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iStar Financial Inc. : iStar Financial Announces First Quarter 2012 Results

04/27/2012 | 07:40am US/Eastern

NEW YORK, April 27, 2012 /PRNewswire/ -- iStar Financial Inc. (NYSE: SFI) today reported results for the first quarter ended March 31, 2012.

First Quarter 2012 Results

iStar reported net income (loss) allocable to common shareholders for the first quarter of ($54.8) million, or ($0.66) per diluted common share, compared to $67.4 million, or $0.71 per diluted common share, for the first quarter 2011. The year-over-year decrease is primarily due to lower gains from early extinguishment of debt of $1.7 million versus $106.6 million for the same period last year, increased interest expense and higher provisions for loan losses and impairments. The decrease was partially offset by increased earnings from equity method investments and income from sales of residential property.

Prior to the effect of depreciation, loan loss provisions, impairments and gains on early extinguishment of debt, all of which are non-cash items, net income (loss) allocable to common shareholders for the first quarter was ($7.3) million, compared to ($5.0) million for the first quarter 2011. Please see the financial tables that follow the text of this press release for a reconciliation of these amounts to GAAP net income (loss) allocable to common shareholders.

Adjusted EBITDA for the quarter was $95.1 million, compared to $90.4 million for the same period last year. The year-over-year improvement was primarily due to increases in earnings from equity method investments and income from sales of residential property, partially offset by lower revenue from a smaller asset base. Please see the financial tables that follow the text of this press release for the Company's calculation of Adjusted EBITDA and a reconciliation to GAAP net income (loss).

During the first quarter, the Company generated $214.8 million of proceeds from its portfolio, comprised of $136.2 million in principal repayments, $51.4 million primarily from unit sales of other real estate owned (OREO) assets, $6.5 million from sales of net lease assets and $20.7 million from other investments. Additionally, the Company funded a total of $23.0 million of investments.

Capital Markets

As previously announced, during the quarter the Company entered into a new $880.0 million senior secured credit agreement comprised of a $410.0 million 2012 A-1 term loan tranche due March 2016 and a $470.0 million 2012 A-2 term loan tranche due March 2017. Proceeds from the new financing were used to repurchase $124.1 million of unsecured notes maturing in 2012 and to repay the $244.0 million remaining balance of its unsecured revolving credit facility due June 2012. The remaining debt proceeds will be used to refinance unsecured debt maturing in 2012.

In addition, during the quarter the Company repurchased $96.3 million of senior unsecured notes and repaid the remaining $169.7 million of its 5.15% senior unsecured notes due March 2012. Further, the Company repaid $89.8 million on the 2011 A-1 tranche of its secured credit facility, bringing the balance of the 2011 A-1 tranche to $871.8 million at the end of the quarter. Subsequent to quarter end, the Company repaid an additional $144.8 million on the 2011 A-1 tranche, thereby satisfying all minimum amortization requirements prior to the payment of any remaining balance at maturity in June 2013.

The Company's leverage was 2.7x at March 31, 2012, unchanged from the prior quarter. Please see the financial tables that follow the text of this press release for a calculation of the Company's leverage. The Company's weighted average effective cost of debt for the first quarter was 5.8%. At the end of the quarter, cash and cash equivalents, including cash reserved for repayment of indebtedness, totaled $609.7 million.

Portfolio Overview

At March 31, 2012, the Company's total portfolio had a carrying value of $6.82 billion, gross of general loan loss reserves. The portfolio was comprised of $2.67 billion of loans and other lending investments, $1.67 billion of net lease assets, $2.00 billion of owned real estate and $468.6 million of other investments.

