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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 1-10150
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ISTAR FINANCIAL INC.
(Exact name of registrant as specified in its charter)
MARYLAND 95-6881527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1114 AVENUE OF THE AMERICAS, 27TH FLOOR 10036
NEW YORK, NY 10036 (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 930-9400
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of Exchange on which registered:
COMMON STOCK, $0.001 PAR VALUE NEW YORK STOCK EXCHANGE
9.375% SERIES B CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
9.200% SERIES C CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
8.000% SERIES D CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (ii) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 15, 2001, the aggregate market value of the common stock, $0.001
par value per share of iStar Financial Inc. ("Common Stock") held by
non-affiliates(1) of the registrant was approximately $2,063.0 million, based
upon the closing price of $24.01 on the New York Stock Exchange composite tape
on such date.
As of March 15, 2001, there were 85,924,550 shares of Common Stock
outstanding.
(1) For purposes of this Annual Report only, includes all outstanding Common
Stock other than Common Stock held directly by the Registrant's directors
and executive officers.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's definitive proxy statement for the registrant's
2001 Annual Meeting, to be filed within 120 days after the close of the
registrant's fiscal year, are incorporated by reference into Part III of
this Annual Report on Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................ 3
Item 2. Properties.......................................... 17
Item 3. Legal Proceedings................................... 17
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 17
PART II
Item 5. Market for Registrant's Equity and Related Share
Matters................................................... 18
Item 6. Selected Financial Data............................. 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 23
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk............................................... 30
Item 8. Financial Statements and Supplemental Data.......... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 84
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................ 84
Item 11. Executive Compensation............................. 84
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 84
Item 13. Certain Relationships and Related Transactions..... 84
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 84
SIGNATURES.................................................. 87
PART I
ITEM 1. BUSINESS
EXPLANATORY NOTE FOR PURPOSES OF THE "SAFE HARBOR PROVISIONS" OF SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
which involve certain risks and uncertainties. Forward-looking statements are
included with respect to, among other things, the Company's current business
plan, business strategy and portfolio management. The Company's actual results
or outcomes may differ materially from those anticipated. Important factors that
the Company believes might cause such differences are discussed in the
cautionary statements presented under the caption "Factors That May Affect the
Company's Business Strategy" in Item 1 of this Form 10-K or otherwise accompany
the forward-looking statements contained in this Form 10-K. In assessing all
forward-looking statements, readers are urged to read carefully all cautionary
statements contained in this Form 10-K.
OVERVIEW
iStar Financial Inc. (the "Company") is the leading publicly traded finance
company focused on the commercial real estate industry. The Company provides
structured financing to private and corporate owners of real estate nationwide,
including senior and junior mortgage debt, corporate mezzanine and subordinated
capital, and corporate net lease financing. The Company, which is taxed as a
real estate investment trust ("REIT"), seeks to deliver superior risk-adjusted
returns on equity to shareholders by providing innovative and value-added
financing solutions to its customers.
The Company's primary product lines include:
- STRUCTURED FINANCE. The Company provides senior and subordinated loans
from $20 million to $100 million to borrowers controlling institutional
quality real estate. These loans may be either fixed or floating rate and
are structured to meet the specific financing needs of the borrowers,
including the acquisition, financing, repositioning or construction of
large, high-quality real estate. The Company offers borrowers a wide range
of structured finance options, including first mortgages, second
mortgages, partnership loans, participating debt and interim/bridge
facilities.
- PORTFOLIO FINANCE. The Company provides funding to regional and national
borrowers who own multiple properties in a geographically diverse
portfolio. Loans are cross-collateralized to give borrowers the benefit of
all available collateral and underwritten to recognize inherent portfolio
diversification. Property types include multifamily, suburban office,
all-suite, extended stay and full service hotels and other property types
where individual property values are less than $20 million on average.
Loan terms are structured to meet the specific requirements of the
borrower and typically range in size from $25 million to $150 million.
- CORPORATE FINANCE. The Company provides senior and subordinated capital to
corporations engaged in real estate or real estate-related businesses.
Financing may be either secured or unsecured and typically ranges in size
from $20 million to $150 million.
- LOAN ACQUISITION. The Company acquires whole loans and loan participations
which present attractive risk-reward opportunities. Loans are generally
acquired at a discount to the principal balance outstanding and may be
acquired with financing provided by the seller. Loan acquisitions
typically range from $5 million to $100 million and are collateralized by
all major property types.
- CORPORATE TENANT LEASING. The Company provides capital to corporations, as
well as borrowers who control properties leased to single creditworthy
tenants. The Company's net leased facilities are generally subject to
long-term leases with rated corporate credit tenants, and provide for all
3
expenses at the property to be paid by the tenant on a triple net lease
basis. Corporate tenant transactions typically range in size from
$20 million to $200 million.
- SERVICING. Through its iStar Asset Services division, the Company provides
rated servicing to third-party, institutional loan portfolios, as well as
to the Company's own portfolio.
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, the Company began its business in 1993 through private investment
funds formed to capitalize on inefficiencies in the real estate finance market.
In March 1998, these funds contributed their approximately $1.1 billion of
assets to the Company's predecessor, Starwood Financial Trust, in exchange for a
controlling interest in that company. Since that time, the Company has grown by
originating new lending and leasing transactions, as well as through corporate
acquisitions.
Specifically, in September 1998, the Company acquired the loan origination
and servicing business of a major insurance company, and in December 1998, the
Company acquired the mortgage and mezzanine loan portfolio of its largest
private competitor. Additionally, in November 1999, the Company acquired TriNet
Corporate Realty Trust, Inc., the largest publicly traded company specializing
in the net leasing of corporate office and industrial facilities. The
acquisition of TriNet was structured as a stock-for-stock merger of TriNet with
a subsidiary of the Company. We refer to TriNet throughout this document as the
"Leasing Subsidiary."
Concurrent with the acquisition of TriNet, the Company also acquired its
external advisor in exchange for shares of Common Stock and converted its
organizational form to a Maryland corporation. As part of the conversion to a
Maryland corporation, the Company replaced its dual class common share structure
with a single class of Common Stock. The Company's Common Stock began trading on
the New York Stock Exchange on November 4, 1999. Prior to this date, the
Company's common shares were traded on the American Stock Exchange.
INVESTMENT STRATEGY
The Company's investment strategy targets specific sectors of the real
estate credit markets in which it believes it can deliver value-added, flexible
financial solutions to its customers, thereby differentiating its financial
products from those offered by other capital providers.
The Company has implemented its investment strategy by:
- Focusing on the origination of large, highly structured mortgage,
corporate and lease financings where customers require flexible financial
solutions, and avoiding commodity businesses in which there is significant
direct competition from other providers of capital.
- Developing direct relationships with borrowers and corporate tenants as
opposed to sourcing transactions through intermediaries.
- Adding value beyond simply providing capital by offering borrowers and
corporate tenants specific lending expertise, flexibility, certainty and
continuing relationships beyond the closing of a particular financing
transaction.
- Taking advantage of market anomalies in the real estate financing markets
when the Company believes credit is mispriced by other providers of
capital, such as the spread between lease yields and the yields on
corporate tenants' underlying credit obligations.
The Company intends to continue to emphasize a mix of portfolio financing
transactions to create asset diversification and single-asset financings for
properties with strong, long-term competitive market positions. The Company's
credit process will continue to focus on:
- Building diversification by asset type, property type, obligor, loan/lease
maturity and geography.
4
- Financing high-quality commercial real estate assets in major metropolitan
markets.
- Underwriting assets using conservative assumptions regarding collateral
value and future property performance.
- Requiring adequate cash flow coverage on its investments.
- Stress testing potential investments for adverse economic and real estate
market conditions.
As of December 31, 2000, based on current gross carrying values, the
Company's business consists of the following product lines:
PRODUCT LINE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
STRUCTURED FINANCE 24%
Portfolio Finance 9%
Corporate Finance 11%
Corporate Tenant leasing 44%
Loan Acquisition 12%
5
The Company seeks to maintain an investment portfolio which is diversified
by asset type, underlying property type and geography. As of December 31, 2000,
based on current gross carrying values, the Company's total investment portfolio
has the following characteristics:
ASSET TYPE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
FIRST MORTGAGES 31%
Second Mortgages 8%
Corporate/Partnership/Other 18%
Corporate Tenant Lease 43%
PROPERTY TYPE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
HOTEL 20%
Mixed Use 4%
Office 49%
Industrial 7%
R&D 3%
Apartment/Residential 7%
Resort/Entertainment 4%
Homebuilder/Land 3%
Retail 3%
GEOGRAPHY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SOUTHEAST 10%
Mid-Atlantic 9%
Northeast 17%
North Central 2%
Central 7%
South 16%
Southwest 3%
West 32%
Northwest 5%
6
FINANCING STRATEGY
The Company has access to a wide range of debt and equity capital resources
to finance its investment and growth strategies. At December 31, 2000, the
Company had approximately $1.8 billion of tangible book equity capital and a
total market capitalization of approximately $4.2 billion. The Company believes
that its size, diversification, investor sponsorship and track record are
competitive advantages in obtaining attractive financing for its businesses.
The Company seeks to maximize risk-adjusted returns on equity and financial
flexibility by opportunistically accessing a variety of public and private debt
and equity capital sources, including:
- iStar Asset Receivables ("STARs"), the Company's proprietary match-funded,
securitized debt program.
- A combined $1.7 billion available under its unsecured and secured
revolving credit facilities at year end (increased to $2.4 billion
subsequent to year end).
