avatar Istar Inc. Finance, Insurance, And Real Estate

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    A significant year 2017 Annual Report


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    We recently celebrated our 20th anniversary as a public company and it gave me a chance to reflect on our past, present and future. We have always been interested in coming up with game-changing ideas in the real estate world and scaling them into leadership positions. In 1993, we took a hard look at the real estate finance markets compared to the corporate finance markets and realized there was a large gap that we could fill, first as a private company and then as a fully-scaled public company. Bringing a level of problem-solving, structuring skills and speed not typically available in the marketplace and marrying it to a customer focused, our-word-is-our-bond approach, we scaled this simple innovation into a multibillion dollar business generating well above market returns. In 2000, we saw another opportunity to rethink a core real estate business — this time, the net lease business. Taking the approach that optimizing a net lease investment required not only real estate expertise, but also insightful corporate credit skills and sophisticated capital markets knowledge, we bought the largest net lease company on the NYSE and retooled the company into a powerful earnings generator with clearly demonstrated, superior returns on its deals. Along the way, we have always been willing to buck the trends to find value for our shareholders, and have often found excellent returns in areas others have either fled, disregarded or simply not taken the time to understand. Our data center investments after the tech bust in the early 2000s, our hotel investments after 9/11, and our first-of-its-kind financing structure for timber in 2006, all generated substantial returns in places others were not looking. With markets flush with capital providers and competition, we took the opportunity over the past two years to incubate another idea that we believe will fundamentally change the way owners of real estate think about their properties. In June of last year, we launched a new public company, Safety, Income & Growth Inc. (NYSE: SAFE), to completely reinvent the use of ground leases in the marketplace. The company has begun executing on a strategy to maximize returns for owners of all major property types in the top markets around the country by separating the different risk-return profile of land from the risk-return profile of the building on top of the land. This completely natural evolution mirrors what has happened in almost all other parts of the capital markets and in the real estate finance markets. The most efficient markets, and most highly valued markets, allocate different risk-reward profiles to different investors, and the resulting sum of the parts exceeds the previous whole. Yet while most markets have continued this evolution in increasingly sophisticated forms, the ground lease market has remained unchanged over the decades and out of step with current market conventions. Into this large market gap, we launched SAFE with two other skilled investors, a sovereign wealth fund and private endowment backed fund. iStar owns just under 40% of the public company shares and is the outside manager of SAFE, so we have a very large vested interest in its success and will continue to work to grow it into a meaningful contributor to our earnings. In addition to focusing on the new, we are also making progress on the old.


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    During 2017, we put an immense amount of work into various legacy assets that have been in our portfolio since the recession. Our strong results for the year, net income of $1.56 per share and adjusted income of $2.57 per share, benefitted from significant positive outcomes in the legacy book. Our strategy over the past few years has been to generate profits from three main sources: our finance business in the form of interest income, our net lease business in the form of operating lease income, and from our legacy business in the form of gains resulting from our reimagining and repositioning assets we took control of during the downturn. Overall, we have been quite successful, generating sizable earnings growth and full-year 2017 adjusted earnings that represented a significant return on book value. Yet, our share price declined almost 9% last year, a very disappointing result in the face of these stellar earnings results. We must ask ourselves what we need to do differently so this disconnect does not repeat itself. The first part of the equation is straightforward — continue to generate strong earnings. This will be helped by the fact that we will recognize over $75 million of adjusted earnings in 2018 that we were not able to recognize in prior years, but are now required to recognize in 2018. GAAP will add these to retained earnings rather than running them through the income statement, but as a shareholder, they are indeed earnings that should be considered as return on our invested capital and will appear in our adjusted earnings metric. We also expect to continue to monetize increasing amounts of legacy assets and harvest solid gains on these sales during the year. In addition, we are focused on deploying our significant cash balances ($658 million at year end) in new investments to generate earnings well above what we earn on cash sitting in the bank. The second part of the equation is a bit trickier — getting the markets excited about our company and having our share price reflect its full value. Generating high returns on equity from a combination of interest income, net lease income and asset sale gains has driven earnings for the past three years, and we have retired some 35% of total shares during this period to amplify the impact of those returns to shareholders. But it is also increasingly clear that earnings alone in the absence of asset growth and a more clearly defined path forward will not trade at an appropriate multiple. Earlier this year, we hired Marcos Alvarado as our new Chief Investment Officer to bring a renewed focus to our core businesses. We made promising strides in the fourth quarter of 2017, with new loan originations exceeding $400 million, and we believe that we can continue to push this momentum into 2018 and beyond. So this is where we find ourselves now. After an initial decade of true innovation and market leadership in multiple investment areas, we want to take back that mantle and move forward as an innovator once more, delivering superior returns on the back of strong earnings, a unique platform and team, and a renewed focus on growth. We thank you for helping us get there. Jay Sugarman Chairman & Chief Executive Officer


