ISTAR FINANCIAL INC - 10-K Annual Report

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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, 2001
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
--------------------------

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, 2002, 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 $2.4 billion, based upon
the closing price of $28.29 on the New York Stock Exchange composite tape on
such date.

As of March 15, 2002, there were 87,877,976 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
2002 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

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
that typically range in size from $20 million to $100 million to borrowers
controlling institutional quality real estate. These loans may be either
fixed or variable rate and are structured to meet the specific financing
needs of the borrowers, including the acquisition or financing 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 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,
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 range 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 in size 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 assets are

2

generally mission-critical headquarters or distribution facilities that
are subject to long-term leases with rated corporate credit tenants, and
which provide for all 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 1 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., then 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
former 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 former dual class common share
structure with a single class of Common Stock. The Company's Common Stock began
trading on the New York Stock Exchange on 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, structured mortgage, corporate and
lease financings where customers require flexible financial solutions.

- Avoiding commodity businesses in which there is significant direct
competition from other providers of capital such as conduit lending and
investment in commercial or residential mortgage-backed securities.

- Developing direct relationships with borrowers and corporate customers as
opposed to sourcing transactions solely through intermediaries.

- Adding value beyond simply providing capital by offering borrowers and
corporate customers 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 customers' underlying credit obligations.

3

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.

- 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, 2001, 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

4

The Company seeks to maintain an investment portfolio which is diversified
by asset type, underlying property type and geography. As of December 31, 2001,
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

PROPERTY TYPE

GEOGRAPHY

5

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, 2001, the
Company had approximately $1.8 billion of tangible book equity capital and a
total market capitalization of approximately $5.1 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 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.

- Long-term, unsecured corporate debt.

- A combined $2.2 billion available under its unsecured and secured
revolving credit facilities at year end.

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.

The Company has not historically utilized, nor currently plans to utilize,
"off-balance sheet" financing vehicles other than normal corporate tenant
leasing joint ventures with unrelated third parties, which may be accounted for
under the equity method due to the existence of provisions providing for a
sharing of control with the venture partners. Detailed information on joint
ventures in which the Company currently has investments/operations, including
information on the Company's share of the joint ventures' non-recourse debt, is
provided in Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources," and in Note 6 to
the Company's Consolidated Financial Statements.

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.

6

Set forth below is information regarding the Company's primary real estate
lending product lines as of December 31, 2001:

As more fully discussed in Note 3 to the Company's Consolidated Financial
Statements, the Company continually monitors borrower performance and completes
a detailed, loan-by-loan formal credit review on a quarterly basis. After having
originated or acquired over $5 billion of investment transactions, neither the
Company nor its private investment fund predecessors have experienced any actual
losses on their lending 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 loan portfolio reserves for losses
which may be realized 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 loan 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, 2001, the Company's Lending Business portfolio has the
following interest rate characteristics:

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.

7

As of December 31, 2001, the Company's Lending Business portfolio has the
following call protection characteristics:

SUMMARY OF LENDING BUSINESS MATURITIES

As of December 31, 2001, the Company's Lending Business portfolio has the
following maturity characteristics:

STRUCTURED FINANCE

The Company provides custom-tailored senior and subordinated loans that
typically range in size from $20 million to $100 million to borrowers
controlling institutional-quality real estate. These loans may be either fixed
or variable rate and are structured to meet the specific financing needs of the
borrowers, including financing related to the acquisition or refinancing 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 facilities.

8

As of December 31, 2001, the Company's structured finance investments have
the following characteristics:

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) All variable-rate loans assume a one-month LIBOR rate of 1.87% (the actual
one-month LIBOR rate at December 31, 2001).

(3) 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.

(4) 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 current appraisal available).

(5) 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 current appraisal available).

(6) Junior first mortgages represent promissory notes secured by first mortgages
which are junior to other promissory notes secured by the same first
mortgage.

10

LOAN SERVICING

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 "CPS2" (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 customer needs.

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 corporate
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 CTL 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
shareholders and may either reinvest the disposition proceeds, use the proceeds
to reduce debt, or distribute the proceeds to shareholders.