- Long-term, unsecured corporate debt.
The Company's business model is premised on significantly lower leverage
than many other commercial finance companies. In this regard, the Company seeks
to:
- Target a maximum consolidated debt/book equity ratio of 1.5x to 2.0x.
- Maintain a large tangible equity base and conservative credit statistics.
- Match fund assets and liabilities.
A more detailed discussion of the Company's current capital resources is
provided in Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
BUSINESS
REAL ESTATE LENDING:
The Company provides structured financing to private and corporate owners of
real estate nationwide, including senior and junior mortgage debt, as well as
corporate mezzanine and subordinated capital.
Set forth below is information regarding the Company's primary real estate
lending product lines as of December 31, 2000:
CURRENT
CARRYING PERCENTAGE
VALUE OF TOTAL
-------------- ----------
(IN THOUSANDS)
Structured finance................................... $ 967,613 43.2%
Portfolio finance.................................... 371,168 16.6%
Corporate finance.................................... 420,837 18.8%
Loan acquisition..................................... 479,565 21.4%
---------- -----
Gross carrying value............................... 2,239,183 100.0%
=====
Provision for possible credit losses............... (14,000)
----------
Total carrying value, net.......................... $2,225,183
==========
As more fully discussed in Note 3 to the Company's Consolidated Financial
Statements, the Company continually monitors borrower performance and completes
a detailed, loan-by-loan formal credit review on
7
a quarterly basis. After having originated or acquired over $4 billion of
investment transactions, neither the Company nor its private investment fund
predecessors have experienced any actual losses on their investments. Further,
based on current reviews of its portfolio, management is not aware of any
factors relating to specific loans which indicate that such losses may be
experienced in the forseeable future.
While no specific losses are currently indicated, the Company has considered
it prudent to establish a policy of providing reserves for potential losses
inherent in the current portfolio which may occur in the future. Accordingly,
since its first full quarter as a public company (the quarter ended June 30,
1998), management has reflected quarterly provisions for possible credit losses
in its operating results.
SUMMARY OF INTEREST CHARACTERISTICS
As more fully discussed in Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
as well as in Item 7a.--"Quantitative and Qualitative Disclosures about Market
Risk," the Company utilizes certain interest rate risk management techniques,
including both asset/liability matching and certain other hedging techniques, in
order to mitigate the Company's exposure to interest rate risks.
As of December 31, 2000, the Company's Lending Business portfolio has the
following interest rate characteristics:
CURRENT
CARRYING PERCENTAGE
VALUE OF TOTAL
-------------- ----------
(IN THOUSANDS)
Fixed rate loans..................................... $1,242,552 55.5%
Variable rate loans.................................. 996,631 44.5%
---------- -----
Gross carrying value................................. $2,239,183 100.0%
========== =====
SUMMARY OF PREPAYMENT TERMS
The Company is exposed to risks of prepayment on its loan assets, and
generally seeks to protect itself from such risk by structuring its loans with
prepayment restrictions and/or penalties.
As of December 31, 2000, the Company's Lending Business portfolio has the
following call protection characteristics:
CURRENT
CARRYING PERCENTAGE
VALUE OF TOTAL
-------------- ----------
(IN THOUSANDS)
Substantial lock-out for original term............... $ 611,838 27.3%
Fixed prepayment penalties........................... 553,188 24.7%
Yield maintenance.................................... 299,666 13.4%
No significant prepayment protection................. 774,491 34.6%
---------- -----
Gross carrying value................................. $2,239,183 100.0%
========== =====
8
SUMMARY OF LENDING BUSINESS MATURITIES
As of December 31, 2000, the Company's Lending Business portfolio has the
following maturity characteristics:
NUMBER OF CURRENT
TRANSACTIONS CARRYING PERCENTAGE
YEAR OF MATURITY MATURING VALUE OF TOTAL
- ---------------- ------------ ------------- ----------
(IN THOUSANDS)
2001..................................... 7 $ 302,552 13.5%
2002..................................... 13 351,158 15.7%
2003..................................... 7 425,863 19.0%
2004..................................... 10 453,850 20.3%
2005..................................... 7 278,450 12.4%
2006..................................... 1 35,583 1.6%
2007..................................... 5 179,230 8.0%
2008..................................... 5 60,605 2.7%
2009..................................... -- -- 0.0%
2010..................................... -- -- 0.0%
2011 and thereafter...................... 3 151,892 6.8%
------------- -----
Gross carrying value................... $ 2,239,183 100.0%
============= =====
Weighted average maturity.............. 3.7 years
=============
STRUCTURED FINANCE
The Company provides custom-tailored senior and subordinated loans from
$20 million to $100 million to borrowers controlling institutional quality real
estate. These loans may be either fixed or floating rate and are structured to
meet the specific financing needs of the borrowers, including financing related
to the acquisition, refinancing, repositioning or construction of large,
high-quality real estate. The Company offers borrowers a wide range of
structured finance options, including first mortgages, second mortgages,
partnership loans, participating debt and interim/bridge facilities.
As of December 31, 2000, the Company's structured finance investments have
the following characteristics:
CURRENT WEIGHTED
# OF INITIAL CURRENT PRINCIPAL AVERAGE
LOANS CARRYING CARRYING BALANCE STATED
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE VALUE (1) OUTSTANDING PAY RATE
- ---------------- ------------------ -------- -------- ---------- ----------- ----------------
First Mortgages:
Fixed.................. Residential/ 6 $222,320 $ 223,749 $ 225,618 9.54%
Resort/Mixed
Use/Office
Floating............... Office/Hotel 4 270,251 285,399 284,151 LIBOR+2.91%
Second Mortgages:
Fixed.................. Office/Mixed 8 184,491 195,207 211,280 10.89%
Use/Hotel
Floating............... -- -- -- -- -- --
Corporate/Partnership/Other Loans:
Fixed.................. Office/Hotel/ 10 184,568 133,519 132,081 10.12%
Retail
Floating............... Office 2 130,000 129,739 130,000 LIBOR+5.19%
-- ---------- ----------
Total.................... 30 $ 967,613 $ 983,130
== ========== ==========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE FIRST AVERAGE LAST
WEIGHTED AVERAGE DOLLAR DOLLAR
AVERAGE ESTIMATED CURRENT CURRENT
STATED ACCOUNTING LOAN-TO- LOAN-TO-
INVESTMENT CLASS ACCRUAL RATE YIELD (2) VALUE (3) VALUE (4)
- ---------------- ---------------- ---------- ------------- ------------
First Mortgages:
Fixed.................. 9.74% 10.81% 0% 61%
Floating............... LIBOR+2.91% 10.42% 0% 73%
Second Mortgages:
Fixed.................. 12.48% 12.35% 38% 71%
Floating............... -- -- -- --
Corporate/Partnership/Oth
Fixed.................. 12.25% 14.71% 62% 75%
Floating............... LIBOR+5.19% 10.86% 63% 80%
Total....................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
9
PORTFOLIO FINANCE
The Company provides funding to regional and national borrowers who own
multiple properties in a geographically diverse portfolio. Loans are
cross-collateralized to give borrowers the benefit of all available collateral
and underwritten to recognize inherent diversification. Property types include
multifamily, suburban office, all-suite, extended stay and limited service
hotels and other property types where individual property values are less than
$20 million on average. Loan terms are structured to meet the specific
requirements of the borrower and typically range in size from $25 million to
$150 million.
As of December 31, 2000, the Company's portfolio finance investments have
the following characteristics:
CURRENT WEIGHTED
# OF INITIAL CURRENT PRINCIPAL AVERAGE
LOANS CARRYING CARRYING BALANCE STATED
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE VALUE (1) OUTSTANDING PAY RATE
- ---------------- ------------------ -------- -------- ----------- ----------- ----------------
First Mortgages:
Fixed................. Residential 5 $84,665 $ 60,961 $ 61,091 18.40%
Floating.............. Residential/Office 2 88,861 87,460 87,500 LIBOR + 1.79%
Second Mortgages:
Fixed................. Office/Hotel 3 90,725 90,519 88,808 11.27%
Floating.............. Hotel 1 29,689 39,832 40,000 LIBOR + 5.80%
Corporate/Partnership/Other Loans:
Fixed................. Office 1 23,100 14,745 14,745 10.00%
Floating.............. Hotel 1 69,856 77,651 78,000 LIBOR + 5.37%
-- ----------- -----------
Total................... 13 $ 371,168 $ 370,144
== =========== ===========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE FIRST AVERAGE LAST
WEIGHTED AVERAGE DOLLAR DOLLAR
AVERAGE ESTIMATED CURRENT CURRENT
STATED ACCOUNTING LOAN-TO- LOAN-TO-
INVESTMENT CLASS ACCRUAL RATE YIELD (2) VALUE (3) VALUE (4)
- ---------------- ---------------- ---------- ------------- ------------
First Mortgages:
Fixed................. 20.07% 21.41% 0% 35%
Floating.............. LIBOR + 1.79% 8.29% 0% 68%
Second Mortgages:
Fixed................. 12.70% 13.38% 36% 72%
Floating.............. LIBOR + 5.80% 12.42% 64% 88%
Corporate/Partnership/Ot
Fixed................. 15.00% 15.00% 63% 71%
Floating.............. LIBOR + 5.37% 11.58% 56% 88%
Total...................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal collateral valuation (where no appraisal
available).