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    Highlights Strong earnings performance $2.57 iStar has closed the books on another significant year of earnings growth, recognizing net income of $111 million and adjusted net income of $215 million in 2017. On a per share basis, earnings reached $1.56 and $2.57 on an adjusted basis. This brings aggregate earnings over the past three years to a $1.56 total of $1.54 per share and adjusted earnings of $4.37 per share. $1.15 $0.60 Net Income $0.35 Adjusted Income ($0.62) F Y 2015 F Y 2016 F Y 2017 Total Return 250 200 iStar 150 S&P 500 S&P 500 Financials 100 2012 2013 2014 2015 2016 2017


  • Page 5

    Upgraded by all 3 rating agencies Launched a In 2017, iStar received rating upgrades from all three revolutionary new major rating agencies: S&P raised its corporate company, Safety, Income rating from B+ to BB-, Moody’s raised its rating from B2 to B1, and Fitch raised its rating from B+ to BB-. & Growth (NYSE: SAFE) This achievement was driven by a proven track record of earnings growth and a strong debt and liquidity profile. iStar successfully IPO’d Safety, Income & Growth Inc. (NYSE: SAFE), the first and only publicly traded company focused on building a diversified portfolio of ground leases. SAFE offers investors a compelling combination of the safest position in a real estate Harvesting value capital structure, compounding inflation-protected income growth, and outsized capital appreciation. from legacy assets iStar is SAFE’s founder, manager, and its largest shareholder. Since 2012, the Company has generated $2.5 billion of proceeds from the sale of legacy assets and recorded net gains of approximately $700 million. In 2017, iStar realized $360 million of proceeds from Transformative $2.0B its legacy assets and plans to accelerate its pace in 2018. Additionally, iStar has hired Andy Richardson capital markets as President of its Land Portfolio, who will focus on driving value in our longer-lived land and transaction development assets. The comprehensive $2.0 billion capital markets transaction in the third quarter of 2017 helped to transform iStar’s financial position. Effectively, Looking ahead to this extended the weighted average maturity by nearly 1.5 years leaving us with no debt maturities the future of core until July 2019, lowered iStar’s cost of capital by an estimated 35bps, and improved earnings and fixed business growth charge coverage. iStar renewed its focus on growing its core businesses of real estate finance and net lease. At the beginning of the year, Marcos Alvarado was hired as the Chief Investment Officer and will lead iStar’s efforts to execute on its core strategy. In the fourth quarter, iStar saw new loan originations reach $457 million and will look to continue this momentum into 2018.


