customer that accounts for 10% or more of revenues
(see Note 9 for other information regarding concentrations of credit risk).
63
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SEGMENT REPORTING (CONTINUED)
The Company evaluates performance based on the following financial measures
for each segment:
CREDIT
REAL ESTATE TENANT CORPORATE/ COMPANY
LENDING LEASING (1) OTHER (2) TOTAL
----------- ----------- ---------- ----------
(IN THOUSANDS)
1999:
Total revenues(3): $ 209,848 $ 42,186 $ 12,763 $ 264,797
Total operating and interest expense(4): 70,778 36,749 118,343 225,870
Net operating income before minority
interests(5): 139,070 5,437 (105,580) 38,927
Total long-lived assets(6): 2,003,506 1,714,284 N/A 3,717,790
Total assets: N/A N/A 3,813,552 3,813,552
1998:
Total revenues(3): 112,914 12,378 2,804 128,096
Total operating and interest expense(4): 36,998 12,554 18,587 68,139
Net operating income before minority
interests(5): 75,916 (176) (15,783) 59,957
Total long-lived assets(6): 1,823,761 189,942 N/A 2,013,703
Total assets: N/A N/A 2,059,616 2,059,616
1997:
Total revenues(3): 896 -- 991 1,887
Total operating and interest expense(4): -- -- 461 461
Net operating income before minority
interests(5): 896 -- 530 1,426
Total long-lived assets(6): -- -- N/A --
Total assets: N/A N/A 13,441 13,441
EXPLANATORY NOTES:
- ------------------------------
(1) Includes the Company's pre-existing Credit Tenant Leasing investments
acquired in the Recapitalization Transactions since March 18, 1998 and the
Credit Tenant Leasing business acquired in the TriNet acquisition since
November 4, 1999.
(2) Corporate and Other represents all corporate-level items, including,
general and administrative expenses and any intercompany eliminations
necessary to reconcile to the consolidated Company totals. This caption also
includes the Company's servicing business, which is not considered a
material separate segment. In addition, as more fully discussed in Note 4,
Corporate and Other for the year ended December 31, 1999 includes a
non-recurring charge of approximately $94.5 million relating to the Advisor
Transaction.
(3) Total revenues represents all revenues earned during the period from the
assets in each segment. Revenue from the Real Estate Lending Business
primarily represents interest income and revenue from the Credit Tenant
Leasing business primarily represents operating lease income.
(4) Total operating and interest expense represents provision for possible
credit losses for the Real Estate Lending business and property operating
costs (including real estate taxes) for the Credit Tenant Leasing business.
Interest expense, general and administrative, advisory fees and stock option
compensation expense is included in Corporate and Other for all periods.
Depreciation and amortization of $10,340, $4,287 and $0 in 1999, 1998 and
1997, respectively, are included in the amounts presented above.
(5) Net operating income before minority interests represents total revenues, as
defined in note (B) above, less total operating and interest expense, as
defined in note (C) above, for each period.
(6) Long-lived assets is comprised of Loans and Other Lending Investments, net
and Real Estate Subject to Operating Leases, net, for each respective
segment.
64
STARWOOD FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--SUBSEQUENT EVENTS
On January 31, 2000, the Company closed a new unsecured revolving credit
facility. The facility is led by a major commercial bank, which has committed
$50.0 of the facility amount and intends to increase the facility to
$100.0 million through syndication. The new facility has a two-year primary term
and one-year extension at the Company's option, and bears interest at LIBOR plus
2.00% to 2.25%, depending upon certain conditions.
As more fully discussed in Note 7, on February 4, 2000, the Company extended
the term, modified the interest rate and certain other provisions on its
existing $500.0 million secured credit facility.
NOTE 18--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the selected quarterly financial data for the
Company (in thousands, except for per share amounts).
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
------------ ------------- -------- ---------
1999
Revenue.......................................... $89,483 $60,635 $59,255 $55,424
Net income (loss)(1)............................. (50,485) 31,271 29,883 28,217
Net income (loss) allocable to common
shares(2)...................................... (58,405) 25,963 24,575 22,909
Net income (loss) per common share............... $ (0.80) $ 0.49 $ 0.46 $ 0.43
Weighted average common shares outstanding....... 73,427 52,471 52,471 52,447
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1998 1998 1998 1998
------------ ------------- -------- ---------
1998
Revenue.......................................... $48,349 $42,077 $33,704 $3,966
Net income (loss)................................ 22,954 20,935 19,889 (3,875)
Net income (loss) applicable to class A shares... 21,790 20,726 19,690 (3,836)
Net income (loss) per class A share.............. $ 0.42 $ 0.40 $ 0.38 $(0.44)
Weighted average class A shares outstanding(3)... 52,408 52,390 52,390 8,644
EXPLANATORY NOTES:
- ------------------------------
(1) As more fully discussed in Note 4, the quarter ended December 31, 1999
includes a non-recurring charge of approximately $94.5 million relating to
the Advisor Transaction. Excluding such charge, net income for the quarter
would have been approximately $44.0 million and net income per common share
for the quarter would have been $0.49.
(2) On November 4, 1999, through the Incorporation Merger, the class B shares
were effectively converted into shares of Common Stock on a 49-for-one basis
and the class A shares were converted into shares of Common Stock on a
one-for-one basis.
(3) As adjusted for one-for-six reverse stock split effective June 19, 1998.
65
STARWOOD FINANCIAL INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGES TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
FOR THE YEAR ENDED DECEMBER 31, 1997
None.................................... $ -- $ -- $ -- $ -- $ --
FOR THE YEAR ENDED DECEMBER 31, 1998
Provision for possible credit losses
(1)................................... $ -- $2,750 $ -- $ -- $2,750
FOR THE YEAR ENDED DECEMBER 31, 1999
Provision for possible credit losses
(1)................................... $2,750 $4,750 $ -- $ -- $7,500
EXPLANATORY NOTE:
- ------------------------------
(1) See Note 5 to the Company's 1999 Consolidated Financial Statements.