(4) Weighted average ratio of last dollar current loan carrying value in
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
CORPORATE FINANCE
The Company provides senior and subordinated capital to corporations engaged
in real estate or real estate-related businesses. Financing may be either
secured or unsecured and typically ranges in size from $20 million to
$150 million. Corporate financing may be either cash flow-oriented or
asset-based.
10
As of December 31, 2000, the Company's corporate finance investments have
the following characteristics:
CURRENT WEIGHTED
# OF INITIAL CURRENT PRINCIPAL AVERAGE
COLLATERAL LOANS CARRYING CARRYING BALANCE STATED
INVESTMENT CLASS TYPES IN CLASS VALUE VALUE (1) OUTSTANDING PAY RATE
- ---------------- ---------------- -------- -------- ---------- ----------- ----------------
First Mortgages:
Fixed..................... Hotel 1 $19,397 $ 19,422 $ 23,148 7.32%
Floating.................. Homebuilder 1 72,495 72,495 72,495 LIBOR + 6.00%
Corporate/Partnership/Other Loans:
Fixed..................... Resort 4 223,441 226,674 253,150 10.50%
Entertainment/
Homebulider/
Residential
Residential/
Hotel 3 112,873 102,246 104,529 LIBOR + 3.92%
Floating..................
--- ---------- ----------
Total....................... 9 $ 420,837 $ 453,322
=== ========== ==========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE FIRST AVERAGE LAST
WEIGHTED AVERAGE DOLLAR DOLLAR
AVERAGE ESTIMATED CURRENT CURRENT
STATED ACCOUNTING LOAN-TO- LOAN-TO-
INVESTMENT CLASS ACCRUAL RATE YIELD (2) VALUE (3) VALUE (4)
- ---------------- ---------------- ---------- ------------- ------------
First Mortgages:
Fixed..................... 7.32% 9.36% 0% 93%(5)
Floating.................. LIBOR + 6.00% 11.65% 2% 31%
Corporate/Partnership/Other
Fixed..................... 10.67% 13.91% 65% 73%
LIBOR + 3.92% 10.59% 60% 70%
Floating..................
Total.......................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal collateral valuation (where no appraisal
available).
(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
(5) Collateral secured by long-term lease to investment grade tenant.
LOAN ACQUISITION
The Company acquires whole loans and loan participations which may be
performing or sub-performing and which the Company believes represent attractive
risk-reward opportunities. Loans are generally acquired at a discount to the
principal balance outstanding and may be acquired with financing provided by the
seller. The Company restructures many of these loans to performing status on
terms favorable to the Company. In other cases, the Company negotiates a payoff
at a price above the Company's basis in the loan. Loan acquisitions typically
range from $5 million to $100 million and are collateralized by all major
property types.
For accounting purposes, these loans are initially reflected at the
Company's acquisition cost which represents the outstanding balance net of the
acquisition discount or premium. The Company amortizes such discounts or
premiums as an adjustment to increase or decrease the yield, respectively,
realized on these loans using the effective interest method. As such,
differences between carrying value and principal balances outstanding do not
represent embedded losses or gains as the Company generally plans to hold such
loans to maturity or negotiate a favorable restructuring of a discount loan.
11
As of December 31, 2000, the Company's loan acquisition investments have the
following characteristics:
CURRENT WEIGHTED
# OF INITIAL CURRENT PRINCIPAL AVERAGE
LOANS CARRYING CARRYING BALANCE STATED
INVESTMENT CLASS COLLATERAL TYPES IN CLASS VALUE VALUE (1) OUTSTANDING PAY RATE
- ---------------- ------------------- -------- ---------- ----------- ----------- ----------------
First Mortgages:
Fixed................... Office/Retail/Hotel 3 $ 256,655 $ 259,697 $ 274,775 9.00%
Floating................ Office/Hotel 2 200,811 201,809 203,529 LIBOR + 1.75%
Corporate/Partnership/Other Loans:
Fixed................... Mixed Use 1 34,277 18,059 25,905 6.75%
Floating................ -- -- -- -- -- --
------ ----------- -----------
Total.......................................... 6 $ 479,565 $ 504,209
====== =========== ===========
EXPLANATORY NOTES:
WEIGHTED WEIGHTED
WEIGHTED AVERAGE FIRST AVERAGE LAST
WEIGHTED AVERAGE DOLLAR DOLLAR
AVERAGE ESTIMATED CURRENT CURRENT
STATED ACCOUNTING LOAN-TO- LOAN-TO-
INVESTMENT CLASS ACCRUAL RATE YIELD (2) VALUE (3) VALUE (4)
- ---------------- ---------------- ---------- ------------- ------------
First Mortgages:
Fixed................... 9.57% 10.56% 0% 83%
Floating................ LIBOR + 1.75% 8.21% 30% 85%
Corporate/Partnership/Othe
Fixed................... 6.75% 11.00% 64% 69%
Floating................ -- -- -- --
Total.....................
EXPLANATORY NOTES:
- ----------------------------------------
(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.
(2) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.
(3) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
(4) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no appraisal available).
LOAN SERVICING
In September 1998, a subsidiary of the Company acquired the loan origination
and servicing business of Phoenix Realty Services, Inc., a subsidiary of Phoenix
Home Life Insurance Company. The acquisition of this servicing business, which
was renamed iStar Asset Services, expanded the Company's ability to service its
own loans and provided the Company with additional relationships with potential
borrowers.
Through its iStar Asset Services division, the Company provides loan
servicing to third-party institutional owners of loan portfolios, as well as to
the Company's own asset base. iStar Asset Services is currently rated "above
average" by Standard & Poor's and "CMS3" (approved) by Fitch Inc. as a master
servicer. The Company's servicing business focuses on maximizing risk-adjusted
investment returns through active, ongoing asset management with particular
focus on risk management, asset financing strategies and opportunistic
responsiveness to changing borrower/tenant needs.
12
CORPORATE TENANT LEASING:
The Company, directly and through its Leasing Subsidiary, provides capital
to corporate owners of office and industrial facilities. Net leased facilities
are generally subject to long-term leases to rated corporate credit tenants, and
typically provide for all expenses at the property to be paid by the tenant on a
triple net lease basis. Corporate tenant lease ("CTL") transactions typically
range in size from $20 million to $200 million.
The Company pursues the origination of corporate tenant lease transactions
by structuring purchase/ leasebacks and by acquiring facilities subject to
existing long-term net leases. In a typical purchase/ leaseback transaction, the
Company purchases a corporation's facility and leases it back to that
corporation subject to a long-term net lease. This structure allows the
corporate customer to reinvest the proceeds from the sale of its facilities into
its core business, while the Company capitalizes on its structured financing
expertise.
The Company generally intends to hold its net leased assets for long-term
investment. However, subject to certain tax restrictions, the Company may
dispose of an asset if it deems the disposition to be in the best interest of
stockholders and may either reinvest the disposition proceeds, use the proceeds
to reduce debt, or distribute the proceeds to stockholders.
The Company's CTL investments primarily represent a diversified portfolio of
strategic office and industrial facilities subject to net lease agreements with
creditworthy corporate tenants. The Company generally seeks high-quality,
general-purpose real estate with residual values that represent a discount to
current market values and replacement costs. Under a typical net lease
agreement, the corporate customer agrees to pay a base monthly operating lease
payment and all facility operating expenses (including taxes, maintenance and
insurance).
The Company generally seeks corporate tenants with the following
characteristics:
- Established companies with stable core businesses or market leaders in
growing industries.
- Investment-grade credit strength or appropriate credit enhancements if
corporate credit strength is not sufficient.
- Commitment to the facility as an important asset to their on-going
businesses.
As of December 31, 2000, the Company had more than 160 corporate customers
operating in more than ten major industry sectors, including aerospace, energy,
finance, healthcare, hospitality, technology and telecommunications. These
customers represent well-recognized national and international companies, such
as Avaya, Federal Express, Hilton, IBM, Microsoft, Nike, Nokia and Verizon.
As of December 31, 2000, the Company's CTL portfolio has the following
tenant credit characteristics:
ANNUALIZED OPERATING PERCENTAGE OF
LEASE PAYMENTS(3) TOTAL
-------------------- -------------
(IN THOUSANDS)
Investment grade(1)........................... $ 99,725 47.9%
Implied investment grade (2).................. 19,719 9.5%
Non-investment grade.......................... 34,702 16.7%
Unrated....................................... 53,818 25.9%
-------- ------
$207,964 100.0%
======== ======
EXPLANATORY NOTES:
- ------------------------------
(1) A tenant's credit rating is considered "Investment Grade" if it has a
published senior unsecured credit rating of Baa3/BBB- or above by one or
more of the three national rating agencies.
(2) A tenant's credit rating is considered "Implied Investment Grade" if it has
no published ratings, but has credit characteristics that the Company
believes warrant an investment grade senior unsecured credit rating.
Examples at December 31, 2000 include Cisco Systems, Inc., and Electronic
Data Systems.
(3) Reflects actual annualized monthly base lease rates in effect at
December 31, 2000 (without giving affect to straight-line adjustments under
GAAP).
13
PORTFOLIO AND ASSET MANAGEMENT STRATEGY. The Company believes that diligent
management of the CTL portfolio is an essential component of its long-term
strategy. There are several ways to optimize the performance and maximize the
value of net leases. The Company monitors its portfolio for changes that could
affect the performance of the markets, credits and industries in which it has
invested. As part of this monitoring, the Company's asset management group
reviews market, customer and industry data and frequently inspects its
facilities. In addition, the Company attempts to develop strong relationships
with its large corporate customers, which provide a source of information
concerning the customers' facilities needs. These relationships allow the
Company to be proactive in obtaining early lease renewals and in conducting
early marketing of assets where the customer has decided not to renew. The
Company will seek to find a new tenant prior to the expiration of the existing
lease.