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    Financial Highlights Consolidated Statements of Operations FOR THE TWELVE MONTHS ENDED DECEMBER 31 2017 2016 2015 (In thousands except share and per share data) Revenues: Operating lease income $ 187,684 $ 191,180 $ 211,207 Interest income 106,548 129,153 134,687 Other income 188,091 46,514 49,924 Land development revenue 196,879 88,340 100,216 $ 679,202 $ 455,187 $ 496,034 Costs and Expenses: Interest expense $ 194,686 $ 221,398 $ 224,639 Real estate expenses 147,617 137,522 146,509 Land development cost of sales 180,916 62,007 67,382 Depreciation and amortization 49,033 51,660 62,045 General and administrative 80,070 73,138 69,264 General and administrative — stock-based compensation 18,812 10,889 12,013 (Recovery of) provision for loan losses (5,828 ) (12,514 ) 36,567 Impairment of assets 32,379 14,484 10,524 Other expense 20,954 5,883 6,374 Total costs and expenses $ 718,639 $ 564,467 $ 635,317 Income (loss) before earnings from equity method investments and other items $ (39,437) $ (109,280 ) $ (139,283 ) Loss on early extinguishment of debt (14,724 ) (1,619) (281) Earnings from equity method investments 13,015 77,349 32,153 Income (loss) from continuing operations before Income taxes $ (41,146) $ (33,550 ) $ (107,411) Income tax (expense) benefit 948 10,166 (7,639) Income (loss) from continuing operations $ (40,198 ) $ (23,384 ) $ (115,050 ) Income (loss) from discontinued operations 4,939 18,270 15,077 Gain from discontinued operations 123,418 – – Income from sales of real estate 92,049 105,296 93,816 Net income (loss) $ 180,208 $ 100,182 $ (6,157) Net (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests (4,526) (4,876) 3,722 Preferred dividends (64,758 ) (51,320 ) (51,320 ) Net (income) loss allocable to HPU holders and Participating Security holders – (14 ) 1,080 Net income (loss) allocable to common shareholders (GAAP) $ 110,924 $ 43,972 $ (52,675) Weighted average number of common shares — Basic 71,021 73,453 84,987 Weighted average number of common shares — Diluted 71,021 73,834 84,987 Basic EPS $ 1.56 $ 0.60 $ (0.62) Diluted EPS $ 1.56 $ 0.60 $ (0.62) Reconciliation of Net Income to Adjusted Income FOR THE TWELVE MONTHS ENDED DECEMBER 31 2017 2016 2015 (In thousands except share and per share data) Net income (loss) allocable to Common Shareholders $ 110,924 $ 43,972 $ (52,675) Add: Depreciation and amortization 60,828 64,447 72,132 Add: (Recovery of) provision for loan losses (5,828 ) (12,514 ) 36,567 Add: Impairment of assets 32,379 18,999 18,509 Add: Stock-based compensation expense 18,812 10,889 12,013 Add: Loss on early extinguishment of debt 3,065 1,619 281 Add: Non-cash interest expense of discount on senior convertible notes 1,255 – – Add: Non-cash preferred stock redemption premium 16,314 – – Less: Losses on charge-offs and dispositions (23,130 ) (14,827) (55,437) HPU/Participating Security allocation adjustment – (23 ) (1,706) Adjusted income (loss) allocable to common shareholders $ 214,619 $ 112,562 $ 29,684 Weighted average common shares outstanding for basic earnings per common share 71,021 73,453 84,987 Adjusted income allocable to common shareholders per share $ 3.02 $ 1.53 $ 0.35 Weighted average common shares outstanding for diluted earnings per common share 87,028 114,102 85,395 Adjusted income allocable to common shareholders per share $ 2.57 $ 1.15 $ 0.35


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    Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________________________________________________________________ FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2017 OR 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 95-6881527 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1114 Avenue of the Americas, 39th Floor New York, NY 10036 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (212) 930-9400 _______________________________________________________________________________ Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of Exchange on which registered: Common Stock, $0.001 par value New York Stock Exchange 8.00% Series D Cumulative Redeemable New York Stock Exchange Preferred Stock, $0.001 par value 7.65% Series G Cumulative Redeemable New York Stock Exchange Preferred Stock, $0.001 par value 7.50% Series I Cumulative Redeemable New York Stock Exchange Preferred Stock, $0.001 par value Securities registered pursuant to Section 12(g) of the Act: Title of each class: Name of Exchange on which registered: 4.50% Series J Convertible Perpetual N/A Preferred Stock, $0.001 par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No


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    Table of Contents 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 No 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Accelerated fil Non-accelerated filer Smaller reporting com Emerging growth er (Do not check if a pany company smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No 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. As of June 30, 2017 the aggregate market value of iStar Inc. common stock, $0.001 par value per share, held by non-affiliates (1) of the registrant was approximately $833 million, based upon the closing price of $12.04 on the New York Stock Exchange composite tape on such date. As of February 22, 2018, there were 67,539,717 shares of common stock outstanding. (1) For purposes of this Annual Report only, includes all outstanding common stock other than common stock held directly by the registrant's directors and executive officers. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the registrant's definitive proxy statement for the registrant's 2018 Annual Meeting, to be filed within 120 days after the close of the registrant's fiscal year, are incorporated by reference into Part III of this Annual Report on Form 10-K.