66
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
UNISYS CORPORATION
1--2 2476 Swedesford Road
Paoli, PA $ -- $4,678 $27,195 $ -- $4,678 $ 27,195 $31,873
UNISYS CORPORATION
3 2611 Corporate West Drive
Lisle, IL 6,676 6,693 16,308 -- 6,693 16,308 23,001
REX STORES CORPORATION
4 2875 Needmore Road
Dayton, OH 2,174 1,083 6,127 -- 1,083 6,127 7,210
THE STANDARD REGISTER COMPANY
5 4000 South Racine Avenue
Chicago, IL -- 426 3,008 -- 426 3,008 3,434
RALPHS GROCERY COMPANY
6 2652 East Long Beach Avenue
Los Angeles, CA -- 9,347 12,518 -- 9,347 12,518 21,865
UNIVERSAL TECHNICAL INSTITUTE
7 3002 North 27th Avenue
Phoenix, AZ -- 1,099 2,193 -- 1,099 2,193 3,292
CATERAIR INTERNATIONAL CORPORATION
8 50 Adrian Court
Burlingame, CA -- 1,207 3,435 -- 1,207 3,435 4,642
9 370 Adrian Road
Millbrae, CA -- 734 2,085 -- 734 2,085 2,819
10 3500 N.W. 24th Street
Miami, FL -- 3,017 8,589 -- 3,017 8,589 11,606
11 3630 N.W. 25th Street
Miami, FL -- 1,596 4,540 -- 1,596 4,540 6,136
12 4101 N.W. 25th Street
Miami, FL -- 1,379 3,927 -- 1,379 3,927 5,306
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
UNISYS CORPORATION
1--2 2476 Swedesford Road
Paoli, PA $(96) 1999 40.0
UNISYS CORPORATION
3 2611 Corporate West Drive
Lisle, IL (70) 1999 40.0
REX STORES CORPORATION
4 2875 Needmore Road
Dayton, OH (27) 1999 40.0
THE STANDARD REGISTER COMPANY
5 4000 South Racine Avenue
Chicago, IL (12) 1999 40.0
RALPHS GROCERY COMPANY
6 2652 East Long Beach Avenue
Los Angeles, CA (53) 1999 40.0
UNIVERSAL TECHNICAL INSTITUTE
7 3002 North 27th Avenue
Phoenix, AZ (12) 1999 40.0
CATERAIR INTERNATIONAL CORPORATION
8 50 Adrian Court
Burlingame, CA (15) 1999 40.0
9 370 Adrian Road
Millbrae, CA (8) 1999 40.0
10 3500 N.W. 24th Street
Miami, FL (37) 1999 40.0
11 3630 N.W. 25th Street
Miami, FL (19) 1999 40.0
12 4101 N.W. 25th Street
Miami, FL (17) 1999 40.0
67
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
13 221 West 79th Street
Bloomington, MN -- 399 1,135 -- 399 1,135 1,534
14 1085 Bible Way
Reno, NV -- 246 699 -- 246 699 945
15 18850 28th Avenue, South
Seattle, WA -- 820 2,331 -- 820 2,331 3,151
16 2800 Collingswood Drive
Orlando, FL -- 1,461 4,156 -- 1,461 4,156 5,617
17 45-10 19th Avenue
Astoria, NY -- 1,778 5,057 -- 1,778 5,057 6,835
18 24-20 49th Street
Astoria, NY -- 888 2,529 -- 888 2,529 3,417
19 8401 Escort Street
Philadelphia, PA -- 613 1,747 -- 613 1,747 2,360
SEARS LOGISTICS SERVICES
20 4150 Lockbourne Industrial
Parkway
Columbus, OH 2,748 390 7,478 -- 390 7,478 7,868
NORTHERN STATES POWER COMPANY
21 3115 Centre Point Drive
Roseville, MN 1,385 1,102 4,407 -- 1,102 4,407 5,509
PNC MORTGAGE CORPORATION OF
AMERICA, INC
22 440 North Fairway Drive
Vernon Hills, IL -- 1,386 12,470 -- 1,386 12,470 13,856
VOLKSWAGEN OF AMERICA, INC
23 450 Barclay Boulevard
Lincolnshire, IL 2,596 3,160 7,432 -- 3,160 7,432 10,592
24 500 South Seventh Avenue
City of Industry, CA 3,330 4,952 11,647 -- 4,952 11,647 16,599
25 11650 Central Parkway
Jacksonville, FL 1,864 2,287 5,380 -- 2,287 5,380 7,667
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
13 221 West 79th Street
Bloomington, MN (5) 1999 40.0
14 1085 Bible Way
Reno, NV (3) 1999 40.0
15 18850 28th Avenue, South
Seattle, WA (10) 1999 40.0
16 2800 Collingswood Drive
Orlando, FL (18) 1999 40.0
17 45-10 19th Avenue
Astoria, NY (22) 1999 40.0
18 24-20 49th Street
Astoria, NY (11) 1999 40.0
19 8401 Escort Street
Philadelphia, PA (7) 1999 40.0
SEARS LOGISTICS SERVICES
20 4150 Lockbourne Industrial
Parkway
Columbus, OH (34) 1999 40.0
NORTHERN STATES POWER COMPANY
21 3115 Centre Point Drive
Roseville, MN (19) 1999 40.0
PNC MORTGAGE CORPORATION OF
AMERICA, INC
22 440 North Fairway Drive
Vernon Hills, IL (53) 1999 40.0
VOLKSWAGEN OF AMERICA, INC
23 450 Barclay Boulevard
Lincolnshire, IL (32) 1999 40.0
24 500 South Seventh Avenue
City of Industry, CA (43) 1999 40.0
25 11650 Central Parkway
Jacksonville, FL (23) 1999 40.0
68
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
LOCKHEED MARTIN AEROSPACE
CORPORATION
26 1260 Crossman Avenue
Sunnyvale, CA 2,687 1,827 11,368 12 1,827 11,380 13,207
LAND O LAKES
27 1275 Red Fox Road
Arden Hills, MN 1,791 711 6,475 -- 711 6,475 7,186
MICROSOFT CORPORATION
28 1321 Greenway
Irving, TX 1,435 2,258 7,276 52 2,258 7,328 9,586
UNIVERSAL CARD SERVICES
29 7595 Oak Grove Plaza
Jacksonville, FL 2,346 1,370 3,872 -- 1,370 3,872 5,242
VACANT
30 7585 Oak Grove Plaza
Jacksonville, FL 1,214 868 2,215 39 868 2,254 3,122
UNISON INDUSTRIES, L.P.
31 7575 Oak Grove Plaza
Jacksonville, FL 3,985 2,342 6,011 -- 2,342 6,011 8,353
GOODMAN MANUFACTURING
32 100 Donwick Drive
Conroe, TX -- 1,231 4,059 49 1,231 4,108 5,339
NIKE, INC
33 8400 Winchester Road
Memphis, TN 6,113 1,471 23,045 -- 1,471 23,045 24,516
CIRRUS LOGIC, INC
34 46702 Bayside Parkway
Fremont, CA 1,203 647 4,545 -- 647 4,545 5,192
35 46831 Lakeview Blvd
Fremont, CA -- 1,075 7,884 -- 1,075 7,884 8,959
CERTIFIED GROCERS OF CALIFORNIA,
LTD
36 5200 Sheila Street
Commerce, CA 2,879 3,447 12,889 -- 3,447 12,889 16,336
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
LOCKHEED MARTIN AEROSPACE
CORPORATION
26 1260 Crossman Avenue
Sunnyvale, CA (39) 1999 40.0
LAND O LAKES
27 1275 Red Fox Road
Arden Hills, MN (27) 1999 40.0
MICROSOFT CORPORATION
28 1321 Greenway
Irving, TX (27) 1999 40.0
UNIVERSAL CARD SERVICES
29 7595 Oak Grove Plaza
Jacksonville, FL (14) 1999 40.0
VACANT
30 7585 Oak Grove Plaza
Jacksonville, FL (8) 1999 40.0
UNISON INDUSTRIES, L.P.