As of December 31, 2000, the Company owned 142 office and industrial
facilities principally subject to net leases to more than 160 customers,
comprising 18.5 million square feet in 26 states. The Company also has a
portfolio of 17 hotels under a long-term master lease with a single customer.
Information regarding the Company's CTL assets as of December 31, 2000 is set
forth below:
% ANNUALIZED
OPERATING
# OF % LEASE
INDUSTRY FACILITES SQUARE FEET PAYMENTS (1) SIGNIFICANT CUSTOMERS
- -------- --------- ----------- ------------ ----------------------------------
Technology........................ 51 34.4% 37.0% IBM, Cisco, Mitsubishi
Electronics, Hewlett-Packard,
Unisys, Lexmark, Microsoft
Telecommunications................ 16 9.1% 18.6% Nokia, Verizon, Avaya, Alcatel
Network, Nortel Networks, AT&T
Wireless, ICG Holdings, Equinix
Other Industry Sectors............ 13 7.8% 4.7% The Mitre Corp., Andersen
Consulting, Allright Parking
Manufacturing..................... 3 7.8% 3.2% Nike, Adidas America, Inc., Mast
Industries
Food and Related Services......... 20 7.6% 6.2% Caterair, Ralphs Grocery Co.,
Unified Western Grocers, Welch
Foods, Inc.
Energy and Utilities.............. 8 4.7% 6.3% Entergy Services, Exxon-Mobil, Bay
State Gas
Automotive, Aerospace and 9 6.4% 4.3% Volkswagen of America, Unison
Defense......................... Industries, Honeywell, TRW Space
Communications
Hospitality....................... 17 6.1% 7.2% Hilton Hotels Corp.
Financial Services................ 9 5.7% 5.9% Wellpoint Health Networks, Arbella
Capital Corp., Blue Cross & Blue
Shield, Wells Fargo
Consumer Goods.................... 3 7.1% 2.3% Sears Logistics, Rex Stores Corp.,
Dunham's Athleisure, Lever
Brothers
Healthcare........................ 5 1.4% 1.4% Fresenius USA, Haemonetics Corp.,
Avitar
Transportation Services........... 4 1.3% 2.2% Federal Express, State of
California Dept. of Transportation
Government Services............... 1 0.6% 0.7% Massachusetts Lottery
--- ----- -----
Total............................. 159 100.0% 100.0%
=== ===== =====
EXPLANATORY NOTE:
- ----------------------------------
(1) Reflects actual annualized monthly base lease rates in effect at
December 31, 2000 (without giving affect to straight-line adjustments under
GAAP).
14
As of December 31, 2000, lease expirations on the Company's CTL assets,
including facilities owned by the Company's joint ventures, are as follows:
PERCENT OF TOTAL
ANNUAL
OPERATING
NUMBER OF ANNUALIZED LEASE PAYMENTS
LEASES OPERATING LEASE REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING PAYMENTS(1) EXPIRING LEASES
- ------------------------ --------- --------------- ----------------
(IN THOUSANDS)
2001.................................. 22 $ 11,018 5.3%
2002.................................. 27 12,139 5.9%
2003.................................. 19 19,622 9.4%
2004.................................. 28 25,797 12.4%
2005.................................. 15 13,551 6.5%
2006.................................. 22 26,350 12.7%
2007.................................. 14 17,740 8.5%
2008.................................. 8 8,565 4.1%
2009.................................. 10 12,740 6.1%
2010.................................. 6 9,259 4.5%
2011 and thereafter................... 25 51,183 24.6%
------ -------- ------
Total............................... 196 $207,964 100.0%
====== ======== ======
EXPLANATORY NOTE:
- ------------------------------
(1) Reflects actual annualized monthly base lease rates in effect at
December 31, 2000 (without giving affect to straight-line adjustments under
GAAP).
POLICIES WITH RESPECT TO OTHER ACTIVITIES
At all times, the Company intends to make investments in a manner consistent
with the requirements of the Code for the Company to qualify as a REIT.
INVESTMENT RESTRICTIONS OR LIMITATIONS
The Company does not have any prescribed allocation among investments or
product lines. Instead, the Company focuses on corporate and real estate credit
underwriting to develop an in-depth analysis of the risk/reward ratios in
determining the pricing and advisability of each particular transaction.
The Company believes that it is not, and intends to conduct its operations
so as not to become, regulated as an investment company under the Investment
Company Act. The Investment Company Act generally exempts entities that are
"primarily engaged in purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" (collectively, "Qualifying Interests").
The Company intends to rely on current interpretations by the staff of the
Securities and Exchange Commission in an effort to qualify for this exemption.
Based on these interpretations, the Company, among other things, must maintain
at least 55% of its assets in Qualifying Interests and at least 25% of its
assets in real estate-related assets (subject to reduction to the extent the
Company invests more than 55% of its assets in Qualifying Interests). Generally,
the Company's senior mortgages and certain of its subordinated mortgages
constitute Qualifying Interests.
The Company is restricted from making certain types of investments which may
limit its flexibility in implementing its investment policy. Specifically,
without the amendment, termination or waiver of provisions of certain
non-competition agreements between Starwood Capital Group, L.L.C. and Starwood
Hotels & Resorts Worldwide, Inc., the Company is prohibited from: (1) making
investments in loans collateralized by hotel assets where it is anticipated that
the underlying equity will be acquired by the debtholder within one year from
the acquisition of such debt; (2) acquiring equity interests in hotels (other
than acquisitions of warrants, equity participations or similar rights
incidental to a debt investment by the Company or that are acquired as a result
of the exercise of remedies in respect to a loan in which the Company has an
interest); or (3) selling, contributing to or acquiring any interests in
Starwood Hotels &
15
Resorts Worldwide, Inc., including debt positions or equity interests obtained
by the Company under, pursuant to or by reason of the Company's ownership of
debt positions.
Subject to the limitations on ownership of certain types of assets and the
gross income tests imposed by the Code, the Company also may invest in the
securities of other REITs, other entities engaged in real estate activities or
other issuers, including for the purpose of exercising control over such
entities.
COMPETITION
The Company is engaged in a competitive business. In originating and
acquiring assets, the Company competes with public and private companies,
including other finance companies, mortgage banks, pension funds, savings and
loan associations, insurance companies, institutional investors, investment
banking firms and other lenders and industry participants, as well as individual
investors. Existing industry participants and potential new entrants compete
with the Company for the available supply of investments suitable for
origination or acquisition, as well as for debt and equity capital. Certain of
the Company's competitors are larger than the Company, have longer operating
histories, may have access to greater capital and other resources, may have
management personnel with more experience than the officers of the Company, and
may have other advantages over the Company in conducting certain businesses and
providing certain services.
REGULATION
The operations of the Company are subject, in certain instances, to
supervision and regulation by state and federal governmental authorities and may
be subject to various laws and judicial and administrative decisions imposing
various requirements and restrictions, which, among other things: (1) regulate
credit granting activities; (2) establish maximum interest rates, finance
charges and other charges; (3) require disclosures to customers; (4) govern
secured transactions; and (5) set collection, foreclosure, repossession and
claims-handling procedures and other trade practices. Although most states do
not regulate commercial finance, certain states impose limitations on interest
rates and other charges and on certain collection practices and creditor
remedies and require licensing of lenders and financiers and adequate disclosure
of certain contract terms. The Company is also required to comply with certain
provisions of the Equal Credit Opportunity Act that are applicable to commercial
loans.
In the judgment of management, existing statutes and regulations have not
had a material adverse effect on the business conducted by the Company. However,
it is not possible to forecast the nature of future legislation, regulations,
judicial decisions, orders or interpretations, nor their impact upon the future
business, financial condition or results of operations or prospects of the
Company.
The Company has elected and expects to continue to make an election to be
taxed as a REIT under Section 856 through 860 of the Code. As a REIT, the
Company generally will not be subject to federal income tax if it distributes at
least 95% of its taxable income for each year to its shareholders. The
distribution rate was modified to 90% by the REIT Modernization Act beginning in
fiscal 2001. REITs are also subject to a number of organizational and
operational requirements in order to elect and maintain REIT status. These
requirements include specific share ownership tests and assets and gross income
composition tests. If the Company fails to qualify as a REIT in any taxable
year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
tax rates. Even if the Company qualifies for taxation as a REIT, the Company may
be subject to state and local income taxes and to federal income tax and excise
tax on its undistributed income.
Although the Company did not qualify as a REIT for its fiscal years 1993
through 1997, it received a written agreement from the IRS confirming that the
Company was eligible to make an election under Section 856(c)(1) of the Code to
be taxed as a REIT for its taxable years beginning January 1, 1998, and the
Company has made such elections.
