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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 March 31, 2004

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
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
7.650% Series G Cumulative Redeemable
Preferred Stock, $0.001 par value		   New York Stock Exchange
7.500% Series I 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 May 3, 2004, there were 110,025,816 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 March 31, 2004 and December 31, 2003
 
2

 
 
Consolidated Statements of Operations—For the three months ended March 31, 2004 and 2003
 
3

 
 
Consolidated Statement of Changes in Shareholders' Equity—For the three months ended March 31, 2004
 
4

 
 
Consolidated Statements of Cash Flows—For the three months ended March 31, 2004 and 2003
 
5

 
 
Notes to Consolidated Financial Statements
 
6

Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
41

Item 4.
 
Controls and Procedures
 
57

PART II.
 
Other Information
 
58

Item 1.
 
Legal Proceedings
 
58

Item 2.
 
Changes in Securities and Use of Proceeds
 
58

Item 3.
 
Defaults Upon Senior Securities
 
58

Item 4.
 
Submission of Matters to a Vote of Security Holders
 
58

Item 5.
 
Other Information
 
58

Item 6.
 
Exhibits and Reports on Form 8-K
 
58

SIGNATURES
 
60


PART I. CONSOLIDATED FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


iStar Financial Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

(unaudited)

 
   As of
March 31,
2004
   As of
December 31,
2003
  
ASSETS  

Loans and other lending investments, net
 
$
3,985,022
 
$
3,702,674
 
Corporate tenant lease assets, net     2,864,255     2,535,885  
Investments in and advances to joint ventures and unconsolidated subsidiaries     19,305     25,019  
Assets held for sale     24,800     24,800  
Cash and cash equivalents     87,632     80,090  
Restricted cash     68,034     57,665  
Accrued interest and operating lease income receivable     25,699     26,076  
Deferred operating lease income receivable     57,083     51,447  
Deferred expenses and other assets     173,017     156,934  
   
 
 
  Total assets   $ 7,304,847   $ 6,660,590  
   
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY
 

Liabilities:
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities   $ 177,720   $ 126,524  
Debt obligations     4,630,443     4,113,732  
   
 
 
  Total liabilities     4,808,163     4,240,256  
   
 
 
Commitments and contingencies     —     —  

Minority interest in consolidated entities
 
 
12,483
 
 
5,106
 

Shareholders' equity:
 
 
 
 
 
 
 
Series B Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 0 and 2,000 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively     —     2  
Series C Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 0 and 1,300 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively     —     1  
Series D Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and outstanding at March 31, 2004 and December 31, 2003     4     4  
Series E Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,600 shares issued and outstanding at March 31, 2004 and December 31, 2003     6     6  
Series F Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and outstanding at March 31, 2004 and December 31, 2003     4     4  
Series G Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 3,200 shares issued and outstanding at March 31, 2004 and December 31, 2003     3     3  
Series I Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 5,000 and 0 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively     5     —  
High Performance Units     7,383     5,131  
Common Stock, $0.001 par value, 200,000 shares authorized, 109,372 and 107,215 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively     108     107  
Warrants and options     19,705     20,695  
Additional paid-in capital     2,806,661     2,678,772  
Retained earnings (deficit)     (297,165 )   (242,449 )
Accumulated other comprehensive income (losses) (See Note 12)     (4,457 )   1,008  
Treasury stock (at cost)     (48,056 )   (48,056 )
   
 
 
  Total shareholders' equity     2,484,201     2,415,228  
   
 
 
  Total liabilities and shareholders' equity   $ 7,304,847   $ 6,660,590  
   
 
 

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
March 31,
  
 
   2004
   2003
  
Revenue:              
  Interest income   $ 83,057   $ 73,427  
  Operating lease income     74,428     64,164  
  Other income     11,941     4,329  
   
 
 
    Total revenue     169,426     141,920  
   
 
 

Costs and expenses:
 
 
 
 
 
 
 
  Interest expense     52,566     47,980  
  Operating costs—corporate tenant lease assets     5,879     3,651  
  Depreciation and amortization     16,043     13,029  
  General and administrative     13,359     7,681  
  General and administrative—stock-based compensation expense     107,541     823  
  Provision for loan losses     3,000     1,750  
  Loss on early extinguishment of debt     12,172     —  
   
 
 
    Total costs and expenses     210,560     74,914  
   
 
 
Net income (loss) before equity in earnings (loss) from joint ventures and unconsolidated subsidiaries, minority interest and other items     (41,134 )   67,006  
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries     6,248     (58 )
Minority interest in consolidated entities     (133 )   (39 )
   
 
 
Net income (loss) from continuing operations     (35,019 )   66,909  
Income (loss) from discontinued operations     (233 )   780  
Gain from discontinued operations     136     264  
   
 
 
Net income (loss)     (35,116 )   67,953  
Preferred dividend requirements     (19,600 )   (9,227 )
   
 
 
Net income (loss) allocable to common shareholders and HPU holders(1)   $ (54,716 ) $ 58,726  
   
 
 
Basic earnings per common share(2)   $ (0.50 ) $ 0.59  
   
 
 
Diluted earnings per common share(2)(3)   $ (0.50 ) $ 0.58  
   
 
 

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 March 31, 2004, net loss used to calculate earnings per basic and diluted common share excludes $905 of net loss allocable to HPU holders. For the three months ended March 31, 2003, net income used to calculate earnings per basic and diluted common share excludes $485 and $472 of net income allocable to HPU holders, respectively.

(3)
For the three months ended March 31, 2003, net income used to calculate earnings per diluted common share includes joint venture income of $39.

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 B
Preferred
Stock
   Series C
Preferred
Stock
   Series D
Preferred
Stock
   Series E
Preferred
Stock
   Series F
Preferred
Stock
   Series G
Preferred
Stock
   Series H
Preferred
Stock
   Series I
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, 2003   $ 2   $ 1   $ 4   $ 6   $ 4   $ 3   $ —   $ —   $ 5,131   $ 107   $ 20,695   $ 2,678,772   $ (242,449 ) $ 1,008   $ (48,056 ) $ 2,415,228  

Exercise of options
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
1
 
 
(990
)
 
10,730
 
 
—
 
 
—
 
 
—
 
 
9,741
 

Net proceeds from Preferred offering
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
3
 
 
5
 
 
—
 
 
—
 
 
—
 
 
203,040
 
 
—
 
 
—
 
 
—
 
 
203,048
 

Redemption of Preferred stock
 
 
(2
)
 
(1
)
 
—
 
 
—
 
 
—
 
 
—
 
 
(3
)
 
—
 
 
—
 
 
—
 
 
—
 
 
(155,956
)
 
—
 
 
—
 
 
—
 
 
(155,962
)

Dividend requirement–preferred
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
(19,600
)
 
—
 
 
—
 
 
(19,600
)

Restricted stock units granted to employees
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
52,497
 
 
—
 
 
—
 
 
—
 
 
52,497
 

Issuance of stock–DRIP/Stock purchase plan
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
15,643
 
 
—
 
 
—
 
 
—
 
 
15,643
 

High Performance Units sold to employees
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
2,252
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
2,252
 

Contributions from significant shareholder
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
1,935
 
 
—
 
 
—
 
 
—
 
 
1,935
 

Net Income (loss) for the period
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
(35,116
)
 
—
 
 
—
 
 
(35,116
)

Change in accumulated other comprehensive income (losses)
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
(5,465
)
 
—
 
 
(5,465
)
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Balance at March 31, 2004
 
$
—
 
$
—
 
$
4
 
$
6
 
$
4
 
$
3
 
$
—
 
$
5
 
$
7,383
 
$
108
 
$
19,705
 
$
2,806,661
 
$
(297,165
)
$
(4,457
)
$
(48,056
)
$
2,484,201
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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
March 31,
  
 
   2004
   2003
  
Cash flows from operating activities:              
Net income (loss)   $ (35,116 ) $ 67,953  
Adjustments to reconcile net income to cash flows provided by operating activities:              
  Minority interest in consolidated entities     133     39  
  Non-cash expense for stock-based compensation     51,438     861  
  Depreciation and amortization     16,043     13,029  
  Depreciation and amortization from discontinued operations     7     243  
  Amortization of deferred financing costs     7,765     6,451  
  Amortization of discounts/premiums, deferred interest and costs on lending investments     (15,865 )   (12,491 )
  Discounts, loan fees and deferred interest received     10,640     4,086  
  Equity in earnings from joint ventures and unconsolidated subsidiaries     (6,248 )   58  
  Distributions from operations of joint ventures     74     1,933  
  Loss on early extinguishment of debt     12,172     —  
  Deferred operating lease income receivable     (5,465 )   (3,589 )
  Gain from discontinued operations     (136 )   (264 )
  Provision for loan losses     3,000     1,750  
  Change in investments in and advances to joint ventures and unconsolidated subsidiaries     —     (1,845 )
  Changes in assets and liabilities:              
    Decrease (increase) in accrued interest and operating lease income receivable     228     (280 )
    Decrease (increase) in deferred expenses and other assets     8,012     (7,304 )
    Increase (decrease) in accounts payable, accrued expenses and other liabilities     42,747     (18,631 )
   
 
 
    Cash flows provided by operating activities     89,429     51,999  
   
 
 
Cash flows from investing activities:              
  New investment originations     (710,835 )   (347,187 )
  Add-on fundings under existing loan commitments     (16,647 )   (7,222 )
  Net proceeds from sale of corporate tenant lease assets     2,822     3,965  
  Repayments of and principal collections on loans and other lending investments     144,880     112,338  
  Capital improvement projects on corporate tenant lease assets     (1,373 )   (114 )
  Other capital expenditures on corporate tenant lease assets     (2,554 )   (896 )
   
 
 
    Cash flows used in investing activities     (583,707 )   (239,116 )
   
 
 
Cash flows from financing activities:              
  Borrowings under secured revolving credit facilities     1,031,335     340,003  
  Repayments under secured revolving credit facilities     (1,197,070 )   (111,930 )
  Repayments under unsecured revolving credit facilities     (130,000 )   —  
  Borrowings under term loans     198,771     —  
  Repayments under term loans     (255,082 )   (1,937 )
  Borrowings under unsecured bond offerings     1,007,575     4,479  
  Repayments under unsecured notes     (110,000 )   —  
  Repayments under secured bond offerings     (70,514 )   (55,718 )
  Borrowings under other debt obligations     —     24,396  
  Repayments under other debt obligations     (10,148 )   —  
  Increase in restricted cash held in connection with debt obligations     (9,708 )   (5,231 )
  Prepayment penalty on early extinguishment of debt     (9,625 )   —  
  Payments for deferred financing costs     (1,246 )   (13,414 )
  Distributions to minority interest in consolidated entities     (208 )   (40 )
  Net proceeds from preferred offering/exchange     203,048     —  
  Redemption of preferred stock     (165,000 )   —  
  Preferred dividends paid     (9,778 )   (9,144 )
  HPUs issued     2,252     —  
  Contribution from significant shareholder     1,935     —  
  Proceeds from exercise of options and issuance of DRIP/Stock purchase shares     25,283     12,994  
   
 
 
    Cash flows provided by financing activities     501,820     184,458  
   
 
 
Increase (decrease) in cash and cash equivalents     7,542     (2,659 )
Cash and cash equivalents at beginning of period     80,090     15,934  
   
 
 
Cash and cash equivalents at end of period   $ 87,632   $ 13,275  
   
 
 
Supplemental disclosure of cash flow information:              
  Cash