31 7575 Oak Grove Plaza
Jacksonville, FL (33) 1999 40.0
GOODMAN MANUFACTURING
32 100 Donwick Drive
Conroe, TX (15) 1999 40.0
NIKE, INC
33 8400 Winchester Road
Memphis, TN (98) 1999 40.0
CIRRUS LOGIC, INC
34 46702 Bayside Parkway
Fremont, CA (18) 1999 40.0
35 46831 Lakeview Blvd
Fremont, CA (31) 1999 40.0
CERTIFIED GROCERS OF CALIFORNIA,
LTD
36 5200 Sheila Street
Commerce, CA (55) 1999 40.0
69
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
FIRST HEALTH STRATEGIES, INC
37-40 Decker Lake Lane Center
Salt Lake City, UT -- 1,179 12,862 -- 1,179 12,862 14,041
TRW, INC
41 3701 Doolittle Drive
Redondo Beach, CA -- 2,572 9,119 -- 2,572 9,119 11,691
DUNHAM'S ATHLEISURE CORPORATION
42 2201 E. Loew Road
Marion, IN -- 142 4,598 -- 142 4,598 4,740
NEWCOURT FINANCIAL USA INC
43 Gatehall Corporate Center II
Parsippany, NJ -- 4,131 42,146 -- 4,131 42,146 46,277
ACOSTA SALES & MARKETING CO
44 6300 Dumbarton Circle
Fremont, CA -- 871 4,798 -- 871 4,798 5,669
CASE SWAYNE CO INC
45 5015 South Water Circle
Wichita, KS -- 222 3,316 -- 222 3,316 3,538
TECH DATA CORPORATION
46 3900 William Richardson Drive
South Bend, IN -- 189 6,242 -- 189 6,242 6,431
PRIMERICA LIFE INSURANCE COMPANY
47 3120 Breckinridge Boulevard
Duluth, GA -- 1,638 14,339 38 1,638 14,377 16,015
ARROW ELECTRONICS, INC
48 Capstone Building
Aurora, CO -- 449 3,029 -- 449 3,029 3,478
KOCH MEMBRANE SYSTEMS
49 10054 Old Grove Road
San Diego, CA -- 1,514 3,030 -- 1,514 3,030 4,544
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
FIRST HEALTH STRATEGIES, INC
37-40 Decker Lake Lane Center
Salt Lake City, UT (55) 1999 40.0
TRW, INC
41 3701 Doolittle Drive
Redondo Beach, CA (38) 1999 40.0
DUNHAM'S ATHLEISURE CORPORATION
42 2201 E. Loew Road
Marion, IN (22) 1999 40.0
NEWCOURT FINANCIAL USA INC
43 Gatehall Corporate Center II
Parsippany, NJ (179) 1999 40.0
ACOSTA SALES & MARKETING CO
44 6300 Dumbarton Circle
Fremont, CA (20) 1999 40.0
CASE SWAYNE CO INC
45 5015 South Water Circle
Wichita, KS (16) 1999 40.0
TECH DATA CORPORATION
46 3900 William Richardson Drive
South Bend, IN (27) 1999 40.0
PRIMERICA LIFE INSURANCE COMPANY
47 3120 Breckinridge Boulevard
Duluth, GA (61) 1999 40.0
ARROW ELECTRONICS, INC
48 Capstone Building
Aurora, CO (13) 1999 40.0
KOCH MEMBRANE SYSTEMS
49 10054 Old Grove Road
San Diego, CA (12) 1999 40.0
70
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
NISSAN MOTOR ACCEPTANCE CORPORATION
50 2901 Kinwest Parkway
Irving, TX -- 1,350 10,521 -- 1,350 10,521 11,871
LEVER BROTHERS COMPANY
51 3501 E. Terra Drive
O'Fallon, MO -- 1,374 12,573 -- 1,374 12,573 13,947
FEDERAL EXPRESS CORPORATION
52-54 NonConnah Corporate Center
Memphis, TN -- 3,197 29,727 -- 3,197 29,727 32,924
VACANT
55 500 Airline Drive
Coppell, TX -- 1,647 12,345 10 1,647 12,355 14,002
FRESENIUS USA, INC
56 2637 Shadelands Drive
Walnut Creek, CA -- 742 7,624 -- 742 7,624 8,366
TERADYNE, INC
57 2625 Shadelands Drive
Walnut Creek, CA -- 488 5,021 -- 488 5,021 5,509
LAM RESEARCH CORPORATION
58 1210 California Circle
Milpitas, CA -- 4,053 8,240 -- 4,053 8,240 12,293
BLUE CROSS & BLUE SHIELD UNITED OF
WISCONSIN
59 401 West Michigan Street
Milwaukee, WI -- 2,357 17,486 -- 2,357 17,486 19,843
NORTHERN TELECOM INC
60 2021 Lakeside Boulevard
Richardson, TX -- 1,217 5,604 -- 1,217 5,604 6,821
adidas AMERICA, INC
61 5675 North Blackstock Road
Spartanburg, SC -- 934 16,667 -- 934 16,667 17,601
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
NISSAN MOTOR ACCEPTANCE CORPORATION
50 2901 Kinwest Parkway
Irving, TX (52) 1999 40.0
LEVER BROTHERS COMPANY
51 3501 E. Terra Drive
O'Fallon, MO (55) 1999 40.0
FEDERAL EXPRESS CORPORATION
52-54 NonConnah Corporate Center
Memphis, TN (115) 1999 40.0
VACANT
55 500 Airline Drive
Coppell, TX (62) 1999 40.0
FRESENIUS USA, INC
56 2637 Shadelands Drive
Walnut Creek, CA (29) 1999 40.0
TERADYNE, INC
57 2625 Shadelands Drive
Walnut Creek, CA (19) 1999 40.0
LAM RESEARCH CORPORATION
58 1210 California Circle
Milpitas, CA (35) 1999 40.0
BLUE CROSS & BLUE SHIELD UNITED OF
WISCONSIN
59 401 West Michigan Street
Milwaukee, WI (69) 1999 40.0
NORTHERN TELECOM INC
60 2021 Lakeside Boulevard
Richardson, TX (23) 1999 40.0
adidas AMERICA, INC
61 5675 North Blackstock Road
Spartanburg, SC (71) 1999 40.0
71
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
FRONTIER CORPORATION
62 12110 North Pecos Street
Westminster, CO -- 304 3,489 -- 304 3,489 3,793
RATIONAL SOFTWARE
63 18880 Homestead Road
Cupertino, CA -- 7,614 18,132 -- 7,614 18,132 25,746
GALILEO INTERNATIONAL PARTNERSHIP
64 6901 S. Havana Street
Englewood, CO -- 2,937 14,858 -- 2,937 14,858 17,795
LUCENT TECHNOLOGIES, INC
65 6162 S. Willow Drive
Englewood, CO -- 1,756 16,919 6 1,756 16,925 18,681
IBM CORPORATION--DALLAS
66 13800 Diplomat Drive