16
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS STRATEGY
The implementation of the Company's business strategy and investment
policies are subject to certain risks, including the effect of economic and
other conditions on underlying property values, the less liquid nature of some
of its investments, the risks of borrower and corporate tenant defaults, risks
resulting from delays in enforcing remedies or in gaining control over real
estate collateral following a default, risks that the properties collateralizing
debt instruments held by the Company or net lease assets owned by the Company
will not generate revenues sufficient to meet operating expenses and to pay
scheduled debt service, the risk that prepayment restrictions may be
insufficient to deter prepayments, the existence of junior mortgages that may
affect the Company's rights, liability associated with uninsurable losses and
unknown environmental liabilities.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real estate (including, in certain
circumstances, a secured lender that succeeds to ownership or control of a
property) may become liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. Those laws
typically impose cleanup responsibility and liability without regard to whether
the owner or control party knew of or was responsible for the release or
presence of such hazardous or toxic substances. The costs of investigation,
remediation or removal of those substances may be substantial. The owner or
control party of a site may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from a site. Certain environmental laws also impose liability in connection with
the handling of or exposure to asbestos-containing materials, pursuant to which
third parties may seek recovery from owners of real properties for personal
injuries associated with asbestos-containing materials. Absent succeeding to
ownership or control of real property, a secured lender is not likely to be
subject to any of these forms of environmental liability. The Company is not
currently aware of any environmental issues which could materially affect the
Company.
EMPLOYEES
As of March 15, 2001, the Company had 126 employees and believes its
relationships with its employees to be good. The Company's employees are not
represented by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's principal executive and administrative offices are located at
1114 Avenue of the Americas New York, NY 10036, 27th floor. Its telephone
number, general facsimile number and e-mail address are (212) 930-9400,
(212) 930-9494 and istarfinancial.com, respectively. The lease for the Company's
primary corporate office space expires in February 2010. The Company believes
that this office space is suitable for its operations for the foreseeable
future. The Company also maintains super-regional offices in San Francisco,
California; Hartford, Connecticut; and Atlanta, Georgia, as well as regional
offices in Boston, Massachusetts; Dallas, Texas; and Denver, Colorado.
See Item 1--"Corporate Tenant Leasing" for a discussion of real estate
facilities held by the Company and its Leasing Subsidiary for investment
purposes and Item 8--"Schedule III--Real Estate and Accumulated Depreciation"
for a detailed listing of such facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation or legal proceedings,
or to the best of its knowledge, any threatened litigation or legal proceedings
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on its results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 2000.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED SHARE MATTERS
In November 1999, the Company eliminated its dual class share structure by
exchanging its outstanding class A and class B shares for shares of a single
class of Common Stock. The Company's Common Stock began trading on the New York
Stock Exchange ("NYSE") under the symbol "SFI" on November 4, 1999. Prior to
November 4, 1999, the class A shares were traded on the American Stock Exchange
under the symbol "APT," and there was no established trading market for the
class B shares.
The high and low sales prices per share of Common Stock (or class A shares
for periods prior to November 4, 1999) are set forth below for the periods
indicated.
QUARTER ENDED HIGH LOW
- ------------- ---------- ------------
1999
March 31, 1999.............................................. $63 $42 1/2
June 30, 1999............................................... $66 1/2 $31 5/8
September 30, 1999.......................................... $76 $27 7/8
December 31, 1999........................................... $27 5/8 $16 11/16
2000
March 31, 2000.............................................. $18 3/4 $16 5/8
June 30, 2000............................................... $20 15/16 $17 3/8
September 30, 2000.......................................... $22 7/16 $20 1/4
December 31, 2000........................................... $21 5/8 $19 1/16
On March 15, 2001, the closing sale price of the Common Stock as reported by
the NYSE was $24.01. The Company had approximately 1,267 holders of record of
Common Stock as of March 15, 2001.
On June 12, 1998, the Frank Russell Company announced that the Company would
be included in the Russell 1000 and Russell 3000 equity indices. From the time
of the Company's inclusion in the Russell indices through the time of the
announcement that the Company had agreed to acquire TriNet, the reported stock
price of the Company was highly volatile, and its trading volume was relatively
low due to the very limited number of shares available for trading at that time.
Specifically, the Company believes that index funds that were required to mirror
the Russell indices' performance purchased a large number of shares of the
Company's Common Stock available in the public float. Those purchases, combined
with the limited availability of the shares at that time, resulted in a dramatic
increase in the "market" price for the common stock shortly after the June 12
announcement.
At December 31, 2000, the Company had four series of preferred stock
outstanding: Series A Preferred Stock (which currently pays dividends at the
rate of 9.50% per annum), 9.375% Series B Preferred Stock, 9.20% Series C
Preferred Stock and 8.00% Series D Preferred Stock. Each of the Series B, C and
D preferred stock was issued in connection with the acquisition of TriNet and is
publicly traded.
The Board of Directors approved, and the Company has implemented, a stock
repurchase program under which the Company is authorized to repurchase up to
5.0 million shares of its Common Stock from time to time, primarily using
proceeds from the disposition of assets and excess cash flow from operations,
but also using borrowings under its credit facilities if the Company determines
that it is advantageous to do so. As of December 31, 2000, the Company had
repurchased approximately 2.3 million shares at an aggregate cost of
approximately $40.7 million.
DIVIDENDS
The Company's management expects that any taxable income remaining after the
distribution of preferred dividends and the regular quarterly or other dividends
on its Common Stock will be distributed
18
annually to the holders of the Common Stock on or prior to the date of the first
regular quarterly dividend payment date of the following taxable year. The
dividend policy with respect to the Common Stock is subject to revision by the
Board of Directors. All distributions in excess of dividends on preferred stock
or those required for the Company to maintain its REIT status will be made by
the Company at the sole discretion of the Board of Directors and will depend on
the taxable earnings of the Company, the financial condition of the Company, and
such other factors as the Board of Directors deems relevant. The Board of
Directors has not established any minimum distribution level. In order to
maintain its qualifications as a REIT, the Company intends to make regular
quarterly dividends to its shareholders that, on an annual basis, will represent
at least 90% of its taxable income (which may not necessarily equal net income
as calculated in accordance with generally accepted accounting principles),
determined without regard to the deduction for dividends paid and excluding any
net capital gains.
Holders of Common Stock will be entitled to receive distributions if, as and
when the Board of Directors authorizes and declares distributions. However,
rights to distributions may be subordinated to the rights of holders of
preferred stock, when preferred stock is issued and outstanding. In any
liquidation, dissolution or winding up of the Company, each outstanding share of
Common Stock will entitle its holder to a proportionate share of the assets that
remain after the Company pays its liabilities and any preferential distributions
owed to preferred shareholders.
The following table sets forth the dividends paid or declared by the Company
on its Common Stock (or class A shares for periods prior to November 4, 1999):
STOCKHOLDER DIVIDEND/
QUARTERLY PERIOD ENDED RECORD DATE SHARE
- ---------------------- ----------------- ---------
1999
March 31, 1999................................. April 15, 1999 $0.42
June 30, 1999.................................. July 15, 1999 $0.43
September 30, 1999............................. October 15, 1999 $0.44
December 31, 1999.............................. December 31, 1999 $0.57(1)
2000
March 31, 2000................................. April 14, 2000 $0.60
June 30, 2000.................................. July 17, 2000 $0.60
September 30, 2000............................. October 16, 2000 $0.60
December 31, 2000.............................. December 29, 2000 $0.60(2)
EXPLANATORY NOTES:
- ------------------------------
(1) A portion of this quarterly dividend (approximately $0.47 per share) was
treated as income to shareholders of record in 1999, and the remainder was
treated as 2000 income.
(2) A portion of this quarterly dividend (approximately $0.5976 per share) was
treated as income to stockholders of record in 2000, and the remainder will
be treated as 2001 income.
In November 1999, the Company declared and paid a dividend of a total of one
million shares of Common Stock pro rata to all holders of record of Common Stock
as of the close of business on November 3, 1999. The Company also declared
dividends aggregating $20.9 million for the Series A preferred stock, which was
outstanding for the entire year ended December 31, 1999. In addition, the
Company declared dividends of $1.2 million, $0.7 million and $2.0 million on its
Series B, C and D preferred stock, respectively, for the year ended
December 31, 1999. The amounts for the Series B, C and D preferred stock for
1999 represent only dividends for the fourth quarter of that year which were
payable by the Company as a result of its acquisition of TriNet. Further, it
declared and paid dividends aggregating $0.2 million per quarter to the holders
of class B shares in connection with the March 31, 1999, June 30, 1999 and
September 30, 1999 quarterly dividends to the holders of the class A shares. As
previously described, the former class A and class B shares were converted into
a single class of shares of Common Stock on November 4, 1999.
19
The Company declared dividends aggregating $20.9 million, $4.7 million,
$3.0 million and $8.0 million, respectively, on its Series A, B, C and D
preferred stock, respectively, for the year ended December 31, 2000. There are
no dividend arrearages on any of the preferred shares currently outstanding.
Distributions to shareholders will generally be taxable as ordinary income,
although a portion of such dividends may be designated by the Company as capital
gain or may constitute a tax-free return of capital. The Company annually
furnishes to each of its shareholders a statement setting forth the
distributions paid during the preceding year and their characterization as
ordinary income, capital gain or return of capital.
The Company intends to continue to declare quarterly distributions on its
Common Stock. No assurance, however, can be given as to the amounts or timing of
future distributions, as such distributions are subject to the Company's
earnings, financial condition, capital requirements and such other factors as
the Company's Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data on a consolidated
historical basis for the Company. However, prior to the recapitalization of the
Company in March 1998, discussed more fully in Note 4 to the Company's
Consolidated Financial Statements (the "Recapitalization Transactions"), the
Company did not have substantial capital resources or operations. Prior to the
Recapitalization Transactions, the Company's structured finance operations were
conducted by two investment partnerships affiliated with Starwood Capital Group,
L.L.C., which contributed substantially all their structured finance assets to
the Company in the Recapitalization Transactions in exchange for cash and shares
of the Company.
