ISTAR INC. - FORM 10-Q - May 3, 2018

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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, 2018
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 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, 39th Floor
 
 
New York, NY
(Address of principal executive offices)
 
10036
(Zip code)
Registrant's telephone number, including area code: (212) 930-9400
_______________________________________________________________________________
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 twelve 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
 
Emerging growth company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o    
As of May 2, 2018, there were 67,901,019 shares, $0.001 par value per share, of iStar Inc. common stock outstanding.
 


TABLE OF CONTENTS

 
 
Page
 
 
 
 
 

 
 
 



PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1.    Financial Statements
iStar Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
(unaudited)
 
As of
 
March 31,
2018
 
December 31,
2017
ASSETS
 
 
 
Real estate
 
 
 
Real estate, at cost
$
1,659,651

 
$
1,629,436

Less: accumulated depreciation
(357,508
)
 
(347,405
)
Real estate, net
1,302,143

 
1,282,031

Real estate available and held for sale
41,857

 
68,588

Total real estate
1,344,000

 
1,350,619

Land and development, net
681,410

 
860,311

Loans receivable and other lending investments, net
1,400,474

 
1,300,655

Other investments
422,853

 
321,241

Cash and cash equivalents
366,723

 
657,688

Accrued interest and operating lease income receivable, net
11,030

 
11,957

Deferred operating lease income receivable, net
88,820

 
86,877

Deferred expenses and other assets, net
134,749

 
141,730

Total assets
$
4,450,059

 
$
4,731,078

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
217,874

 
$
238,004

Loan participations payable, net
85,354

 
102,425

Debt obligations, net
3,130,934

 
3,476,400

Total liabilities
3,434,162

 
3,816,829

Commitments and contingencies (refer to Note 11)


 


Equity:
 
 
 
iStar Inc. shareholders' equity:
 
 
 
Preferred Stock Series D, G and I, liquidation preference $25.00 per share (refer to Note 13)
12

 
12

Convertible Preferred Stock Series J, liquidation preference $50.00 per share (refer to Note 13)
4

 
4

Common Stock, $0.001 par value, 200,000 shares authorized, 67,901 and 68,236 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
68

 
68

Additional paid-in capital
3,350,250

 
3,352,665

Retained earnings (deficit)
(2,368,162
)
 
(2,470,564
)
Accumulated other comprehensive income (loss) (refer to Note 13)
(925
)
 
(2,482
)
Total iStar Inc. shareholders' equity
981,247

 
879,703

Noncontrolling interests
34,650

 
34,546

Total equity
1,015,897

 
914,249

Total liabilities and equity
$
4,450,059

 
$
4,731,078

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

1

iStar Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
For the Three Months Ended March 31,
 
2018
 
2017
Revenues:
 
 
 
Operating lease income
$
45,799

 
$
47,347

Interest income
26,697

 
29,058

Other income
15,320

 
11,864

Land development revenue
276,429

 
20,050

Total revenues
364,245

 
108,319

Costs and expenses:
 
 
 
Interest expense
45,182

 
51,145

Real estate expense
36,180

 
35,590

Land development cost of sales
223,407

 
15,910

Depreciation and amortization
11,110

 
12,280

General and administrative(1)
28,814

 
25,173

Recovery of loan losses
(855
)
 
(4,928
)
Impairment of assets
4,100

 
4,413

Other expense
1,166

 
1,869

Total costs and expenses
349,104

 
141,452

Income (loss) before earnings from equity method investments and other items
15,141

 
(33,133
)
Loss on early extinguishment of debt, net
(372
)
 
(210
)
Earnings from equity method investments
3,332

 
5,702

Income (loss) from continuing operations before income taxes
18,101

 
(27,641
)
Income tax expense
(121
)
 
(607
)
Income (loss) from continuing operations
17,980

 
(28,248
)
Income from discontinued operations
—

 
4,766

Income from sales of real estate(2)
17,048

 
8,110

Net income (loss)
35,028

 
(15,372
)
Net (income) loss attributable to noncontrolling interests
(95
)
 
1,100

Net income (loss) attributable to iStar Inc. 
34,933

 
(14,272
)
Preferred dividends
(8,124
)
 
(12,830
)
Net income (loss) allocable to common shareholders
$
26,809

 
$
(27,102
)
Per common share data:
 
 
 
Income (loss) attributable to iStar Inc. from continuing operations:
 
 
 
Basic
$
0.39

 
$
(0.44
)
Diluted
$
0.35

 
$
(0.44
)
Net income (loss) attributable to iStar Inc.:
 
 
 
Basic
$
0.39

 
$
(0.38
)
Diluted
$
0.35

 
$
(0.38
)
Weighted average number of common shares:
 
 
 
Basic
67,913

 
72,065

Diluted
83,670

 
72,065

_______________________________________________________________________________
(1)
For the three months ended March 31, 2018 and 2017, includes $7.9 million and $5.0 million, respectively, of equity-based compensation associated with iPIP Plans (refer to Note 14). These plans are liability-based plans which are marked-to-market quarterly and such marks are based upon the performance of the assets underlying the plans as of the quarterly measurement dates; however, actual amounts cannot be determined until the end date of the plans and the ultimate repayment or monetization of the related assets.
(2)
Income from sales of real estate represents gains from sales of real estate that do not qualify as discontinued operations.


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

2

iStar Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2018
 
2017
Net income (loss)
$
35,028

 
$
(15,372
)
Other comprehensive income (loss):
 
 
 
Impact from adoption of new accounting standards (refer to Note 3)
276

 
—

Reclassification of losses on cash flow hedges into earnings upon realization(1)
9

 
122

Unrealized losses on available-for-sale securities
(971
)
 
(17
)
Unrealized gains on cash flow hedges
2,351

 
540

Unrealized losses on cumulative translation adjustment
(108
)
 
(401
)
Other comprehensive income
1,557

 
244

Comprehensive income (loss)
36,585

 
(15,128
)
Comprehensive (income) loss attributable to noncontrolling interests
(95
)
 
1,100

Comprehensive income (loss) attributable to iStar Inc. 
$
36,490

 
$
(14,028
)
_______________________________________________________________________________
(1)
Amount reclassified to "Interest expense" in the Company's consolidated statements of operations is $30 for the three months ended March 31, 2017. Amounts reclassified to "Earnings from equity method investments" in the Company's consolidated statements of operations are $9 and $92 for the three months ended March 31, 2018 and 2017, respectively.

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

3

iStar Inc.
Consolidated Statements of Changes in Equity
For the Three Months Ended March 31, 2018 and 2017
(In thousands)
(unaudited)




 
 
iStar Inc. Shareholders' Equity
 
 
 
 
 
 
Preferred
Stock(1)
 
Preferred Stock Series J(1)
 
Common
Stock at
Par
 
Additional
Paid-In
Capital
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Equity
Balance as of December 31, 2017
 
$
12

 
$
4

 
$
68

 
$
3,352,665

 
$
(2,470,564
)
 
$
(2,482
)
 
$
34,546

 
$
914,249

Dividends declared—preferred
 
—

 
—

 
—

 
—

 
(8,124
)
 
—

 
—

 
(8,124
)
Issuance of stock/restricted stock unit amortization, net
 
—

 
—

 
1

 
5,888

 
—

 
—

 
—

 
5,889

Net income for the period
 
—

 
—

 
—

 
—

 
34,933

 
—

 
95

 
35,028

Change in accumulated other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
1,281

 
—

 
1,281

Repurchase of stock
 
—

 
—

 
(1
)
 
(8,303
)
 
—

 
—

 
—

 
(8,304
)
Contributions from noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
9

 
9

Impact from adoption of new accounting standards (refer to Note 3)
 
—

 
—

 
—

 
—

 
75,593

 
276

 
—

 
75,869

Balance as of March 31, 2018
 
$
12

 
$
4

 
$
68

 
$
3,350,250

 
$
(2,368,162
)
 
$
(925
)
 
$
34,650

 
$
1,015,897

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
$
22

 
$
4

 
$
72

 
$
3,602,172

 
$
(2,581,488
)
 
$
(4,218
)
 
$
43,120

 
$
1,059,684

Dividends declared—preferred
 
—

 
—

 
—

 
—

 
(12,830
)
 
—

 
—

 
(12,830
)
Issuance of stock/restricted stock unit amortization, net
 
—

 
—

 
—

 
1,237

 
—

 
—

 
—

 
1,237

Net income (loss) for the period(2)
 
—

 
—

 
—

 
—

 
(14,272
)
 
—

 
241

 
(14,031
)
Change in accumulated other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
244

 
—

 
244

Change in additional paid in capital attributable to redeemable noncontrolling interest
 
—

 
—

 
—

 
177

 
—

 
—

 
—

 
177

Balance as of March 31, 2017
 
$
22

 
$
4

 
$
72

 
$
3,603,586

 
$
(2,608,590
)
 
$
(3,974
)
 
$
43,361

 
$
1,034,481

_______________________________________________________________________________
(1)
Refer to Note 13 for details on the Company's Preferred Stock.
(2)
For the three months ended March 31, 2017, net income (loss) shown above excludes $(1,341) of net loss attributable to redeemable noncontrolling interests.

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

4

iStar Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
35,028

 
$
(15,372
)
Adjustments to reconcile net income to cash flows from operating activities:
 
 
 
(Recovery of) provision for loan losses
(855
)
 
(4,928
)
Impairment of assets
4,100

 
4,413

Depreciation and amortization
11,110

 
13,067

Non-cash expense for stock-based compensation
9,091

 
5,881

Amortization of discounts/premiums and deferred financing costs on debt obligations, net
3,943

 
3,512

Amortization of discounts/premiums on loans and deferred interest on loans, net
(9,067
)
 
(14,652
)
Deferred interest on loans received
17,930

 
1

Earnings from equity method investments
(3,332
)
 
(5,702
)
Distributions from operations of other investments
3,101

 
20,029

Deferred operating lease income
(2,239
)
 
(2,185
)
Income from sales of real estate
(17,048
)
 
(8,618
)
Land development revenue in excess of cost of sales
(53,022
)
 
(4,140
)
Loss on early extinguishment of debt, net
372

 
210

Other operating activities, net
865

 
3,689

Changes in assets and liabilities:
 
 
 
Changes in accrued interest and operating lease income receivable
617

 
2,131

Changes in deferred expenses and other assets, net
(2,016
)
 
(8,035
)
Changes in accounts payable, accrued expenses and other liabilities
(45,144
)
 
(24,987
)
Cash flows provided by (used in) operating activities
(46,566
)
 
(35,686
)
Cash flows from investing activities:
 
 
 
Originations and fundings of loans receivable, net
(103,288
)
 
(61,605
)
Capital expenditures on real estate assets
(7,840
)
 
(7,781
)
Capital expenditures on land and development assets
(30,954
)
 
(27,604
)
Repayments of and principal collections on loans receivable and other lending investments, net
114,525

 
171,066

Net proceeds from sales of real estate
48,469

 
30,215

Net proceeds from sales of land and development assets
130,304

 
20,923

Distributions from other investments
17,813

 
4,709

Contributions to and acquisition of interest in other investments
(43,391
)
 
(1,813
)
Other investing activities, net
491

 
1,801

Cash flows provided by investing activities
126,129

 
129,911

Cash flows from financing activities:
 
 
 
Borrowings from debt obligations and convertible notes
—

 
854,637

Repayments and repurchases of debt obligations
(349,658
)
 
(353,458
)
Preferred dividends paid
(8,124
)
 
(12,830
)
Repurchase of stock
(8,304
)
 
—

Payments for deferred financing costs
(252
)
 
(11,497
)
Payments for withholding taxes upon vesting of stock-based compensation
(3,845
)
 
(420
)
Payments for debt prepayment or extinguishment costs
—

 
(847
)
Other financing activities, net
9

 
(661
)
Cash flows provided by (used in) financing activities
(370,174
)
 
474,924

Effect of exchange rate changes on cash
22

 
1

Changes in cash, cash equivalents and restricted cash
(290,589
)
 
569,150

Cash, cash equivalents and restricted cash at beginning of period
677,733

 
354,627

Cash, cash equivalents and restricted cash at end of period
$
387,144

 
$
923,777

Supplemental disclosure of non-cash investing and financing activity:
 
 
 
Fundings and repayments of loan receivables and loan participations, net

$
(17,117
)
 
$
22,602

Accounts payable for capital expenditures on real estate assets
338

 
781

Acquisitions of land and development assets through foreclosure
4,600

 
—

Profit sharing arrangement
28,831

 
—

Financing provided on sales of land and development assets, net
142,639

 
—

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

5
iStar Inc.
Notes to Consolidated Financial Statements
(unaudited)





Note 1—Business and Organization

Business—iStar Inc. (the "Company") finances, invests in and develops real estate and real estate related projects as part of its fully-integrated investment platform. The Company also provides management services for its ground lease and net lease equity method investments (refer to Note 7). The Company has invested more than $35 billion over the past two decades and is structured as a real estate investment trust ("REIT") with a diversified portfolio focused on larger assets located in major metropolitan markets. The Company's primary reportable business segments are real estate finance, net lease, operating properties and land and development (refer to Note 17).

Organization—The Company began its business in 1993 through the management of private investment funds and became publicly traded in 1998. Since that time, the Company has grown through the origination of new investments and corporate acquisitions.

Note 2—Basis of Presentation and Principles of Consolidation
Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 Annual Report").
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim periods or the entire year. Certain prior year amounts have been reclassified in the Company's consolidated financial statements and the related notes to conform to the current period presentation.
Principles of Consolidation—The consolidated financial statements include the financial statements of the Company, its wholly owned subsidiaries, controlled partnerships and variable interest entities ("VIEs") for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. The Company's involvement with VIEs affects its financial performance and cash flows primarily through amounts recorded in "Operating lease income," "Interest income," "Earnings from equity method investments," "Real estate expense" and "Interest expense" in the Company's consolidated statements of operations. The Company has not provided financial support to those VIEs that it was not previously contractually required to provide.    
Consolidated VIEs—As of March 31, 2018, the Company consolidates VIEs for which it is considered the primary beneficiary. As of March 31, 2018, the total assets of these consolidated VIEs were $318.9 million and total liabilities were $43.2 million. The classifications of these assets are primarily within "Land and development, net" and "Real estate, net" on the Company's consolidated balance sheets. The classifications of liabilities are primarily within "Accounts payable, accrued expenses and other liabilities" on the Company's consolidated balance sheets. The liabilities of these VIEs are non-recourse to the Company and can only be satisfied from each VIE's respective assets. The Company did not have any unfunded commitments related to consolidated VIEs as of March 31, 2018.

Unconsolidated VIEs—As of March 31, 2018, the Company has investments in VIEs where it is not the primary beneficiary and accordingly the VIEs have not been consolidated in the Company's consolidated financial statements. As of March 31, 2018, the Company's maximum exposure to loss from these investments does not exceed the sum of the $92.9 million carrying value of the investments, which are classified in "Other investments" and "Loans receivable and other lending investments, net" on the Company's consolidated balance sheets, and $29.7 million of related unfunded commitments.


6
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Note 3—Summary of Significant Accounting Policies

The following paragraphs describe the impact on the Company's consolidated financial statements from the adoption of Accounting Standards Updates ("ASUs") on January 1, 2018.

ASU 2014-09—ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Certain contracts with customers, including lease contracts and financial instruments and other contractual rights, are not within the scope of the new guidance. The Company's revenue within the scope of the guidance is primarily ancillary income related to its operating properties. The Company adopted ASU 2014-09 using the modified retrospective approach and the adoption did not have a material impact on the Company's consolidated financial statements.

ASU 2016-01 and ASU 2018-03—ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), addressed certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, provided technical corrections and improvements to ASU 2016-01. ASU 2016-01 requires entities to measure equity investments not accounted for under the equity method at fair value and recognize changes in fair value in net income. For equity investments without readily determinable fair values, entities may elect a measurement alternative that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. Upon adoption, entities must record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the standard is adopted. ASU 2016-01 also eliminated the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The adoption of ASU 2016-01 and ASU 2018-03 did not have a material impact on the Company's consolidated financial statements.

ASU 2016-15—ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), was issued to reduce diversity in practice in how certain cash receipts and cash payments, including debt prepayment or debt extinguishment costs, distributions from equity method investees, and other separately identifiable cash flows, are presented and classified in the statement of cash flows. The adoption of ASU 2016-15 was retrospective and resulted in an increase to cash flows provided by operating activities of $1.1 million and a decrease to cash flows provided by financing activities of $1.1 million for the three months ended March 31, 2017, primarily resulting from the reclassification of cash payments made related to the extinguishment of debt.
ASU 2016-18—ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"), requires that restricted cash be included with cash and cash equivalents when reconciling beginning and ending cash and cash equivalents on the statement of cash flows and requires disclosure of what is included in restricted cash. The adoption of ASU 2016-18 did not have a material impact on the Company's consolidated financial statements. The adoption of ASU 2016-18 was retrospective and resulted in an increase to cash flows provided by operating activities of $0.7 million and a decrease to cash flows provided by investing activities of $0.3 million for the three months ended March 31, 2017.

The following table provides a reconciliation of the cash and cash equivalents and restricted cash reported in the Company's consolidated balance sheets that total to the same amount as reported in the consolidated statements of cash flows (in thousands):
 
 
March 31, 2018
 
December 31, 2017
 
March 31, 2017
 
December 31, 2016
Cash and cash equivalents
 
$
366,723

 
$
657,688

 
$
897,487

 
$
328,744

Restricted cash included in deferred expenses and other assets, net(1)
 
20,421

 
20,045

 
26,290

 
25,883

Total cash, cash equivalents and restricted cash reported in the consolidated statements of cash flows
 
$
387,144

 
$
677,733

 
$
923,777

 
$
354,627

_______________________________________________________________________________
(1)
Restricted cash represents amounts required to be maintained under certain of the Company's debt obligations, loans, leasing, land development, sale and derivative transactions.

7
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)



ASU 2017-01—The adoption of ASU 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01"), did not have a material impact on the Company's consolidated financial statements. Under ASU 2017-01, certain transactions previously accounted for as business combinations under the former accounting guidance will be accounted for as asset acquisitions under ASU 2017-01. As a result, the Company expects more transaction costs to be capitalized relating to real estate acquisitions as a result of ASU 2017-01.
ASU 2017-05—ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets ("ASU 2017-05"), simplifies GAAP by eliminating several accounting differences between transactions involving assets and transactions involving businesses. The amendments in ASU 2017-05 require an entity to initially measure a retained noncontrolling interest in a nonfinancial asset at fair value consistent with how a retained noncontrolling interest in a business is measured. Also, if an entity transfers ownership interests in a consolidated subsidiary that is within the scope of ASC 610-20 and continues to have a controlling financial interest in that subsidiary, ASU 2017-05 requires the entity to account for the transaction as an equity transaction, which is consistent with how changes in ownership interests in a consolidated subsidiary that is a business are recorded when a parent retains a controlling financial interest in the business. The Company adopted ASU 2017-05 using the modified retrospective approach which was applied to all contracts. On January 1, 2018, the Company recorded a step-up in basis to fair value of its retained noncontrolling interest relating to the sale of its ground lease business (refer to note 4) and other transactions where the Company sold or contributed real estate to a venture and previously recognized partial gains. Prior to the adoption of ASU 2017-05, the Company was required to recognize gains on only the portion of its interest transferred to third parties and was precluded from recognizing a gain on its retained noncontrolling interest which was carried at the Company’s historical cost basis. The adoption of ASU 2017-05 had the following impact on the Company's consolidated financial statements (in thousands):
 
 
 
 
Impact from ASU 2017-05 on January 1, 2018
 
 
 
 
December 31, 2017
 
 
January 1, 2018
Other investments
 
$
321,241

 
$
75,869

 
$
397,110

Total assets
 
4,731,078

 
75,869

 
4,806,947

 
 
 
 
 
 
 
Retained earnings (deficit)
 
$
(2,470,564
)
 
$
75,869

 
$
(2,394,695
)
Total equity
 
914,249

 
75,869

 
990,118


ASU 2017-12—ASU 2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"), was issued to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The Company adopted ASU 2017-12 on January 1, 2018 and the adoption did not have a material impact on the Company's consolidated financial statements.

New Accounting Pronouncements—In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments held by a reporting entity. This amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company currently records a general reserve that covers performing loans and reserves for loan losses are recorded when: (i) available information as of each balance sheet date indicates that it is probable a loss has occurred in the portfolio; and (ii) the amount of the loss can be reasonably estimated. The formula-based general reserve is derived from estimated principal default probabilities and loss severities applied to groups of loans based upon risk ratings assigned to loans with similar risk characteristics during our quarterly loan portfolio assessment. The Company estimates loss rates based on historical realized losses experienced within its portfolio and take into account current economic conditions affecting the commercial real estate market when establishing appropriate time frames to evaluate loss experience. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Management does not believe the guidance will have a material impact on the Company's consolidated financial statements.

8
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. For operating leases, a lessee will be required to do the following: (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position; (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and (iii) classify all cash payments within operating activities in the statement of cash flows. For operating lease arrangements for which the Company is the lessee, primarily the lease of office space, the Company expects the impact of ASU 2016-02 to be the recognition of a right-of-use asset and lease liability on its consolidated balance sheets. The accounting applied by the Company as a lessor will be largely unchanged from that applied under previous GAAP. However, in certain instances, a new long-term lease of land subsequent to adoption could be classified as a sales-type lease, which could result in the Company derecognizing the underlying asset and recording a profit or loss on sale and the net investment in the lease. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. Management is evaluating the impact of the guidance on the Company's consolidated financial statements.
Note 4—Real Estate
The Company's real estate assets were comprised of the following ($ in thousands):
 
Net Lease(1)
 
Operating
Properties
 
Total
As of March 31, 2018
 
 
 
 
 
Land, at cost
$
218,261

 
$
212,782

 
$
431,043

Buildings and improvements, at cost
888,058

 
340,550

 
1,228,608

Less: accumulated depreciation
(297,881
)
 
(59,627
)
 
(357,508
)
Real estate, net
808,438

 
493,705

 
1,302,143

Real estate available and held for sale (2)
—

 
41,857

 
41,857

Total real estate
$
808,438

 
$
535,562

 
$
1,344,000

As of December 31, 2017
 
 
 
 
 
Land, at cost
$
219,092

 
$
203,278

 
$
422,370

Buildings and improvements, at cost
888,959

 
318,107

 
1,207,066

Less: accumulated depreciation
(292,268
)
 
(55,137
)
 
(347,405
)
Real estate, net
815,783

 
466,248

 
1,282,031

Real estate available and held for sale (2)
—

 
68,588

 
68,588

Total real estate
$
815,783

 
$
534,836

 
$
1,350,619

_______________________________________________________________________________
(1)
In 2014, the Company partnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets (the "Net Lease Venture") and gave a right of first offer to the Net Lease Venture on all new net lease investments (refer to Note 7 for more information on the Net Lease Venture). The Company is responsible for sourcing new opportunities and managing the Net Lease Venture in exchange for a promote and management fee.
(2)
As of March 31, 2018 and December 31, 2017, the Company had $40.9 million and $48.5 million, respectively, of residential condominiums available for sale in its operating properties portfolio.

Disposition of Ground Lease Business—In April 2017, institutional investors acquired a controlling interest in the Company's ground lease business through the merger of a Company subsidiary and related transactions (the "Acquisition Transactions"). Ground leases generally represent ownership of the land underlying commercial real estate projects that is triple net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon ("Ground Lease"). The Company's Ground Lease business was a component of the Company's net lease segment and consisted of 12 properties subject to long-term net leases including seven Ground Leases and one master lease (covering five properties). The acquiring entity was a newly formed unconsolidated entity named Safety, Income & Growth Inc. ("SAFE"). The carrying value of the Company's Ground Lease assets was approximately $161.1 million. Shortly before the Acquisition Transactions, the Company completed the $227.0 million 2017 Secured Financing on its Ground Lease assets (refer to Note 10). The Company received all of the proceeds of the 2017 Secured Financing. The Company received an additional $113.0 million of proceeds in the Acquisition Transactions, including $55.5 million that the Company contributed to SAFE in its initial capitalization. As a result of the Acquisition Transactions, the Company deconsolidated the 12 properties and the associated 2017 Secured Financing. The Company accounts for its investment in SAFE as an equity method investment (refer to Note 7). The Company accounted for this transaction as an in substance sale of real estate and recognized a gain of $123.4 million, reflecting the aggregate gain less the fair value of the Company's retained

9
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


interest in SAFE. As a result of the adoption of ASU 2017-05 (refer to Note 3), on January 1, 2018, the Company recorded an increase to retained earnings of $55.5 million, bringing the Company's aggregate gain on the sale of its Ground Lease business to approximately $178.9 million.
Discontinued Operations—The transactions described above involving the Company's Ground Lease business qualified for discontinued operations and the following table summarizes income from discontinued operations for the three months ended March 31, 2017 ($ in thousands)(1)(2):
Revenues
 
$
5,244

Expenses
 
(986
)
Income from sales of real estate
 
508

Income from discontinued operations
 
$
4,766

_______________________________________________________________________________
(1)
The transactions closed on April 14, 2017. Revenues primarily consisted of operating lease income and expenses primarily consisted of depreciation and amortization and real estate expense.
(2)
For the three months ended March 31, 2017, cash flows provided by operating activities and cash flows used in investing activities from discontinued operations was $6.3 million and $0.5 million, respectively.

Other Dispositions—The following table presents the net proceeds and income recognized for properties sold, by property type ($ in millions):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Operating Properties
 
 
 
 
       Proceeds
 
$
41.9

 
$
10.2

       Income from sales of real estate
 
16.6

 
1.9

 
 
 
 
 
Net Lease
 
 
 
 
       Proceeds
 
$
2.3

 
$
19.5

       Income from sales of real estate
 
0.4

 
6.2

 
 
 
 
 
Total
 
 
 
 
       Proceeds
 
$
44.2

 
$
29.7

       Income from sales of real estate
 
17.0

 
8.1


Impairments—During the three months ended March 31, 2018, the Company recorded an impairment of $4.1 million on a real estate asset held for sale due to impending contracts to sell the remaining four condominium units at the property. During the three months ended March 31, 2017, the Company recorded an impairment of $4.4 million on a real estate asset held for sale due to shifting demand in the local condominium market along with a change in the Company's exit strategy.
Tenant Reimbursements—The Company receives reimbursements from tenants for certain facility operating expenses including common area costs, insurance, utilities and real estate taxes. Tenant expense reimbursements were $5.6 million and $5.5 million for the three months ended March 31, 2018 and 2017, respectively. These amounts are included in "Operating lease income" in the Company's consolidated statements of operations.
Allowance for Doubtful Accounts—As of March 31, 2018 and December 31, 2017, the allowance for doubtful accounts related to real estate tenant receivables was $1.6 million and $1.3 million, respectively, and the allowance for doubtful accounts related to deferred operating lease income was $1.5 million and $1.3 million as of March 31, 2018 and December 31, 2017, respectively. These amounts are included in "Accrued interest and operating lease income receivable, net" and "Deferred operating lease income receivable, net," respectively, on the Company's consolidated balance sheets.

10
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Note 5—Land and Development

The Company's land and development assets were comprised of the following ($ in thousands):
 
As of
 
March 31,
 
December 31,
 
2018
 
2017
Land and land development, at cost(1)
$
689,249

 
$
868,692

Less: accumulated depreciation
(7,839
)
 
(8,381
)
Total land and development, net
$
681,410

 
$
860,311

_______________________________________________________________________________
(1)
During the three months ended March 31, 2018, the Company funded capital expenditures on land and development assets of $31.0 million.

Acquisitions—During the three months ended March 31, 2018, the Company acquired, via foreclosure, title to a land asset which had a total fair value of $4.6 million and had previously served as collateral for loans receivable held by the Company. No gain or loss was recorded in connection with this transaction.

Dispositions—During the three months ended March 31, 2018 and 2017, the Company sold land parcels and residential lots and units and recognized land development revenue of $276.4 million and $20.1 million, respectively, from its land and development portfolio. In connection with the sale of two land parcels during the three months ended March 31, 2018, the Company originated an aggregate $145.0 million of financing to the buyers. $81.2 million was repaid subsequent to March 31, 2018. During the three months ended March 31, 2018 and 2017, the Company recognized land development cost of sales of $223.4 million and $15.9 million, respectively, from its land and development portfolio.
Note 6—Loans Receivable and Other Lending Investments, net

The following is a summary of the Company's loans receivable and other lending investments by class ($ in thousands):
 
As of
Type of Investment
March 31,
2018
 
December 31,
2017
Senior mortgages
$
906,482

 
$
791,152

Corporate/Partnership loans
513,088

 
488,921

Subordinate mortgages
9,657

 
9,495

Total gross carrying value of loans
1,429,227

 
1,289,568

Reserves for loan losses
(69,466
)
 
(78,489
)
Total loans receivable, net
1,359,761

 
1,211,079

Other lending investments—securities
40,713

 
89,576

Total loans receivable and other lending investments, net
$
1,400,474

 
$
1,300,655


Reserve for Loan Losses—Changes in the Company's reserve for loan losses were as follows ($ in thousands):
 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Reserve for loan losses at beginning of period
 
$
78,489

 
$
85,545

Recovery of loan losses
 
(855
)
 
(4,928
)
Charge-offs
 
(8,168
)
 
(1,228
)
Reserve for loan losses at end of period
 
$
69,466

 
$
79,389


11
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)



The Company's recorded investment in loans (comprised of a loan's carrying value plus accrued interest) and the associated reserve for loan losses were as follows ($ in thousands):
 
Individually
Evaluated for
Impairment(1)
 
Collectively
Evaluated for
Impairment(2)
 
Total
As of March 31, 2018
 
 
 
 
 
Loans
$
224,113

 
$
1,211,138

 
$
1,435,251

Less: Reserve for loan losses
(52,866
)
 
(16,600
)
 
(69,466
)
Total(3)
$
171,247

 
$
1,194,538

 
$
1,365,785

As of December 31, 2017
 
 
 
 
 
Loans
$
237,877

 
$
1,056,944

 
$
1,294,821

Less: Reserve for loan losses
(60,989
)
 
(17,500
)
 
(78,489
)
Total(3)
$
176,888

 
$
1,039,444

 
$
1,216,332

_______________________________________________________________________________
(1)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs totaling net discounts of $0.7 million and $0.7 million as of March 31, 2018 and December 31, 2017, respectively. The Company's loans individually evaluated for impairment primarily represent loans on non-accrual status; therefore, the unamortized amounts associated with these loans are not currently being amortized into income.
(2)
The carrying value of these loans include unamortized discounts, premiums, deferred fees and costs totaling net premiums of $5.5 million and $6.2 million as of March 31, 2018 and December 31, 2017, respectively.
(3)
The Company's recorded investment in loans as of March 31, 2018 and December 31, 2017, including accrued interest of $6.0 million and $5.3 million, respectively, is included in "Accrued interest and operating lease income receivable, net" on the Company's consolidated balance sheets. As of March 31, 2018 and December 31, 2017, the total amounts exclude $40.7 million and $89.6 million, respectively, of securities that are evaluated for impairment under ASC 320.

Credit Characteristics—As part of the Company's process for monitoring the credit quality of its loans, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its performing loans. Risk ratings, which range from 1 (lower risk) to 5 (higher risk), are based on judgments, which are inherently uncertain, and there can be no assurance that actual performance will be similar to current expectation. The Company designates loans as non-performing at such time as: (1) the loan becomes 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt.

The Company's recorded investment in performing loans, presented by class and by credit quality, as indicated by risk rating, was as follows ($ in thousands):
 
As of March 31, 2018
 
As of December 31, 2017
 
Performing
Loans
 
Weighted
Average
Risk Ratings
 
Performing
Loans
 
Weighted
Average
Risk Ratings
Senior mortgages
$
842,509

 
2.52

 
$
713,057

 
2.72

Corporate/Partnership loans
358,943

 
2.47

 
334,364

 
2.85

Subordinate mortgages
9,686

 
3.00

 
9,523

 
3.00

  Total
$
1,211,138

 
2.51

 
$
1,056,944

 
2.77



12
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


The Company's recorded investment in loans, aged by payment status and presented by class, was as follows ($ in thousands):
 
Current
 
Less Than
and Equal
to 90 Days
 
Greater
Than
90 Days(1)
 
Total
Past Due
 
Total
As of March 31, 2018
 
 
 
 
 
 
 
 
 
Senior mortgages
$
848,509

 
$
—

 
$
61,437

 
$
61,437

 
$
909,946

Corporate/Partnership loans
358,943

 
—

 
156,676

 
156,676

 
515,619

Subordinate mortgages
9,686

 
—

 
—

 
—

 
9,686

Total
$
1,217,138

 
$
—

 
$
218,113

 
$
218,113

 
$
1,435,251

As of December 31, 2017
 
 
 
 
 
 
 
 
 
Senior mortgages
$
719,057

 
$
—

 
$
75,343

 
$
75,343

 
$
794,400

Corporate/Partnership loans
334,364

 
—

 
156,534

 
156,534

 
490,898

Subordinate mortgages
9,523

 
—

 
—

 
—

 
9,523

Total
$
1,062,944

 
$
—

 
$
231,877

 
$
231,877

 
$
1,294,821

_______________________________________________________________________________
(1)
As of March 31, 2018, the Company had three loans which were greater than 90 days delinquent and were in various stages of resolution, including legal and foreclosure-related proceedings and environmental matters, and ranged from 2.0 to 9.0 years outstanding. As of December 31, 2017, the Company had four loans which were greater than 90 days delinquent and were in various stages of resolution, including legal and foreclosure-related proceedings and environmental matters, and ranged from 1.0 to 9.0 years outstanding.

Impaired Loans—The Company's recorded investment in impaired loans, presented by class, was as follows ($ in thousands)(1):
 
As of March 31, 2018
 
As of December 31, 2017
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Senior mortgages
$
67,437

 
$
67,871

 
$
(40,395
)
 
$
81,343

 
$
81,431

 
$
(48,518
)
Corporate/Partnership loans
156,676

 
145,849

 
(12,471
)
 
156,534

 
145,849

 
(12,471
)
Total
$
224,113

 
$
213,720

 
$
(52,866
)
 
$
237,877

 
$
227,280

 
$
(60,989
)
____________________________________________________________
(1)
All of the Company's non-accrual loans are considered impaired and included in the table above.