Farmers Branch, TX -- 1,301 8,814 -- 1,301 8,814 10,115
RIVEREDGE SUMMIT
67 1500-1600 RiverEdge Parkway
Atlanta, GA -- 5,652 48,598 15 5,652 48,613 54,265
NORTHERN TELECOM INC
68 Cardinal Commerce Center
Richardson, TX -- 850 8,470 -- 850 8,470 9,320
CANYON CORPORATE CENTER
69 5515 East La Palma Avenue
Anaheim, CA -- 3,476 13,245 45 3,476 13,290 16,766
70 5601 East La Palma Avenue
Anaheim, CA -- 2,205 8,434 -- 2,205 8,434 10,639
71 5605 East La Palma Avenue
Anaheim, CA -- 653 2,463 -- 653 2,463 3,116
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
FRONTIER CORPORATION
62 12110 North Pecos Street
Westminster, CO (15) 1999 40.0
RATIONAL SOFTWARE
63 18880 Homestead Road
Cupertino, CA (71) 1999 40.0
GALILEO INTERNATIONAL PARTNERSHIP
64 6901 S. Havana Street
Englewood, CO (62) 1999 40.0
LUCENT TECHNOLOGIES, INC
65 6162 S. Willow Drive
Englewood, CO (72) 1999 40.0
IBM CORPORATION--DALLAS
66 13800 Diplomat Drive
Farmers Branch, TX (37) 1999 40.0
RIVEREDGE SUMMIT
67 1500-1600 RiverEdge Parkway
Atlanta, GA (215) 1999 40.0
NORTHERN TELECOM INC
68 Cardinal Commerce Center
Richardson, TX (36) 1999 40.0
CANYON CORPORATE CENTER
69 5515 East La Palma Avenue
Anaheim, CA (56) 1999 40.0
70 5601 East La Palma Avenue
Anaheim, CA (36) 1999 40.0
71 5605 East La Palma Avenue
Anaheim, CA (11) 1999 40.0
72
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
RIVERPARK
72 200 Riverpark Drive
North Reading, MA -- 548 5,595 -- 548 5,595 6,143
73 300 Riverpark Drive
North Reading, MA -- 1,689 17,224 -- 1,689 17,224 18,913
74 400 Riverpark Drive
North Reading, MA -- 1,701 17,346 -- 1,701 17,346 19,047
SUNBELT BEVERAGE CORP
75 7621 Energy Parkway
Baltimore, MD -- 1,520 9,230 10 1,520 9,240 10,760
FRONTIER CORPORATION
76 1499 West 121st. Street
Westminister, CO -- 610 7,217 -- 610 7,217 7,827
CHARLESTON PLACE
77 1545 Charleston Road -- 5,594 12,274 -- 5,594 12,274 17,868
Mountain View, CA
78-79 1565-1585 Charleston Road -- 12,374 27,147 -- 12,374 27,147 39,521
BAY STATE GAS
80 300 Friberg Parkway
Westborough, MA -- 1,634 10,650 -- 1,634 10,650 12,284
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
RIVERPARK
72 200 Riverpark Drive
North Reading, MA (22) 1999 40.0
73 300 Riverpark Drive
North Reading, MA (64) 1999 40.0
74 400 Riverpark Drive
North Reading, MA (65) 1999 40.0
SUNBELT BEVERAGE CORP
75 7621 Energy Parkway
Baltimore, MD (37) 1999 40.0
FRONTIER CORPORATION
76 1499 West 121st. Street
Westminister, CO (30) 1999 40.0
CHARLESTON PLACE
77 1545 Charleston Road (50) 1999 40.0
Mountain View, CA
78-79 1565-1585 Charleston Road (111) 1999 40.0
BAY STATE GAS
80 300 Friberg Parkway
Westborough, MA (45) 1999 40.0
73
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
WARNER CROSSING
81 1120 West Warner Road
Tempe, AZ -- 694 4,295 -- 694 4,295 4,989
82 1130 West Warner Road
Tempe, AZ -- 1,023 6,585 -- 1,023 6,585 7,608
83 1140 West Warner Road
Tempe, AZ -- 1,023 6,585 -- 1,023 6,585 7,608
84 8440 South Hardy Drive
Tempe, AZ -- 1,023 6,585 -- 1,023 6,585 7,608
85 8320 South Hardy Drive
Tempe, AZ -- 1,497 9,634 -- 1,497 9,634 11,131
GATEWAY LAKES
86 1551 102nd Avenue
St. Petersburg, FL -- 715 3,030 -- 715 3,030 3,745
87 1527 102nd Avenue
St. Petersburg, FL -- 627 2,659 -- 627 2,659 3,286
EDENVALE BUSINESS PARK
88 5853-5863 Rue Ferrari Drive
San Jose, CA -- 9,579 23,054 -- 9,579 23,054 32,633
PINACOR, INC
89 105 West Bethany Drive
Allen, TX -- 1,225 9,131 -- 1,225 9,131 10,356
COMPUTER SCIENCES CORP
90 7700-7720 Hubble Drive
Lanham, MD -- 2,461 11,926 20 2,461 11,946 14,407
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
WARNER CROSSING
81 1120 West Warner Road
Tempe, AZ (18) 1999 40.0
82 1130 West Warner Road
Tempe, AZ (28) 1999 40.0
83 1140 West Warner Road
Tempe, AZ (29) 1999 40.0
84 8440 South Hardy Drive
Tempe, AZ (29) 1999 40.0
85 8320 South Hardy Drive
Tempe, AZ (41) 1999 40.0
GATEWAY LAKES
86 1551 102nd Avenue
St. Petersburg, FL (11) 1999 40.0
87 1527 102nd Avenue
St. Petersburg, FL (12) 1999 40.0
EDENVALE BUSINESS PARK
88 5853-5863 Rue Ferrari Drive
San Jose, CA (94) 1999 40.0
PINACOR, INC
89 105 West Bethany Drive
Allen, TX (38) 1999 40.0
COMPUTER SCIENCES CORP
90 7700-7720 Hubble Drive
Lanham, MD (51) 1999 40.0
74
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
POLYCOM, INC
91 1565 Barber Lane
Milpitas, CA -- 4,831 12,243 -- 4,831 12,243 17,074
ALLIANCE DATA SYSTEMS
92 17201 Waterview Parkway
Dallas, TX -- 1,899 4,586 -- 1,899 4,586 6,485
HEWLETT PACKARD
93 3000 Waterview Parkway
Richardson, TX -- 2,903 30,921 -- 2,903 30,921 33,824
MULTILINK
94 Six Riverside Drive
Andover, MA -- 637 7,150 -- 637 7,150 7,787
WELLPOINT HEALTH NETWORK, INC
95-96 2000 Corporate Center Drive
Newbury Park, CA -- 4,518 24,660 -- 4,518 24,660 29,178
TRINET PROPERTY PARTNERS, L.P.
97 1022 Hingham Street
Rockland, MA -- 1,990 11,643 -- 1,990 11,643 13,633
98 65 Dan Road
Canton, MA -- 907 3,856 -- 907 3,856 4,763
99 One Longwater Circle
Norwell, MA -- 1,128 1,641 -- 1,128 1,641 2,769
100 100 Longwater Circle
Norwell, MA 3,910 964 3,766 -- 964 3,766 4,730
101 101 Philip Drive
Norwell, MA 2,356 501 2,254 -- 501 2,254 2,755
102 30 Dan Road
Canton, MA -- 1,395 3,851 -- 1,395 3,851 5,246
103 85 Dan Road
Canton, MA -- 1,066 2,718 55 1,066 2,773 3,839
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
POLYCOM, INC
91 1565 Barber Lane
Milpitas, CA (52) 1999 40.0
ALLIANCE DATA SYSTEMS
92 17201 Waterview Parkway
Dallas, TX (19) 1999 40.0
HEWLETT PACKARD
93 3000 Waterview Parkway
Richardson, TX (129) 1999 40.0
MULTILINK
94 Six Riverside Drive
Andover, MA (30) 1999 40.0
WELLPOINT HEALTH NETWORK, INC
95-96 2000 Corporate Center Drive
Newbury Park, CA (94) 1999 40.0
TRINET PROPERTY PARTNERS, L.P.
97 1022 Hingham Street
Rockland, MA (48) 1999 40.0
98 65 Dan Road
Canton, MA (16) 1999 40.0
99 One Longwater Circle
Norwell, MA (7) 1999 40.0
100 100 Longwater Circle
Norwell, MA (16) 1999 40.0
101 101 Philip Drive
Norwell, MA (10) 1999 40.0
102 30 Dan Road
Canton, MA (16) 1999 40.0
103 85 Dan Road
Canton, MA (11) 1999 40.0
75
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
104 300 Foxborough Boulevard
Foxborough, MA 3,285 1,206 3,719 -- 1,206 3,719 4,925
105 105 Forbes Boulevard
Mansfield, MA 1,071 578 1,428 -- 578 1,428 2,006
106 60 Columbian Street
Braintree, MA -- 2,203 7,328 -- 2,203 7,328 9,531
107 76 Pacella Park Drive
Randolph, MA 2,893 609 3,436 -- 609 3,436 4,045
108 260 Kenneth W. Welch Drive
Lakeville, MA -- 1,002 4,007 -- 1,002 4,007 5,009
109 700 Longwater Drive
Norwell, MA -- 1,344 5,374 -- 1,344 5,374 6,718
110 3000 Longwater Drive
Norwell, MA 2,061 1,144 1,634 -- 1,144 1,634 2,778
ICG HOLDINGS, INC
111 161 Inverness Drive West
Englewood, CO -- 11,456 36,657 -- 11,456 36,657 48,113
CONCORD FARMS
112 Three Concord Farms
Concord, MA -- 1,405 7,461 91 1,405 7,552 8,957
113 Four Concord Farms
Concord, MA -- 1,297 7,590 39 1,297 7,629 8,926
114 Five Concord Farms
Concord, MA -- 1,014 4,323 48 1,014 4,371 5,385
115 Six Concord Farms
Concord, MA -- 1,292 7,387 39 1,292 7,426 8,718
Two Concord Farms
Concord, MA -- 1,640 -- -- 1,640 -- 1,640
Seven Concord Farms
Concord, MA -- 1,254 -- -- 1,254 -- 1,254
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
104 300 Foxborough Boulevard
Foxborough, MA (16) 1999 40.0
105 105 Forbes Boulevard
Mansfield, MA (6) 1999 40.0
106 60 Columbian Street
Braintree, MA (31) 1999 40.0
107 76 Pacella Park Drive
Randolph, MA (16) 1999 40.0
108 260 Kenneth W. Welch Drive
Lakeville, MA (16) 1999 40.0
109 700 Longwater Drive
Norwell, MA (21) 1999 40.0
110 3000 Longwater Drive
Norwell, MA (8) 1999 40.0
ICG HOLDINGS, INC
111 161 Inverness Drive West
Englewood, CO (156) 1999 40.0
CONCORD FARMS
112 Three Concord Farms
Concord, MA (32) 1999 40.0
113 Four Concord Farms
Concord, MA (31) 1999 40.0
114 Five Concord Farms
Concord, MA (19) 1999 40.0
115 Six Concord Farms
Concord, MA (30) 1999 40.0
Two Concord Farms
Concord, MA -- 1999 n/a
Seven Concord Farms
Concord, MA -- 1999 n/a
76
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ----------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ --------
ARBELLA CAPITAL CORP
116 1100 Crown Colony Drive
Quincy, MA 13,280 3,275 21,537 -- 3,275 21,537 24,812
MAST INDUSTRIES
117 100 Old River Road
Andover, MA -- 1,769 8,401 -- 1,769 8,401 10,170
HAEMONETICS CORP
118 355 Wood Road
Braintree, MA -- 784 4,880 -- 784 4,880 5,664
NOKIA
119 6000 Connection Drive
Irving, TX -- 6,022 41,594 -- 6,022 41,594 47,616
ANDERSEN CONSULTING
120 1661 Page Mill Road
Palo Alto, CA -- -- 18,975 -- -- 18,975 18,975
WINDWARD FOREST
121 960 Northpoint Parkway
Alpharetta, GA -- 896 6,676 -- 896 6,676 7,572
THE MITRE CORPORATION
122 11493 Sunset Hills Road
Fairfax, VA -- 4,391 22,137 -- 4,391 22,137 26,528
GTE COMMUNICATIONS CORP
123 Sierra I at Los Colinas
Irving, TX -- 3,329 21,162 -- 3,329 21,162 24,491
POYDRAS PLAZA
124 Entergy Building
New Orleans, LA 78,610 2,064 35,092 2 2,064 35,094 37,158
125 Mobil Building
New Orleans, LA -- 2,408 24,095 -- 2,408 24,095 26,503
126 Parking Garage
New Orleans, LA -- 6,134 9,350 5 6,134 9,355 15,489
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
ARBELLA CAPITAL CORP
116 1100 Crown Colony Drive
Quincy, MA (92) 1999 40.0
MAST INDUSTRIES
117 100 Old River Road
Andover, MA (38) 1999 40.0
HAEMONETICS CORP
118 355 Wood Road
Braintree, MA (21) 1999 40.0
NOKIA
119 6000 Connection Drive
Irving, TX (177) 1999 40.0
ANDERSEN CONSULTING