The Company's CTL investments primarily represent a diversified portfolio of
mission-critical headquarters or distribution 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 on a stand-alone basis.

- Commitment to the facility as a mission-critical asset to their on-going
businesses.

As of December 31, 2001, the Company had 159 corporate customers operating
in more than 21 major industry sectors, including aerospace, energy, finance,
healthcare, manufacturing, technology and telecommunications. These customers
represent well-recognized national and international companies, such as Federal
Express, Goodyear, IBM, Nike, Nokia, the U.S. Government and Verizon.

11

As of December 31, 2001, the Company's CTL portfolio has the following
tenant credit characteristics:

EXPLANATORY NOTES:
- ------------------------------

(1) A customer'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. Where a customer's credit is
rated investment grade by one agency and non-investment grade by another,
the Company only classifies the credit "Investment Grade" if the agency
rating the credit investment grade is Standard & Poor's or Moody's Investors
Service.

(2) A customer'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, 2001 include Alcatel Network Systems, Cisco Systems
Inc., Mitsubishi Electronics and Volkswagen of America.

(3) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2001. The operating lease income includes the Company's
pro-rata share from facilities owned by the Company's joint ventures.

RISK MANAGEMENT STRATEGIES. The Company believes that diligent risk
management of its CTL assets is an essential component of its long-term
strategy. There are several ways to optimize the performance and maximize the
value of CTL assets. 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 risk 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.

12

As of December 31, 2001, the Company owned 154 office and industrial
facilities principally subject to net leases to 159 customers, comprising
22.6 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, 2001 is set forth below:

EXPLANATORY NOTE:
- ----------------------------------
(1) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2001. The operating lease income includes the Company's
pro-rata share from facilities owned by the Company's joint ventures.

(2) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2001 as a percentage of annualized total revenue for the
quarter ended December 31, 2001.

13

As of December 31, 2001, lease expirations on the Company's CTL assets,
including facilities owned by the Company's joint ventures, are as follows:

EXPLANATORY NOTES:
- ------------------------------

(1) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2001. The operating lease income includes the Company's
pro-rata share from facilities owned by the Company's joint ventures.

(2) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2001 as a percentage of annualized total revenue for the
quarter ended December 31, 2001.

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 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.

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.

14

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 must currently distribute, at a minimum, an amount equal to 90% of its
taxable income and must distribute 100% of its taxable income to avoid paying
corporate federal income taxes. 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.

The Company was eligible and elected to be taxed as a REIT for taxable years
beginning January 1, 1998.

FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS STRATEGY

The implementation of the Company's business strategy and investment
policies are subject to certain risks, including the effect of economic and
other conditions on underlying property performance, 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 CTL
assets owned by the Company will not generate revenues sufficient to meet
operating expenses and to pay scheduled debt service, the risk that prepayment

15

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, 2002, the Company had 134 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. Its telephone number, general
facsimile number and web address are (212) 930-9400, (212) 930-9494 and
www.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 corporate tenant
lease facilities held by the Company and its Leasing Subsidiary for investment
purposes and Item 8--"Schedule III--Corporate Tenant Lease Assets 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 2001.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED SHARE MATTERS

The Company's Common Stock trades on the New York Stock Exchange ("NYSE")
under the symbol "SFI."

The high and low sales prices per share of Common Stock are set forth below
for the periods indicated.

On March 15, 2002, the closing sale price of the Common Stock as reported by
the NYSE was $28.29. The Company had approximately 2,025 holders of record of
Common Stock as of March 15, 2002.

At December 31, 2001, 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 is publicly traded.

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 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.

17

The following table sets forth the dividends paid or declared by the Company
on its Common Stock:

EXPLANATORY NOTES:
- ------------------------------

(1) A portion of this quarterly dividend (approximately $0.5976 per share) was
treated as income to shareholders of record in 2000, and the remainder was
treated as 2001 income.