At March 31, 2012, the Company's $2.01 billion of performing loans and other lending investments had a weighted average last dollar loan-to-value ratio of 76.0% and a weighted average maturity of 3.1 years. The performing loans consisted of 49.5% floating rate loans that generated a weighted average effective yield for the quarter of 5.8%, or approximately 550 basis points over the average one-month LIBOR rate for the quarter, and 50.5% fixed rate loans that generated a weighted average effective yield for the quarter of 8.3%. The weighted average risk rating of the Company's performing loans improved to 3.27, from 3.29 in the prior quarter. Included in the performing loan balance were $169.8 million of watch list assets, compared to $136.0 million in the prior quarter.

At March 31, 2012, the Company's non-performing loans (NPLs) had a carrying value of $662.7 million, net of $477.2 million of specific reserves. This compares to $771.2 million, net of $557.1 million of specific reserves, at the end of the prior quarter.

For the first quarter, the Company recorded $17.5 million in loan loss provision versus $16.0 million in the prior quarter. At March 31, 2012, loan loss reserves totaled $567.2 million or 18.0% of total gross carrying value of loans. This compares to loan loss reserves of $646.6 million or 18.5% of total gross carrying value of loans at December 31, 2011.

At the end of the quarter, the Company's $1.67 billion of net lease assets, net of $347.3 million of accumulated depreciation, were 91.2% leased with a weighted average remaining lease term of 12.4 years. The weighted average risk rating of the Company's net lease assets improved to 2.63, versus 2.67 in the prior quarter. The Company recorded $14.1 million of impairments within its net lease asset portfolio. During the quarter, the Company's occupied net lease assets generated a weighted average effective yield of 10.2% and the total net lease assets generated a weighted average effective yield of 9.1%.

At the end of the quarter, the Company's $2.00 billion owned real estate portfolio was comprised of $775.9 million of OREO and $1.23 billion of real estate held for investment (REHI). The Company's OREO assets are considered held for sale based on management's current intention to market and sell the assets in the near term, while management's current intent and strategy is to hold, operate or develop its REHI assets over a longer term.

During the quarter, the Company took title to properties with a carrying value of $140.4 million. The Company also recorded $2.5 million of impairments within its OREO portfolio. For the quarter, the Company recorded $14.4 million of revenue and $6.7 million of income from sales of residential property units within its owned real estate portfolio during the quarter, offset by $22.1 million of net expenses. In addition, the Company funded $10.8 million of capital expenditures associated with its owned real estate portfolio.

    [Financial Tables to Follow]
        *                   *
                      *

iStar Financial Inc. (NYSE: SFI) 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 ("REIT"), has invested more than $35 billion over the past two decades. Additional information on iStar Financial is available on the Company's website at www.istarfinancial.com.

iStar Financial will hold a quarterly earnings conference call at 10:00 a.m. ET today, April 27, 2012. This conference call will be broadcast live over the Internet and can be accessed by all interested parties through iStar Financial's website, www.istarfinancial.com, under the "Investor Relations" section. To listen to the live call, please go to the website's "Investor Relations" section at least 15 minutes prior to the start of the call to register, download and install any necessary audio software. For those who are not available to listen to the live broadcast, a replay will be available shortly after the call on the iStar Financial website.

(Note: Statements in this press release which are not historical fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although iStar Financial Inc. believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from iStar Financial Inc.'s expectations include the Company's ability to generate liquidity and to repay indebtedness as it comes due, additional loan loss provisions, the amount and timing of asset sales (including OREO assets), increases in NPLs, repayment levels, the Company's ability to reduce its indebtedness, the Company's ability to maintain compliance with its debt covenants, economic conditions, the availability of liquidity for commercial real estate transactions and other risks detailed from time to time in iStar Financial Inc.'s SEC reports.)