Further, on November 4, 1999, as more fully discussed in Note 4 to the
Company's Consolidated Financial Statements, the Company acquired TriNet, which
increased the size of the Company's operations, and also acquired its external
advisor. Operating results for the year ended December 31, 1999 reflect only the
effects of these transactions subsequent to their consummation.
Accordingly, the historical balance sheet information as of and prior to
December 31, 1998, as well as the results of operations for the Company for all
periods prior to and including the year ended December 31, 1999, do not reflect
the current operations of the Company as a well capitalized, internally-managed
finance company operating in the commercial real estate industry. For these
reasons, the Company believes that the information contained in the following
tables relating to the 1996 and 1997 periods is not indicative of the Company's
current business and should be read in conjunction with the discussions set
forth in Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations."
20
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Interest income......................................... $ 268,011 $ 209,848 $ 112,914 $ 896 $ 478
Operating lease income.................................. 185,956 42,186 12,378 -- --
Other income............................................ 17,855 12,763 2,804 991 10
----------- ----------- ----------- -------- --------
Total revenue....................................... 471,822 264,797 128,096 1,887 488
----------- ----------- ----------- -------- --------
Interest expense........................................ 173,891 91,184 44,697 -- 272
Operating costs-corporate tenant lease assets........... 12,809 2,246 -- -- --
Depreciation and amortization........................... 34,514 10,340 4,287 -- --
General and administrative.............................. 25,706 6,269 2,583 461 639
Provision for possible credit losses.................... 6,500 4,750 2,750 -- --
Stock option compensation expense(1).................... 2,864 412 5,985 -- --
Advisory fees........................................... -- 16,193 7,837 -- --
Costs incurred in acquiring external advisor(2)......... -- 94,476 -- -- --
----------- ----------- ----------- -------- --------
Total expenses...................................... 256,284 225,870 68,139 461 911
----------- ----------- ----------- -------- --------
Income (loss) before minority interest.................. 215,538 38,927 59,957 1,426 (423)
Minority interest in consolidated entities(3)........... (195) (41) (54) (1,415) (154)
Gain on sale of corporate tenant lease assets........... 2,948 -- -- -- --
Extraordinary loss on early extinguishment of debt...... (705) -- -- -- --
----------- ----------- ----------- -------- --------
Net income (loss)....................................... $ 217,586 $ 38,886 $ 59,903 $ 11 $ (577)
Preferred dividend requirements......................... (36,908) (23,843) (944) -- --
----------- ----------- ----------- -------- --------
Net income allocable to common shareholders............. $ 180,678 $ 15,043 $ 58,959 $ 11 $ (577)
=========== =========== =========== ======== ========
Basic earnings (loss) per common share(4)............... $ 2.11 $ 0.25 $ 1.40 $ 0.01 $ (1.36)
=========== =========== =========== ======== ========
Diluted earnings (loss) per common share................ $ 2.10 $ 0.25 $ 1.36 $ 0.00 $ (1.36)
=========== =========== =========== ======== ========
Dividends declared per common share(9).................. $ 2.40 $ 1.86 $ 1.14 $ 0.00 $ 0.00
=========== =========== =========== ======== ========
SUPPLEMENTAL DATA:
Dividends declared on preferred shares.................. $ 36,576 $ 24,819 $ 929 $ -- $ --
Dividends declared on common shares..................... 205,477 116,813 60,343 -- --
Adjusted earnings allocable to common shareholders(5)... 230,688 127,798 66,615 11 (577)
Adjusted earnings per common share--basic............... 2.69 2.19 1.59 0.01 (1.36)
Adjusted earnings per common share--diluted............. 2.67 2.07 1.53 0.00 (1.36)
Cash flows from:
Operating activities................................ 192,469 122,549 54,915 1,271 (227)
Investing activities................................ (176,652) (143,911) (1,271,309) (6,013) (522)
Financing activities................................ (27,473) 45,660 1,226,208 4,924 --
EBITDA.................................................. 423,943 251,120 116,778 -- --
Ratio of EBITDA to interest expense(6).................. 2.44x 1.54x 2.44x -- --
Ratio of EBITDA to combined fixed charges(7)............ 2.01x 1.22x 2.39x -- --
Weighted average common shares outstanding--basic(8).... 85,441 57,749 41,607 1,258 425
Weighted average common shares
outstanding--diluted(8)............................... 86,151 60,393 43,460 2,562 425
BALANCE SHEET DATA:
Loans and other lending investments, net................ $ 2,225,183 $ 2,003,506 $ 1,823,761 $ -- $ --
Real estate subject to operating leases, net............ 1,670,169 1,714,284 189,942 -- --
Total assets............................................ 4,034,775 3,813,552 2,059,616 13,441 5,674
Debt obligations........................................ 2,131,967 1,901,204 1,055,719 -- --
Minority interest in consolidated entities(3)........... 6,224 2,565 -- 5,175 3,917
Shareholders' equity.................................... 1,787,885 1,801,343 970,728 6,351 1,578
SUPPLEMENTAL DATA:
Total debt to shareholders' equity...................... 1.2x 1.1x 1.1x -- --
21
EXPLANATORY NOTES:
- ------------------------------
(1) Historical stock option expense represents the option value of approximately
2.5 million fully-vested options to acquire class A shares which were issued
to the Company's external advisor upon consummation of the March 18, 1998
recapitalization of the Company. A portion of those options were then
regranted to employees of the advisor subject to vesting periods which were
typically three years from the date of grant. The remainder of those options
were regranted on a fully-vested basis to an affiliate of Starwood Capital
Group L.L.C., which then further regranted those options to certain of its
employees subject to vesting restrictions.
(2) As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, this amount represents a non-recurring, non-cash charge of
approximately $94.5 million relating to the acquisition of the Company's
external advisor.
(3) Historical minority interest for the Company for fiscal 1998, 1997 and 1996
represents a minority interest in APMT Limited Partnership which was
converted into class A shares on March 18, 1998, the date the partnership
was liquidated and terminated. Minority interests in fiscal 1999 reflects
minority interests in certain of the Leasing Subsidiary's consolidated
ventures. Minority interests in fiscal 2000 also reflects minority interests
in certain of the Leasing Subsidiary's and the Parent's consolidated
ventures.
(4) Earnings per common share excludes 1% of net income allocable to the
Company's class B shares prior to November 4, 1999. The class B shares were
exchanged for Common Stock in connection with the acquisition of TriNet and
other related transactions on November 4, 1999. As a result, the Company now
has a single class of Common Stock outstanding.
(5) Adjusted earnings represent GAAP net income before depreciation and
amortization and, for the year ended December 31, 1999, exclude the
non-recurring, non-cash cost incurred in acquiring the Company's external
advisor (see Note 4 to the Company's Consolidated Financial Statements).
(6) The 1999 and 1998 EBITDA to interest expense ratios on a pro forma basis
would have been 2.83x and 2.84x, respectively (see Note 4).
(7) Combined fixed charges are comprised of interest expense, capitalized
interest, amortization of loan costs and preferred stock dividend
requirements. The 1999 and 1998 EBITDA to combined fixed charges ratios on a
pro forma basis would have been 2.23x and 2.44x, respectively.
(8) As adjusted for one-for-six reverse stock split effected by the Company on
June 19, 1998.
(9) The Company generally declares common and preferred dividends in the month
subsequent to the end of the quarter.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, on March 18, 1998, the Company completed the Recapitalization
Transactions which, among other things, substantially recapitalized the Company
and modified its investment policy. Effective June 18, 1998, the Company (which
was organized under California law) changed its domicile to Maryland by merging
with a newly-formed subsidiary organized under Maryland law, and issued new
shares of the subsidiary to the Company's shareholders in exchange for their
shares in the Company. Concurrently, the Company consummated a one-for-six
reverse stock split.
Immediately prior to the consummation of the Recapitalization Transactions,
the Company's assets primarily consisted of approximately $11.0 million in
short-term, liquid real estate investments, cash and cash equivalents.
On December 15, 1998, the Company sold $220.0 million of preferred shares
and warrants to purchase class A shares to a group of investors affiliated with
Lazard Freres. Concurrent with the sale of the preferred shares and warrants,
the Company purchased $280.3 million in real estate loans and participation
interests from a group of investors also affiliated with Lazard Freres. These
transactions are referred to collectively as the "Lazard Transaction."
As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, on November 3, 1999, the Company's shareholders approved a series of
transactions including: (1) the acquisition of TriNet; (2) the acquisition of
the Company's external advisor; and (3) the reorganization of the Company from a
trust to a corporation and the exchange of the class A and class B shares for
Common Stock. Pursuant to the TriNet acquisition, TriNet merged with and into a
subsidiary of the Company, with TriNet surviving as a wholly-owned subsidiary of
the Company. In the acquisition, each share of common stock of TriNet was
converted into 1.15 shares of Common Stock. Each share of TriNet Series A,
Series B and Series C Cumulative Redeemable Preferred Stock was converted into a
share of Series B, Series C or Series D (respectively) Cumulative Redeemable
Preferred Stock of the Company. The Company's preferred stock issued to the
former TriNet preferred shareholders has substantially the same terms as the
TriNet preferred stock, except that the new Series B, C and D preferred shares
have additional voting rights not associated with the TriNet preferred stock.
The Company's Series A Preferred Stock remained outstanding with the same rights
and preferences as existed prior to the TriNet acquisition. As a consequence of
the acquisition of its external advisor, the Company is now internally-managed
and no longer pays external advisory fees.