(2) For tax reporting purposes, the 2001 dividends were classified as 90.55%
($2.2206) ordinary income and 9.45% ($0.2318) return of capital.

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, 2001. 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 March 1998, as discussed
more fully in Note 1 to the Company's Consolidated Financial Statements (the
"Recapitalization Transactions"), the Company did not have substantial
operations or capital resources. Prior to the Recapitalization Transactions, the
Company's structured finance operations were conducted by two private investment
partnerships 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 1997 period is not

18

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."

19

EXPLANATORY NOTES:
- ------------------------

(1) 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 in November 1999.

(2) Represents one-time effect of adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as of January 1, 2001.

(3) Prior to November 1999, earnings per common share excludes 1% of net income
allocable to the Company's former class B shares. The former 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.

(4) The Company generally declares common and preferred dividends in the month
subsequent to the end of the quarter.

(5) Adjusted earnings represents net income in accordance with GAAP, before
gains (losses) on sales of corporate tenant lease assets, extraordinary
items and cumulative effect of change in accounting principle, plus
depreciation and amortization, less preferred stock dividends, and after
adjustments for unconsolidated partnerships and joint ventures 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
(see Note 4 to the Company's Conslidated Financial Statements) would have
been 2.83x and 2.84x, respectively.

(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 (see Note 4 to the Company's Conslidated Financial
Statements) 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.

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The Company began its business in 1993 through private investment funds
formed to take advantage of the lack of well-capitalized lenders capable of
servicing the needs of high-end customers in its markets. In March 1998, the
Company's private investment 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 public company. In November 1999, the Company
acquired its leasing subsidiary, TriNet Corporate Realty Trust, Inc. ("TriNet"
or the "Leasing Subsidiary"), which was then the largest publicly-traded company
specializing in the net leasing of corporate office and industrial facilities.
Concurrent with the TriNet Acquisition, the Company also acquired its external
advisor in exchange for shares of its Common Stock and converted its
organizational form to a Maryland corporation. As part of the conversion to a
Maryland corporation, the Company replaced its former dual-class Common Stock
structure with a single class of Common Stock. This single class of Common Stock
began trading on the New York Stock Exchange under the symbol "SFI" in
November 1999.

None of the Company's investment assets were directly impacted by the
terrorist attacks against the United States on September 11, 2001. While the
Company believes that the diversification of its portfolio, its strict
underwriting standards and its use of credit enhancement techniques represent an
appropriate emphasis on risk management, the Company cannot predict the effect
that any future terrorist attack might have on the U.S. economy and the
Company's business.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

INTEREST INCOME--Interest income decreased $13.9 million to $254.1 million
for the 12 months ended December 31, 2001 from $268.0 million for the same
period in 2000. Approximately $12.7 million of this decrease is the result of
lower average LIBOR rates of 3.9% in 2001 compared to 6.4% in 2000 on the
Company's variable-rate lending investments. This decrease was partially offset
by $55.1 million of interest income on new originations or additional fundings,
net of $51.6 million from the repayment of loans and other lending investments,
in addition to a decrease of $1.5 million from income earned on cash and cash
equivalents.

OPERATING LEASE INCOME--Operating lease income increased $15.3 million to
$201.3 million for the 12 months ended December 31, 2001 from $186.0 million for
the same period in 2000. Of this increase, $11.8 million was attributable to new
corporate tenant lease assets and $6.0 million to additional operating lease
income from existing corporate tenant lease assets owned in both periods. In
addition, joint venture income contributed $4.6 million to the increase. These
increases were partially offset by a $7.0 million decrease in operating lease
income resulting from asset dispositions made in 2000 and 2001.

OTHER INCOME--Other income consists primarily of prepayment penalties and
gains from the early repayment of loans and other lending investments, financial
advisory and asset management fees, lease termination fees, mortgage servicing
fees, loan participation payments and dividends on certain investments. During
the year ended December 31, 2001, other income included loan participation
payments of $13.1 million (45.5% of other income), prepayment penalties and
gains on loan repayments of $13.0 million (45.1%) and financial advisory, lease
termination, asset management and mortgage servicing fees of $5.3 million
(18.4%). These amounts were partially offset by a loss of $2.3 million from
iStar Operating, the Company's internal loan servicing business.

INTEREST EXPENSE--For the 12 months ended December 31, 2001, interest
expense decreased by $3.8 million to $170.1 million from $173.9 million for the
same period in 2000. This decrease was primarily due to the lower average LIBOR
rates of 3.9% in 2001 compared to 6.4% in 2000 on the Company's variable-rate
debt obligations. This decrease was partially offset by the higher average
borrowings on the Company's credit facilities, term loans and unsecured notes
and $7.6 million additional amortization of deferred financing costs on the
Company's debt obligations in 2001 compared to the same period in 2000.

21

OPERATING COSTS-CORPORATE TENANT LEASE ASSETS--For the 12 months ended
December 31, 2001, operating costs were substantially unchanged as compared to
the same period in 2000. Such operating costs represent unreimbursed operating
expenses associated with corporate tenant lease assets.

DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased by
approximately $1.1 million to $35.6 million for the 12 months ended
December 31, 2001 from $34.5 million for the same period 2000. This increase is
primarily the result of additional depreciation from new corporate tenant lease
assets and from improvements of existing corporate tenant lease assets that
accounted for $1.3 and $1.0 million of the increase, respectively. These
increases were partially offset by corporate tenant lease dispositions that
accounted for a $1.1 million decrease.

GENERAL AND ADMINISTRATIVE--For the 12 months ended December 31, 2001,
general and administrative expenses decreased by $1.5 million to $24.2 million,
compared to $25.7 million for the same period in 2000. This decrease is
primarily the result of a reduction in office and related costs and professional
fees, partially offset by an increase in personnel and related costs.

PROVISION FOR LOAN LOSSES--The Company's charge for provision for loan
losses increased to $7.0 million for the 12 months ended December 31, 2001 from
$6.5 million for the same period in 2000 as a result of the continued expansion
of the Company's lending operations as well as additional seasoning of its
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 loan portfolio reserves
for losses which may be realized in the future. Accordingly, since its first
full quarter operating its current business as a public company (the quarter
ended June 30, 1998), management has reflected quarterly provisions for loan
losses in its operating results. The Company plans to continue to recognize
quarterly provisions until a stabilized reserve level is attained.

STOCK-BASED COMPENSATION EXPENSE--Stock-based compensation expense increased
by approximately $711,000 as a result of charges relating to grants of stock
options and restricted shares.

GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--During 2001, the Company
disposed of four corporate tenant lease assets for total proceeds of
$26.3 million and recognized net gains of $1.1 million.

During 2000, the Company disposed of 14 corporate tenant lease assets,
including six assets held in joint venture partnerships, for total proceeds of
$256.7 million, and recognized net gains of $2.9 million.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the 12 months
ended December 31, 2001 and 2000, the Company or its joint ventures prepaid debt
obligations of $133.0 million and $24.5 million, respectively. These
transactions resulted in an extraordinary loss on early extinguishment of debt
resulting from prepayment penalties and the expense associated with remaining
unamortized deferred financing costs in the amount of $1.6 million and $705,000
for the 12 months ended December 31, 2001 and 2000, respectively.

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 income 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
approximately $584.5 million of principal repayments on the Company's 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. 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

22

the entire year in fiscal 2000 as compared to two months in 1999. In addition,
approximately $5.4 million resulted from income generated by $128.4 million of
new corporate tenant lease assets.

OTHER INCOME--Other income consists primarily of prepayment penalties and
gains from the early repayment of loans and other lending investments, financial
advisory and asset management fees, lease termination fees, mortgage servicing
fees, loan participation payments and dividends on certain investments. During
the year ended December 31, 2000, other income included prepayment penalties and
gains on loan repayments of $10.5 million (or 58.8% of other income),
$2.1 million (11.8%) in connection with a loan defeasance, loan participation
payments of $1.9 million (10.6%), financial advisory, asset management and
mortgage servicing fees of $2.6 million (14.6%) and lease termination fees of
$770,000 (4.3%).