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    Table of Contents TABLE OF CONTENTS Page PART I 1 Item 1. Business 1 Item 1a. Risk Factors 17 Item 1b. Unresolved Staff Comments 28 Item 2. Properties 28 Item 3. Legal Proceedings 29 Item 4. Mine Safety Disclosures 29 PART II 29 Item 5. Market for Registrant's Equity and Related Share Matters 29 Item 6. Selected Financial Data 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 33 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 56 Item 8. Financial Statements and Supplemental Data 57 Item 9. Changes and Disagreements with Registered Public Accounting Firm on Accounting and Financial Disclosure 134 Item 9a. Controls and Procedures 134 Item 9b. Other Information 134 PART III 135 Item 10. Directors, Executive Officers and Corporate Governance of the Registrant 135 Item 11. Executive Compensation 135 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 135 Item 13. Certain Relationships, Related Transactions and Director Independence 135 Item 14. Principal Registered Public Accounting Firm Fees and Services 135 PART IV 135 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 135 Item 16. Form10-K Summary 138 SIGNATURES


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    Table of Contents 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 (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 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 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 Inc. (references to the "Company," "we," "us" or "our" refer to iStar Inc.) 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. 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 four primary business segments are real estate finance, net lease, operating properties and land and development. Real Estate Finance: The real estate finance portfolio is comprised of senior and mezzanine real estate loans that may be either fixed-rate or variable-rate and are structured to meet the specific financing needs of borrowers. The Company's portfolio also includes preferred equity investments and senior and subordinated loans to business entities, particularly entities engaged in real estate or real estate related businesses, and may be either secured or unsecured. The Company's loan portfolio includes whole loans and loan participations. Net Lease: The net lease portfolio is primarily comprised of properties owned by the Company and leased to single creditworthy tenants where the properties are subject to long-term leases. Most of the leases provide for expenses at the facilities to be paid by the tenants on a triple net lease basis. The properties in this portfolio are diversified by property type and geographic location. In addition to net lease properties owned by the Company, the Company partnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets (the "Net Lease Venture"). The Company invests in new net lease investments primarily through the Net Lease Venture, in which it holds a non-controlling 51.9% interest. In 2017, the Company also conceived and ultimately launched a new, publicly traded REIT focused exclusively on the ground lease ("Ground Lease") asset class called Safety, Income & Growth Inc. ("SAFE"). 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 triple net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon. As of December 31, 2017, we owned approximately 37.6% of SAFE's common stock outstanding which had a market value of $120.2 million at that date. We also serve as SAFE's external manager pursuant to a management agreement. Operating Properties: The operating properties portfolio is comprised of commercial and residential properties which represent a diverse pool of assets across a broad range of geographies and property types. The Company generally seeks to reposition or redevelop its transitional properties with the objective of maximizing their value through the infusion of capital and/or concentrated asset management efforts. The commercial properties within this portfolio include office, retail, hotel and other property types. The residential properties within this portfolio are generally luxury condominium projects located in major U.S. cities where the Company's strategy is to sell individual condominium units through retail distribution channels. 1


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    Table of Contents Land & Development: The land and development portfolio is primarily comprised of land entitled for master planned communities as well as waterfront and urban infill land parcels located throughout the United States. Master planned communities represent large-scale residential projects that the Company will entitle, plan and/or develop and may sell through retail channels to homebuilders or in bulk. Waterfront parcels are generally entitled for residential projects and urban infill parcels are generally entitled for mixed-use projects. The Company may develop these properties itself, or in partnership with commercial real estate developers, or may sell the properties. The Company's primary sources of revenues are operating lease income, which is comprised of the rent and reimbursements that tenants pay to lease the Company's properties, interest income, which is the interest that borrowers pay on loans, and land development revenue from lot and parcel sales. The Company primarily generates income through a “spread” or “margin,” which is the difference between the revenues net of property related expenses generated from leases and loans and interest expense. In addition, the Company generates income from sales of its real estate and income from equity in earnings of its unconsolidated ventures. Company History and Recent Developments 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 lending and leasing transactions, as well as through corporate acquisitions. During the economic downturn, the composition of the Company's portfolio changed as loans were repaid and the Company acquired title to assets of defaulting borrowers. The composition of the Company's real estate portfolio expanded to include operating properties and land and development assets. The Company has been originating new lending and net lease investments, repositioning or redeveloping its transitional operating properties and progressing on the entitlement, development and sales of its land and development assets. The Company intends to continue these efforts, with the objective of having these assets contribute positively to earnings in the future. The Company's business segments are discussed further in "Industry Segments." Financing Strategy The Company uses leverage to enhance its return on assets. 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. Going forward, the Company will seek to raise capital through a variety of means, which may include unsecured and secured debt financing, debt refinancings, asset sales, sales of interests in business lines, issuances of equity, joint ventures and other third party capital arrangements. 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 Our strategy is to continue to focus on our net lease and real estate finance businesses to find selective investment opportunities in these core businesses. In addition, we will continue to monetize our commercial and residential operating properties as well as our land portfolio. 2