The transactions described above and other related transactions have
materially impacted the historical operations of the Company. Accordingly, the
reported historical financial information for periods prior to these
transactions is not believed to be fully indicative of the Company's future
operating results or financial condition.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
INTEREST INCOME--Interest income increased to approximately $268.0 million
for the year ended December 31, 2000 from approximately $209.8 million for the
same period in 1999. This increase is a result of the interest generated by
$721.2 million of newly-originated loan investments during fiscal 2000 and an
additional $56.0 million funded under existing loan commitments. The increase
was partially offset by a reduction in interest earned as a result of principal
repayments of approximately $584.5 million made to the Company on its loan
investments during the year ended December 31, 2000. In addition, the increase
was in part due to higher average interest rates on the Company's variable-rate
loans and other lending investments.
OPERATING LEASE INCOME--Operating lease income increased to approximately
$186.0 million for the year ended December 31, 2000 from approximately
$42.2 million for the same period in 1999.
23
Approximately $134.2 million of this increase is attributable to operating lease
income generated from corporate tenant lease assets acquired in the acquisition
of TriNet, which were included in operations for the entire year in fiscal 2000
as compared to only approximately two months in fiscal 1999. In addition,
approximately $5.4 million resulted from income generated by $128.4 million of
new corporate tenant lease investments.
OTHER INCOME--Included in other income for fiscal year 2000 are prepayment
fees of approximately $7.9 million resulting from the full or partial repayments
of several loans, recognition of $2.1 million in connection with loan
defeasances, a forbearance fee of $1.1 million resulting from the purchase of a
sub-performing loan and subsequent restructuring of such loan to fully
performing status, a prepayment penalty of approximately $1.2 million resulting
from the refinancing of a senior mortgage and corporate loan, and approximately
$1.4 million resulting from the repayment of a senior loan held at a discount
upon the conversion of such loan to a corporate tenant lease holding pursuant to
a purchase option granted to the Company in connection with its original
investment in the asset.
INTEREST EXPENSE--The Company's interest expense increased by $82.7 million
for the year ended December 31, 2000 over the same period in the prior year.
Approximately $44.1 million of this increase is attributable to interest expense
incurred by the Leasing Subsidiary subsequent to its acquisition, which was
included in operations for the entire year in fiscal 2000 as compared to only
approximately two months in 1999. In addition, the increase was in part due to
higher average aggregate borrowings by the Company on its credit facilities,
other term loans and secured notes, the proceeds of which were used to fund
additional investments. The increase was also attributable to higher average
interest rates on the Company's variable-rate debt obligations.
OPERATING COSTS-CORPORATE TENANT LEASE ASSETS--For the year ended
December 31, 2000, operating costs associated with corporate tenant lease assets
increased by approximately $10.6 million to approximately $12.8 million, net of
recoveries from tenants. Such operating costs represent unreimbursed operating
expenses associated with corporate tenant lease assets. This increase is
primarily attributable to operating costs generated from corporate tenant lease
assets acquired in the acquisition of TriNet, which were included in operations
for the entire year in fiscal 2000 as compared to only approximately two months
in 1999.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased by
approximately $24.2 million to $34.5 million for the year ended December 31,
2000 over the same period in the prior year. Approximately $24.0 million of this
increase is attributable to depreciation and amortization relating to the
corporate tenant lease assets acquired in the acquisition of TriNet, which were
included in operations for the entire year in fiscal 2000 as compared to only
approximately two months in 1999.
GENERAL AND ADMINISTRATIVE--The Company's general and administrative
expenses during the year ended December 31, 2000 increased by approximately
$19.4 million to $25.7 million compared to the same period in 1999. These
increases were generally the result of the increased scope of the Company's
operations associated with the acquisition of TriNet and the direct overhead
costs associated with the Company's former external advisor, which impacted
operations for the entire year in fiscal 2000 as compared to only approximately
two months in 1999.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's charge for provision for
possible credit losses increased to $6.5 million from $4.8 million as a result
of expanded lending operations as well as additional seasoning of the Company's
existing lending portfolio. As more fully discussed in Note 5 to the Company's
Consolidated Financial Statements, the Company has not realized any actual
losses on any of its loan investments to date. However, the Company has
considered it prudent to establish a policy of providing reserves for potential
losses in the current portfolio which may occur in the future. Accordingly,
since its first full quarter as a public company (the quarter ended June 30,
1998), management has reflected quarterly provisions for possible credit losses
in its operating results. The Company will continue to recognize quarterly
provisions until a stabilized reserve level is attained.
24
STOCK OPTION COMPENSATION EXPENSE--Stock compensation expense increased by
approximately $2.5 million as a result of charges relating to grants of stock
options to the Company's employees, including amortization of the deferred
charge related to options granted to employees of the Company's former external
advisor subsequent to such personnel becoming direct employees of the Company as
of November 4, 1999.
ADVISORY FEES--There were no advisory fees during the year ended
December 31, 2000 because, subsequent to the acquisition of the Company's
external advisor, the Company is now internally-managed. No further advisory
fees will be incurred.
COSTS INCURRED IN ACQUIRING EXTERNAL ADVISOR--As more fully discussed in
Note 4 to the Company's Consolidated Financial Statements, included in fiscal
1999 costs and expenses is a non-recurring, non-cash charge of approximately
$94.5 million relating to the aquisition of the Company's external advisor.
GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--During the year ended 2000,
the Company disposed of 14 corporate tenant lease assets, including six assets
held in joint venture partnerships, for a total of $256.7 million in proceeds,
and recognized total gains of $2.9 million.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--Certain of the proceeds
from an asset disposition were used to partially repay $8.1 million of a
mortgage loan. In connection with this partial paydown, the Company incurred
prepayment penalties, which resulted in an extraordinary loss of $317,000 during
the first quarter of 2000. Additionally, proceeds from a joint venture asset
disposition were used to repay the third-party debt of the joint venture of
$16.4 million. In connection with this paydown, the venture incurred certain
prepayment penalties, which resulted in an extraordinary loss to the Company of
$388,000 during the third quarter of 2000. There were no comparable early
extinguishments of debt during the year ended December 31, 1999, including by
the Leasing Subsidiary after its acquisition on November 4, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
INTEREST INCOME--During fiscal year 1999, interest income increased by
approximately $96.9 million over interest income for fiscal year 1998. This
increase is a result of the interest generated by the loans and other
investments contributed in the Recapitalization Transactions, as well as
approximately $663.4 million of loans and other lending investments
newly-originated or acquired by the Company during 1999 and an additional
$46.4 million funded under existing commitments. The increase was partially
offset by principal repayments of approximately $561.9 million made to the
Company during fiscal year 1999.
OPERATING LEASE INCOME--Operating lease income increased by $29.8 million
from fiscal year 1998 to fiscal year 1999 due to approximately $26.8 million in
operating lease income generated from corporate tenant lease assets acquired in
the acquisition of TriNet.
OTHER INCOME--Included in other income for fiscal year 1999 is a fee
associated with the repayment of a construction loan of approximately
$1.9 million, yield maintenance payments of approximately $8.1 million resulting
from the repayment of three loans, and approximately $1.0 million in additional
revenue from certain cash flow participation features on five of the Company's
loan investments.
INTEREST EXPENSE--The Company's interest expense increased by $46.5 million
as a result of higher average borrowings by the Company on its credit facilities
and other term loans, the proceeds of which were used to fund additional loan
origination and acquisition activities. The increase was also attributable to
higher average interest rates on the Company's variable-rate debt obligations.
Further, interest expense includes interest incurred by the Leasing Subsidiary
subsequent to its acquisition.
OPERATING COSTS-CORPORATE TENANT LEASE ASSETS--Such operating costs
represent unreimbursed operating expenses incurred by the Leasing Subsidiary
subsequent to its acquisition.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased as a
result of a full year's depreciation on the Company's pre-existing corporate
tenant leasing portfolio, as well as depreciation on the Leasing Subsidiary's
net leased assets subsequent to its acquisition.
25
GENERAL AND ADMINISTRATIVE--General and administrative costs increased by
approximately $3.7 million as a result of additional costs incurred subsequent
to the acquisition of the Company's external advisor, as well as additional
administrative expenses associated with the Leasing Subsidiary subsequent to its
acquisition.
PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's charge for provision for
possible credit losses increased by approximately $2.0 million as a result of
expanded lending operations as well as additional seasoning of the Company's
existing lending portfolio. As more fully discussed in Note 5 to the Company's
Consolidated Financial Statements, the Company has not realized any actual
losses on any of its loan investments to date. However, the Company has
considered it prudent to establish a policy of providing reserves for potential
losses in the current portfolio which may occur in the future. Accordingly,
since its first full quarter as a public company (the quarter ended June 30,
1998), management has reflected quarterly provisions for possible credit losses
in its operating results. The Company will continue to recognize quarterly
provisions until a stabilized reserve level is attained.
STOCK OPTION COMPENSATION EXPENSE--Stock option compensation expense
declined by approximately $5.6 million as a result of the non-recurring charge
relating to the original grant of stock options to the Company's external
advisor in fiscal 1998 concurrently with the consummation of the
Recapitalization Transactions.
ADVISORY FEES--Base advisory fees increased by approximately $5.3 million as
a result of fees being incurred from June 16, 1999 through year end in the prior
year and through November 4, 1999 in fiscal 1999. Further, as a result of the
Company's expanded operations, incentive fees paid under the prior advisory
contract increased from $2.3 million in 1998 to $5.4 million in 1999. Subsequent
to the acquisition of the Company's external advisor, the Company is now
internally-managed and no further advisory fees will be incurred.