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 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 corporate 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 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 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 were included
in operations for the entire year in fiscal 2000 as compared to two months in
1999.

PROVISION FOR LOAN LOSSES--The Company's charge for provision for loan
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 loan portfolio reserves
for losses which may be realized 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 loan losses in its operating results. The
Company plans to continue to recognize quarterly provisions until a stabilized
reserve level is attained.

STOCK-BASED COMPENSATION EXPENSE--Stock-based 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.

23

ADVISORY FEES--There were no advisory fees during the year ended
December 31, 2000 because, subsequent to the acquisition of the Company's former
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 former 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 net gains of $2.9 million.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the 12 months
ended December 31, 2000, the Company or its joint ventures prepaid debt
obligations of $24.5 million. These transactions resulted in an extraordinary
loss on early extinquishment of debt resulting from prepayment penalties in the
amount of $705,000.

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 of change in accounting principle, plus depreciation
and amortization, less preferred stock dividends, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures reflect the Company's share of adjusted earnings
calculated 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.

EXPLANATORY NOTE:
- ------------------------------

(1) Represents one-time effect of adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as of January 1, 2001.

24

RISK MANAGEMENT

INVESTMENT MODIFICATIONS--On October 1, 2001, the Company substantially
enhanced the value of its security under a ground lease with a CTL customer
located in San Jose, CA. As part of the transaction, the customer posted an
additional $15.0 million letter of credit as additional collateral for its lease
obligation to the Company. This increased the total letters of credit securing
the customer's lease obligation from $10.0 million to $25.0 million. In
addition, the customer received a one-time $3.0 million reduction to its
operating lease payments through September 30, 2002, and in return the Company
received prepaid cash of $6.6 million for operating lease payments for the same
period. The prepaid lease payment together with the increased letters of credit
are sufficient to fully cover the customer's lease payments to the Company until
May 2005. For accounting purposes, the one-time reduction will be recognized on
a straight-line basis over the remaining lease term. The customer remains
current on all of its lease obligations to the Company.

On October 1, 2001, the Company agreed to a six-month deferal of principal
amortization on a $42.0 million first mortgage secured by a hotel property in
New York, New York. This mortgage matures on April 30, 2005 and bears interest
at LIBOR + 4.50%. In addition to the interest coupon, the borrower is required
to pay significant annual amortization, such that the borrower's debt service
constant is 11.33%. The Company granted the borrower a one-time deferral of
principal payments for a period of six months covering the fourth quarter of
2001 and the first quarter of 2002. In return, the borrower was required to
establish an additional debt service reserve secured by a pledge of the
partnership interests in two residential properties located in New York, New
York. In addition, the borrower is required to immediately repay the deferred
amortization out of operating cash flow, to the extent available, commencing
April 1, 2002. The borrower remains current on all of its debt service payments
to the Company, and the Company is currently comfortable that it has adequate
collateral to support the book value of the asset.

NON-ACCRUAL LOANS--The Company transfers loans to non-accrual status at such
time as: (1) management believes that the potential risk exists that scheduled
debt service payments will not be met within the coming 12 months; (2) the loans
become 90 days delinquent; (3) management determines the borrower is incapable
of, or ceased efforts toward, curing the cause of an impairment; or (4) the net
realizable value of the loan's underlying collateral approximates the Company's
carrying value of such loan. Interest income is recognized only upon actual cash
receipt for loans on non-accrual status. As of December 31, 2001, the Company
had two assets on non-accrual status with an aggregate gross book value of
$6.2 million, or 0.14% of the gross book value of the Company's investments.
Each borrower remains current on all of its debt service payments to the
Company, and the Company is currently comfortable that it has adequate
collateral to support the book values of the assets.

One of the two non-accrual loans is a $4.3 million partnership loan on two
shopping malls located in the suburbs of Washington, D.C. This investment was
part of a larger loan originally made by affiliates of Lazard Freres prior to
the Company's acquisition of Lazard's structured finance portfolio in 1998. The
loan matures in September 2003 and bears interest at 12.00%. The Company
received cash payments equal to the interest due on the loan during the year
ended December 31, 2001, and the borrower remains current on its obligations to
the Company. However, the Company anticipates that this loan will remain on
non-accrual status for the foreseeable future.

Additionally, the Company, through its investment in TriNet Management
Operating Company, has a $2.0 million investment in debt securities that are
convertible into shares of a real estate company which trades on the Mexican
Stock Exchange. This investment was made by TriNet prior to its acquisition by
the Company in 1999. The securities bear interest at 12.00% per annum payable in
arrears on December 4th of each year. The Company received cash payments equal
to the interest due on the investment for the year ended December 31, 2001, and
the borower remains current on its obligations to the Company. However, the
Company anticipates that this investment will remain on non-accrual status for
the forseeable future.

WATCH LIST ASSETS--The Company conducts a quarterly comprehensive credit
review, resulting in an individual risk rating being assigned to each asset.
This review is designed to enable management to evaluate and proactively manage
asset-specific credit issues and identify credit trends on a portfolio-wide

25

basis as an "early warning system." In addition to the three loans mentioned
above under "Investment Modifications" and "Non-Accrual Loans," the Company has
two CTL investments that are on its credit watch list.

In November 2000, a customer occupying a headquarters office facility owned
by the Company filed for protection under Chapter 11 of the U.S. Bankruptcy
Code. Following the bankruptcy filing, the customer affirmed the Company's lease
in bankruptcy and agreed to extend the Company's lease for an additional ten
years (with escalating lease payments) through January 2023. Throughout this
period, the customer remained current on its lease payments to the Company and
remains current through the date hereof. The customer reasonably expects to
emerge from bankruptcy prior to July 2002, although there can be no assurance
that this will occur. The net carrying value of this investment at December 31,
2001 was $41.1 million.

In January 2002, a customer occupying office facilities owned by the Company
filed a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. The customer utilizes these facilities as the U.S. headquarters
for one of its major business lines. The customer recently moved approximately
150 of its employees from other area locations into the Company's facilities,
and continues to consolidate its space needs into the Company's facilities. In
addition, the customer has invested approximately $3 million of its own capital
in the facilities. The customer remains current on its lease payments to the
Company. The customer has not yet filed any motion to assume or reject the
Company's lease with the Bankruptcy Court. The net carrying value of this
investment at December 31, 2001 was $11.2 million.

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 corporate tenant
leasing transactions.

The Company believes that its existing sources of funds will be adequate for
purposes of meeting its short- and long-term liquidity needs. The Company's
ability to meet its long-term (i.e., beyond one year) liquidity requirements is
subject to obtaining additional debt and equity financing. Any decision by the
Company's lenders and investors to 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

The following table outlines the timing of required principal payments
related to the Company's debt agreements (in thousands):

EXPLANATORY NOTES:

- ------------------------------

(1) Assumes exercise of extensions to the extent such extensions are at the
Company's option.

(2) Based on expected proceeds from principal payments received on loan assets
collateralizing such notes.

The Company has three LIBOR-based secured revolving credit facilities of
$700.0 million, $700.0 million and $500.0 million, respectively, which have
final maturities in fiscal years 2005, 2005 and 2003, respectively. The final
maturities of these facilities include a one-year "term-out" extension at the
Company's option. As of December 31, 2001, the Company had drawn approximately
$312.3 million, $439.3 million and $148.9 million under these facilities,
respectively. Availability under these facilities is based on collateral
provided under a borrowing base calculation. At December 31, 2001, the Company
also had an unsecured credit facility totaling $300.0 million which bears
interest at LIBOR + 2.125% and matures in July 2004, including a one-year
extension at the Company's option. At December 31, 2001, the Company had not
drawn any amounts under this facility.

RECENT FINANCING ACTIVITIES--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. For accounting purposes, this
transaction was treated as a secured financing.

On January 11, 2001, the Company closed a new $700.0 million secured
revolving c