13
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


The Company's average recorded investment in impaired loans and interest income recognized, presented by class, were as follows ($ in thousands):
 
For the Three Months Ended March 31,
 
2018
 
2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
Subordinate mortgages
$
—

 
$
92

 
$
10,953

 
$
—

Subtotal
—

 
92

 
10,953

 
—

With an allowance recorded:
 
 
 
 
 
 
 
Senior mortgages
74,390

 
—

 
84,194

 
—

Corporate/Partnership loans
156,605

 
—

 
157,224

 
—

Subtotal
230,995

 
—

 
241,418

 
—

Total:
 
 
 
 
 
 
 
Senior mortgages
74,390

 
—

 
84,194

 
—

Corporate/Partnership loans
156,605

 
—

 
157,224

 
—

Subordinate mortgages
—

 
92

 
10,953

 
—

Total
$
230,995

 
$
92

 
$
252,371

 
$
—


Securities—Other lending investments—securities include the following ($ in thousands):
 
Face
Value
 
Amortized Cost Basis
 
Net Unrealized Gain (Loss)
 
Estimated Fair Value
 
Net Carrying Value
As of March 31, 2018
 
 
 
 
 
 
 
 
 
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
Municipal debt securities
$
21,195

 
$
21,195

 
$
640

 
$
21,835

 
$
21,835

Held-to-Maturity Securities
 
 
 
 
 
 
 
 
 
Debt securities
18,903

 
18,878

 
403

 
19,281

 
18,878

Total
$
40,098

 
$
40,073

 
$
1,043

 
$
41,116

 
$
40,713

As of December 31, 2017
 
 
 
 
 
 
 
 
 
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
Municipal debt securities
$
21,230

 
$
21,230

 
$
1,612

 
$
22,842

 
$
22,842

Held-to-Maturity Securities
 
 
 
 
 
 
 
 
 
Debt securities
66,618

 
66,734

 
1,581

 
68,315

 
66,734

Total
$
87,848

 
$
87,964

 
$
3,193

 
$
91,157

 
$
89,576



14
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


As of March 31, 2018, the contractual maturities of the Company's securities were as follows ($ in thousands):
 
Held-to-Maturity Securities
 
Available-for-Sale Securities
 
Amortized Cost Basis
 
Estimated Fair Value
 
Amortized Cost Basis
 
Estimated Fair Value
Maturities
 
 
 
 
 
 
 
Within one year
$
—

 
$
—

 
$
—

 
$
—

After one year through 5 years
18,878

 
19,281

 
—

 
—

After 5 years through 10 years
—

 
—

 
—

 
—

After 10 years
—

 
—

 
21,195

 
21,835

Total
$
18,878

 
$
19,281

 
$
21,195

 
$
21,835


Note 7—Other Investments

The Company's other investments and its proportionate share of earnings from equity method investments were as follows ($ in thousands):
 
 
 
Equity in Earnings (Losses)
 
Carrying Value as of
 
For the Three Months Ended March 31,
 
March 31, 2018
 
December 31, 2017
 
2018
 
2017
Real estate equity investments
 
 
 
 
 
 
 
iStar Net Lease I LLC ("Net Lease Venture")
$
132,103

 
$
121,139

 
$
2,084

 
$
981

Safety, Income & Growth Inc. ("SAFE")(1)
146,991

 
83,868

 
1,472

 
—

Marina Palms, LLC ("Marina Palms")(1)
4,670

 
2,555

 
1,489

 
3,117

Other real estate equity investments(1)
126,855

 
100,061

 
(1,219
)
 
1,357

Subtotal
410,619

 
307,623

 
3,826

 
5,455

Other strategic investments
12,234

 
13,618

 
(494
)
 
247

Total
$
422,853

 
$
321,241

 
$
3,332

 
$
5,702

____________________________________________________________
(1)
On January 1, 2018, the Company recorded a step-up in basis to fair value of its retained noncontrolling interest relating to the sale of its Ground Lease business (refer to note 4) and other transactions where the Company sold or contributed real estate to a venture and previously recognized partial gains. Prior to the adoption of ASU 2017-05 (refer to Note 3), the Company was required to recognize gains on only the portion of its interest transferred to third parties and was precluded from recognizing a gain on its retained noncontrolling interest, which was carried at the Company’s historical cost basis.

Net Lease Venture—In February 2014, the Company partnered with a sovereign wealth fund to form the Net Lease Venture to acquire and develop net lease assets and gave a right of first offer to the Net Lease Venture on all new net lease investments. The Company has an equity interest in the Net Lease Venture of approximately 51.9%. This entity is not a VIE and the Company does not have controlling interest due to the substantive participating rights of its partner. The partners plan to contribute up to an aggregate $500 million of equity to acquire and develop net lease assets over time. The Company is responsible for sourcing new opportunities and managing the venture in exchange for a promote and management fee. Several of the Company's senior executives whose time is substantially devoted to the Net Lease Venture own a total of 0.6% equity ownership in the venture via co-investment. These senior executives are also entitled to an amount equal to 50.0% of any promote payment received based on the 47.5% partner's interest. The Net Lease Venture's investment period was extended from March 31, 2018 to June 30, 2018 during the first quarter 2018.
As of March 31, 2018 and December 31, 2017, the venture's carrying value of total assets was $740.7 million and $658.3 million, respectively. During the three months ended March 31, 2018 and 2017, the Company recorded management fees of $0.6 million and $0.5 million, respectively, from the Net Lease Venture which are included in "Other income" in the Company's consolidated statements of operations.
Safety, Income & Growth Inc.—The Company and two institutional investors capitalized SIGI Acquisition, Inc. ("SIGI") on April 14, 2017 to acquire, manage and capitalize Ground Leases. The Company contributed $55.5 million for an initial 49.1%

15
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


noncontrolling interest in SIGI and the two institutional investors contributed an aggregate $57.5 million for an initial 50.9% controlling interest in SIGI. A wholly-owned subsidiary of the Company that held the Company's Ground Lease business and assets merged with and into SIGI on April 14, 2017 with SIGI surviving the merger and being renamed Safety, Income & Growth Inc. ("SAFE"). Through this merger and related transactions, the institutional investors acquired a controlling interest in the Company's Ground Lease business. The Company's carrying value of the Ground Lease assets was approximately $161.1 million. Shortly before the Acquisition Transactions, the Company completed the $227.0 million 2017 Secured Financing on its Ground Lease assets (refer to Note 10). The Company received all of the proceeds of the 2017 Secured Financing. The Company received an additional $113.0 million of proceeds in the Acquisition Transactions, including $55.5 million that the Company contributed to SAFE in its initial capitalization. As a result of the Acquisition Transactions, the Company deconsolidated the 12 properties and the associated 2017 Secured Financing. The Company accounted for this transaction as an in substance sale of real estate and recognized a gain of $123.4 million, reflecting the aggregate gain less the fair value of the Company's retained interest in SAFE. As a result of the adoption of ASU 2017-05, on January 1, 2018, the Company recorded an increase to retained earnings of $55.5 million, bringing the Company's aggregate gain on the sale of its Ground Lease business to approximately $178.9 million.
On June 27, 2017, SAFE completed its initial public offering (the "Offering") raising $205.0 million in gross proceeds and concurrently completed a $45.0 million private placement to the Company. In addition, the Company paid $18.9 million in organization and offering costs of the up to $25.0 million in organization and offering costs it agreed to pay in connection with the Offering and concurrent private placement. The Company expensed the portion of offering costs that was attributable to other investors in "Other expense" in the Company's consolidated statements of operations and capitalized the portion of offering costs attributable to the Company's ownership interest in "Other investments" on the Company's consolidated balance sheets. Subsequent to the initial public offering, the Company purchased 2.2 million shares of SAFE's common stock for $41.7 million, representing an average cost of $18.67 per share, pursuant to two 10b5-1 plans in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended, under which the Company could buy shares of SAFE's common stock in the open market. As of March 31, 2018, the Company had utilized all of the availability authorized in the 10b5-1 Plans and owned approximately 39.9% of SAFE's common stock outstanding.

In addition, subsequent to SAFE's initial public offering, trusts established by Jay Sugarman, the Company's Chairman and Chief Executive Officer, and Geoffrey Jervis, the Company's former Chief Operating Officer and former Chief Financial Officer, purchased 26,000 shares in the aggregate of SAFE's common stock for an aggregate $0.5 million, representing an average cost of $19.20 per share, pursuant to a 10b5-1 plan in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended.
A wholly-owned subsidiary of the Company is the external manager of SAFE and is entitled to a management fee, payable solely in shares of SAFE's common stock, equal to the sum of 1.0% of SAFE's total equity up to $2.5 billion and 0.75% of SAFE's total equity in excess of $2.5 billion. The Company is not entitled to receive any performance or incentive compensation. The Company is also entitled to receive expense reimbursements, including for the allocable costs of its personnel that perform certain legal, accounting, due diligence tasks and other services that third-party professionals or outside consultants otherwise would perform. The Company has agreed to waive both the management fee and certain of the expense reimbursements through June 30, 2018. For the three months ended March 31, 2018, the Company waived $0.9 million of management fees and $0.4 million of expense reimbursements. The Company has an exclusivity agreement with SAFE pursuant to which it agreed, subject to certain exceptions, that it will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a Ground Lease unless it has first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity.
In August 2017, the Company committed to provide a $24.0 million loan to the ground lessee of a Ground Lease originated at SAFE. The loan has an initial term of one year and will be used for the renovation of a medical office building in Atlanta, GA. $10.3 million of the loan was funded as of March 31, 2018. The transaction was approved by the Company's and SAFE's independent directors. 
In October 2017, the Company closed on a 99-year Ground Lease and a $80.5 million construction financing commitment to support the ground-up development of Great Oaks Multifamily, a to-be-built 301-unit community within the Great Oaks Master Plan of San Jose, CA. The transaction includes a combination of: (i) a newly created Ground Lease and up to a $7.2 million leasehold improvement allowance; and (ii) a $80.5 million leasehold first mortgage. The Company entered into a forward purchase contract with SAFE under which SAFE would acquire the Ground Lease in November 2020 for approximately $34.0 million. The forward purchase contract was approved by the Company's and SAFE's independent directors. 

16
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Marina Palms—As of March 31, 2018, the Company owned a 47.5% equity interest in Marina Palms, a 468 unit, two tower residential condominium development in North Miami Beach, Florida. The 234 unit north tower has one unit remaining for sale as of March 31, 2018. The 234 unit south tower has 30 units remaining for sale as of March 31, 2018. This entity is not a VIE and the Company does not have controlling interest due to shared control of the entity with its partner. As of March 31, 2018 and December 31, 2017, the venture's carrying value of total assets was $30.9 million and $32.4 million, respectively.
Other real estate equity investments—As of March 31, 2018, the Company's other real estate equity investments include equity interests in real estate ventures ranging from 20.0% to 95.0%, comprised of investments of $55.9 million in operating properties and $71.0 million in land assets. As of December 31, 2017, the Company's other real estate equity investments included $38.8 million in operating properties and $61.3 million in land assets.
In December 2016, the Company sold a land and development asset to a newly formed unconsolidated entity in which the Company owns a 50.0% equity interest. This entity is a VIE and the Company does not have a controlling interest due to shared control of the entity with its partner. The Company and its partner each made a $7.0 million contribution to the venture and the Company provided financing to the entity in the form of a $27.0 million senior loan commitment, of which $26.0 million and $25.4 million was funded as of March 31, 2018 and December 31, 2017, respectively, and is included in "Loans receivable and other lending investments, net" on the Company's consolidated balance sheets. During the three months ended March 31, 2018 and 2017, the Company recorded $0.5 million and $0.4 million of interest income, respectively, on the senior loan.

Other strategic investments—As of March 31, 2018 and December 31, 2017, the Company also had investments in real estate related funds and other strategic investments in real estate entities.
Summarized investee financial information—The following table presents the investee level summarized financial information of the Company's equity method investments, which were significant subsidiaries, for the three months ended March 31, 2018 and 2017 ($ in thousands):
 
Revenues
 
Expenses
 
Net Income
For the Three Months Ended March 31, 2018
 
 
 
 
 
Marina Palms
$
12,315

 
$
(7,873
)
 
$
4,442

 
 
 
 
 
 
For the Three Months Ended March 31, 2017
 
 
 
 
 
Marina Palms
$
23,669

 
$
(14,911
)
 
$
8,758



17
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Note 8—Other Assets and Other Liabilities
Deferred expenses and other assets, net, consist of the following items ($ in thousands):
 
As of
 
March 31, 2018
 
December 31, 2017
Other receivables(1)
$
48,232

 
$
56,369

Intangible assets, net(2)
27,410

 
27,124

Other assets(3)
23,125

 
24,490

Restricted cash
20,421

 
20,045

Leasing costs, net(4)
9,675

 
9,050

Corporate furniture, fixtures and equipment, net(5)
4,598

 
4,652

Deferred financing fees, net
1,288

 
—

Deferred expenses and other assets, net
$
134,749

 
$
141,730

_______________________________________________________________________________
(1)
As of March 31, 2018 and December 31, 2017, included $26.0 million of reimbursements receivable related to the construction and development of an operating property.
(2)
Intangible assets, net includes above market and in-place lease assets and lease incentives related to the acquisition of real estate assets. Accumulated amortization on intangible assets, net was $35.1 million and $34.9 million as of March 31, 2018 and December 31, 2017, respectively. The amortization of above market leases and lease incentive assets decreased operating lease income in the Company's consolidated statements of operations by $0.4 million and $0.8 million for the three months ended March 31, 2018 and 2017, respectively. These intangible lease assets are amortized over the remaining term of the lease. The amortization expense for in-place leases was $0.4 million and $0.5 million for the three months ended March 31, 2018 and 2017, respectively. These amounts are included in "Depreciation and amortization" in the Company's consolidated statements of operations.
(3)
Other assets primarily includes prepaid expenses and deposits for certain real estate assets.
(4)
Accumulated amortization of leasing costs was $4.6 million and $4.7 million as of March 31, 2018 and December 31, 2017, respectively.
(5)
Accumulated depreciation on corporate furniture, fixtures and equipment was $10.8 million and $10.5 million as of March 31, 2018 and December 31, 2017, respectively.

Accounts payable, accrued expenses and other liabilities consist of the following items ($ in thousands):
 
As of
 
March 31, 2018
 
December 31, 2017
Other liabilities(1)
$
104,261

 
$
79,015

Accrued expenses(2)
75,995

 
101,035

Accrued interest payable
29,741

 
49,933

Intangible liabilities, net(3)
7,877

 
8,021

Accounts payable, accrued expenses and other liabilities
$
217,874

 
$
238,004

_______________________________________________________________________________
(1)
As of March 31, 2018 and December 31, 2017, other liabilities includes $58.0 million and $29.2 million, respectively, related to profit sharing arrangements with developers for certain properties sold. As of March 31, 2018 and December 31, 2017, includes $0.9 million and $1.6 million, respectively, associated with "Real estate available and held for sale" on the Company's consolidated balance sheets. As of March 31, 2018 and December 31, 2017, other liabilities also includes $4.8 million and $6.2 million, respectively, related to tax increment financing bonds which were issued by government entities to fund development within two of the Company's land projects. The amount represents tax assessments associated with each project, which will decrease as the Company sells units.
(2)
As of March 31, 2018 and December 31, 2017, accrued expenses includes $4.2 million and $2.5 million, respectively, associated with "Real estate available and held for sale" on the Company's consolidated balance sheets.
(3)
Intangible liabilities, net includes below market lease liabilities related to the acquisition of real estate assets. Accumulated amortization on below market lease liabilities was $7.1 million and $7.8 million as of March 31, 2018 and December 31, 2017, respectively. The amortization of below market leases increased operating lease income in the Company's consolidated statements of operations by $0.1 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively.


18
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Note 9—Loan Participations Payable, net

The Company's loan participations payable, net were as follows ($ in thousands):
 
 
Carrying Value as of
 
 
March 31, 2018
 
December 31, 2017
Loan participations payable(1)
 
$
85,621

 
$
102,737

Debt discounts and deferred financing costs, net
 
(267
)
 
(312
)
Total loan participations payable, net
 
$
85,354

 
$
102,425

_______________________________________________________________________________
(1)
As of March 31, 2018, the Company had two loan participations payable with a weighted average interest rate of 6.8%. As of December 31, 2017, the Company had two loan participations payable with a weighted average interest rate of 6.5%.
 
Loan participations represent transfers of financial assets that did not meet the sales criteria established under ASC Topic 860 and are accounted for as loan participations payable, net as of March 31, 2018 and December 31, 2017. As of March 31, 2018 and December 31, 2017, the corresponding loan receivable balances were $85.3 million and $102.3 million, respectively, and are included in "Loans receivable and other lending investments, net" on the Company's consolidated balance sheets. The principal and interest due on these loan participations payable are paid from cash flows of the corresponding loans receivable, which serve as collateral for the participations.

19
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Note 10—Debt Obligations, net

The Company's debt obligations were as follows ($ in thousands):
 
Carrying Value as of
 
Stated
Interest Rates
 
Scheduled
Maturity Date
 
March 31, 2018
 
December 31, 2017
 
 
Secured credit facilities and mortgages:
 
 
 
 
 
 
 
2015 $325 million Revolving Credit Facility
$
—

 
$
325,000

 
LIBOR + 2.50%

(1) 
September 2020
2016 Senior Credit Facility
376,671

 
399,000

 
LIBOR + 3.00%

(2) 
October 2021
Mortgages collateralized by net lease assets
206,162

 
208,491

 
4.102% - 7.26%

(3) 
Various through 2026
Total secured credit facilities and mortgages
582,833

 
932,491

 
 

 
 
Unsecured notes:
 
 
 
 
 
 
 
5.00% senior notes(4)
770,000

 
770,000

 
5.00
%
 
July 2019
4.625% senior notes(5)
400,000

 
400,000

 
4.625
%
 
September 2020
6.50% senior notes(6)
275,000

 
275,000

 
6.50
%
 
July 2021
6.00% senior notes(7)
375,000

 
375,000

 
6.00
%
 
April 2022
5.25% senior notes(8)
400,000

 
400,000

 
5.25
%
 
September 2022
3.125% senior convertible notes(9)
287,500

 
287,500

 
3.125
%
 
September 2022
Total unsecured notes
2,507,500

 
2,507,500

 
 

 
 
Other debt obligations:

 
 
 
 
 
 
Trust preferred securities
100,000

 
100,000

 
LIBOR + 1.50%

 
October 2035
Total debt obligations
3,190,333

 
3,539,991

 
 

 
 
Debt discounts and deferred financing costs, net
(59,399
)
 
(63,591
)
 
 

 
 
Total debt obligations, net(10)
$
3,130,934

 
$
3,476,400

 
 

 
 
_______________________________________________________________________________
(1)
The loan bears interest at the Company's election of either: (i) a base rate, which is the greater of (a) prime, (b) federal funds plus 0.5% or (c) LIBOR plus 1.0% and subject to a margin ranging from 1.25% to 1.75%; or (ii) LIBOR subject to a margin ranging from 2.25% to 2.75%. At maturity, the Company may convert outstanding borrowings to a one year term loan which matures in quarterly installments through September 2021.
(2)
The loan bears interest at the Company's election of either: (i) a base rate, which is the greater of (a) prime, (b) federal funds plus 0.5% or (c) LIBOR plus 1.0% and subject to a margin of 2.00%; or (ii) LIBOR subject to a margin of 3.00% with a minimum LIBOR rate of 0.75%.
(3)
As of March 31, 2018, the weighted average interest rate of these loans is 5.2%.
(4)
The Company can prepay these senior notes without penalty beginning July 1, 2018.
(5)
The Company can prepay these senior notes without penalty beginning June 15, 2020.
(6)
The Company can prepay these senior notes without penalty beginning July 1, 2020.
(7)
The Company can prepay these senior notes without penalty beginning April 1, 2021.
(8)
The Company can prepay these senior notes without penalty beginning September 15, 2021.
(9)
The Company's 3.125% senior convertible fixed rate notes due September 2022 ("3.125% Convertible Notes") are convertible at the option of the holders at a conversion rate of 64.36 shares per $1,000 principal amount of 3.125% Convertible Notes, which equals a conversion price of $15.54 per share, at any time prior to the close of business on the business day immediately preceding September 15, 2022. Upon conversion, the Company will pay or deliver, as the case may be, a combination of cash and shares of its common stock. As such, at issuance in September 2017, the Company valued the debt component at $221.8 million, net of fees, and the equity component of the conversion feature at $22.5 million, net of fees, and recorded the equity component in "Additional paid-in capital" on the Company's consolidated balance sheet. In October 2017, the initial purchasers of the 3.125% Convertible Notes exercised their option to purchase an additional $37.5 million aggregate principal amount of the 3.125% Convertible Notes. At issuance, the Company valued the debt component at $34.0 million, net of fees, and the equity component of the conversion feature at $3.4 million, net of fees, and recorded the equity component in "Additional paid-in capital" on the Company's consolidated balance sheet. As of March 31, 2018, the carrying value of the 3.125% Convertible Notes was $258.2 million, net of fees, and the unamortized discount of the 3.125% Convertible Notes was $24.0 million, net of fees. During the three months ended March 31, 2018, the Company recognized $2.2 million of contractual interest and $1.2 million of discount amortization on the 3.125% Convertible Notes. The effective interest rate was 5.2%.
(10)
The Company capitalized interest relating to development activities of $2.4 million and $2.0 million during the three months ended March 31, 2018 and 2017, respectively.


20
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Future Scheduled Maturities—As of March 31, 2018, future scheduled maturities of outstanding debt obligations are as follows ($ in thousands):
 
Unsecured Debt
 
Secured Debt
 
Total
2018 (remaining nine months)
$
—

 
$
—

 
$
—

2019
770,000

 
1,356

 
771,356

2020
400,000

 
—

 
400,000

2021
275,000

 
492,552

 
767,552

2022
1,062,500

 
58,519

 
1,121,019

Thereafter
100,000

 
30,406

 
130,406

Total principal maturities
2,607,500

 
582,833

 
3,190,333

Unamortized discounts and deferred financing costs, net
(52,109
)
 
(7,290
)
 
(59,399
)
Total debt obligations, net
$
2,555,391

 
$
575,543

 
$
3,130,934


2017 Secured Financing—In March 2017, the predecessor of SAFE (which at the time was comprised of the Company's wholly-owned subsidiaries conducting its Ground Lease business) entered into a $227.0 million secured financing transaction (the "2017 Secured Financing") that accrued interest at 3.795% and matures in April 2027. The 2017 Secured Financing was collateralized by the 12 properties comprising SAFE's initial portfolio. In connection with the 2017 Secured Financing, the Company incurred $7.3 million of lender and third-party fees, substantially all of which was capitalized in "Debt obligations, net" on the Company's consolidated balance sheets. In April 2017, the Company derecognized the 2017 Secured Financing when third parties acquired a controlling interest in SAFE's predecessor, prior to SAFE's initial public offering (refer to Note 4).
The Company is providing a limited recourse guaranty and environmental indemnity under the 2017 Secured Financing that will remain in effect until SAFE has achieved either an equity market capitalization of at least $500.0 million (inclusive of the initial portfolio that the Company contributed to SAFE) or a net worth of at least $250.0 million (exclusive of the initial portfolio that the Company contributed to SAFE), and SAFE or another replacement guarantor provides similar guaranties and indemnities to the lenders. The management agreement with SAFE provides that SAFE may not terminate the management agreement unless a successor guarantor reasonably acceptable to the Company has agreed to replace the Company as guarantor and indemnitor or has provided the Company with a reasonably acceptable indemnity for any losses suffered by the Company as guarantor and indemnitor. SAFE has generally agreed to indemnify the Company for any amounts the Company is required to pay, or other losses the Company may suffer, under the limited recourse guaranty and environmental indemnity.
2016 Senior Credit Facility—In June 2016, the Company entered into a senior credit facility of $450.0 million (the "2016 Senior Credit Facility"). In August 2016, the Company upsized the facility to $500.0 million. The initial $450.0 million of the 2016 Senior Credit Facility was issued at 99% of par and the upsize was issued at par. In January 2017, the Company repriced the 2016 Senior Credit Facility to LIBOR plus 3.75% with a 1.00% LIBOR floor from LIBOR plus 4.50% with a 1.00% LIBOR floor. In September 2017, the Company reduced, repriced and extended the 2016 Senior Credit Facility to $400.0 million priced at LIBOR plus 3.00% with a 0.75% LIBOR floor and maturing in October 2021. These transactions resulted in an aggregate 1.50% reduction in price.
The 2016 Senior Credit Facility is collateralized 1.25x by a first lien on a fixed pool of assets. Proceeds from principal repayments and sales of collateral are applied to amortize the 2016 Senior Credit Facility. Proceeds received for interest, rent, lease payments and fee income are retained by the Company. The Company may also make optional prepayments, subject to prepayment fees, and is required to repay 0.25% of the principal amount on the first business day of each quarter.
During the three months ended March 31, 2018, repayments of the 2016 Senior Credit Facility resulted in losses on early extinguishment of debt of $0.4 million.
2015 Revolving Credit Facility—In March 2015, the Company entered into a secured revolving credit facility with a maximum capacity of $250.0 million (the "2015 Revolving Credit Facility"). In September 2017, the Company upsized the 2015 Revolving Credit Facility to $325.0 million, added additional lenders to the syndicate, extended the maturity date to September 2020 and made certain other changes. This facility is secured by a pledge of the equity interest in a pool of assets which provide asset value coverage for borrowings under the facility. Borrowings under this credit facility bear interest at a floating rate indexed to one of several base rates plus a margin which adjusts upward or downward based upon the Company's corporate credit rating.

21
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


An undrawn credit facility commitment fee ranges from 0.30% to 0.50%, based on corporate credit ratings. At maturity, the Company may convert outstanding borrowings to a one year term loan which matures in quarterly installments through September 2021. During the three months ended March 31, 2018, the Company repaid from cash on hand the $325.0 million outstanding on the 2015 Revolving Credit Facility and as of March 31, 2018, based on the Company's borrowing base of assets, the Company had $325.0 million of borrowing capacity available under the 2015 Revolving Credit Facility.
Unsecured Notes—In September 2017, the Company issued $400.0 million principal amount of 4.625% senior unsecured notes due September 2020, $400.0 million principal amount of 5.25% senior unsecured notes due September 2022 and $250.0 million of 3.125% Convertible Notes due September 2022. The Company incurred approximately $18.6 million dollars in fees related to these offerings, all of which was capitalized in "Debt obligations, net" on the Company's consolidated balance sheets. Proceeds from these offerings, together with cash on hand, were used to repay in full the $550.0 million principal amount outstanding of the 4.0% senior unsecured notes due November 2017, the $300.0 million principal amount outstanding of the 7.125% senior unsecured notes due February 2018 and the $300.0 million principal amount outstanding of the 4.875% senior unsecured notes due July 2018. In addition, the initial purchasers of the 3.125% Convertible Notes exercised their option to purchase an additional $37.5 million aggregate principal amount of the 3.125% Convertible Notes.

In March 2017, the Company issued $375.0 million principal amount of 6.00% senior unsecured notes due April 2022. Proceeds from the offering were primarily used to repay in full the $99.7 million principal amount outstanding of the 5.85% senior unsecured notes due March 2017 and repay in full the $275.0 million principal amount outstanding of the 9.00% senior unsecured notes due June 2017 prior to maturity.

Collateral Assets—The carrying value of the Company's assets that are directly pledged or are held by subsidiaries whose equity is pledged as collateral to secure the Company's obligations under its secured debt facilities are as follows, by asset type ($ in thousands):
 
As of
 
March 31, 2018
 
December 31, 2017
 
Collateral Assets(1)
 
Non-Collateral Assets
 
Collateral Assets(1)
 
Non-Collateral Assets
Real estate, net
$
790,545

 
$
511,598

 
$
795,321

 
$
486,710

Real estate available and held for sale
—

 
41,857

 
20,069

 
48,519

Land and development, net
25,100

 
656,310

 
25,100

 
835,211

Loans receivable and other lending investments, net(2)(3)
185,161

 
1,146,571

 
194,529

 
1,021,340

Other investments
—

 
422,853

 
—

 
321,241

Cash and other assets
—

 
601,322

 
—

 
898,252

Total
$
1,000,806

 
$
3,380,511

 
$
1,035,019

 
$
3,611,273

_______________________________________________________________________________
(1)
The 2016 Senior Credit Facility and the 2015 Revolving Credit Facility are secured only by pledges of equity of certain of the Company's subsidiaries and not by pledges of the assets held by such subsidiaries. Such subsidiaries are subject to contractual restrictions under the terms of such credit facilities, including restrictions on incurring new debt (subject to certain exceptions).
(2)
As of March 31, 2018 and December 31, 2017, the amounts presented exclude general reserves for loan losses of $16.6 million and $17.5 million, respectively.
(3)
As of March 31, 2018 and December 31, 2017, the amounts presented exclude loan participations of $85.3 million and $102.3 million, respectively.

Debt Covenants

The Company's outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness, as such terms are defined in the indentures governing the debt securities, of at least 1.2x and a covenant not to incur additional indebtedness (except for incurrences of permitted debt), if on a pro forma basis the Company's consolidated fixed charge coverage ratio, determined in accordance with the indentures governing the Company's debt securities, is 1.5x or lower. If any of the Company's covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of its debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders. If the Company's ability to incur additional indebtedness under the fixed charge coverage ratio is limited, the Company is permitted to incur indebtedness for the purpose of refinancing existing indebtedness and for other permitted purposes under the indentures.


22
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


The Company's 2016 Senior Credit Facility and the 2015 Revolving Credit Facility contain certain covenants, including covenants relating to collateral coverage, dividend payments, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. In particular, the 2016 Senior Credit Facility requires the Company to maintain collateral coverage of at least 1.25x outstanding borrowings on the facility. The 2015 Revolving Credit Facility is secured by a borrowing base of assets and requires the Company to maintain both borrowing base asset value of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x. The 2015 Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the borrowing base asset value remains at least 1.5x outstanding borrowings on the facility. To satisfy this covenant, the Company has the option to pay down outstanding borrowings or substitute assets in the borrowing base. In addition, for so long as the Company maintains its qualification as a REIT, the 2016 Senior Credit Facility and the 2015 Revolving Credit Facility permit the Company to distribute 100% of its REIT taxable income on an annual basis (prior to deducting certain cumulative net operating loss ("NOL") carryforwards). The Company may not pay common dividends if it ceases to qualify as a REIT.

The Company's 2016 Senior Credit Facility and the 2015 Revolving Credit Facility contain cross default provisions that would allow the lenders to declare an event of default and accelerate the Company's indebtedness to them if the Company fails to pay amounts due in respect of its other recourse indebtedness in excess of specified thresholds or if the lenders under such other indebtedness are otherwise permitted to accelerate such indebtedness for any reason. The indentures governing the Company's unsecured public debt securities permit the bondholders to declare an event of default and accelerate the Company's indebtedness to them if the Company's other recourse indebtedness in excess of specified thresholds is not paid at final maturity or if such indebtedness is accelerated.
Note 11—Commitments and Contingencies

Unfunded Commitments—The Company generally funds construction and development loans and build-outs of space in real estate assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. The Company refers to these arrangements as Performance-Based Commitments. In addition, the Company has committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments.

As of March 31, 2018, the maximum amount of fundings the Company may be required to make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and that 100% of its capital committed to Strategic Investments is drawn down, are as follows ($ in thousands):
 
Loans and Other Lending Investments(1)
 
Real Estate
 
Other
Investments
 
Total
Performance-Based Commitments
$
436,639

 
$
10,630

 
$
24,587

 
$
471,856

Strategic Investments
—

 
—

 
9,427

 
9,427

Total
$
436,639

 
$
10,630

 
$
34,014

 
$
481,283

_______________________________________________________________________________
(1)
Excludes $83.7 million of commitments on loan participations sold that are not the obligation of the Company.

Legal Proceedings—The Company and/or one or more of its subsidiaries is party to various pending litigation matters that are considered ordinary routine litigation incidental to the Company's business as a finance and investment company focused on the commercial real estate industry, including foreclosure-related proceedings. In addition to such matters, the Company is a party to the following legal proceeding:
U.S. Home Corporation ("Lennar") v. Settlers Crossing, LLC, et al. (United States District Court for the District of Maryland, Civil Action No. DKC 08-1863)
On December 4, 2017, the U.S. Supreme Court issued an order denying Lennar’s petition for a writ of certiorari in this matter. The amount of attorneys’ fees and costs to be recovered by the Company will be determined through further proceedings before the District Court. The Company has applied for attorney’s fees in excess of $17.0 million. A hearing on the Company’s application for attorney’s fees has not yet been scheduled. Please refer to the Company's 2017 Annual Report for a more complete description of this matter.

23
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Note 12—Derivatives
The Company's use of derivative financial instruments has historically been limited to the utilization of interest rate swaps, interest rate caps and foreign exchange contracts. The principal objective of such financial instruments is to minimize the risks and/or costs associated with the Company's operating and financial structure and to manage its exposure to interest rates and foreign exchange rates. Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements, foreign exchange rate movements, and other identified risks, but may not meet the strict hedge accounting requirements.
The Company did not directly own any derivative financial instruments as of March 31, 2018 and December 31, 2017. The tables below present the effect of the Company's derivative financial instruments, including the Company's share of derivative financial instruments at certain of its equity method investments, in the consolidated statements of operations and the consolidated statements of comprehensive income (loss) ($ in thousands):
Derivatives Designated in Hedging Relationships
 
Location of Gain (Loss)
Recognized in Income
 
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings
 (Ineffective Portion)
For the Three Months Ended March 31, 2018
 
 
 
 
 
 
Interest rate swaps
 
Earnings from equity method investments
 
2,351

 
(9
)
 
N/A
For the Three Months Ended March 31, 2017
 
 
 
 
 
 
Interest rate cap
 
Earnings from equity method investments
 
(5
)
 
(5
)
 
N/A
Interest rate swaps
 
Interest Expense
 
467

 
(30
)
 
N/A
Interest rate swap
 
Earnings from equity method investments
 
78

 
(87
)
 
N/A
Foreign exchange contracts
 
Earnings from equity method investments
 
(299
)
 
—

 
N/A
 
 
 
 
Amount of Gain (Loss) Recognized in Income For the Three Months Ended March 31, 2017
 
 
Location of Gain
(Loss) Recognized in
Income
 
Derivatives not Designated in Hedging Relationships
 
 
Interest rate cap
 
Other Expense
 
$
47

Foreign exchange contracts
 
Other Expense
 
(125
)
During the three months ended March 31, 2017, the Company entered into and settled a rate lock swap in connection with the 2017 Secured Financing and a simultaneous rate lock swap with SAFE. As a result of the settlements, the Company initially recorded a $0.4 million unrealized gain in “Accumulated other comprehensive income” on the Company’s consolidated balance sheets and subsequently derecognized the gain when third parties acquired a controlling interest in the Company's Ground Lease business (refer to Note 4).

24
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


Note 13—Equity

Preferred Stock—The Company had the following series of Cumulative Redeemable and Convertible Perpetual Preferred Stock outstanding as of March 31, 2018 and December 31, 2017:
 
 
 
 
 
 
Cumulative Preferential Cash
Dividends(1)(2)
 
 
Series
 
Shares Issued and
Outstanding
(in thousands)
 
Par Value
 
Liquidation Preference(3)(4)
 
Rate per Annum
 
Equivalent to
Fixed Annual
Rate (per share)
 
Carrying Value
(in thousands)
D
 
4,000

 
$
0.001

 
$
25.00

 
8.00
%
 
$
2.00

 
$
89,041

G
 
3,200

 
0.001

 
25.00

 
7.65
%
 
1.91

 
72,664

I
 
5,000

 
0.001

 
25.00

 
7.50
%
 
1.88

 
120,785

J (convertible)(4)
 
4,000

 
0.001

 
50.00

 
4.50
%
 
2.25

 
193,510

 
 
16,200

 
 

 
 
 
 

 
 

 
$
476,000

________________________________________
(1)
Holders of shares of the Series D, G, I and J preferred stock are entitled to receive dividends, when and as declared by the Company's Board of Directors, out of funds legally available for the payment of dividends. Dividends are cumulative from the date of original issue and are payable quarterly in arrears on or before the 15th day of each March, June, September and December or, if not a business day, the next succeeding business day. Any dividend payable on the preferred stock for any partial dividend period will be computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends will be payable to holders of record as of the close of business on the first day of the calendar month in which the applicable dividend payment date falls or on another date designated by the Company's Board of Directors for the payment of dividends that is not more than 30 nor less than 10 days prior to the dividend payment date.
(2)
The Company declared and paid dividends of $2.0 million, $1.5 million and $2.3 million on its Series D, G and I Cumulative Redeemable Preferred Stock during the three months ended March 31, 2018 and 2017, respectively. The Company declared and paid dividends of $2.3 million on its Series J Convertible Perpetual Preferred Stock during the three months ended March 31, 2018 and 2017. The Company declared and paid dividends of $2.8 million and $2.0 million on its Series E and F Cumulative Redeemable Preferred Stock, respectively, during the three months ended March 31, 2017. The Company redeemed all of its issued and outstanding Series E and F Cumulative Redeemable Preferred Stock in October 2017. The character of the 2017 dividends was 100% capital gain distribution, of which 27.90% represented unrecaptured section 1250 gain and 72.10% represented long term capital gain. There are no dividend arrearages on any of the preferred shares currently outstanding.
(3)
The Company may, at its option, redeem the Series G and I Preferred Stock, in whole or in part, at any time and from time to time, for cash at a redemption price equal to 100% of the liquidation preference of $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.
(4)
Each share of the Series J Preferred Stock is convertible at the holder's option at any time, initially into 3.9087 shares of the Company's common stock (equal to an initial conversion price of approximately $12.79 per share), subject to specified adjustments. On or after March 15, 2018, the Company may, at its option, redeem the Series J Preferred Stock, in whole or in part, at any time and from time to time, for cash at a redemption price equal to 100% of the liquidation preference of $50.00 per share, plus accrued and unpaid dividends, if any, to the redemption date.

Dividends—To maintain its qualification as a REIT, the Company must annually distribute, at a minimum, an amount equal to 90% of its taxable income, excluding net capital gains, and must distribute 100% of its taxable income (including net capital gains) to eliminate corporate federal income taxes payable by the REIT. The Company has recorded NOLs and may record NOLs in the future, which may reduce its taxable income in future periods and lower or eliminate entirely the Company's obligation to pay dividends for such periods in order to maintain its REIT qualification. As of December 31, 2016, the Company had $948.8 million of NOL carryforwards at the corporate REIT level that can generally be used to offset both ordinary taxable income and capital gain net income in future years. The NOL carryforwards will expire beginning in 2029 and through 2036 if unused. The Company estimates that the amount of NOL carryforwards as of December 31, 2017 will be approximately $588 million; however, the actual NOL carryforward as of December 31, 2017 will be determined upon filing the Company's 2017 tax return. Because taxable income differs from cash flow from operations due to non-cash revenues and expenses (such as depreciation and certain asset impairments), in certain circumstances, the Company may generate operating cash flow in excess of its dividends, or alternatively, may need to make dividend payments in excess of operating cash flows. The 2016 Senior Credit Facility and the 2015 Revolving Credit Facility permit the Company to distribute 100% of its REIT taxable income on an annual basis (prior to deducting certain cumulative NOL carryforwards), as long as the Company maintains its REIT qualification. The 2016 Senior Credit Facility and 2015 Revolving Credit Facility restrict the Company from paying any common dividends if it ceases to qualify as a REIT. The Company did not declare or pay any common stock dividends for the three months ended March 31, 2018 and 2017.

Stock Repurchase Program—The Company may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans. During the three months ended March 31, 2018, the Company repurchased 0.8 million

25
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


shares of its outstanding common stock for $8.3 million, representing an average cost of $10.22 per share. As of March 31, 2018, the Company had remaining authorization to repurchase up to $41.7 million of common stock under its stock repurchase program.
 
Accumulated Other Comprehensive Income (Loss)—"Accumulated other comprehensive income (loss)" reflected in the Company's shareholders' equity is comprised of the following ($ in thousands):
 
As of
 
March 31, 2018
 
December 31, 2017
Unrealized gains on available-for-sale securities
$
640

 
$
1,335

Unrealized gains on cash flow hedges
3,068

 
707

Unrealized losses on cumulative translation adjustment
(4,633
)
 
(4,524
)
Accumulated other comprehensive income
$
(925
)
 
$
(2,482
)

Note 14—Stock-Based Compensation Plans and Employee Benefits

Stock-Based Compensation—The Company recorded stock-based compensation expense, including the effect of performance incentive plans (see below), of $9.1 million and $5.9 million for the three months ended March 31, 2018 and 2017, respectively, in "General and administrative" in the Company's consolidated statements of operations.
Performance Incentive Plans—The Company's Performance Incentive Plan ("iPIP") is designed to provide, primarily to senior executives and select professionals engaged in the Company's investment activities, long-term compensation which has a direct relationship to the realized returns on investments included in the plan. The fair value of points is determined using a model that forecasts the Company's projected investment performance. iPIP is a liability-classified award, which will be remeasured each reporting period at fair value until the awards are settled. The following is a summary of the status of the Company’s iPIP points and changes during the three months ended March 31, 2018 and the year ended December 31, 2017.
 
Three Months Ended March 31, 2018
 
Year Ended December 31, 2017
 
iPIP Investment Pool
 
iPIP Investment Pool
 
2013-2014
 
2015-2016
 
2017-2018
 
2013-2014
 
2015-2016
 
2017-2018
Points at beginning of period
86.57

 
84.16

 
40.97

 
92.00

 
74.10

 
0

Granted
0.50

 
0

 
49.08

 
5.00

 
17.88

 
41.68

Forfeited
(0.15
)
 
(0.89
)
 
(4.56
)
 
(10.43
)
 
(7.82
)
 
(0.71
)
Points at end of period
86.92

 
83.27

 
85.49

 
86.57

 
84.16

 
40.97

During the three months ended March 31, 2018, the Company made initial distributions to participants in the 2013-2014 investment pool following a determination that, as of December 31, 2017, the Company had realized a return of all invested capital in the assets included in the 2013-2014 investment pool, together with a return based on leverage and a preferred return hurdle of 9.0%. After the amount distributable to participants was reduced based on the Company's total shareholder return in accordance with the provisions of the iPIP, iPIP participants received total distributions in the amount of $13.6 million as compensation, comprised of $6.8 million in cash and 595,869 shares of the Company's common stock, with a fair value of $6.8 million or $11.41 per share, which are fully-vested and issued under the 2009 LTIP (see below). After deducting statutory minimum tax withholdings, a total of 328,074 shares of the Company's common stock were issued. As of March 31, 2018 and December 31, 2017, the Company had accrued compensation costs relating to iPIP of $32.2 million and $38.1 million, respectively, which are included in "Accounts payable, accrued expenses and other liabilities" on the Company's consolidated balance sheets.
Long-Term Incentive Plan—The Company's 2009 Long-Term Incentive Plan (the "2009 LTIP") is designed to provide incentive compensation for officers, key employees, directors and advisors of the Company. The 2009 LTIP provides for awards of stock options, shares of restricted stock, phantom shares, restricted stock units, dividend equivalent rights and other share-based performance awards. All awards under the 2009 LTIP are made at the discretion of the Company's Board of Directors or a committee of the Board of Directors. The Company's shareholders approved the 2009 LTIP in 2009 and approved the performance-based provisions of the 2009 LTIP, as amended, in 2014.

26
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


As of March 31, 2018, an aggregate of 2.7 million shares remain available for issuance pursuant to future awards under the Company's 2009 LTIP.
Restricted Share Issuances—During the three months ended March 31, 2018, the Company granted 213,609 shares of common stock to certain employees under the 2009 LTIP as part of annual incentive awards that included a mix of cash and equity awards. The shares are fully-vested and 135,503 shares were issued net of required, statutory minimum tax withholdings. The employees are restricted from selling these shares for up to 18 months from the date of grant.
Restricted Stock Unit Activity—A summary of the Company’s stock-based compensation awards to certain employees in the form of long-term incentive awards for the three months ended March 31, 2018 and the year ended December 31, 2017, are as follows (in thousands):
 
Three Months Ended
March 31, 2018
 
Year Ended
December 31, 2017
Nonvested at beginning of period
282

 
290

Granted
264

 
116

Vested
(20
)
 
(75
)
Forfeited
(40
)
 
(49
)
Nonvested at end of period
486

 
282


As of March 31, 2018, there was $3.5 million of total unrecognized compensation cost related to all unvested restricted stock units that are expected to be recognized over a weighted average remaining vesting/service period of 2.2 years.
Directors' Awards—As of March 31, 2018, a combined total of 226,182 CSEs and restricted shares of common stock granted to members of the Company's Board of Directors remained outstanding under the Company's Non-Employee Directors Deferral Plan, with an aggregate intrinsic value of $2.3 million.

401(k) Plan—The Company made gross contributions of $0.7 million and $0.6 million for the three months ended March 31, 2018 and 2017, respectively.

Note 15—Earnings Per Share

The following table presents a reconciliation of income (loss) from continuing operations used in the basic and diluted Earnings per share ("EPS") calculations ($ in thousands, except for per share data):
 
For the Three Months Ended March 31,
 
2018
 
2017
Income (loss) from continuing operations
$
17,980

 
$
(28,248
)
Income from sales of real estate
17,048

 
8,110

Net (income) loss attributable to noncontrolling interests
(95
)
 
1,100

Preferred dividends
(8,124
)
 
(12,830
)
Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders for basic earnings per common share(1)
$
26,809

 
$
(31,868
)
Add: Effect of Series J convertible perpetual preferred stock
2,250

 
—

Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders for diluted earnings per common share(1)
$
29,059

 
$
(31,868
)



27
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)



 
For the Three Months Ended March 31,
 
2018
 
2017
Earnings allocable to common shares:
 
 
 
Numerator for basic earnings per share:
 
 
 
Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders
$
26,809

 
$
(31,868
)
Income from discontinued operations
—

 
4,766

Net income (loss) attributable to iStar Inc. and allocable to common shareholders
$
26,809

 
$
(27,102
)
 
 
 
 
Numerator for diluted earnings per share:
 
 
 
Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders
$
29,059

 
$
(31,868
)
Income from discontinued operations
—

 
4,766

Net income (loss) attributable to iStar Inc. and allocable to common shareholders
$
29,059

 
$
(27,102
)
 
 
 
 
Denominator for basic and diluted earnings per share:
 
 
 
Weighted average common shares outstanding for basic earnings per common share
67,913

 
72,065

Add: Effect of assumed shares issued under treasury stock method for restricted stock units
122

 
—

Add: Effect of series J convertible perpetual preferred stock
15,635

 
—

Weighted average common shares outstanding for diluted earnings per common share
83,670

 
72,065

 
 
 
 
Basic earnings per common share:
 
 
 
Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders
$
0.39

 
$
(0.44
)
Income from discontinued operations
—

 
0.06

Net income (loss) attributable to iStar Inc. and allocable to common shareholders
$
0.39

 
$
(0.38
)
 
 
 
 
Diluted earnings per common share:
 
 
 
Income (loss) from continuing operations attributable to iStar Inc. and allocable to common shareholders
$
0.35

 
$
(0.44
)
Income from discontinued operations
—

 
0.06

Net income (loss) attributable to iStar Inc. and allocable to common shareholders
$
0.35

 
$
(0.38
)

28
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)



The following shares were not included in the diluted EPS calculation because they were anti-dilutive (in thousands)(1):
 
For the Three Months Ended March 31,
 
2018
 
2017
Series J convertible perpetual preferred stock
—

 
15,635

Joint venture shares
—

 
298

_______________________________________________________________________________
(1)
For the three months ended March 31, 2017, the effect of the Company's Series J convertible preferred stock, unvested Units, performance-based Units, CSEs and restricted stock awards were anti-dilutive due to the Company having a net loss for the period. The Company will settle conversions of the 3.125% Convertible Notes by paying the conversion value in cash up to the original principal amount of the notes being converted and shares of common stock to the extent of any conversion premium. The amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value calculated for each trading day in a 40 consecutive day observation period. Based upon the conversion price of the 3.125% Convertible Notes, no shares of common stock would have been issuable upon conversion of the 3.125% Convertible Notes for the three months ended March 31, 2018 and therefore the 3.125% Convertible Notes had no effect on diluted EPS for such periods. 

Note 16—Fair Values
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs to be used in valuation techniques to measure fair value:
Level 1:    Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2:    Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3:    Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Certain of the Company's assets and liabilities are recorded at fair value either on a recurring or non-recurring basis. Assets required to be marked-to-market and reported at fair value every reporting period are classified as being valued on a recurring basis. Assets not required to be recorded at fair value every period may be recorded at fair value if a specific provision or other impairment is recorded within the period to mark the carrying value of the asset to market as of the reporting date. Such assets are classified as being valued on a non-recurring basis.

29
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


The following fair value hierarchy table summarizes the Company's assets and liabilities recorded at fair value on a recurring and non-recurring basis by the above categories ($ in thousands):
 
 
 
Fair Value Using
 
Total
 
Quoted market
prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
As of March 31, 2018
 
 
 
 
 
 
 
Recurring basis:
 
 
 
 
 
 
 
Available-for-sale securities(1)
$
21,835

 
$
—

 
$
—

 
$
21,835

Non-recurring basis:
 
 
 
 
 
 
 
Impaired real estate available and held for sale(2)
6,041

 
—

 
—

 
6,041

 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
Recurring basis:
 
 
 
 
 
 
 
Available-for-sale securities(1)
$
22,842

 
$
—

 
$
—

 
$
22,842

Non-recurring basis:
 
 
 
 
 
 
 
Impaired real estate(3)
12,400

 
—

 
—

 
12,400

Impaired real estate available and held for sale(4)
800

 
—

 
—

 
800

Impaired land and development(5)
21,400

 
—

 
—

 
21,400

____________________________________________________________
(1)
The fair value of the Company's available-for-sale securities are based upon unadjusted third-party broker quotes and are classified as Level 3.
(2)
The Company recorded an impairment on a residential real estate asset available and held for sale with a fair value of $6.0 million due to impending contracts to sell the remaining four condominium units at the property.
(3)
The Company recorded an impairment on a real estate asset with a fair value of $12.4 million based on market comparable sales.
(4)
The Company recorded an impairment on a residential real estate asset available and held for sale based on market comparable sales.
(5)
The Company recorded an impairment on a land and development asset with a fair value of $21.4 million based on a discount rate of 6% and a 10 year holding period.