COSTS INCURRED IN ACQUIRING EXTERNAL ADVISOR--Finally, as more fully
discussed in Note 4 to the Company's Consolidated Financial Statements, included
in fiscal 1999 costs and expenses is a non-recurring, non-cash charge of
approximately $94.5 million relating to the acquisition of the Company's
external advisor.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to fund its investment activities and operating
expenses. The Company has significant access to capital resources to fund its
existing business plan, which includes the expansion of its real estate lending
and corporate tenant leasing businesses. The Company's capital sources include
cash flow from operations, borrowings under lines of credit, additional term
borrowings, long-term financing secured by the Company's assets, unsecured
financing and the issuance of common, convertible and /or preferred equity
securities. Further, the Company may acquire other businesses or assets using
its capital stock, cash or a combination thereof.
The distribution requirements under the REIT provisions of the Code limit
the Company's ability to retain earnings and thereby replenish capital committed
to its operations. However, the Company believes that its significant capital
resources and access to financing will provide it with financial flexibility and
market responsiveness at levels sufficient to meet current and anticipated
capital requirements, including expected new lending and leasing transactions.
The Company's ability to meet its long-term (i.e., beyond one year)
liquidity requirements is subject to the renewal of its credit lines and /or
obtaining other sources of financing, including issuing additional debt or
equity from time to time. Any decision by the Company's lenders and investors to
enter into such transactions with the Company will depend upon a number of
factors, such as compliance with the terms of its existing credit arrangements,
the Company's financial performance, industry or market trends, the general
availability of and rates applicable to financing transactions, such lenders'
and investors' resources and policies concerning the terms under which they make
such capital commitments and the relative attractiveness of alternative
investment or lending opportunities.
26
Based on its monthly interest and other expenses, monthly cash receipts,
existing investment commitments and funding plans, the Company believes that its
existing sources of funds will be adequate for purposes of meeting its short-
and long-term liquidity needs. Material increases in monthly interest expense or
material decreases in monthly cash receipts would negatively impact the
Company's liquidity. On the other hand, material decreases in monthly interest
expense would positively affect the Company's liquidity.
As more fully discussed in Note 7 to the Company's Consolidated Financial
Statements, at December 31, 2000, the Company had existing fixed-rate borrowings
of approximately $150.7 million secured by real estate under operating leases
which mature in 2009, an aggregate of approximately $162.1 million in
LIBOR-based, variable-rate loans secured by various senior and subordinate
mortgage investments and real estate under operating leases which mature between
fiscal 2001 and 2003, fixed-rate corporate debt obligations aggregating
approximately $356.5 million which mature between 2001 and 2017, and other
variable- and fixed-rate secured debt obligations aggregating approximately
$108.6 million which mature at various dates through 2010.
In addition, the Company has entered into LIBOR-based secured revolving
credit facilities of $700.0 and $500.0 million which expire in fiscal 2005 and
2002, respectively. As of December 31, 2000, the Company had drawn approximately
$284.4 million and $308.0 million under these facilities, respectively.
Availability under these facilities is based on collateral provided under a
borrowing base calculation. The Company also has two unsecured credit facilities
totaling $450.0 million. The $100.0 million facility had no outstanding balance
as of December 31, 2000, matures in January 2002 and bears interest at LIBOR
plus 2.25%. In addition, the Leasing Subsidiary's $350.0 million unsecured
credit facility had a balance of $173.5 million as of December 31, 2000, matures
on May 31, 2001 with a one-year extension period at the Company's option and
bears interest at LIBOR plus 1.55%. Under the terms of the this facility, the
Leasing Subsidiary is generally permitted to make cash distributions to the
Company in an amount equal to 85% of cash flow from operations in any rolling
four-quarter period. Subsequent to year end, the Company extended the term of
this facility to May 2002.
The Company has entered into LIBOR interest rate caps struck at 9.00%, 7.50%
and 7.50% in notional amounts of $300.0 million, $40.4 million and
$38.3 million, respectively, which expire in March 2001, January 2001 and
June 2001, respectively. In addition, in connection with the acquisition of
TriNet, the Company acquired LIBOR interest rate caps currently struck at 7.75%,
7.75% and 7.50% in notional amounts of $75.0 million, $35.0 million and
$75.0 million, respectively, which expire in December 2004, December 2004 and
June 2001, respectively. In connection with the closing of STARS, Series 2000-1
in May 2000, the Company entered into a LIBOR interest rate cap struck at 10.00%
in the notional amount of $312.0 million, and simultaneously sold a LIBOR
interest rate cap with the same terms. Since these instruments do not reduce the
Company's net interest rate risk exposure, they do not qualify as hedges and
changes in their respective values are charged to earnings. As the significant
terms of these arrangements are substantially the same, the effects of a
revaluation of these two instruments are expected to substantially offset one
another. At December 31, 2000, the net fair value of the Company's interest rate
caps was approximately $0.4 million.
The Company has entered into LIBOR interest rate swaps struck at 5.714%,
7.055% and 7.058% in notional amounts of $92.0 million, $125.0 million and
$125.0 million, respectively which expire in March 2001, June 2003 and
June 2003, respectively. These swaps effectively fix the interest rate on a
portion of the Company's floating-rate term loan obligations. In connection with
the acquisition of TriNet, the Company acquired an interest rate swap which,
together with certain existing interest rate cap agreements, effectively fix the
interest rate on $75.0 million of the Leasing Subsidiary's LIBOR-based
borrowings at 5.58% plus the applicable margin through December 1, 2004.
Management expects that it will have aggregate LIBOR-based borrowings at the
Leasing Subsidiary in excess of the notional amount for the duration of the
swap. The actual borrowing cost to the Company with respect to indebtedness
covered by the swap will depend upon the applicable margin over LIBOR for such
indebtedness, which will be determined by the terms of the relevant debt
instruments. In June 2000, an interest rate swap with a
27
notional amount of approximately $112.0 million matured. At December 31, 2000,
the fair value (liability) of the Company's interest rate swaps was ($7.7)
million.
During the year ended December 31, 1999, the Company settled an aggregate
notional amount of approximately $63.0 million that was outstanding under
certain hedging agreements which the Company had entered into in order to hedge
the potential effects of interest rate movements on anticipated fixed-rate
borrowings. The settlement of such agreements resulted in the receipt of
approximately $0.6 million which had been deferred pending completion of the
planned fixed-rate financing transaction. Subsequently, the transaction was
modified and consummated as a variable-rate financing transaction. As a result,
the previously deferred receipt no longer qualified for hedge accounting
treatment and the $0.6 million was recognized as a gain and included in other
income in the consolidated statement of operations for the year ended
December 31, 2000.
During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented forecasted transactions for which the Company had
previously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the settlement of such hedges has been deferred and is
being amortized as an increase to the effective financing costs of the new term
loan over its effective ten-year term.
On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, STARS, Series 2000-1. In the initial
transaction, a wholly-owned subsidiary of the Company issued $896.5 million of
investment grade bonds secured by the subsidiary's assets, which had an
aggregate outstanding principal balance of approximately $1.2 billion at
inception. Principal payments received on the assets will be utilized to repay
the most senior class of the bonds then outstanding. The maturity of the bonds
match funds the maturity of the underlying assets financed under the program.
The Company initially purchased the class F bonds at a par value of
$38.2 million, which the Company financed with a $27.8 million repurchase
agreement maturing in May 2001, which has a balance of $24.2 million at
December 31, 2000. On July 17, 2000, the Company sold, at par, $5.0 million of
the class F bonds to an institutional investor. For accounting purposes, these
transactions were treated as secured financings.
On December 28, 2000, the Company expanded its existing $675.0 million
secured warehouse facility to $700.0 million. The Company extended the original
March 2001 maturity date to March 2005, including a one-year "term out"
extension option to the facility's maturity during which the interest rate
spread will increase 25 basis points, no additional draws under the facility
will be permitted, and the outstanding principal must amortize 25% per quarter.
In connection with the extension, the Company and the facility lender also
increased the range of collateral eligible for inclusion in the facility. Also
in connection with the extension, the Company agreed to increase the facility's
interest rate from LIBOR plus 1.50% to a revised rate of LIBOR plus 1.75% to
2.25%, depending upon certain conditions.
On January 11, 2001, the Company closed a new $700.0 million secured
revolving credit facility which is led by a major commercial bank. The new
facility has a three-year primary term and one-year "term out" extension option,
and bears interest at LIBOR plus 1.40% to 2.15%, depending upon the collateral
contributed to the borrowing base. The new facility accepts a broad range of
structured finance assets and has a final maturity of January 2005.
STOCK REPURCHASE PROGRAM: The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets and excess cash
flow from operations, but also using borrowings under its credit facilities if
the Company determines that it is advantageous to do so. As of December 31,
2000, the Company had repurchased approximately 2.3 million shares at an
aggregate cost of approximately $40.7 million.
28
ADJUSTED EARNINGS
Adjusted earnings represents net income computed in accordance with GAAP,
before gains (losses) on sales of corporate tenant lease assets, extraordinary
items and cumulative effect, plus depreciation and amortization, less preferred
stock dividends, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect adjusted earnings on the same basis.
The Company believes that to facilitate a clear understanding of the
historical operating results of the Company, adjusted earnings should be
examined in conjunction with net income as shown in the Consolidated Statements
of Operations. Adjusted earnings should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indicator of the Company's
performance, or to cash flows from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs.