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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)  

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

o
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. 1-15371

iSTAR FINANCIAL INC.
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization)		   95-6881527
(I.R.S. Employer Identification Number)
1114 Avenue of the Americas, 27th Floor
New York, NY
(Address of principal executive offices)		   10036
(Zip code)

Registrant's telephone number, including area code: (212) 930-9400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:   Name of Exchange on which registered:
Common Stock, $0.001 par value   New York Stock Exchange
9.375% Series B Cumulative Redeemable
Preferred Stock, $0.001 par value		   New York Stock Exchange
9.200% Series C Cumulative Redeemable
Preferred Stock, $0.001 par value		   New York Stock Exchange
8.000% Series D Cumulative Redeemable
Preferred Stock, $0.001 par value		   New York Stock Exchange
7.875% Series E Cumulative Redeemable
Preferred Stock, $0.001 par value		   New York Stock Exchange
7.800% Series F Cumulative Redeemable
Preferred Stock, $0.001 par value		   New York Stock Exchange

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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2). Yes ý    No o

        As of November 7, 2003, there were 101,434,366 shares of common stock of iStar Financial Inc. $0.001 par value per share outstanding ("Common Stock").


iStar Financial Inc.

Index to Form 10-Q

 
    
   Page
PART I.   Consolidated Financial Information   2
Item 1.   Financial Statements:    
    Consolidated Balance Sheets at September 30, 2003 and December 31, 2002   2
    Consolidated Statements of Operations—For the three and nine months ended September 30, 2003 and 2002   3
    Consolidated Statement of Changes in Shareholders' Equity—For the nine months ended September 30, 2003   4
    Consolidated Statements of Cash Flows—For the three and nine months ended September 30, 2003 and 2002   5
    Notes to Consolidated Financial Statements   6
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   44
Item 4.   Controls and Procedures   62

PART II.
 
Other Information
 
63
Item 1.   Legal Proceedings   63
Item 2.   Changes in Securities and Use of Proceeds   63
Item 3.   Defaults Upon Senior Securities   63
Item 4.   Submission of Matters to a Vote of Security Holders   63
Item 5.   Other Information   63
Item 6.   Exhibits and Reports on Form 8-K   63

SIGNATURES
 
64

PART I. CONSOLIDATED FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


iStar Financial Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

(unaudited)

 
   As of
September 30,
2003
   As of
December 31,
2002
  
ASSETS  

Loans and other lending investments, net
 
$
3,579,479
 
$
3,050,342
 
Corporate tenant lease assets, net     2,497,999     2,291,805  
Investments in and advances to joint ventures and unconsolidated subsidiaries     29,957     30,611  
Assets held for sale     34,470     28,501  
Cash and cash equivalents     23,154     15,934  
Restricted cash     70,496     40,211  
Accrued interest and operating lease income receivable     24,789     26,804  
Deferred operating lease income receivable     47,404     36,739  
Deferred expenses and other assets     198,037     90,750  
   
 
 
  Total assets   $ 6,505,785   $ 5,611,697  
   
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY
 

Liabilities:
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities   $ 117,528   $ 117,001  
Dividends payable     1,900     5,225  
Debt obligations     4,114,348     3,461,590  
   
 
 
  Total liabilities     4,233,776     3,583,816  
   
 
 
Commitments and contingencies     —     —  
Minority interest in consolidated entities     4,904     2,581  

Shareholders' equity:
 
 
 
 
 
 
 
Series A Preferred Stock, $0.001 par value, liquidation preference $50.00 per share, 1,600 and 4,400 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively     2     4  
Series B Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 2,000 shares issued and outstanding at September 30, 2003 and December 31, 2002     2     2  
Series C Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 1,300 shares issued and outstanding at September 30, 2003 and December 31, 2002     1     1  
Series D Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and outstanding at September 30, 2003 and December 31, 2002     4     4  
Series E Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,600 and 0 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively     6     —  
Series F Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 and 0 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively     4     —  
High Performance Units     5,110     1,359  
Common Stock, $0.001 par value, 200,000 shares authorized, 101,423 and 98,114 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively     101     98  
Warrants and options     20,602     20,322  
Additional paid-in capital     2,466,360     2,281,636  
Retained earnings (deficit)     (175,528 )   (227,769 )
Accumulated other comprehensive income (losses) (See Note 12)     (1,503 )   (2,301 )
Treasury stock (at cost)     (48,056 )   (48,056 )
   
 
 
  Total shareholders' equity     2,267,105     2,025,300  
   
 
 
  Total liabilities and shareholders' equity   $ 6,505,785   $ 5,611,697  
   
 
 

The accompanying notes are an integral part of the financial statements.

2


iStar Financial Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

 
   For the
Three Months Ended
September 30,
   For the
Nine Months Ended
September 30,
  
 
   2003
   2002*
   2003
   2002*
  
Revenue:                          
  Interest income   $ 77,167   $ 66,786   $ 224,672   $ 187,057  
  Operating lease income     65,399     62,594     196,226     174,662  
  Other income     9,971     4,822     22,741     21,263  
   
 
 
 
 
    Total revenue     152,537     134,202     443,639     382,982  
   
 
 
 
 

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Interest expense     47,185     47,471     145,357     135,935  
  Operating costs—corporate tenant lease assets     4,881     3,616     12,550     9,543  
  Depreciation and amortization     13,696     12,591     40,483     34,598  
  General and administrative     11,154     8,088     27,870     22,849  
  General and administrative—stock-based compensation expense     848     9,546     2,537     17,365  
  Provision for loan losses     1,750     2,000     5,250     5,750  
  Loss on early extinguishment of debt     —     —     —     12,166  
   
 
 
 
 
    Total costs and expenses     79,514     83,312     234,047     238,206  
   
 
 
 
 
Net income before equity in earnings from joint ventures and unconsolidated subsidiaries, minority interest and other items     73,023     50,890     209,592     144,776  
Equity in earnings from joint ventures and unconsolidated subsidiaries     744     85     586     1,301  
Minority interest in consolidated entities     (40 )   (40 )   (119 )   (122 )
   
 
 
 
 
Net income from continuing operations     73,727     50,935     210,059     145,955  
Income from discontinued operations     450     1,612     1,555     5,620  
Gain from discontinued operations     701     123     964     717  
   
 
 
 
 
Net income     74,878     52,670     212,578     152,292  
Preferred dividend requirements     (8,258 )   (9,227 )   (26,712 )   (27,681 )
   
 
 
 
 
Net income allocable to common shareholders and HPU holders(1)   $ 66,620   $ 43,443   $ 185,866   $ 124,611  
   
 
 
 
 
Basic earnings per common share(2)   $ 0.66   $ 0.49   $ 1.85   $ 1.41  
   
 
 
 
 
Diluted earnings per common share(2)(3)   $ 0.63   $ 0.47   $ 1.79   $ 1.36  
   
 
 
 
 
*
Reclassified to conform to 2003 presentation.

Explanatory Notes:


(1)
HPU holders are Company employees who purchased high performance common stock units under the Company's High Performance Unit Program.

(2)
For the three months ended September 30, 2003, net income used to calculate earnings per basic and diluted common share excludes $538 and $517 of net income allocable to HPU holders, respectively. For the nine months ended September 30, 2003, net income used to calculate earnings per basic and diluted common share excludes $1,517 and $1,470 of net income allocable to HPU holders, respectively.

(3)
For the three and nine months ended September 30, 2003, net income used to calculate earnings per diluted common share includes joint venture income of $40 and $119, respectively.

The accompanying notes are an integral part of the financial statements.

3

iStar Financial Inc.

Consolidated Statement of Changes in Shareholders' Equity

(In thousands)

(unaudited)

 
   Series A
Preferred
Stock
   Series B
Preferred
Stock
   Series C
Preferred
Stock
   Series D
Preferred
Stock
   Series E
Preferred
Stock
   Series F
Preferred
Stock
   High
Performance
Units
   Common
Stock
at Par
   Warrants
and
Options
   Additional
Paid-In
Capital
   Retained
Earnings
(Deficit)
   Accumulated
Other
Comprehensive
Income
(Losses)
   Treasury Stock
   Total
  
Balance at December 31, 2002   $ 4   $ 2   $ 1   $ 4   $ —   $ —   $ 1,359   $ 98   $ 20,322   $ 2,281,636   $ (227,769 ) $ (2,301 ) $ (48,056 ) $ 2,025,300  
Exercise of options     —     —     —     —     —     —     —     1     280     19,620     —     —     —     19,901  
Dividends declared—preferred     —     —     —     —     —     —     —     —     —     195     (26,712 )   —     —     (26,517 )
Dividends declared—common     —     —     —     —     —     —     —     —     —     —     (132,553 )   —     —     (132,553 )
Dividends declared—HPU's     —     —     —     —     —     —     —     —     —     —     (1,072 )   —     —     (1,072 )
Restricted stock units granted to employees     —     —     —     —     —     —     —     —     —     665     —     —     —     665  
Options granted to employees     —     —     —     —     —     —     —     —     —     82     —     —     —     82  
High performance units sold to employees     —     —     —     —     —     —     3,751     —     —     —     —     —     —     3,751  
Net proceeds from preferred offering/exchange     (2 )   —     —     —     6     4     —     —     —     90,728     —     —     —     90,736  
Issuance of stock—DRIP/Stock purchase plan     —     —     —     —     —     —     —     2     —     73,434     —     —     —     73,436  
Net income for the period     —     —     —     —     —     —     —     —     —     —     212,578     —     —     212,578  
Change in accumulated other comprehensive income (losses)     —     —     —     —     —     —     —     —     —     —     —     798     —     798  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2003   $ 2   $ 2   $ 1   $ 4   $ 6   $ 4   $ 5,110   $ 101   $ 20,602   $ 2,466,360   $ (175,528 ) $ (1,503 ) $ (48,056 ) $ 2,267,105  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of the financial statements.

4


iStar Financial Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 
   For the
Three Months Ended
September 30,
   For the
Nine Months Ended
September 30,
  
 
   2003
   2002*
   2003
   2002*
  
Cash flows from operating activities:                          
Net income   $ 74,878   $ 52,670   $ 212,578   $ 152,292  
Adjustments to reconcile net income to cash flows provided by operating activities:                          
  Minority interest in consolidated entities     40     40     119     122  
  Non-cash expense for stock-based compensation     884     9,568     2,649     17,409  
  Depreciation and amortization     20,405     18,041     60,796     51,809  
  Depreciation and amortization from discontinued operations     77     139     77     455  
  Amortization of discounts/premiums, deferred interest and costs on lending investments     (12,753 )   (9,612 )   (38,095 )   (22,232 )
  Discounts, loan fees and deferred interest received     12,398     22,838     23,128     31,878  
  Equity in earnings from joint ventures and unconsolidated subsidiaries     (744 )   (85 )   (586 )   (1,301 )
  Distributions from operations of joint ventures     219     985     2,770     5,533  
  Loss on early extinguishment of debt     —     —     —     12,166  
  Deferred operating lease income receivable     (3,555 )   (3,525 )   (10,766 )   (11,710 )
  Gain from discontinued operations     (701 )   (123 )   (964 )   (717 )
  Provision for loan losses     1,750     2,000     5,250     5,750  
  Change in investments in and advances to joint ventures and unconsolidated subsidiaries     —     —     (2,877 )   —  
  Changes in assets and liabilities:                          
    Decrease in accrued interest and operating lease income receivable     2,532     11,236     637     8,633  
    (Increase) decrease in deferred expenses and other assets     (30,690 )   798     (61,295 )   (315 )
    (Decrease) increase in accounts payable, accrued expenses and other liabilities     (10,496 )   (5,668 )   (1,712 )   4,943  
   
 
 
 
 
  Cash flows provided by operating activities     54,244     99,302     191,709     254,715  
   
 
 
 
 
Cash flows from investing activities:                          
  New investment originations     (822,901 )   (285,544 )   (1,636,215 )   (1,385,281 )
  Add-on fundings under existing loan commitments     (12,110 )   (2,483 )   (33,251 )   (17,987 )
  Net proceeds from sale of corporate tenant lease assets     7,598     —     11,563     3,702  
  Net proceeds from discontinued operations     —     12,500     —     17,500  
  Repayments of and principal collections on loans and other lending investments     435,548     202,503     872,940     478,321  
  Investments in and advances to unconsolidated joint ventures     —     —     —     (127 )
  Capital improvements for build-to-suit projects     —     (86 )   —     (1,039 )
  Capital improvement projects on corporate tenant lease assets     (1,198 )   (714 )   (1,834 )   (1,802 )
  Other capital expenditures on corporate tenant lease assets     (313 )   (1,604 )   (4,538