                                                                                                                                  
                                                       iStar Financial Inc.
                                              Consolidated Statements of Operations
                                                          (In thousands)
                                                           (unaudited)
                                                    Three Months Ended
                                                         March 31,
                                                                                               2012                         2011
                                                                                               ----                         ----
    REVENUES
                                                                                                                                  
    Interest income                                                                         $37,203                      $60,768
    Operating lease income                                                                   41,211                       40,799
    Other income                                                                             16,286                        8,675
         Total revenues                                                                     $94,700                     $110,242
                                                                                            -------                     --------
                                                                                                                                  
    COSTS AND EXPENSES
                                                                                                                                  
    Interest expense                                                                        $86,143                      $69,344
    Operating costs - net lease assets                                                        3,164                        4,288
    Operating costs - REHI and OREO                                                          22,074                       17,788
    Depreciation and amortization                                                            17,175                       15,474
    General and administrative(1)                                                            22,845                       24,400
    Provision for loan losses                                                                17,500                       10,881
    Impairment of assets                                                                     15,504                        1,490
    Other expense                                                                               453                        2,722
         Total costs and expenses                                                          $184,858                     $146,387
                                                                                           --------                     --------
                                                                                                                                  
    Income (loss) before earnings from equity method investments
         and other items                                                                   ($90,158)                    ($36,145)
         Gain on early extinguishment of debt, net                                            1,704                      106,604
         Earnings from equity method investments                                             34,786                       24,932
                                                                                             ------                       ------
    Income (loss) from continuing operations before
     income taxes                                                                          ($53,668)                     $95,391
         Income tax expense                                                                  (1,271)                     (11,052)
    Income (loss) from continuing operations                                               ($54,939)                     $84,339
         Income (loss) from discontinued operations                                            (248)                        (437)
         Gain from discontinued operations                                                    2,406                            -
         Income from sales of residential property                                            6,733                            -
    Net income (loss)                                                                      ($46,048)                     $83,902
         Net (income) loss attributable to noncontrolling
          interests                                                                             (25)                        (430)
    Net income (loss) attributable to iStar Financial
     Inc.                                                                                  ($46,073)                     $83,472
         Preferred dividends                                                                (10,580)                     (10,580)
          Net (income) loss allocable to HPUs and
         Participating Security holders(2)                                                    1,861                       (5,472)
    Net income (loss) allocable to common shareholders                                     ($54,792)                     $67,420
                                                                                           ========                      =======
                                                                                                                                  
    (1) For the three months ended March 31, 2012 and 2011, includes $4,666 and $4,155 of stock-based
     compensation expense, respectively.
    (2) HPU Holders are current and former Company employees who purchased high performance common stock units
     under the Company's High Performance Unit Program. Participating Security holders are Company employees and
     directors who hold unvested restricted stock units and common stock equivalents under the Company's LTIP
     that are currently eligible to receive dividends.

                                                                                                                                                 
                                                          iStar Financial Inc.
                                                     Earnings Per Share Information
                                                (In thousands, except per share amounts)
                                                              (unaudited)
                                                                                                                                                 
                                                            Three Months Ended
                                                                 March 31,
                                                                                                       2012                       2011
                                                                                                       ----                       ----
    EPS INFORMATION FOR COMMON SHARES
                                                                                                                                                 
    Income (loss) attributable to iStar Financial Inc.
        from continuing operations(1)
    Basic                                                                                            ($0.69)                     $0.73
    Diluted                                                                                          ($0.69)                     $0.71
    Net income (loss) attributable to iStar Financial Inc.
    Basic                                                                                            ($0.66)                     $0.73
    Diluted                                                                                          ($0.66)                     $0.71
    Weighted average shares outstanding
    Basic                                                                                            83,556                     92,458
    Diluted                                                                                          83,556                     94,609
                                                                                                                                                 
    Common shares outstanding at end of period                                                       84,358                     92,472
                                                                                                                                                 
    EPS INFORMATION FOR HPU SHARES
                                                                                                                                                 
    Income (loss) attributable to iStar Financial Inc.
        from continuing operations(1)
    Basic                                                                                          ($128.81)                   $138.80
    Diluted                                                                                        ($128.81)                   $135.87
    Net income (loss) attributable to iStar Financial Inc.
    Basic                                                                                          ($124.07)                   $138.00
    Diluted                                                                                        ($124.07)                   $135.07
    Weighted average shares outstanding
          Basic and diluted                                                                              15                         15
                                                                                                                                                 
    (1) Adjusted for preferred dividends, net (income) loss from noncontrolling interests and income from sales of
     residential property.
                                                                                                                                                 

                               iStar Financial Inc.
                           Consolidated Balance Sheets
                                  (In thousands)
                                   (unaudited)
                                     As of                   As of
                                March 31, 2012         December 31, 2011
                                --------------         -----------------
    ASSETS

    Loans and other
     lending
     investments, net                       $2,596,400              $2,860,762
    Net lease assets,
     net                                     1,668,552               1,702,764
    Real estate held
     for investment,
     net                                     1,228,733               1,228,134
    Other real estate
     owned                                     775,899                 677,458
    Other investments                          468,646                 457,835
    Assets held for
     sale                                        5,737                       -
    Cash and cash
     equivalents                               126,859                 356,826
    Restricted cash                            524,174                  32,630
    Accrued interest
     and operating
     lease income
     receivable, net                            15,297                  16,878
    Deferred operating
     lease income
     receivable                                 74,338                  72,074
    Deferred expenses
     and other assets,
     net                                       105,263                 112,476
    Total assets                            $7,589,898              $7,517,837
                                            ==========              ==========

    LIABILITIES AND EQUITY

    Accounts payable,
     accrued expenses
     and other
     liabilities                              $114,516                $106,693

    Debt obligations, net:
       Secured credit
        facilities                           3,156,772               2,393,240
       Unsecured senior
        notes                                2,419,062               2,805,817
       Secured term loans                      294,400                 296,643
       Unsecured credit
        facility                                     -                 243,650
       Other debt
        obligations                             98,201                  98,190
         Total debt
          obligations, net                   5,968,435               5,837,540

         Total liabilities                  $6,082,951              $5,944,233

    Total iStar
     Financial Inc.
     shareholders'
     equity                                  1,462,099               1,528,356
    Noncontrolling
     interests                                  44,848                  45,248
    Total equity                            $1,506,947              $1,573,604

    Total liabilities
     and equity                             $7,589,898              $7,517,837
                                            ==========              ==========

                                                                                                                                                        
                                                    iStar Financial Inc.
                                                  Supplemental Information
                                                       (In thousands)
                                                        (unaudited)
                                              Three Months Ended
                                                   March 31,
                                                                                         2012                         2011
                                                                                         ----                         ----
    NON-GAAP FINANCIAL MEASURES
                                                                                                                                                        
    Reconciliation of Net Income to Adjusted
     EBITDA
    ----------------------------------------
    Net income (loss)                                                                ($46,048)                     $83,902
    Add: Interest expense                                                              86,143                       69,634
    Add: Income tax expense                                                             1,271                       11,052
    Add: Depreciation and amortization                                                 17,238                       15,933
                                                                                       ------                       ------
    EBITDA                                                                            $58,604                     $180,521
    Add: Provision for loan losses                                                     17,500                       10,881
    Add: Impairment of assets                                                          16,024                        1,464
    Add: Stock-based compensation expense                                               4,666                        4,155
    Less: Gain on early extinguishment of debt,
     net                                                                               (1,704)                    (106,604)
    Adjusted EBITDA(1)                                                                $95,090                      $90,417
                                                                                      =======                      =======
                                                                                                                                                        
    Reconciliation of Adjustments to Net Income Allocable to Common
     Shareholders
    ---------------------------------------------------------------
    Net income (loss) allocable to common
     shareholders                                                                    ($54,792)                     $67,420
    Add: Depreciation and amortization                                                 17,238                       15,933
    Add: Provision for loan losses                                                     17,500                       10,881
    Add: Impairment of assets                                                          16,024                        1,464
    Less: Gain on early extinguishment of debt,
     net                                                                               (1,704)                    (106,604)
    Less: HPU/Participating Security allocation
     adjustment                                                                        (1,611)                       5,880
    Net income (loss) allocable to common
     shareholders, as adjusted(1)                                                     ($7,345)                     ($5,026)
                                                                                      =======                      =======
                                                                                                                                                        
    (1) Adjusted EBITDA and net income (loss) allocable to common shareholders after giving effect to
     these adjustments should be examined in conjunction with net income (loss) as shown in the
     Consolidated Statements of Operations. These non-GAAP financial measures should not be considered
     as an alternative to net income (determined in accordance with GAAP) as an indicator of the
     Company's performance, or to cash flows from operating activities (determined in accordance with
     GAAP) as a measure of the Company's liquidity, nor are they indicative of funds available to fund
     the Company's cash needs or available for distribution to shareholders. It should be noted that the
     Company's manner of calculating these non-GAAP financial measures may differ from the calculations
     of similarly-titled measures by other companies. Management believes that it is useful to consider
     EBITDA and net income excluding the adjustments shown above because the adjustments are non-cash
     items that do not necessarily reflect an actual change in the long-term economic value or

                                iStar Financial Inc.
                              Supplemental Information
                                   (In thousands)
                                     (unaudited)
                                                     Three Months Ended
                                                       March 31, 2012
                                                       --------------
    OPERATING STATISTICS

    Return on Average Common Book Equity
    ------------------------------------
    Average total book equity                                       $1,495,228
    Less: Average book value of
     preferred equity                                                 (506,176)
                                                                      --------
    Average common book equity (A)                                    $989,052

    Net income (loss) allocable to common shareholders, HPU holders
     and
         Participating Security holders                               ($56,653)
         Annualized(B)                                               ($226,612)
    Return on Average Common Book
     Equity (B) /(A)                                                       Neg

    Expense Ratio
    -------------
    General and administrative
     expenses -annualized (C)                                          $91,380
    Average total assets (D)                                        $7,553,868
    Expense Ratio (C) / (D)                                                1.2%

    Interest Coverage
    -----------------
    Adjusted EBITDA(A)                                                 $95,090
    Interest expense and preferred
     dividends (B)                                                     $96,723
    Adjusted EBITDA /Interest
     Expense and Preferred Dividends
     (A) /(B)                                                             1.0x

                                                           As of
                                                       March 31, 2012
                                                       --------------
    Leverage
    --------
    Book debt                                                       $5,968,435
    Less: Cash and cash equivalents,
     including cash reserved for
     repayment of indebtedness                                        (609,748)
    Net book debt (E)                                               $5,358,687

    Book equity                                                     $1,506,947
    Add: Accumulated depreciation                                      411,837
    Add: General loan loss reserves                                     74,300
    Sum of book equity, accumulated
     depreciation and general loan
     loss reserves (F)                                              $1,993,084
    Leverage(E) / (F)                                                     2.7x

                                                                                                             iStar Financial Inc.
                                                                                                           Supplemental Information
                                                                                                                (In thousands)
                                                                                                                 (unaudited)
                                                                                                                                                                           As of
                                                                                                                                                                      March 31, 2012
                                                                                                                                                                      --------------
    UNFUNDED COMMITMENTS

    Performance-based commitments                                                                                                                                                       $64,673
    Discretionary fundings                                                                                                                                                              128,008
    Strategic investments                                                                                                                                                                25,375
                                                                                                                                                                                         ------
    Total Unfunded Commitments                                                                                                                                                         $218,056

    UNENCUMBERED ASSETS / UNSECURED DEBT

    Unencumbered assets (A)                                                                                                                                                          $3,855,103
    Unsecured debt (B)                                                                                                                                                               $2,535,675
    Unencumbered Assets /Unsecured Debt
     (A) /(B)                                                                                                                                                                              1.5x

    LOANS AND OTHER LENDING INVESTMENTS CREDIT STATISTICS

                                                                                                                  As of
                                                                                                                  -----
                                                                                                      March 31, 2012                       December 31, 2011
                                                                                                      --------------                       -----------------
    Carrying value of NPLs /
       As a percentage of total carrying value of loans                                                            $662,732         25.7 %                   $771,196                     27.1 %

    NPL asset specific reserves for loan losses /
       As a percentage of gross carrying value of NPLs(1)                                                          $477,179         41.9 %                   $557,129                     41.9 %

    Total reserve for loan losses /
         As a percentage of total gross carrying value of loans(1)                                                 $567,179         18.0 %                   $646,624                     18.5 %

    (1) Gross carrying value represents iStar's carrying value of loans, gross of loan loss reserves.

                                                                                                                              iStar Financial Inc.
                                                                                                                            Supplemental Information
                                                                                                                                  (In millions)
                                                                                                                                   (unaudited)

    PORTFOLIO STATISTICS AS OF MARCH 31, 2012(1)

    Asset Type                                                                                                                                                             Total          % of Total
    ----------                                                                                                                                                             -----          ----------
    First Mortgages / Senior Loans                                                                                                                                                 $2,125               31.2%
    Net Lease Assets                                                                                                                                                              1,674               24.5%
    Real Estate Held for Investment                                                                                                                                               1,229               18.0%
    Other Real Estate Owned                                                                                                                                                         776               11.4%
    Mezzanine / Subordinated Debt                                                                                                                                                   545                8.0%
    Other Investments                                                                                                                                                               469                6.9%
    Total                                                                                                                                                                        $6,818              100.0%
                                                                                                                                                                                 ======              =====

    Geography                                                                                                                                                              Total          % of Total
    ---------                                                                                                                                                              -----          ----------
    West                                                                                                                                                                         $1,631               23.9%
    Northeast                                                                                                                                                                     1,222               17.9%
    Southeast                                                                                                                                                                     1,021               15.0%
    Southwest                                                                                                                                                                       845               12.4%
    Mid-Atlantic                                                                                                                                                                    674                9.9%
    Various                                                                                                                                                                         543                8.0%
    Central                                                                                                                                                                         370                5.4%
    International                                                                                                                                                                   282                4.1%
    Northwest                                                                                                                                                                       230                3.4%
    Total                                                                                                                                                                        $6,818              100.0%
                                                                                                                                                                                 ======              =====

    Property Type                                                Performing                                Net Lease           NPLs                  REHI        OREO      Total          % of Total
                                                                   Loans                                    Assets
    ---                                                            -----                                    ------
    Land                                                                         $206                                   $56            $211                 $803      $118       $1,394               20.4%
    Apartment / Residential                                                       458                                     -             142                   25       491        1,116               16.4%
    Retail                                                                        351                                   158              67                  153        70          799               11.7%
    Office                                                                        116                                   473              38                   70         3          700               10.3%
    Industrial / R&D                                                               87                                   471               8                   49         1          616                9.0%
    Entertainment / Leisure                                                        78                                   422              81                    -         -          581                8.5%
    Hotel                                                                         304                                    94             110                   42        16          566                8.3%
    Mixed Use / Mixed Collateral                                                  237                                     -               -                   87        77          401                5.9%
    Other Property Types                                                          170                                     -               6                    -         -          176                2.6%
    Other Investments                                                               -                                     -               -                    -         -          469                6.9%
                                                                                  ---                                   ---             ---                  ---       ---          ---                ---
    Total                                                                      $2,007                                $1,674            $663               $1,229      $776       $6,818              100.0%
                                                                               ======                                ======            ====               ======      ====       ======              =====

    (1) Based on carrying value of the Company's total investment portfolio, gross of general loan loss reserves.

SOURCE iStar Financial Inc.

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