PART I
Item 1. Business
Explanatory Note for Purposes of the "Safe Harbor Provisions" of Section 21E of the Securities Exchange Act of 1934, as amended
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, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are included with respect to, among other things, iStar Financial Inc.'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. Important factors that iStar Financial Inc. believes might cause such differences are discussed in the section entitled, "Risk Factors" in Part I, Item 1a of this Form 10-K or otherwise accompany the forward-looking statements contained in this Form 10-K. 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-K.
Overview
iStar Financial Inc., or the "Company," is a fully-integrated finance and investment company focused on the commercial real estate industry. The Company provides custom-tailored investment capital to high-end private and corporate owners of real estate and invests directly across a range of real estate sectors. The Company, which is taxed as a real estate investment trust, or "REIT," has invested more than $35 billion over the past two decades. The Company's three primary business segments are lending, net leasing and real estate investment.
The lending portfolio is primarily comprised of senior and mezzanine real estate loans that typically range in size from $20 million to $150 million and have original terms generally ranging from three to ten years. These loans may be either fixed-rate (based on the U.S. Treasury rate plus a spread) or variable-rate (based on LIBOR plus a spread) and are structured to meet the specific financing needs of borrowers. The Company's portfolio also includes senior and subordinated loans to corporations, particularly those engaged in real estate or real estate related businesses. These financings may be either secured or unsecured, typically range in size from $20 million to $150 million and have initial maturities generally ranging from three to ten years. The Company's loan portfolio includes whole loans, loan participations and debt securities.
The Company's net lease portfolio is primarily comprised of properties owned by the Company and leased to single creditworthy tenants, where the properties are generally mission critical headquarters or distribution facilities that are subject to long-term leases. Most of the leases provide for expenses at the facility to be paid by the tenant on a triple net lease basis. Net lease transactions have initial terms generally ranging from 15 to 20 years and typically range in size from $20 million to $150 million.
The Company's real estate investment portfolio includes real estate held for investment ("REHI") and other real estate owned ("OREO") properties primarily acquired through foreclosure or through deed-in-lieu of foreclosure in full or partial satisfaction of non-performing loans. Through the infusion of capital and/or intensive asset management, the Company generally seeks to reposition and redevelop these
assets with the objective of maximizing their value. The Company has developed significant expertise in the ownership and repositioning of multifamily, condominium, master planned and development properties.
The Company's primary sources of revenues are interest income, which is the interest that borrowers pay on loans, and operating lease income, which is the rent that corporate customers pay to lease its properties. The Company primarily generates income through the "spread" or "margin," which is the difference between the revenues generated from loans and leases and interest expense and the cost of its net lease operations. Going forward, the Company also expects to earn income from its other real estate investments. Income from real estate investments may include operating revenues as well as income from sales of properties either in bulk or through unit sales. This income will be reduced by holding costs while the real estate investments are redeveloped, repositioned and eventually sold.
The Company began its business in 1993 through private investment funds and became publicly traded in 1998. Since that time, the Company has grown through the origination of new lending and leasing transactions, as well as through corporate acquisitions.
Current Market Conditions
Weakened economic conditions and volatility within the commercial real estate and capital markets have adversely affected the Company's business. These conditions have resulted in high levels of non-performing loans and increasing amounts of real estate owned as the Company has taken title to assets of defaulting borrowers. The economic conditions also resulted in increased financing costs. The Company's capital sources in the past two years have primarily included loan repayments from borrowers, proceeds from asset sales and proceeds from secured debt refinancing. The Company has limited new investments while focusing primarily on resolving problem assets, deleveraging and preserving shareholder value. These factors continue to have an effect on the Company's operations and operating costs. A more detailed discussion of how current market conditions have impacted the Company is provided in Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Risk Management
The Company's risk management team is vertically integrated within the organization and comprised of in-house professionals with expertise in asset management, legal, corporate credit, loan servicing, project and construction management and engineering. The risk management team includes a rated loan servicer, iStar Asset Services, or "iSAS," that is focused on preserving and maximizing returns from the Company's investments while providing the Company's customers with comprehensive post-closing support. The Company employs a proactive risk management strategy centered on information sharing and customer contact.
The Company has a quarterly risk rating process designed to enable it to evaluate, monitor and manage asset-specific credit issues and identify credit trends on a portfolio-wide basis. The quarterly risk rating process allows the Company to create a common language and framework to evaluate risk and the adequacy of the loan loss provision and reserves. A credit review of each asset is performed with ratings of "1" to "5" assigned ("1" represents the lowest level of risk, "5" represents the highest level of risk).
The Company also has collateral and customer monitoring risk management systems that enable it to review the performance of its asset base. Risk management information is generated from collateral-level controls, customer reporting requirements and on-site asset and market monitoring programs.
iSAS, the Company's rated loan servicing subsidiary, and the Company's asset management personnel are responsible for managing the Company's asset base, including monitoring customers' compliance with their respective loan and leasing agreements, collecting customer payments and analyzing and distributing customer performance information. In addition, these individuals manage the construction oversight and disbursement process. iSAS performs servicing responsibilities primarily for Company owned assets.
The Company's risk management team employs an asset specific approach to managing and resolving loans that may become non-performing as well as REHI and OREO assets. Asset performance or collectability can deteriorate due to a variety of factors, including adverse market conditions, construction delays and overruns, or a borrower's financial condition or managerial capabilities. Once an asset's performance or collectability begins deteriorating and the Company believes the asset will become a non-performing loan ("NPL"), the team will formulate an asset resolution strategy.
For resolutions where title to collateral is obtained, the risk management team puts in place an asset-specific plan designed to maximize the value of the collateral. The plan may include completing the construction or renovation of the property, continuing the sale of condominium units, leasing or increasing the occupancy of the property, engaging a third party property manager or selling the entire asset or a partial interest to a third party. The Company may also seek to collect under guarantees of the loan.
The risk management team responsible for a non-performing loan or REHI/OREO resolution presents its proposed plan to the Company's senior management team for discussion and approval. The resolution plan is monitored on a quarterly basis and may be monitored more frequently, as necessary. Asset resolution strategies may be modified as conditions change.
Financing Strategy
The Company has utilized a wide range of debt and equity capital resources to finance its previous investment and growth strategies. Prior to the onset of the credit crisis, the Company's primary sources of liquidity were its unsecured bank credit facilities, issuances of unsecured debt and equity securities in capital markets transactions and repayments from loan assets. Since 2008, the capital markets have been very volatile and liquidity has been constrained. As a result, the Company has sought alternative sources of liquidity primarily through secured debt financings and asset sales, however these economic conditions have continued to impact the Company's cost of funds. The Company has sought, and may continue to seek, to raise capital through all means including secured financing, debt exchanges, unsecured financing, asset sales, issuance of equity, joint ventures and other third party capital arrangements in order to better align its asset and liability profile. A more detailed discussion of the Company's current liquidity and capital resources is provided in Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Investment Strategy
The Company has historically focused its investment strategy on the following: