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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 June 30, 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 August 3, 2004, there were 111,182,445 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 June 30, 2004 and December 31, 2003   2
    Consolidated Statements of Operations—For the three and six months ended June 30, 2004 and 2003   3
    Consolidated Statement of Changes in Shareholders' Equity—For the six months ended June 30, 2004   4
    Consolidated Statements of Cash Flows—For the three and six months ended June 30, 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   59
PART II.   Other Information   60
Item 1.   Legal Proceedings   60
Item 2.   Changes in Securities and Use of Proceeds   60
Item 3.   Defaults Upon Senior Securities   60
Item 4.   Submission of Matters to a Vote of Security Holders   60
Item 5.   Other Information   61
Item 6.   Exhibits and Reports on Form 8-K   61
SIGNATURES   62

PART I. CONSOLIDATED FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

iStar Financial Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

(unaudited)

 
   As of
June 30,
2004
   As of
December 31,
2003
  
ASSETS  
Loans and other lending investments, net   $ 4,255,005   $ 3,702,674  
Corporate tenant lease assets, net     2,854,967     2,535,885  
Investments in and advances to joint ventures and unconsolidated subsidiaries     18,380     25,019  
Assets held for sale     51,692     24,800  
Cash and cash equivalents     96,073     80,090  
Restricted cash     82,625     57,665  
Accrued interest and operating lease income receivable     26,689     26,076  
Deferred operating lease income receivable     63,412     51,447  
Deferred expenses and other assets     157,588     156,934  
   
 
 
  Total assets   $ 7,606,431   $ 6,660,590  
   
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Liabilities:              
Accounts payable, accrued expenses and other liabilities   $ 157,387   $ 126,524  
Debt obligations     4,942,568     4,113,732  
   
 
 
  Total liabilities     5,099,955     4,240,256  
   
 
 
Commitments and contingencies     —     —  

Minority interest in consolidated entities
 
 
12,572
 
 
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 June 30, 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 June 30, 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 June 30, 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 June 30, 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 June 30, 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 June 30, 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 June 30, 2004 and December 31, 2003, respectively     5     —  
High Performance Units     7,433     5,131  
Common Stock, $0.001 par value, 200,000 shares authorized, 111,167 and 107,215 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively     111     107  
Warrants and options     6,489     20,695  
Additional paid-in capital     2,833,843     2,678,772  
Retained earnings (deficit)     (303,548 )   (242,449 )
Accumulated other comprehensive income (losses) (See Note 12)     (2,390 )   1,008  
Treasury stock (at cost)     (48,056 )   (48,056 )
   
 
 
  Total shareholders' equity     2,493,904     2,415,228  
   
 
 
  Total liabilities and shareholders' equity   $ 7,606,431   $ 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
June 30,
   For the
Six Months Ended
June 30,
  
 
   2004
   2003
   2004
   2003
  
Revenue:                          
  Interest income   $ 92,195   $ 74,079   $ 175,252   $ 147,506  
  Operating lease income     79,985     65,584     154,413     129,748  
  Other income     9,910     8,440     21,851     12,769  
   
 
 
 
 
    Total revenue     182,090     148,103     351,516     290,023  
   
 
 
 
 
Costs and expenses:                          
  Interest expense     59,121     50,191     111,687     98,171  
  Operating costs—corporate tenant lease assets     5,845     3,693     11,724     7,345  
  Depreciation and amortization     17,163     13,458     33,206     26,488  
  General and administrative     12,511     9,038     25,870     16,719  
  General and administrative—stock-based compensation expense     568     866     108,109     1,689  
  Provision for loan losses     2,000     1,750     5,000     3,500  
  Loss on early extinguishment of debt     1,006     —     13,178     —  
   
 
 
 
 
    Total costs and expenses     98,214     78,996     308,774     153,912  
   
 
 
 
 
Net income before equity in earnings (loss) from joint ventures and unconsolidated subsidiaries, minority interest and other items     83,876     69,107     42,742     136,111  
Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries     (855 )   (100 )   5,393     (158 )
Minority interest in consolidated entities     (128 )   (40 )   (261 )   (79 )
   
 
 
 
 
Net income from continuing operations     82,893     68,967     47,874     135,874  
Income (loss) from discontinued operations     126     779     (107 )   1,561  
Gain from discontinued operations     —     —     136     264  
   
 
 
 
 
Net income     83,019     69,746     47,903     137,699  
Preferred dividend requirements     (10,580 )   (9,227 )   (30,180 )   (18,454 )
   
 
 
 
 
Net income allocable to common shareholders and HPU holders(1)   $ 72,439   $ 60,519   $ 17,723   $ 119,245  
   
 
 
 
 
Basic earnings per common share(2)   $ 0.64   $ 0.60   $ 0.16   $ 1.20  
   
 
 
 
 
Diluted earnings per common share(3)(4)   $ 0.64   $ 0.59   $ 0.16   $ 1.16  
   
 
 
 
 

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 June 30, 2004 and June 30, 2003, excludes $1,163 and $494 of net income allocable to HPU holders respectively. For the six months ended June 30, 2004 and June 30, 2003, excludes $259 and $979 of net income allocable to HPU holders, respectively.

(3)
For the three months ended June 30, 2004 and June 30, 2003, excludes $1,148 and $481 of net income allocable to HPU holders respectively. For the six months ended June 30, 2004 and June 30, 2003, excludes $243 and $952 of net income allocable to HPU holders, respectively.

(4)
For the three months ended June 30, 2004 and June 30, 2003, includes $41 and $40 of joint venture income, respectively. For the six months ended June 30, 2004 and June 30, 2003, includes $3 and $79 of joint venture income, 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 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
and warrants		     —     —     —     —     —     —     —     —     —     4     (14,206 )   37,037     —     —     —     22,835  
Net proceeds from Preferred offering     —     —     —     —     —     —     3     5     —     —     —     202,743     —     —     —     202,751  
Redemption of Preferred stock     (2 )   (1 )   —     —     —     —     (3 )   —     —     —     —     (155,959 )   —     —     —     (155,965 )
Dividend declared Common Stock     —     —     —     —     —     —     —     —     —     —     —     —     (77,569 )   —     —     (77,569 )
Dividend declared HPU Units     —     —     —     —     —     —     —     —     —     —     —     —     (1,253 )   —     —     (1,253 )
Dividend requirement-preferred     —     —     —     —     —     —     —     —     —     —     —     —     (30,180 )   —     —     (30,180 )
Restricted stock units granted to employees     —     —     —     —     —     —     —     —     —     —     —     53,034     —     —     —     53,034  
Issuance of stock-DRIP/Stock purchase plan     —     —     —     —     —     —     —     —     —     —     —     16,281     —     —     —     16,281  
High Performance Units sold to employees     —     —     —     —     —     —     —     —     2,302     —     —     —     —     —     —     2,302  
Contributions from significant shareholder     —     —     —     —     —     —     —     —     —     —     —     1,935     —     —     —     1,935  
Net income for the period     —     —     —     —     —     —     —     —     —     —     —     —     47,903     —     —     47,903  
Change in accumulated other comprehensive income (losses)     —     —     —     —     —     —     —     —     —     —     —     —     —     (3,398 )   —     (3,398 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2004   $ —   $ —   $ 4   $ 6   $ 4   $ 3   $ —   $ 5   $ 7,433   $ 111   $ 6,489   $ 2,833,843   $ (303,548 ) $ (2,390 ) $ (48,056 ) $ 2,493,904  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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
June 30,
   For the
Six Months Ended
June 30,
  
 
   2004
   2003
   2004
   2003
  
Cash flows from operating activities:                          
Net income   $ 83,019   $ 69,746   $ 47,903   $ 137,699  
Adjustments to reconcile net income to cash flows provided by operating activities:                          
  Minority interest in consolidated entities     128     40     261     79  
  Non-cash expense for stock-based compensation     625     904     52,791     1,765  
  Depreciation and amortization     17,163     13,458     33,206     26,488  
  Depreciation and amortization from discontinued operations     —     253     7     495  
  Amortization of deferred financing costs     7,853     6,957     15,618     13,408  
  Amortization of discounts/premiums, deferred interest and costs on lending investments     (13,592 )   (12,852 )   (29,457 )   (25,342 )
  Discounts, loan fees and deferred interest received     3,127     6,643     13,767     10,729  
  Equity in earnings (loss) from joint ventures and unconsolidated subsidiaries     855     100     (5,393 )   158  
  Distributions from operations of joint ventures     70     618     143     2,551  
  Loss on early extinguishment of debt     1,006     —     13,178     —  
  Deferred operating lease income receivable     (6,330 )   (3,622 )   (11,795 )   (7,211 )
  Gain from discontinued operations     —     —     (136 )   (264 )
  Provision for loan losses     2,000     1,750     5,000     3,500  
  Change in investments in and advances to joint ventures and unconsolidated subsidiaries     —     (1,032 )   —     (2,877 )
  Changes in assets and liabilities:                          
    Increase in accrued interest and operating lease income receivable     (990 )   (1,612 )   (762 )   (1,893 )
    Decrease (increase) in deferred expenses and other assets     13,963     (23,300 )   21,248     (30,603 )
    (Decrease) increase in accounts payable, accrued expenses and other liabilities     (58,778 )   27,416     (16,031 )   8,785  
   
 
 
 
 
    Cash flows provided by operating activities     50,119     85,467     139,548     137,467