120 1661 Page Mill Road
Palo Alto, CA (74) 1999 40.0
WINDWARD FOREST
121 960 Northpoint Parkway
Alpharetta, GA (29) 1999 40.0
THE MITRE CORPORATION
122 11493 Sunset Hills Road
Fairfax, VA (90) 1999 40.0
GTE COMMUNICATIONS CORP
123 Sierra I at Los Colinas
Irving, TX (88) 1999 40.0
POYDRAS PLAZA
124 Entergy Building
New Orleans, LA (151) 1999 40.0
125 Mobil Building
New Orleans, LA (105) 1999 40.0
126 Parking Garage
New Orleans, LA (41) 1999 40.0
77
STARWOOD FINANCIAL INC.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INITIAL COST COSTS GROSS AMOUNT AT CLOSE OF PERIOD
----------------------- CAPITALIZED ------------------------------------
BUILDING AND SUBSEQUENT TO BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ------------- -------- ------------ ----------
HILTON HOTELS CORPORATION (1)(2) 153,618 5,101 32,080 -- 5,101 32,080 37,181
127 18740 Pacific Highway South
Seattle, WA
255 Southwest Temple -- 5,620 32,695 -- 5,620 32,695 38,315
Salt Lake City, UT
1401 Arden Way -- 1,281 9,809 -- 1,281 9,809 11,090
Sacramento, CA
7450 Hazard Center Drive -- 4,394 27,030 -- 4,394 27,030 31,424
San Diego, CA
One Doubletree Drive -- 3,308 20,390 -- 3,308 20,390 23,698
Sonoma, CA
200 North Riverside -- 609 4,668 -- 609 4,668 5,277
Medford, OR
1800 Fairview Ave. -- 968 6,405 -- 968 6,405 7,373
Boise, ID
304 Southeast Nye Avenue -- 556 4,245 -- 556 4,245 4,801
Pendleton, OR
510 Kelso Drive -- 502 3,779 -- 502 3,779 4,281
Kelso, WA
100 Columbia Street -- 507 3,981 -- 507 3,981 4,488
Vancouver, WA
501 Camino Del Rio -- 1,242 7,865 -- 1,242 7,865 9,107
Durango, CO
1225 North Wenatchee Avenue -- 513 3,825 -- 513 3,825 4,338
Wenatchee, WA
1313 North Bayshore Drive -- 404 3,049 -- 404 3,049 3,453
Coos Bay, OR
205 Coburg Road -- 361 2,721 -- 361 2,721 3,082
Eugene, OR
499 Industrial Street -- 269 2,043 -- 269 2,043 2,312
Astoria, OR
700 West Broadway Street -- 210 1,607 -- 210 1,607 1,817
Missoula, MT
1415 Northeast Third Street -- 233 1,726 -- 233 1,726 1,959
Bend, OR
-------- -------- ---------- ------ -------- ------------ ----------
Total real estate subject to $305,510 $277,872 $1,390,358 $ 575 $277,872 $ 1,390,933 $1,668,805
operating leases
======== ======== ========== ====== ======== ============ ==========
DEPRECIABLE
ACCUMULATED DATE LIFE
DESCRIPTION DEPRECIATION ACQUIRED (YEARS)
- ----------- ------------ -------- -----------
HILTON HOTELS CORPORATION (1)(2) (1,630) 1998 39.0
127 18740 Pacific Highway South
Seattle, WA
255 Southwest Temple (1,698) 1998 39.0
Salt Lake City, UT
1401 Arden Way (665) 1998 39.0
Sacramento, CA
7450 Hazard Center Drive (1,503) 1998 39.0
San Diego, CA
One Doubletree Drive (906) 1998 39.0
Sonoma, CA
200 North Riverside (320) 1998 39.0
Medford, OR
1800 Fairview Ave. (399) 1998 39.0
Boise, ID
304 Southeast Nye Avenue (314) 1998 39.0
Pendleton, OR
510 Kelso Drive (280) 1998 39.0
Kelso, WA
100 Columbia Street (302) 1998 39.0
Vancouver, WA
501 Camino Del Rio (443) 1998 39.0
Durango, CO
1225 North Wenatchee Avenue (272) 1998 39.0
Wenatchee, WA
1313 North Bayshore Drive (209) 1998 39.0
Coos Bay, OR
205 Coburg Road (200) 1998 39.0
Eugene, OR
499 Industrial Street (135) 1998 39.0
Astoria, OR
700 West Broadway Street (122) 1998 39.0
Missoula, MT
1415 Northeast Third Street (123) 1998 39.0
Bend, OR
--------
Total real estate subject to $(14,627)
operating leases
========
78
STARWOOD FINANCIAL INC.
NOTES TO SCHEDULE III
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
1. RECONCILIATION OF REAL ESTATE:
The following table reconciles Real Estate from January 1, 1997 to
December 31, 1999:
1999 1998 1997
---------- -------- ---------
Balance at January 1........................................ $ 194,229 $ -- $ --
Additions (see Note 4 to the Consolidated Financial
Statements)............................................... 1,474,576 194,229 --
Dispositions................................................ -- -- --
---------- -------- ---------
Balance at December 31...................................... $1,668,805 $194,229 $ --
========== ======== =========
2. RECONCILIATION OF ACCUMULATED DEPRECIATION:
The following table reconciles Accumulated Depreciation from January 1, 1997
to December 31, 1999:
1999 1998 1997
-------- -------- ---------
Balance at January 1........................................ $ (4,287) $ -- $ --
Additions................................................... (10,340) (4,287) --
Dispositions................................................ -- -- --
-------- ------- ---------
Balance at December 31...................................... $(14,627) $(4,287) $ --
======== ======= =========
79
STARWOOD FINANCIAL INC.
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
INTEREST ACCRUAL INTEREST PAYMENT FINAL MATURITY
TYPE OF LOAN/BORROWER DESCRIPTION/LOCATION RATES RATES DATE
- --------------------- ---------------------------- -------------------- ---------------- --------------
Senior Mortgages
Borrower A......................
Retail, Chicago, IL 8.88% 8.88% 1/1/04
Borrower B(1)...................
Office, San Diego, CA LIBOR + 1.50% LIBOR + 1.50% 12/31/04
Borrower C(1)...................
Office, Dallas, TX LIBOR + 1.75% LIBOR + 1.75% 9/8/01
Borrower D......................
Office, Dallas, TX LIBOR + 1.75% LIBOR + 1.75% 8/24/04
Borrower E(1)...................
Retail, Concorde, CA 7.75% 7.75% 9/1/09
Borrower F......................
Office/Residential, San
Diego and San Francisco, CA LIBOR + 3.25% LIBOR + 3.25% 12/31/02
Borrower G(1)...................
Hotel/Residential/Land,
Honolulu, HI 20.00% 18.00% 5/25/02
Borrower G(1)...................
Hotel/Residential/Land,
Honolulu, HI 24.00% 20.00% 5/25/02
Borrower H......................
Office, Gaithersburg, MD LIBOR + 3.50% LIBOR + 2.00% 11/30/00
Borrower I(1)...................
Hotel/Conference Center,
Rye Brook, NY 10.30% 10.30% 3/31/07
All other senior mortgages
individually LESS THAN 3%.......
Subordinated Mortgages
Borrower B(1)...................
Office, San Diego, CA 13.00% 8.00% 12/31/04
Borrower D(1)...................
Office, Dallas, TX 15.00% LIBOR + 2.12% 8/24/04
Borrower E(1)...................
Retail, Concorde, CA 9.53% 9.53% 9/1/00
Borrower E(1)...................
Retail, Concorde, CA 10.13% 10.13% 10/1/00
Borrower J(1)...................
Hotels, Various States LIBOR + 5.80% LIBOR + 5.80% 9/15/03
Borrower K(1)...................
Bonita Springs, FL 17.00% 10.00% 3/1/01
Borrower I(1)...................
Hotel/Conference Center,
Rye Brook, NY 10.30% 10.30% 3/31/07
All other subordinated mortgages
individually LESS THAN 3%.......
Partnership Loans/Unsecured Notes
Borrower J(1)...................
Hotels, Various States LIBOR + 5.37% LIBOR + 5.37% 9/15/03
Borrower L......................
Office, Los Angeles, CA 13.75% 9.00% 11/11/27
PERIODIC FACE CARRYING
PAYMENT PRIOR AMOUNT OF AMOUNT OF
TYPE OF LOAN/BORROWER TERMS(3) LIENS(2) LOANS LOANS
- --------------------- -------- -------- ---------- ----------
Senior Mortgages
Borrower A......................
P&I $ -- $ 109,734 $ 109,292
Borrower B(1)...................
IO -- 105,000 105,000
Borrower C(1)...................
IO -- 97,123 94,354
Borrower D......................
IO -- 85,757 85,757
Borrower E(1)...................
P&I -- 9,853 10,203
Borrower F......................
P&I -- 65,160 64,297
Borrower G(1)...................
IO -- 52,609 52,313
Borrower G(1)...................
IO -- 12,079 11,995
Borrower H......................
P&I -- 62,326 63,085
Borrower I(1)...................
P&I -- 42,554 43,245
All other senior mortgages
individually LESS THAN 3%....... -- 281,615 298,499
-------- ---------- ----------
-- 923,810 938,040
-------- ---------- ----------
Subordinated Mortgages
Borrower B(1)...................
IO -- 29,000 26,448
Borrower D(1)...................
CF -- 29,539 30,423
Borrower E(1)...................
P&I -- 74,283 75,268
Borrower E(1)...................
P&I -- 35,512 34,557
Borrower J(1)...................
IO 108,100 40,000 39,771
Borrower K(1)...................
IO 17,700 54,231 53,568
Borrower I(1)...................
P&I -- 22,767 22,767
All other subordinated mortgages
individually LESS THAN 3%....... -- 272,162 257,639
-------- ---------- ----------
125,800 557,494 540,141
-------- ---------- ----------
Partnership Loans/Unsecured Notes
Borrower J(1)...................
IO 134,900 70,500 70,025
Borrower L......................
IO 174,500 65,593 65,397
80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Portions of the Company's definitive proxy statement for the 2000 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Portions of the Company's definitive proxy statement for the 2000 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Portions of the Company's definitive proxy statement for the 2000 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Portions of the Company's definitive proxy statement for the 2000 annual
meeting of the shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d). Financial statements and schedules--see Index to Financial
Statements and Schedules included in Item 8.
(b) Reports on Form 8-K.
None.
(c) Exhibits--see index on following page.
81
INDEX TO EXHIBITS
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of June 15, 1999, by
and among Starwood Financial Trust, ST Merger Sub, Inc. and
TriNet Corporate Realty Trust, Inc.****
2.2 Agreement and Plan of Merger, dated as of June 15, 1999, by
and among Starwood Financial Trust, Starwood Financial, Inc.
and to the extent described therein, TriNet Corporate Realty
Trust, Inc.****
2.3 Agreement and Plan of Merger, dated as of June 15, 1999, by
and among Starwood Financial Trust, SA Merger Sub, Inc., STW
Holdings I, Inc., the Stockholders named therein, Starwood
Capital Group, L.L.C. and, to the extent described therein,
TriNet Corporate Realty Trust, Inc.****
3.1 Amended and Restated Charter of the Company (including the
Articles Supplementary for the Series A, B, C and D
Preferred Stock).
3.2 Bylaws of the Company
4.1 Amended and Restated Registration Rights Agreement dated
March 18, 1998 among Starwood Financial Trust and Starwood
Mezzanine Investors, L.P., SAHI Partners and SOFI-IV SMT
Holdings, L.L.C.**
4.2 Investor Rights Agreement, dated as of December 15, 1998
among Starwood Financial Trust, a Maryland real estate
investment trust, Starwood Mezzanine Investors, L.P., a
Delaware limited partnership, SOFI-IV SMT Holdings, L.L.C.,
a Delaware limited liability company, B Holdings, L.L.C., a
Delaware limited liability company, and Lazard Freres Real
Estate Fund II, L.P., a Delaware limited partnership, Lazard
Freres Real Estate Offshore Fund II L.P., a Delaware limited
Partnership, and LF Mortgage REIT, a Maryland real estate
investment trust.***
4.3.......... Form of warrant certificates.***
4.4 Form of stock certificate for the Company's Common Stock.
4.5 Form of certificate for Series A Preferred Shares of
beneficial interest.***
10.1......... Starwood Financial Trust 1996 Share Incentive Plan.**
10.2 Contribution Agreement dated as of February 11, 1998,
between Starwood Financial Trust, Starwood Mezzanine
Investors, L.P. and Starwood Opportunity Fund IV, L.P.**
10.3 Second Amended and Restated Shareholder's Agreement dated
March 18, 1998 among B Holdings, L.L.C., SAHI Partners,
Starwood Mezzanine Investors, L.P., SOFI-IV SMT Holdings,
L.L.C., and Starwood Financial Trust.**
10.4 Securities Purchase Agreement, dated as of December 15,
1998, by and between Starwood Financial Trust, Lazard Freres
Real Estate Fund II, L.P., a Delaware limited partnership,
Lazard Freres Real Estate Offshore Fund II, L.P., a Delaware
limited partnership, and LF Mortgage REIT, a Maryland real
estate investment trust.***
10.5 Asset Purchase and Sale Agreement, dated as of December 15,
1998 by and between Lazard Freres Real Estate Fund, L.P., a
Delaware limited partnership, Lazard Freres Real Estate Fund
II, L.P., a Delaware limited partnership, Prometheus
Mid-Atlantic Holding, L.P., a Delaware limited partnership,
Pacific Preferred LLC, a New York limited liability company,
Atlantic Preferred II LLC, a New York limited liability
company, Indian Preferred LLC, a New York limited liability
company and Prometheus Investment Holding, L.P., a Delaware
limited partnership and Starwood Financial Trust.***
82
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
10.6 Form of Advisor Lock-Up Agreement, dated as of June 15,
1999, among Greenhill & Co., LLC and each owner of interests
in the Advisor*****
10.7 Form of Option Standstill Agreement, dated as of June 15,
1999, among Starwood Financial Trust and each of George R.
Puskar, Willis Anderson, Jr., Stephen B. Oresman, Robert W.
Holman Jr. and John G. McDonald*****
10.8 Form of Starwood Financial Trust Affiliate Lock-Up
Agreement, dated as of June 15, 1999, between Greenhill &
Co., LLC and each of B Holdings L.L.C., SOFI-IV SMT
Holdings, L.L.C. and Starwood Mezzanine Investors, L.P.*****
10.9 Stock Purchase Agreement dated as of June 15, 1999 among Jay
Sugarman, Spencer B. Haber, A. William Stein and Robert
Holman, Jr.*****
10.10 Amendment No. 1 to the Stock Purchase Agreement dated as of
July 26, 1999, which amends the Stock Purchase Agreement
dated as of June 15, 1999 among Jay Sugarman, Spencer B.
Haber, A. William Stein and Robert Holman, Jr.*****
10.11 Shareholder Agreement, dated as of June 15, 1999, among
SOFI-IV SMT Holdings, L.L.C., Starwood Mezzanine Investors,
L.P., B Holdings, L.L.C. and TriNet Corporate Realty Trust,
Inc.*****
10.12 First Amendment to Shareholder Agreement dated as of
July 15, 1999, which amends the Shareholder Agreement, dated
as of June 15, 1999, among SOFI-IV SMT Holdings, L.L.C.,
Starwood Mezzanine Investors, L.P., B Holdings L.L.C. and
TriNet Corporate Realty Trust, Inc.*****
10.13 Employment Agreement, dated as of May 20, 1999, by and
between Starwood Financial Advisors, L.L.C. and Jay
Sugarman.
21.1......... Subsidiaries of the Company.
EXPLANATORY NOTES:
- ------------------------
* Incorporated by reference from the Company's Registration Statement on
Form S-4 filed on May 12, 1998.
** Incorporated by reference from the Company's Annual Report on Form 10- K
for the year ended December 31, 1997 filed on April 2, 1998.
*** Incorporated by reference from the Company's Form 8-K filed on
December 23, 1998.
**** Incorporated by reference to the Company's Current Report on Form 8-K
filed on June 22, 1999.
***** Incorporated by reference to the Company's Registration Statement on Form
S-4 filed on August 25, 1999.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
STARWOOD FINANCIAL INC.
REGISTRANT
Date March 30, 2000 /s/ JAY SUGARMAN
------------------------------------------------
Jay Sugarman
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following person on behalf of
the registrant and in the capacities and on the dates indicated.
Date March 30, 2000 /s/ BARRY S. STERNLICHT
-------------------------------------------
Barry S. Sternlicht
CHAIRMAN OF THE BOARD OF DIRECTORS
Date March 30, 2000 /s/ JAY SUGARMAN
-------------------------------------------
Jay Sugarman
CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR
Date March 30, 2000 /s/ SPENCER B. HABER
-------------------------------------------
Spencer B. Haber
CHIEF FINANCIAL OFFICER, SECRETARY AND DIRECTOR
(EXECUTIVE VICE PRESIDENT--FINANCE)
Date March 30, 2000 /s/ JEFFREY G. DISHNER
-------------------------------------------
Jeffrey G. Dishner
DIRECTOR
Date March 30, 2000 /s/ JONATHAN D. EILIAN
-------------------------------------------
Jonathan D. Eilian
DIRECTOR
Date March 30, 2000 /s/ MERRICK R. KLEEMAN
-------------------------------------------
Merrick R. Kleeman
DIRECTOR
84
Date March 30, 2000 /s/ ROBIN JOSEPHS
-------------------------------------------
Robin Josephs
DIRECTOR
Date March 30, 2000 /s/ WILLIAM M. MATTHES
-------------------------------------------
William M. Matthes
DIRECTOR
Date March 30, 2000 /s/ KNEELAND C. YOUNGBLOOD
-------------------------------------------
Kneeland C. Youngblood
DIRECTOR
Date March 30, 2000 /s/ WILLIS ANDERSEN JR.
-------------------------------------------
Willis Andersen Jr.
DIRECTOR
Date March 30, 2000 /s/ MADISON F. GROSE
-------------------------------------------
Madison F. Grose
DIRECTOR
Date March 30, 2000 /s/ ROBERT W. HOLMAN, JR.
-------------------------------------------
Robert W. Holman, Jr.
DIRECTOR
Date March 30, 2000 /s/ JOHN G. MCDONALD
-------------------------------------------
John G. McDonald
DIRECTOR
Date March 30, 2000 /s/ STEPHEN B. ORESMAN
-------------------------------------------
Stephen B. Oresman
DIRECTOR
Date March 30, 2000 /s/ GEORGE R. PUSKAR
-------------------------------------------
George R. Puskar
DIRECTOR
Date March 30, 2000 /s/ MICHAEL G. MEDZIGIAN
-------------------------------------------
Michael G. Medzigian
DIRECTOR
85