The following table summarizes changes in Level 3 available-for-sale securities reported at fair value on the Company's consolidated balance sheets for the three months ended March 31, 2018 and 2017 ($ in thousands):
 
 
2018
 
2017
Beginning balance
 
$
22,842

 
$
21,666

Repayments
 
(36
)
 
(10
)
Unrealized gains recorded in other comprehensive income
 
(971
)
 
(17
)
Ending balance
 
$
21,835

 
$
21,639

Fair values of financial instruments—The Company's estimated fair values of its loans receivable and other lending investments and outstanding debt was $1.4 billion and $3.3 billion, respectively, as of March 31, 2018 and $1.3 billion and $3.7 billion, respectively, as of December 31, 2017. The Company determined that the significant inputs used to value its loans receivable and other lending investments and debt obligations fall within Level 3 of the fair value hierarchy. The carrying value of other financial instruments including cash and cash equivalents, restricted cash, accrued interest receivable and accounts payable, approximate the fair values of the instruments. Cash and cash equivalents and restricted cash values are considered Level 1 on the fair value hierarchy. The fair value of other financial instruments, including derivative assets and liabilities, is included in the fair value hierarchy table above.
Note 17—Segment Reporting
The Company has determined that it has four reportable segments based on how management reviews and manages its business. These reportable segments include: Real Estate Finance, Net Lease, Operating Properties and Land and Development. The Real Estate Finance segment includes all of the Company's activities related to senior and mezzanine real estate loans and real estate related securities. The Net Lease segment includes the Company's activities and operations related to the ownership of properties generally leased to single corporate tenants. The Operating Properties segment includes the Company's activities and operations related to its commercial and residential properties. The Land and Development segment includes the Company's activities related to its developable land portfolio.
The Company evaluates performance based on the following financial measures for each segment. The Company's segment information is as follows ($ in thousands):
 
Real Estate Finance
 
Net Lease
 
Operating Properties
 
Land and Development
 
Corporate/Other(1)
 
Company Total
Three Months Ended March 31, 2018:
 
 
 
 
 
 
 
 
 
 
Operating lease income
$
—

 
$
29,727

 
$
15,817

 
$
255

 
$
—

 
$
45,799

Interest income
26,697

 
—

 
—

 
—

 
—

 
26,697

Other income
384

 
1,049

 
12,144

 
471

 
1,272

 
15,320

Land development revenue
—

 
—

 
—

 
276,429

 
—

 
276,429

Earnings (losses) from equity method investments
—

 
3,556

 
(1,275
)
 
1,545

 
(494
)
 
3,332

Income from sales of real estate
—

 
414

 
16,634

 
—

 
—

 
17,048

Total revenue and other earnings
27,081

 
34,746

 
43,320

 
278,700

 
778

 
384,625

Real estate expense
—

 
(3,948
)
 
(21,626
)
 
(10,606
)
 
—

 
(36,180
)
Land development cost of sales
—

 
—

 
—

 
(223,407
)
 
—

 
(223,407
)
Other expense
(400
)
 
—

 
—

 
—

 
(766
)
 
(1,166
)
Allocated interest expense
(11,765
)
 
(14,201
)
 
(5,528
)
 
(6,473
)
 
(7,215
)
 
(45,182
)
Allocated general and administrative(2)
(3,969
)
 
(4,586
)
 
(2,043
)
 
(3,805
)
 
(5,320
)
 
(19,723
)
Segment profit (loss)(3)
$
10,947

 
$
12,011

 
$
14,123

 
$
34,409

 
$
(12,523
)
 
$
58,967

Other significant items:
 
 
 
 
 
 
 
 
 
 
 
Recovery of loan losses
$
(855
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
(855
)
Impairment of assets
—

 
—

 
4,100

 
—

 
—

 
4,100

Depreciation and amortization
—

 
6,309

 
3,926

 
515

 
360

 
11,110

Capitalized expenditures
—

 
478

 
7,700

 
31,447

 
—

 
39,625

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017:
 
 
 
 
 
 
 
 
 
 
Operating lease income
$
—

 
$
31,252

 
$
15,989

 
$
106

 
$
—

 
$
47,347

Interest income
29,058

 
—

 
—

 
—

 
—

 
29,058

Other income
76

 
506

 
10,355

 
386

 
541

 
11,864

Land development revenue
—

 
—

 
—

 
20,050

 
—

 
20,050

Earnings from equity method investments
—

 
981

 
632

 
3,842

 
247

 
5,702

Income from discontinued operations
—

 
4,766

 
—

 
—

 
—

 
4,766

Income from sales of real estate
—

 
6,212

 
1,898

 
—

 
—

 
8,110

Total revenue and other earnings
29,134

 
43,717

 
28,874

 
24,384

 
788

 
126,897

Real estate expense
—

 
(4,575
)
 
(21,518
)
 
(9,497
)
 
—

 
(35,590
)
Land development cost of sales
—

 
—

 
—

 
(15,910
)
 
—

 
(15,910
)
Other expense
(605
)
 
—

 
—

 
—

 
(1,264
)
 
(1,869
)
Allocated interest expense
(11,888
)
 
(15,735
)
 
(5,606
)
 
(8,118
)
 
(9,798
)
 
(51,145
)
Allocated general and administrative(2)
(3,596
)
 
(4,642
)
 
(1,755
)
 
(3,926
)
 
(5,373
)
 
(19,292
)
Segment profit (loss)(3)
$
13,045

 
$
18,765

 
$
(5
)
 
$
(13,067
)
 
$
(15,647
)
 
$
3,091


30
iStar Inc.
Notes to Consolidated Financial Statements (Continued)
(unaudited)


 
Real Estate Finance
 
Net Lease
 
Operating Properties
 
Land and Development
 
Corporate/Other(1)
 
Company Total
Other significant items:
 
 
 
 
 
 
 
 
 
 
 
Recovery of loan losses
$
(4,928
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
(4,928
)
Impairment of assets
—

 
—

 
4,413

 
—

 
—

 
4,413

Depreciation and amortization
—

 
7,641

 
4,039

 
270

 
330

 
12,280

Capitalized expenditures
—

 
771

 
8,210

 
26,592

 
—

 
35,573

 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2018
 
 
 
 
 
 
 
 
 
 

Real estate
 

 
 

 
 

 
 

 
 

 
 
Real estate, net
$
—

 
$
808,438

 
$
493,705

 
$
—

 
$
—

 
$
1,302,143

Real estate available and held for sale
—

 
—

 
41,857

 
—

 
—

 
41,857

Total real estate
—

 
808,438

 
535,562

 
—

 
—

 
1,344,000

Land and development, net
—

 
—

 
—

 
681,410

 
—

 
681,410

Loans receivable and other lending investments, net
1,400,474

 
—

 
—

 
—

 
—

 
1,400,474

Other investments
—

 
279,094

 
55,929

 
75,596

 
12,234

 
422,853

Total portfolio assets
$
1,400,474

 
$
1,087,532

 
$
591,491

 
$
757,006

 
$
12,234

 
3,848,737

Cash and other assets
 
 
 
 
 
 
 
 
 
 
601,322

Total assets


 


 


 


 


 
$
4,450,059

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Real estate
 

 
 

 
 

 
 

 
 

 
 
Real estate, net
$
—

 
$
815,783

 
$
466,248

 
$
—

 
$
—

 
$
1,282,031

Real estate available and held for sale
—

 
—

 
68,588

 
—

 
—


68,588

Total real estate
—

 
815,783

 
534,836

 
—

 
—

 
1,350,619

Land and development, net
—

 
—

 
—

 
860,311

 
—

 
860,311

Loans receivable and other lending investments, net
1,300,655

 
—

 
—

 
—

 
—

 
1,300,655

Other investments
—

 
205,007

 
38,761

 
63,855

 
13,618

 
321,241

Total portfolio assets
$
1,300,655

 
$
1,020,790

 
$
573,597

 
$
924,166

 
$
13,618

 
3,832,826

Cash and other assets
 
 
 
 
 
 
 
 
 
 
898,252

Total assets


 


 


 


 


 
$
4,731,078

_______________________________________________________________________________
(1)
Corporate/Other represents all corporate level and unallocated items including any intercompany eliminations necessary to reconcile to consolidated Company totals. This caption also includes the Company's joint venture investments and strategic investments that are not included in the other reportable segments above.
(2)
General and administrative excludes stock-based compensation expense of $9.1 million and $5.9 million for the three months ended March 31, 2018 and 2017, respectively.
(3)
The following is a reconciliation of segment profit to net income (loss) ($ in thousands):
 
For the Three Months Ended March 31,
 
2018
 
2017
Segment profit
$
58,967

 
$
3,091

Add: Recovery of loan losses
855

 
4,928

Less: Impairment of assets
(4,100
)
 
(4,413
)
Less: Stock-based compensation expense
(9,091
)
 
(5,881
)
Less: Depreciation and amortization
(11,110
)
 
(12,280
)
Less: Income tax expense
(121
)
 
(607
)
Less: Loss on early extinguishment of debt, net
(372
)
 
(210
)
Net income (loss)
$
35,028

 
$
(15,372
)

31

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are included with respect to, among other things, iStar Inc.'s (the "Company's") current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-Q and the uncertainties and risks described in Item 1A—"Risk Factors" in our 2017 Annual Report, all of which could affect our future results of operations, financial condition and liquidity. For purposes of Management's Discussion and Analysis of Financial Condition and Results of Operations, the terms "we," "our" and "us" refer to iStar Inc. and its consolidated subsidiaries, unless the context indicates otherwise.
The discussion below should be read in conjunction with our consolidated financial statements and related notes in this quarterly report on Form 10-Q and our 2017 Annual Report. These historical financial statements may not be indicative of our future performance. We have reclassified certain items in our consolidated financial statements of prior periods to conform to our current financial statements presentation.
Introduction
iStar Inc. ("iStar") finances, invests in and develops real estate and real estate related projects as part of its fully-integrated investment platform. We also provide management services for our ground lease ("Ground Lease") and net lease equity method investments. We have invested more than $35 billion over the past two decades and are structured as a real estate investment trust ("REIT") with a diversified portfolio focused on larger assets located in major metropolitan markets. Our primary business segments are real estate finance, net lease, operating properties and land and development.
Executive Overview

We continue to focus on our net lease and real estate finance businesses to find selective investment opportunities in these core businesses. We also continue to make significant progress in monetizing our commercial and residential operating properties as well as our land portfolio. In our continuing effort to find untapped investment opportunities in real estate, in 2017 we conceived and ultimately launched Safety, Income & Growth Inc. ("SAFE"), a new, publicly traded REIT focused exclusively on the Ground Lease asset class.
Operating Results
During the three months ended March 31, 2018, all of our business segments contributed positively to our earnings. We sold two land parcels totaling 93 acres in San Jose, CA and San Pedro, CA, generating approximately $253.4 million in gross proceeds and $48.3 million in profit. We continue to work on repositioning or redeveloping our transitional operating properties and progressing on the entitlement and development of our land and development assets in order to maximize their value. We intend to continue these efforts, with the objective of increasing the contribution of these assets to our earnings in the future. Furthermore, we have sold and expect to continue to opportunistically sell operating assets and land in order to generate cash proceeds to reinvest into real estate finance and net lease assets, and in active development projects. For the three months ended March 31, 2018, we recorded net income allocable to common shareholders of $26.8 million, compared to a net loss of $27.1 million during the same period in the prior year. Adjusted income (loss) allocable to common shareholders for the three months ended March 31, 2018 was $132.3 million, compared to $(11.8) million during the same period in the prior year (see "Adjusted Income" for a reconciliation of adjusted income to net income).

32

Capital Markets Activity
In the third and fourth quarters of 2017, we completed a comprehensive set of capital markets transactions that addressed all parts of our capital structure, resulting in our having:

•
repaid or refinanced all of our 2017 and 2018 corporate debt maturities, leaving no corporate debt maturities until July 2019;
•
extended our weighted average debt maturity by 1.5 years to 4.0 years;
•
reduced annual expenses;
•
lowered our cost of capital;
•
established new banking relationships;
•
increased liquidity to pursue new investment opportunities; and
•
received upgrades in our corporate credit ratings from all three major ratings agencies, which we expect will positively impact the marginal cost of our future borrowings and broaden our set of investment opportunities.

As of March 31, 2018, we had $366.7 million of cash which we expect to use primarily to fund future investment activities. In addition, we have additional borrowing capacity under the 2015 Revolving Credit Facility (refer to Note 10) of $325.0 million at March 31, 2018.
Portfolio Overview

As of March 31, 2018, based on carrying values exclusive of accumulated depreciation and general loan loss reserves, our total investment portfolio has the following characteristics:

chart-abc376e924f254399c9a03.jpg

33

As of March 31, 2018, based on carrying values exclusive of accumulated depreciation and general loan loss reserves, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands):
Property/Collateral Types
 
Real Estate Finance
 
Net Lease
 
Operating Properties
 
Land & Development
 
Total
 
% of
Total
Land and Development
 
$
166,894

 
$
—

 
$
—

 
$
764,845

 
$
931,739

 
21.9
%
Office / Industrial
 
55,266

 
682,759

 
119,694

 
—

 
857,719

 
20.3
%
Entertainment / Leisure
 
—

 
489,394

 
—

 
—

 
489,394

 
11.6
%
Mixed Use / Mixed Collateral
 
299,374

 
—

 
230,336

 
—

 
529,710

 
12.5
%
Hotel
 
326,923

 
—

 
104,745

 
—

 
431,668

 
10.2
%
Condominium
 
340,189

 
—

 
40,911

 
—

 
381,100

 
9.0
%
Retail
 
24,907

 
57,348

 
140,795

 
—

 
223,050

 
5.3
%
Other Property Types
 
203,521

 
—

 
14,637

 
—

 
218,158

 
5.2
%
Ground Leases
 
—

 
155,912

 
—

 
—

 
155,912

 
3.7
%
Strategic Investments
 
—

 
—

 
—

 
—

 
12,234

 
0.3
%
Total
 
$
1,417,074

 
$
1,385,413

 
$
651,118

 
$
764,845

 
$
4,230,684

 
100.0
%
Geographic Region
 
Real Estate Finance
 
Net Lease
 
Operating Properties
 
Land & Development
 
Total
 
% of
Total
Northeast
 
$
705,993

 
$
426,371

 
$
74,617

 
$
271,387

 
$
1,478,368

 
34.9
%
West
 
186,496

 
287,778

 
66,730

 
195,920

 
736,924

 
17.4
%
Southeast
 
232,553

 
266,670

 
140,429

 
108,106

 
747,758

 
17.7
%
Southwest
 
103,881

 
162,701

 
250,339

 
28,952

 
545,873

 
12.9
%
Central
 
162,420

 
79,327

 
84,898

 
31,500

 
358,145

 
8.5
%
Mid-Atlantic
 
—

 
159,703

 
34,105

 
128,980

 
322,788

 
7.6
%
Various(1)
 
25,731

 
2,863

 
—

 
—

 
28,594

 
0.7
%
Strategic Investments(1)
 
—

 
—

 
—

 
—

 
12,234

 
0.3
%
Total
 
$
1,417,074

 
$
1,385,413

 
$
651,118

 
$
764,845

 
$
4,230,684

 
100.0
%
_______________________________________________________________________________
(1)Combined, strategic investments and the various category include $9.0 million of international assets.
Real Estate Finance

Our real estate finance business targets sophisticated and innovative owner/operators of real estate and real estate related projects by providing one-stop capabilities that encompass financing alternatives ranging from full envelope senior loans to mezzanine and preferred equity capital positions. As of March 31, 2018, our real estate finance portfolio, including securities, totaled $1.4 billion, exclusive of general loan loss reserves. The portfolio included $1.2 billion of performing loans with a weighted average maturity of 1.3 years.


34

The tables below summarize our loans and the reserves for loan losses associated with our loans ($ in thousands):
 
March 31, 2018
 
Number of Loans
 
Gross Carrying Value
 
Reserve for Loan Losses
 
Carrying Value
 
% of Total
 
Reserve for Loan Losses as a % of Gross Carrying Value
Performing loans
44

 
$
1,205,114

 
$
(16,600
)
 
$
1,188,514

 
87.4%
 
1.4%
Non-performing loans
4

 
224,113

 
(52,866
)
 
171,247

 
12.6%
 
23.6%
Total
48

 
$
1,429,227

 
$
(69,466
)
 
$
1,359,761

 
100.0%
 
4.9%
 
 
 

 

 
 
 
 
 
 
 
December 31, 2017
 
Number of Loans
 
Gross Carrying Value
 
Reserve for Loan Losses
 
Carrying Value
 
% of Total
 
Reserve for Loan Losses as a % of Gross Carrying Value
Performing loans
36

 
$
1,051,691

 
$
(17,500
)
 
$
1,034,191

 
85.4%
 
1.7%
Non-performing loans
5

 
237,877

 
(60,989
)
 
176,888

 
14.6%
 
25.6%
Total
41

 
$
1,289,568

 
$
(78,489
)
 
$
1,211,079

 
100.0%
 
6.1%

Performing Loans—The table below summarizes our performing loans exclusive of reserves ($ in thousands):
 
March 31, 2018
 
December 31, 2017
Senior mortgages
$
839,045

 
$
709,809

Corporate/Partnership loans
356,412

 
332,387

Subordinate mortgages
9,657

 
9,495

Total
$
1,205,114

 
$
1,051,691

 
 
 
 
Weighted average LTV
60
%
 
67
%
Yield
9.4
%
 
9.8
%

Non-Performing Loans—We designate loans as non-performing at such time as: (1) the loan becomes 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt. As of March 31, 2018, we had non-performing loans with an aggregate carrying value of $171.2 million compared to non-performing loans with an aggregate carrying value of $176.9 million as of December 31, 2017. We expect that our level of non-performing loans will fluctuate from period to period.

Reserve for Loan Losses—The reserve for loan losses was $69.5 million as of March 31, 2018, or 4.9% of total loans, compared to $78.5 million or 6.1% as of December 31, 2017. For the three months ended March 31, 2018, the recovery of loan losses included a reduction in the general reserve of $0.9 million due to an overall improvement in the risk ratings. We expect that our level of reserve for loan losses will fluctuate from period to period. Due to the volatility of the commercial real estate market, the process of estimating collateral values and reserves requires the use of significant judgment. We currently believe there is adequate collateral and reserves to support the carrying values of the loans.

The reserve for loan losses includes an asset-specific component and a formula-based component. An asset-specific reserve is established for an impaired loan when the estimated fair value of the loan's collateral less costs to sell is lower than the carrying value of the loan. As of March 31, 2018, asset-specific reserves decreased to $52.9 million compared to $61.0 million as of December 31, 2017.

The formula-based general reserve is derived from estimated principal default probabilities and loss severities applied to groups of performing loans based upon risk ratings assigned to loans with similar risk characteristics during our quarterly loan portfolio assessment. During this assessment, we perform a comprehensive analysis of our loan portfolio and assign risk ratings to loans that incorporate management's current judgments and future expectations about their credit quality based on all known and relevant factors that may affect collectability. We consider, among other things, payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional

35

economic factors. This methodology results in loans being segmented by risk classification into risk rating categories that are associated with estimated probabilities of default and principal loss. We estimate loss rates based on historical realized losses experienced within our portfolio and take into account current economic conditions affecting the commercial real estate market when establishing appropriate time frames to evaluate loss experience.

The general reserve decreased to $16.6 million or 1.4% of performing loans as of March 31, 2018, compared to $17.5 million or 1.7% of performing loans as of December 31, 2017. The decrease was primarily attributable to an overall improvement in the risk ratings.

Net Lease

Our net lease business seeks to create stable cash flows through long-term net leases primarily to single tenants on our properties. We target mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combine our capabilities in underwriting, lease structuring, asset management and build-to-suit construction. We invest in new net lease investments primarily through our Net Lease Venture, in which we hold a 51.9% interest. The Net Lease Venture has a right of first offer on any new net lease investments that we source. The Net Lease Venture's investment period was extended from March 31, 2018 to June 30, 2018 during the first quarter 2018. The term of the Net Lease Venture extends through February 13, 2022, subject to two, one-year extension options at the discretion of us and our partner.

In April 2017, institutional investors acquired a controlling interest in our Ground Lease business through the merger of one of our subsidiaries and related transactions (the "Acquisition Transactions"). Our Ground Lease business was a component of our net lease segment and consisted of 12 properties subject to long-term net leases including seven Ground Leases and one master lease (covering five properties). As a result of the Acquisition Transactions, we: (i) recognized a gain of approximately $178.9 million; (ii) deconsolidated the 12 properties and the associated 2017 Secured Financing; and (iii) account for our investment in SAFE as an equity method investment (refer to Note 7).
On June 27, 2017, SAFE completed its initial public offering raising $205.0 million in gross proceeds and concurrently completed a $45.0 million private placement to us, its largest shareholder. We believe that SAFE is the first publicly-traded company formed primarily to acquire, own, manage, finance and capitalize ground leases. Ground leases generally represent ownership of the land underlying commercial real estate projects that is net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon. We have an exclusivity agreement with SAFE pursuant to which we agreed, subject to certain exceptions, that we will not acquire, originate, invest in, or provide financing for a third party’s acquisition of, a Ground Lease unless we have first offered that opportunity to SAFE and a majority of its independent directors has declined the opportunity. In addition, a wholly-owned subsidiary of ours is the external manager of SAFE and our Chief Executive Officer is the Chairman of SAFE's board of directors.
As of March 31, 2018, our wholly-owned net lease portfolio totaled $1.1 billion exclusive of $298.0 million of accumulated depreciation. Our net lease portfolio, including the carrying value of our equity method investments in SAFE and the Net Lease Venture, totaled $1.39 billion. The table below provides certain statistics for our net lease portfolio.
 
 
Wholly-owned
Real Estate
 
SAFE
 
Net Lease
Venture
 
Ownership %
 
100.0
%
 
39.9
%
 
51.9
%
 
Net book value (millions)
 
$
808

 
$
577

(1) 
$
659

(1) 
Accumulated depreciation (millions)
 
298

 
10

 
53

 
Gross carrying value (millions)
 
$
1,106

 
$
587

 
$
712

 
 
 
 
 
 
 
 
 
Occupancy
 
98.2
%
 
100.0
%
 
100.0
%
 
Square footage (thousands)
 
11,305

 
1,793

 
5,364

 
Weighted average lease term (years)
 
13.8

 
72.0

 
18.8

 
Weighted average yield
 
8.9
%
 
8.1
%
(2) 
9.0
%
(2) 
_______________________________________________________________________________
(1)Net book value represents the net book value of real estate and real estate-related intangibles.
(2)Represents the annualized asset yield.


36

Operating Properties

As of March 31, 2018, our operating property portfolio, including equity method investments, totaled $651.1 million, exclusive of $59.6 million of accumulated depreciation, and was comprised of $610.2 million of commercial and $40.9 million of residential real estate properties.

Commercial Operating Properties
 
Our commercial operating properties represent a diverse pool of assets across a broad range of geographies and collateral types including office, retail and hotel properties. We generally seek to reposition our transitional properties with the objective of maximizing their values through the infusion of capital and/or intensive asset management efforts resulting in value realization upon sale.

The table below provides certain statistics for our commercial operating property portfolio.
 
Commercial Operating Property Statistics

($ in millions)
 
Stabilized Operating(1)
 
Transitional Operating(1)
 
Total
 
March 31, 2018
December 31, 2017
 
March 31, 2018
December 31, 2017
 
March 31, 2018
December 31, 2017
Gross carrying value ($mm)(2)
$
443

$
427

 
$
167

$
153

 
$
610

$
580

Occupancy(3)
85
%
85
%
 
56
%
61
%
 
80
%
78
%
Yield
7.8
%
6.0
%
 
4.3
%
3.7
%
 
6.9
%
5.5
%
______________________________________________________________
(1)
Stabilized commercial properties generally have occupancy levels above 80% and/or generate yields resulting in a sufficient return based upon the properties’ risk profiles. Transitional commercial properties are generally those properties that do not meet these criteria.
(2)
Gross carrying value represents carrying value exclusive of accumulated depreciation.
(3)
Occupancy is as of March 31, 2018 and December 31, 2017.

Residential Operating Properties

As of March 31, 2018, our residential operating portfolio is comprised of condominium units generally located within luxury projects in major U.S. cities. The table below provides certain statistics for our residential operating property portfolio (excluding fractional units).
Residential Operating Property Statistics
($ in millions)
 
Three Months Ended March 31,
 
2018
 
2017
Condominium units sold
3

 
7

Proceeds
$
7.1

 
$
10.2

Income from sales of real estate
$
1.2

 
$
1.9


37


Land and Development

As of March 31, 2018, our land and development portfolio, exclusive of accumulated depreciation and including equity method investments, totaled $764.8 million, with six projects in production, seven in development and 13 in the pre-development phase. These projects are collectively entitled for approximately 10,800 lots and units. The following tables present certain statistics for our land and development portfolio.
Land and Development Portfolio Rollforward
(in millions)
 
Three Months Ended March 31,
 
2018
 
2017
Beginning balance(1)
$
860.3

 
$
945.5

Asset sales(2)
(186.9
)
 
(15.3
)
Asset transfers in (out)(3)
(21.3
)
 
—

Capital expenditures
31.4

 
26.6

Other
(2.1
)
 
(1.6
)
Ending balance(1)
$
681.4

 
$
955.2

_______________________________________________________________________
(1)As of March 31, 2018 and December 31, 2017, excludes $75.6 million and $63.9 million, respectively, of equity method investments.
(2)
Represents gross book value of the assets sold, rather than proceeds received. During the three months ended March 31, 2018, we received approximately $253.4 million in gross proceeds in connection with the sale of two land parcels totaling 93 acres in San Jose, CA and San Pedro, CA.
(3)Assets transferred into land and development segment or out to another segment.
Land and Development Statistics
(in millions)
 
Three Months Ended March 31,
 
2018
 
2017
Land development revenue
$
276.4

 
$
20.1

Land development cost of sales
223.4

 
15.9

Gross profit
$
53.0

 
$
4.2

Earnings from land and development equity method investments
1.5

 
3.8

Total
$
54.5

 
$
8.0




38

Results of Operations for the Three Months Ended March 31, 2018 compared to the Three Months Ended March 31, 2017
 
For the Three Months Ended March 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
(in thousands)
 
 
Operating lease income
$
45,799

 
$
47,347

 
$
(1,548
)
 
(3
)%
Interest income
26,697

 
29,058

 
(2,361
)
 
(8
)%
Other income
15,320

 
11,864

 
3,456

 
29
 %
Land development revenue
276,429

 
20,050

 
256,379

 
>100%

Total revenue
364,245

 
108,319

 
255,926

 
>100%

Interest expense
45,182

 
51,145

 
(5,963
)
 
(12
)%
Real estate expense
36,180

 
35,590

 
590

 
2
 %
Land development cost of sales
223,407

 
15,910

 
207,497

 
>100%

Depreciation and amortization
11,110

 
12,280

 
(1,170
)
 
(10
)%
General and administrative
28,814

 
25,173

 
3,641

 
14
 %
Recovery of loan losses
(855
)
 
(4,928
)
 
4,073

 
(83
)%
Impairment of assets
4,100

 
4,413

 
(313
)
 
(7
)%
Other expense
1,166

 
1,869

 
(703
)
 
(38
)%
Total costs and expenses
349,104

 
141,452

 
207,652

 
>100%

Loss on early extinguishment of debt, net
(372
)
 
(210
)
 
(162
)
 
77
 %
Earnings from equity method investments
3,332

 
5,702

 
(2,370
)
 
(42
)%
Income tax expense
(121
)
 
(607
)
 
486

 
(80
)%
Income from discontinued operations
—

 
4,766

 
(4,766
)
 
(100
)%
Income from sales of real estate
17,048

 
8,110

 
8,938

 
>100%

Net income (loss)
$
35,028

 
$
(15,372
)
 
$
50,400

 
>100%


Revenue—Operating lease income, which primarily includes income from net lease assets and commercial operating properties, decreased $1.5 million, or 3.3%, to $45.8 million during the three months ended March 31, 2018 from $47.3 million for the same period in 2017. The following table summarizes our operating lease income by segment ($ in millions).
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2018
 
2017
 
Change
 
Reason for Change
Net Lease
 
$
29.7

 
$
31.2

 
$
(1.5
)
 
Sale of net lease assets, partially offset by the execution of new leases.
Operating Properties
 
15.8

 
16.0

 
(0.2
)
 
Modification of leases from base rent to percentage rent.
Land and Development
 
0.3

 
0.1

 
0.2

 
Increase in operating lease income at one of our land and development properties.
Total
 
$
45.8

 
$
47.3

 
$
(1.5
)
 
 


39

The following table shows certain same store statistics for our Net Lease and Operating Properties segments. Same store assets are defined as assets we owned on or prior to January 1, 2017 and were in service through March 31, 2018 (Operating lease income in millions).
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Operating lease income
 
 
 
 
Net Lease
 
$
29.0

 
$
27.6

Operating Properties
 
$
13.4

 
$
13.1

 
 
 
 
 
Rent per square foot
 
 
 
 
Net Lease
 
$
10.47

 
$
9.78

Operating Properties
 
$
34.37

 
$
34.12

 
 
 
 
 
Occupancy(1)
 
 
 
 
Net Lease
 
98.2
%
 
97.9
%
Operating Properties
 
80.3
%
 
79.4
%
______________________________________________________________
(1)
Occupancy is as of March 31, 2018 and 2017.

Interest income decreased $2.4 million, or 8.1%, to $26.7 million during the three months ended March 31, 2018 from $29.1 million for the same period in 2017. The decrease was due primarily to a decrease in the average balance of our performing loans, which decreased to $1.14 billion in 2018 from $1.28 billion in 2017. The weighted average yield on our performing loans increased to 9.4% for the three months ended March 31, 2018 from 9.2% for the same period in 2017.
Other income increased $3.4 million, or 29.1%, to $15.3 million during the three months ended March 31, 2018 from $11.9 million for the same period in 2017. Other income during the three months ended March 31, 2018 consisted primarily of income from our hotel properties, other ancillary income from our operating properties and interest income on our cash. Other income during the three months ended March 31, 2017 consisted of primarily of income from our hotel properties and other ancillary income from our operating properties. The increase in 2018 was related primarily to an increase in income from our hotel properties and an increase in interest income earned on our cash.
Land development revenue and cost of sales—During the three months ended March 31, 2018, we sold land parcels and residential lots and units and recognized land development revenue of $276.4 million which had associated cost of sales of $223.4 million, representing a $53.0 million gross profit. During the three months ended March 31, 2017, we sold residential lots and units and recognized land development revenue of $20.1 million which had associated cost of sales of $15.9 million, representing a $4.2 million gross profit. The increase in 2018 was primarily the result of two bulk land parcel sales.
Costs and expenses—Interest expense decreased $5.9 million, or 11.7%, to $45.2 million during the three months ended March 31, 2018 from $51.1 million for the same period in 2017 due to a decrease in the balance of our average outstanding debt and lower average borrowing costs, which decreased to $3.47 billion for the three months ended March 31, 2018 from $3.63 billion for the same period in 2017. Our weighted average cost of debt for the three months ended March 31, 2018 and 2017 was 5.4% and 5.9%, respectively.
Real estate expenses increased $0.6 million, or 1.7%, to $36.2 million during the three months ended March 31, 2018 from $35.6 million for the same period in 2017. The following table summarizes our real estate expenses by segment ($ in millions).
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2018
 
2017
 
Change
 
Reason for Change
Net Lease
 
$
3.9

 
$
4.6

 
$
(0.7
)
 
Sale of net lease assets.
Operating Properties
 
21.7

 
21.5

 
0.2

 
Slight increase in bad debt expense at one of our operating properties.
Land and Development
 
10.6

 
9.5

 
1.1

 
Increase in marketing and other costs at one of our land and development properties.
Total
 
$
36.2

 
$
35.6

 
$
0.6

 
 

40


Depreciation and amortization decreased $1.2 million, or 9.5%, to $11.1 million during the three months ended March 31, 2018 from $12.3 million for the same period in 2017, primarily due to the sale of net lease and commercial operating properties in since April 1, 2017.
General and administrative expenses increased $3.6 million, or 14.5%, to $28.8 million during the three months ended March 31, 2018 from $25.2 million for the same period in 2017. The following table summarizes our general and administrative expenses for the three months ended March 31, 2018 and 2017 (in millions):
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
Change
Payroll and related costs(1)
 
$
15.3

 
$
14.5

 
$
0.8

Performance Incentive Plans(2)
 
7.9

5.0

5.0

 
2.9

Public company costs
 
1.5

 
1.8

 
(0.3
)
Occupancy costs
 
1.3

 
1.3

 
—

Other
 
2.8

 
2.6

 
0.2

Total
 
$
28.8

 
$
25.2

 
$
3.6

____________________________________________________
(1)
Increase primarily relates to severance related costs.
(2)
Represents the fair value of points issued and change in fair value of the plans during the periods presented. Such amounts may increase or decrease over time until the awards are settled. Please refer to Note 14 - Stock-Based Compensation Plans and Employee Benefits for a description of the Performance Incentive Plans.

The net recovery of loan losses was $0.9 million during the three months ended March 31, 2018 as compared to a net recovery of loan losses of $4.9 million for the same period in 2017. The recovery of loan losses for the three months ended March 31, 2018 and 2017 was due to a reduction in the general reserve due to an overall improvement in the risk ratings of our loan portfolio.
Impairment of assets was $4.1 million during the three months ended March 31, 2018 and resulted from an impairment on a real estate asset held for sale due to impending contracts to sell the remaining four condominium units at the property. During the three months ended March 31, 2017 we recorded an aggregate impairment of $4.4 million resulting from shifting demand in the local condominium market along with a change in our exit strategy on a real estate asset held for sale.
Other expense decreased to $1.2 million during the three months ended March 31, 2018 from $1.9 million for the same period in 2017. The decrease was primarily the result of costs incurred in connection with the repricing of our 2016 Senior Credit Facility during the three months ended March 31, 2017 (refer to Note 10).
Loss on early extinguishment of debt, net—During the three months ended March 31, 2018 and 2017, we incurred losses on early extinguishment of debt of $0.4 million and $0.2 million, respectively, resulting from repayments of our 2016 Senior Credit Facility.
Earnings from equity method investments—Earnings from equity method investments decreased $2.4 million, or 41.6%, to $3.3 million during the three months ended March 31, 2018 from $5.7 million for the same period in 2017. During the three months ended March 31, 2018, we recognized $2.1 million related to operations at our Net Lease Venture, $1.5 million from our equity method investment in SAFE and $0.3 million was aggregate losses from our remaining equity method investments. During the three months ended March 31, 2017, we recognized $3.1 million related to sales activity on a land development venture, $1.0 million related to operations at our Net Lease Venture and $1.6 million was aggregate income from our remaining equity method investments.
Income tax expense—Income tax expense of $0.1 million was recorded during the three months ended March 31, 2018 as compared to $0.6 million for the same period in 2017. The income tax expense for the three months ended March 31, 2018 and 2017 primarily related to state margins taxes and other minimum state franchise taxes.

Discontinued Operations—In April 2017, institutional investors acquired a controlling interest in our Ground Lease business through the merger of one of our subsidiaries and related transactions. We received total consideration of $340.0 million, including $113.0 million in cash, including $55.5 million that we contributed to SAFE in its initial capitalization, and the proceeds from the $227.0 million 2017 Secured Financing (refer to Note 10). Income from discontinued operations represents the operating results from the 12 properties comprising our Ground Lease business.
    

41

Income from sales of real estate—Income from sales of real estate increased to $17.0 million during the three months ended March 31, 2018 from $8.1 million for the same period in 2017. The following table presents our income from sales of real estate by segment ($ in millions).
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net Lease
 
$
0.4

 
$
6.2

Operating Properties
 
16.6

 
1.9

Total
 
$
17.0

 
$
8.1


Adjusted Income

In addition to net income (loss) prepared in conformity with generally accepted accounting principles in the United States of America ("GAAP"), we use adjusted income, a non-GAAP financial measure, to measure our operating performance. Adjusted income is used internally as a supplemental performance measure adjusting for certain non-cash GAAP measures to give management a view of income more directly derived from current period activity. Adjusted income is calculated as net income (loss) allocable to common shareholders, prior to the effect of depreciation and amortization, provision for (recovery of) loan losses, impairment of assets, stock-based compensation expense, the non-cash portion of gain (loss) on early extinguishment of debt and is adjusted for the effect of gains or losses on charge-offs and dispositions on carrying value gross of loan loss reserves and impairments ("Adjusted Income"). In the third quarter 2017, we modified our presentation of Adjusted Income to exclude the effect of the amount of the liquidation preference that was recorded as a premium above book value on the redemption of preferred stock and the imputed non-cash interest expense recognized for the conversion feature of our senior convertible notes (refer to Note 10). Adjusted Income includes the impact to retained earnings (income that would have been recognized in prior periods had the accounting standards been effective during those prior periods) resulting from the adoption of new accounting standards on January 1, 2018 (refer to Note 3).


42

Adjusted Income should be examined in conjunction with net income (loss) as shown in our consolidated statements of operations. Adjusted Income should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted Income indicative of funds available to fund our cash needs or available for distribution to shareholders. Rather, Adjusted Income is an additional measure we use to analyze our business performance because it excludes the effects of certain non-cash charges that we believe are not necessarily indicative of our operating performance while including the effect of gains or losses on investments when realized. It should be noted that our manner of calculating Adjusted Income may differ from the calculations of similarly-titled measures by other companies.
 
For the Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Adjusted Income
 
 
 
Net income (loss) allocable to common shareholders
$
26,809

 
$
(27,102
)
Add: Depreciation and amortization(1)
20,069

 
15,052

Less: Recovery of loan losses
(855
)
 
(4,928
)
Add: Impairment of assets
4,100

 
4,413

Add: Stock-based compensation expense
9,091

 
5,881

Add: Loss on early extinguishment of debt, net
372

 
210

Add: Non-cash interest expense on senior convertible notes
1,160

—

—

Add: Impact from adoption of new accounting standards(2)
75,869

 
—

Less: Losses on charge-offs and dispositions(3)
(4,307
)
 
(5,316
)
Adjusted income (loss) allocable to common shareholders
$
132,308

 
$
(11,790
)
______________________________________________________________
(1)
Depreciation and amortization also includes our proportionate share of depreciation and amortization expense for equity method investments (including from the adoption of ASU 2017-05) and excludes the portion of depreciation and amortization expense allocable to noncontrolling interests.
(2)
Represents an increase to retained earnings on January 1, 2018 upon the adoption of ASU 2017-05 (refer to Note 3).
(3)
Represents the impact of charge-offs and dispositions realized during the period. These charge-offs and dispositions were on assets that were previously impaired for GAAP and reflected in net income but not Adjusted Income.
Liquidity and Capital Resources

During the three months ended March 31, 2018, we invested $253.5 million associated with new investments, prior financing commitments and ongoing development during the quarter. Total investments included $171.4 million in lending and other investments, $33.7 million to develop our land and development assets, $36.2 million to invest in net lease assets and $12.2 million of capital to reposition or redevelop our operating properties. Also during the three months ended March 31, 2018, we generated $439.2 million of proceeds from loan repayments and asset sales within our portfolio, comprised of $132.5 million from real estate finance, $46.6 million from operating properties, $18.9 million from net lease assets, $240.4 million from land and development assets and $0.8 million from other investments. These amounts are inclusive of fundings and proceeds from both consolidated investments and our pro rata share from equity method investments.
The following table outlines our capital expenditures on real estate and land and development assets as reflected in our consolidated statements of cash flows, by segment ($ in thousands):
 
For the Three Months Ended March 31,
 
2018
 
2017
Operating Properties
$
6,585

 
$
7,283

Net Lease
1,255

 
498

Total capital expenditures on real estate assets
$
7,840

 
$
7,781

 
 
 
 
Land and Development
$
30,954

 
$
27,604

Total capital expenditures on land and development assets
$
30,954

 
$
27,604


43

As of March 31, 2018, we had unrestricted cash of $366.7 million. Our primary cash uses over the next 12 months are expected to be funding of investments, capital expenditures and funding ongoing business operations. Over the next 12 months, we currently expect to fund in the range of approximately $175.0 million to $225.0 million of capital expenditures within our portfolio. The majority of these amounts relate to our land and development and operating properties business segments and include multifamily and residential development activities which are expected to include approximately $140.0 million in vertical construction. The amount spent will depend on the pace of our development activities as well as the extent to which we strategically partner with others to complete these projects. As of March 31, 2018, we also had approximately $481.3 million of maximum unfunded commitments associated with our investments of which we expect to fund the majority of over the next two years, assuming borrowers and tenants meet all milestones, performance hurdles and all other conditions to fundings (see "Unfunded Commitments" below). Our capital sources to meet cash uses through the next 12 months and beyond will primarily be expected to include cash on hand, income from our portfolio, loan repayments from borrowers and proceeds from asset sales.

We cannot predict with certainty the specific transactions we will undertake to generate sufficient liquidity to meet our obligations as they come due. We will adjust our plans as appropriate in response to changes in our expectations and changes in market conditions. While economic trends have stabilized, it is not possible for us to predict whether these trends will continue or to quantify the impact of these or other trends on our financial results.
Contractual Obligations—The following table outlines the contractual obligations related to our long-term debt obligations, loan participations payable and operating lease obligations as of March 31, 2018 (refer to Note 10 to the consolidated financial statements).
 
Amounts Due By Period
 
Total

Less Than 1
Year

1 - 3
Years

3 - 5
Years

5 - 10
Years

After 10
Years
 
(in thousands)
Long-Term Debt Obligations:
 

 

 

 

 

 
Unsecured notes
$
2,507,500


$
—


$
1,170,000


$
1,337,500


$
—


$
—

Secured credit facilities
376,671


4,000


8,000


364,671


—


—

Mortgages
206,163


9,616


18,146


163,156


15,245


—

Trust preferred securities
100,000


—


—


—


—


100,000

Total principal maturities
3,190,334


13,616


1,196,146


1,865,327


15,245


100,000

Interest Payable(1)
576,587


161,519


252,654


111,552


20,908


29,954

Loan Participations Payable(2)
85,621

 
72,986

 
12,635

 
—

 
—

 
—

Operating Lease Obligations
16,941


4,688


7,580


1,759


2,914


—

Total
$
3,869,483


$
252,809


$
1,469,015


$
1,978,638


$
39,067


$
129,954

_______________________________________________________________________________
(1)
Variable-rate debt assumes 1-month LIBOR of 1.88% and 3-month LIBOR of 2.31% that were in effect as of March 31, 2018.
(2)
Refer to Note 9 to the consolidated financial statements.
 

44

Collateral Assets—The carrying value of our assets that are directly pledged or are held by subsidiaries whose equity is pledged as collateral to secure our obligations under our secured debt facilities are as follows, by asset type ($ in thousands):
 
As of
 
March 31, 2018
 
December 31, 2017
 
Collateral Assets(1)
 
Non-Collateral Assets
 
Collateral Assets(1)
 
Non-Collateral Assets
Real estate, net
$
790,545

 
$
511,598

 
$
795,321

 
$
486,710

Real estate available and held for sale
—

 
41,857

 
20,069

 
48,519

Land and development, net
25,100

 
656,310

 
25,100

 
835,211

Loans receivable and other lending investments, net(2)(3)
185,161

 
1,146,571

 
194,529

 
1,021,340

Other investments
—

 
422,853

 
—

 
321,241

Cash and other assets
—

 
601,322

 
—

 
898,252

Total
$
1,000,806

 
$
3,380,511

 
$
1,035,019

 
$
3,611,273

_______________________________________________________________________________
(1)
The 2016 Senior Credit Facility and the 2015 Revolving Credit Facility are secured only by pledges of equity of certain of our subsidiaries and not by pledges of the assets held by such subsidiaries. Such subsidiaries are subject to contractual restrictions under the terms of such credit facilities, including restrictions on incurring new debt (subject to certain exceptions).
(2)
As of March 31, 2018 and December 31, 2017, the amounts presented exclude general reserves for loan losses of $16.6 million and $17.5 million, respectively.
(3)
As of March 31, 2018 and December 31, 2017, the amounts presented exclude loan participations of $85.3 million and $102.3 million, respectively.

Debt Covenants—Our outstanding unsecured debt securities contain corporate level covenants that include a covenant to maintain a ratio of unencumbered assets to unsecured indebtedness of at least 1.2x and a covenant not to incur additional indebtedness (except for incurrences of permitted debt), if on a pro forma basis our consolidated fixed charge coverage ratio, determined in accordance with the indentures governing our debt securities, is 1.5x or lower. If any of our covenants are breached and not cured within applicable cure periods, the breach could result in acceleration of our debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders. If our ability to incur additional indebtedness under the fixed charge coverage ratio is limited, we are permitted to incur indebtedness for the purpose of refinancing existing indebtedness and for other permitted purposes under the indentures.
The 2016 Senior Credit Facility and the 2015 Revolving Credit Facility contain certain covenants, including covenants relating to collateral coverage, dividend payments, restrictions on fundamental changes, transactions with affiliates, matters relating to the liens granted to the lenders and the delivery of information to the lenders. In particular, the 2016 Senior Credit Facility requires us to maintain collateral coverage of at least 1.25x outstanding borrowings on the facility. The 2015 Revolving Credit Facility is secured by a borrowing base of assets and requires us to maintain both borrowing base asset value of at least 1.5x outstanding borrowings on the facility and a consolidated ratio of cash flow to fixed charges of at least 1.5x. The 2015 Revolving Credit Facility does not require that proceeds from the borrowing base be used to pay down outstanding borrowings provided the borrowing base asset value remains at least 1.5x outstanding borrowings on the facility. To satisfy this covenant, we have the option to pay down outstanding borrowings or substitute assets in the borrowing base. In addition, for so long as we maintain our qualification as a REIT, the 2016 Senior Credit Facility and the 2015 Revolving Credit Facility permit us to distribute 100% of our REIT taxable income on an annual basis (prior to deducting certain cumulative NOL carryforwards).

Derivatives—Our use of derivative financial instruments is primarily limited to the utilization of interest rate swaps, interest rate caps or other instruments to manage interest rate risk exposure and foreign exchange contracts to manage our risk to changes in foreign currencies. Refer to Note 12 to the consolidated financial statements.

Off-Balance Sheet Arrangements—We are not dependent on the use of any off-balance sheet financing arrangements for liquidity. We have made investments in various unconsolidated ventures. Refer to Note 7 to the consolidated financial statements for further details of our unconsolidated investments. Our maximum exposure to loss from these investments is limited to the carrying value of our investments and any unfunded commitments (see below).


45

Unfunded Commitments—We generally fund construction and development loans and build-outs of space in net lease assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. We refer to these arrangements as Performance-Based Commitments. In addition, we have committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments. As of March 31, 2018, the maximum amounts of the fundings we may make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments and that 100% of our capital committed to Strategic Investments is drawn down, are as follows (in thousands):
 
Loans and Other Lending Investments(1)
 
Real Estate
 
Other
Investments
 
Total
Performance-Based Commitments
$
436,639

 
$
10,630

 
$
24,587

 
$
471,856

Strategic Investments
—

 
—

 
9,427

 
9,427

Total
$
436,639

 
$
10,630

 
$
34,014

 
$
481,283

_______________________________________________________________________________
(1)
Excludes $83.7 million of commitments on loan participations sold that are not our obligation.

Stock Repurchase Program—We may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans. During the three months ended March 31, 2018, we repurchased 0.8 million shares of our outstanding common stock for $8.3 million, representing an average cost of $10.22 per share. As of March 31, 2018, we had remaining authorization to repurchase up to $41.7 million of common stock under our stock repurchase program.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabilities, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, reviewed and applied consistently from period to period. We base our estimates on historical corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment.
For a discussion of our critical accounting policies, refer to Note 3 to the consolidated financial statements.

New Accounting Pronouncements—For a discussion of the impact of new accounting pronouncements on our financial condition or results of operations, refer to Note 3 to the consolidated financial statements.

46

Item 3.    Quantitative and Qualitative Disclosures about Market Risk
Market Risks
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. In pursuing our business plan, the primary market risk to which we are exposed is interest rate risk. Our operating results will depend in part on the difference between the interest and related income earned on our assets and the interest expense incurred in connection with our interest-bearing liabilities. Changes in the general level of interest rates prevailing in the financial markets will affect the spread between our floating rate assets and liabilities subject to the net amount of floating rate assets/liabilities and the impact of interest rate floors and caps. Any significant compression of the spreads between interest-earning assets and interest-bearing liabilities could have a material adverse effect on us.
In the event of a significant rising interest rate environment or economic downturn, defaults could increase and cause us to incur additional credit losses which would adversely affect our liquidity and operating results. Such delinquencies or defaults would likely have a material adverse effect on the spreads between interest-earning assets and interest-bearing liabilities. In addition, an increase in interest rates could, among other things, reduce the value of our fixed-rate interest-bearing assets and our ability to realize gains from the sale of such assets.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. We monitor the spreads between our interest-earning assets and interest-bearing liabilities and may implement hedging strategies to limit the effects of changes in interest rates on our operations, including engaging in interest rate swaps, interest rate caps and other interest rate-related derivative contracts. Such strategies are designed to reduce our exposure, on specific transactions or on a portfolio basis, to changes in cash flows as a result of interest rate movements in the market. We do not enter into derivative contracts for speculative purposes or as a hedge against changes in our credit risk or the credit risk of our borrowers.
While a REIT may utilize derivative instruments to hedge interest rate risk on its liabilities incurred to acquire or carry real estate assets without generating non-qualifying income, use of derivatives for other purposes will generate non-qualified income for REIT income test purposes. This includes hedging asset related risks such as credit and interest rate exposure on our loan assets. As a result our ability to hedge these types of risks is limited. There can be no assurance that our profitability will not be materially adversely affected during any period as a result of changing interest rates.
The following table quantifies the potential changes in annual net income, assuming no change in our interest earning assets or interest bearing liabilities, should interest rates increase or decrease by 10, 50 or 100 basis points, assuming no change in the shape of the yield curve (i.e., relative interest rates). The base interest rate scenario assumes the one-month LIBOR rate of 1.88% as of March 31, 2018. Actual results could differ significantly from those estimated in the table.
Estimated Change In Net Income
($ in thousands)
Change in Interest Rates
 
Net Income(1)
-100 Basis Points
 
$
(10,174
)
-50 Basis Points
 
(5,191
)
-10 Basis Points
 
(1,061
)
Base Interest Rate
 
—

+10 Basis Points
 
1,067

+50 Basis Points
 
5,335

+100 Basis Points
 
10,669

______________________________________________________________________________
(1)
We have an overall net variable-rate asset position, which results in an increase in net income when rates increase and a decrease in net income when rates decrease. As of March 31, 2018, $498.0 million of our floating rate loans have a cumulative weighted average interest rate floor of 0.5% and $462.3 million of our floating rate debt has a cumulative weighted average interest rate floor of 0.7%.
Item 4.    Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company has formed a disclosure committee that is responsible for considering the

47

materiality of information and determining the disclosure obligations of the Company on a timely basis. The disclosure committee reports directly to the Company's Chief Executive Officer and Chief Financial Officer.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the disclosure committee and other members of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) or Rule 15d-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
There have been no changes during the last fiscal quarter in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company's periodic reports.

48

PART II. OTHER INFORMATION
Item 1.    Legal Proceedings
The Company and/or one or more of its subsidiaries is party to various pending litigation matters that are considered ordinary routine litigation incidental to the Company's business as a finance and investment company focused on the commercial real estate industry, including foreclosure-related proceedings. In addition to such matters, the Company is a party to the following legal proceeding:
U.S. Home Corporation ("Lennar") v. Settlers Crossing, LLC, et al. (United States District Court for the District of Maryland, Civil Action No. DKC 08-1863)
On December 4, 2017, the U.S. Supreme Court issued an order denying Lennar’s petition for a writ of certiorari in this matter. The amount of attorneys’ fees and costs to be recovered by the Company will be determined through further proceedings before the District Court. The Company has applied for attorney’s fees in excess of $17.0 million. A hearing on the Company’s application for attorney’s fees has not yet been scheduled. Please refer to the Company's 2017 Annual Report for a more complete description of this matter.

Item 1a.    Risk Factors
There were no material changes from the risk factors previously disclosed in our 2017 Annual Report.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the information with respect to purchases made by us or on our behalf of our common stock during the three months ended March 31, 2018.
 
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of a Publicly Announced Plan
Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans(1)
January 1 to January 31
35,000

$
—

35,000

$
49,625,690

February 1 to February 28
777,746

$
—

777,746

$
41,710,022

March 1 to March 31
—

$
—

—

$
—

_______________________________________________________________________________
(1)
We may repurchase shares in negotiated transactions or open market transactions, including through one or more trading plans.
Item 3.    Defaults Upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
Not applicable.
Item 5.    Other Information
None.

49

Item 6.    Exhibits
INDEX TO EXHIBITS
Exhibit
Number
Document Description
3.2
31.0
32.0
101**
The following financial information from the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2018 is formatted in XBRL ("eXtensible Business Reporting Language"): (i) the Consolidated Balance Sheets (unaudited) as of March 31, 2018 and December 31, 2017, (ii) the Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2018 and 2017, (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2018 and 2017, (iv) the Consolidated Statements of Changes in Equity (unaudited) for the three months ended March 31, 2018 and 2017, (v) the Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2018 and 2017 and (vi) the Notes to the Consolidated Financial Statements (unaudited).
_______________________________________________________________________________
*
Incorporated by reference to the Company's Current Report on Form 8-K filed on April 3, 2018.
**
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934 and otherwise is not subject to liability under these sections.


50

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
iStar Inc.
 Registrant
Date:
May 3, 2018
/s/ JAY SUGARMAN
 
 
Jay Sugarman
 Chairman of the Board of Directors and Chief
Executive Officer (principal executive officer)
 
 
 
 
 
iStar Inc.
 Registrant
Date:
May 3, 2018
/s/ ANDREW C. RICHARDSON
 
 
Andrew C. Richardson
 Interim Chief Financial Officer (principal financial and accounting officer)


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