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    Table of Contents In originating new investments, the Company's strategy is to focus on the following: Targeting the origination of custom-tailored mortgage, corporate and lease financings where customers require flexible financial solutions and "one-call" responsiveness; Avoiding commodity businesses where there is significant direct competition from other providers of capital; Developing direct relationships with borrowers and corporate customers in addition to sourcing transactions through intermediaries; Adding value beyond simply providing capital by offering borrowers and corporate customers specific lending expertise, flexibility, certainty of closing and continuing relationships beyond the closing of a particular financing transaction; Taking advantage of market anomalies in the real estate financing markets when, in the Company's view, credit is mispriced by other providers of capital; and Evaluating relative risk adjusted returns across multiple investment markets. Underwriting Process The Company reviews investment opportunities with its investment professionals, as well as representatives from its legal, credit, risk management and capital markets departments. The Company has developed a process for screening potential investments called the Six Point Methodologysm. Through this proprietary process, the Company internally evaluates an investment opportunity by: (1) evaluating the source of the opportunity; (2) evaluating the quality of the collateral, corporate credit or lessee, as well as the market and industry dynamics; (3) evaluating the borrower equity, corporate sponsorship and/or guarantors; (4) determining the optimal legal and financial structure for the transaction given its risk profile; (5) performing an alternative investment test; and (6) evaluating the liquidity of the investment. Professionals from all disciplines throughout the entire origination process evaluate investments, from the initial consideration of the opportunity, utilizing the Six Point Methodology,sm through the preparation and distribution of an approval memorandum for the Company's internal investment committee and/or Board of Directors and into the documentation and closing process. Any commitment to make an investment of $25 million or less in any transaction or series of related transactions requires the approval of the Chief Executive Officer and Chief Investment Officer. Any commitment in excess of $25 million but less than or equal to $60 million requires the further approval of the Company's internal investment committee, consisting of senior management representatives from all of the Company's key disciplines. Any commitment in excess of $60 million, and any strategic investment such as a corporate merger, acquisition or material transaction involving the Company's entry into a new line of business, requires the approval of the Board of Directors. Hedging Strategy The Company finances its business with a combination of fixed-rate and variable-rate debt and its asset base consists of fixed-rate and variable-rate investments. Its variable-rate assets and liabilities are intended to be matched against changes in variable interest rates. This means that as interest rates increase, the Company earns more on its variable-rate lending assets and pays more on its variable-rate debt obligations and, conversely, as interest rates decrease, the Company earns less on its variable- rate lending assets and pays less on its variable-rate debt obligations. When the Company's variable-rate debt obligations differ from its variable-rate lending assets, the Company may utilize derivative instruments to limit the impact of changing interest rates on its net income. The Company also uses derivative instruments to limit its exposure to changes in currency rates in respect of certain investments denominated in foreign currencies. The derivative instruments the Company uses are typically in the form of interest rate swaps, interest rate caps and foreign exchange contracts. 3


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    Table of Contents Portfolio Overview As of December 31, 2017, based on carrying values gross of accumulated depreciation and general loan loss reserves, our total investment portfolio has the following characteristics: Asset Type 4


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    Table of Contents As of December 31, 2017, based on carrying values gross of accumulated depreciation and general loan loss reserves, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands): Real Estate Net Operating Land and % of Property/Collateral Types Finance Lease Properties Development Total Total Land and Development $ — $ — $ — $ 932,547 $ 932,547 22.1% Office / Industrial 48,900 673,424 128,368 — 850,692 20.1% Mixed Use / Mixed Collateral 306,625 — 196,667 — 503,292 11.9% Entertainment / Leisure — 489,497 — — 489,497 11.5% Condominium 421,787 — 48,519 — 470,306 11.1% Hotel 291,929 — 104,415 — 396,344 9.3% Other Property Types 223,458 — 11,837 — 235,295 5.5% Retail 25,456 57,348 138,928 — 221,732 5.2% Ground Leases(1) — 129,154 — — 129,154 3.0% Strategic Investments — — — — 13,618 0.3% Total $ 1,318,155 $ 1,349,423 $ 628,734 $ 932,547 $ 4,242,477 100.0% Real Estate Net Operating Land and % of Geographic Region Finance Lease Properties Development Total Total Northeast $ 798,357 $ 414,373 $ 47,557 $ 268,953 $ 1,529,240 36.0% West 38,137 286,222 66,398 366,672 757,429 17.9% Southeast 181,074 253,960 140,635 114,266 689,935 16.3% Southwest 93,509 162,684 256,248 22,292 534,733 12.6% Central 181,621 79,701 82,161 31,500 374,983 8.8% Mid-Atlantic — 149,618 35,735 128,864 314,217 7.4% Various(2) 25,457 2,865 — — 28,322 0.7% Strategic Investments(2) — — — — 13,618 0.3% Total $ 1,318,155 $ 1,349,423 $ 628,734 $ 932,547 $ 4,242,477 100.0% _______________________________________________________________________________ (1) Primarily represents the market value of our equity method investment in SAFE. (2) Strategic investments and the various category include $9.2 million of international assets. 5


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    Table of Contents Industry Segments The Company has four business segments: Real Estate Finance, Net Lease, Operating Properties and Land and Development. The following describes the Company's reportable segments as of December 31, 2017 ($ in thousands): Real Estate Operating Land and Corporate / Finance Net Lease Properties Development Other(1) Total Real estate, at cost $ — $ 1,108,051 $ 521,385 $ — $ — $ 1,629,436 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 — — 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 _______________________________________________________________________________ (1) Corporate/Other includes certain joint venture and strategic investments that are not included in the other reportable segments. See Item 8—"Financial Statements and Supplemental Data—Note 7" for further detail on these investments. Additional information regarding segment revenue and profit information as well as prior period information is presented in Item 8—"Financial Statements and Supplemental Data—Note 17" and a discussion of operating results is presented in Item 7 —"Management's Discussion and Analysis of Financial Condition and Results of Operations." Real Estate Finance The Company's real estate finance business targets large, sophisticated investors by providing one-stop capabilities that encompass financing alternatives ranging from full envelope senior loans to mezzanine and preferred equity capital positions. The Company's real estate finance portfolio consists of senior mortgage loans that are secured by commercial and residential real estate assets where the Company is the first lien holder, subordinated mortgage loans that are secured by second lien or junior interests in commercial and residential real estate assets, and corporate/partnership loans, which represent mezzanine or subordinated loans to entities for which the Company does not have a lien on the underlying asset, but may have a pledge of underlying equity ownership of such assets. The Company's real estate finance portfolio includes loans on stabilized and transitional properties and ground-up construction projects. In addition, the Company has preferred equity investments and debt securities classified as other lending investments. 6


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    Table of Contents The Company's real estate finance portfolio included the following ($ in thousands): As of December 31, 2017 2016 Total % of Total Total % of Total Performing loans: Senior mortgages $ 709,809 53.9% $ 854,805 58.0% Corporate/partnership loans 332,387 25.2% 333,244 22.6% Subordinate mortgages 9,495 0.7% 14,078 1.0% Subtotal 1,051,691 79.8% 1,202,127 81.6% Non-performing loans(1): Senior mortgages 32,825 2.5% 36,159 2.5% Corporate/partnership loans 144,063 10.9% 144,674 9.8% Subordinate mortgages — —% 10,863 0.7% Subtotal 176,888 13.4% 191,696 13.0% Total carrying value of loans 1,228,579 93.2% 1,393,823 94.6% Other lending investments—securities 89,576 6.8% 79,916 5.4% Total carrying value 1,318,155 100.0% 1,473,739 100.0% General reserve for loan losses (17,500) (23,300) Total loans receivable and other lending investments, net $ 1,300,655 $ 1,450,439 _______________________________________________________________________________ (1) Non-performing loans are presented net of asset-specific loan loss reserves of $61.0 million and $62.2 million, respectively, as of December 31, 2017 and 2016. Summary of Portfolio Characteristics—As of December 31, 2017, the Company's performing loans and other lending investments had a weighted average loan to value ratio of 67%. Additionally, the Company's performing loans were comprised of 22% fixed-rate loans and 78% variable-rate loans that had a weighted average yield of 9.8% and a weighted average remaining term of 2.0 years. Portfolio Activity—During the year ended December 31, 2017, the Company invested $618.5 million (including capitalized deferred interest) in its real estate finance portfolio and received repayments of $722.0 million (including the receipt of previously capitalized deferred interest). 7


  • Page 17

    Table of Contents Summary of Interest Rate Characteristics—The Company's loans receivable and other lending investments had the following interest rate characteristics ($ in thousands): As of December 31, 2017 2016 Weighted Weighted Carrying % Average Carrying % Average Value of Total Accrual Rate Value of Total Accrual Rate Fixed-rate loans and other lending investments $ 251,185 19.1% 9.4% $ 282,810 19.2% 9.4% Variable-rate loans(1) 890,082 67.5% 8.2% 999,233 67.8% 7.3% Non-performing loans(2) 176,888 13.4% N/A 191,696 13.0% N/A Total carrying value 1,318,155 100.0% 1,473,739 100.0% General reserve for loan losses (17,500) (23,300) Total loans receivable and other lending investments, net $ 1,300,655 $ 1,450,439 __________________________________________________________________________ (1) As of December 31, 2017 and 2016, includes $416.6 million and $657.9 million, respectively, of loans with a weighted average LIBOR floor of 0.3% and 0.2%, respectively. (2) Non-performing loans are presented net of asset-specific loan loss reserves of $61.0 million and $62.2 million, respectively, as of December 31, 2017 and 2016. Summary of Maturities—As of December 31, 2017 the Company's loans receivable and other lending investments had the following maturities ($ in thousands): Number of Loans Carrying % Year of Maturity Maturing Value of Total 2018 17 $ 583,623 44.2% 2019 10 463,541 35.2% 2020 3 16,907 1.3% 2021 4 7,597 0.6% 2022 — — —% 2023 and thereafter 5 69,599 5.3% Total performing loans and other lending investments 39 $ 1,141,267 86.6% Non-performing loans(1) 5 176,888 13.4% Total carrying value 44 $ 1,318,155 100.0% General reserve for loan losses (17,500) Total loans receivable and other lending investments, net $ 1,300,655 _______________________________________________________________________________ (1) Non-performing loans are presented net of asset-specific loan loss reserves of $61.0 million. Net Lease The Company's net lease business seeks to create stable cash flows through long-term net leases primarily to single tenants on its properties. The Company targets mission-critical facilities leased on a long-term basis to tenants, offering structured solutions that combine its capabilities in underwriting, lease structuring, asset management and build-to-suit construction. Leases typically provide for expenses at the facility to be paid by the tenant on a triple net lease basis. Under a typical net lease agreement, the tenant agrees to pay a base monthly operating lease payment and most or all of the facility operating expenses (including taxes, utilities, maintenance and insurance). The Company generally intends to hold its net lease assets for long-term investment. However, the Company may dispose of assets if it deems the disposition to be in the Company's best interests. In 2014, the Company partnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets and gave a right of first refusal to the venture on all new net lease investments that meet specified investment criteria (refer to Note 7 in our consolidated financial statements for more information on our Net Lease Venture). The Net Lease Venture's investment period expires on March 31, 2018. The term of the Net Lease Venture extends through February 13, 2022, subject to two, one- year extension options at the discretion of the Company and its partner. 8


  • Page 18

    Table of Contents In April 2017, institutional investors acquired from us a controlling interest in SAFE's predecessor, which held our Ground Lease business (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 deconsolidated the 12 properties and the associated financing. We account for our investment in SAFE as an equity method investment (refer to Note 7). 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 June 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. Subsequent to the initial public offering and through December 31, 2017, we purchased 1.8 million shares of SAFE's common stock for $34.1 million in open market transactions, at an average cost of $18.85 per share. As of December 31, 2017, we owned approximately 37.6% of SAFE's common stock outstanding which had a market value of $120.2 million at that date. As of December 31, 2017, our consolidated net lease portfolio totaled $1.1 billion gross of $292.3 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 $1.3 billion. The table below provides certain statistics for our net lease portfolio and net lease equity method investments. Consolidated Net Lease Real Estate SAFE Venture Ownership % 100.0% 37.6% 51.9% (1) (1) Net book value (millions) $ 816 $ 490 $ 597 Accumulated depreciation (millions) 292 7 48 Gross carrying value (millions) $ 1,108 $ 497 $ 645 Occupancy 97.9% 100.0% 100.0% Square footage (thousands) 11,322 3,849 4,238 Weighted average lease term (years) 14.0 60.6 19.0 (2) Weighted average yield 8.9% 5.0% 8.5% _______________________________________________________________________________ (1) Net book value represents the net book value of real estate and real estate-related intangibles. (2) Represents the annualized asset yield. Portfolio Activity—During the year ended December 31, 2017, the Company acquired one net lease asset for $6.6 million and invested an aggregate $4.9 million of tenant improvements and capital expenditures on its existing net lease assets. In addition, during the year ended December 31, 2017, the Company made contributions of $49.2 million to the Net Lease Venture and received distributions of $26.0 million from the Net Lease Venture. During the year ended December 31, 2017, the Company recognized $87.5 million in income from sales of real estate and received proceeds of $175.4 million from its net lease portfolio (refer to Note 4 in the Company's consolidated financial statements for further details on consolidated net lease asset activities). 9


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    Table of Contents Summary of Lease Expirations—As of December 31, 2017, lease expirations on the Company's net lease assets, excluding our equity method investments in SAFE and the Net Lease Venture, are as follows ($ in thousands): Annualized In- Number of Place % of In-Place Square Feet of Leases Operating Operating % of Total Leases Expiring Year of Lease Expiration Expiring Lease Income Lease Income Revenue(1) (in thousands) 2018 2 $ 2,323 2.1% 0.6% 119 2019 2 582 0.5% 0.1% 61 2020 1 1,489 1.4% 0.4% 115 2021 2 3,076 2.8% 0.7% 144 2022 3 9,709 9.0% 2.4% 584 2023 2 4,573 4.2% 1.1% 67 2024 1 5,272 4.9% 1.3% 200 2025 — — —% —% — 2026 4 10,020 9.3% 2.4% 638 2027 2 2,796 2.6% 0.7% 892 2028 and thereafter 10 68,339 63.2% 16.6% 8,260 Total 29 $ 108,179 100.0% 26.3% 11,080 Weighted average remaining lease term (in years) 14.0 _______________________________________________________________________________ (1) Reflects the percentage of annualized operating lease income for leases in-place as a percentage of annualized total revenue. 10


  • Page 20

    Table of Contents Operating Properties The operating properties portfolio is comprised of commercial and residential properties, which represent a diverse pool of assets across a broad range of geographies and property types. The Company generally seeks to reposition or redevelop its transitional properties with the objective of maximizing their value through the infusion of capital and/or intensive asset management efforts. Upon stabilization, the Company will generally look to monetize these assets if favorable conditions exist for maximizing value. The commercial properties within this portfolio include office, retail, hotel and other property types. The residential properties within this portfolio are generally luxury condominium projects located in major U.S. cities where the Company's strategy is to sell individual condominium units through retail distribution channels. The Company's operating properties portfolio, including equity method investments, included the following ($ in thousands): Commercial Residential As of December 31, As of December 31, 2017 2016 2017 2016 Real estate, at cost $ 521,385 $ 522,337 $ — $ — Less: accumulated depreciation (55,137) (46,175) — — Real estate, net $ 466,248 $ 476,162 $ — $ — Real estate available and held for sale 20,069 — 48,519 82,480 Other investments 38,761 3,577 — 6 Total portfolio assets $ 525,078 $ 479,739 $ 48,519 $ 82,486 Commercial Properties The Company classifies commercial properties as either stabilized or transitional. In determining whether a commercial property is stabilized or transitional, the Company analyzes certain performance metrics, primarily occupancy and yield. 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. The table below provides certain statistics for our commercial operating property portfolio. Commercial Operating Property Statistics ($ in millions) Stabilized Operating Transitional Operating Total December 31, December 31, December 31, December 31, December 31, December 31, 2017 2016 2017 2016 2017 2016 Gross book value ($mm)(1) $ 427 $ 337 $ 153 $ 189 $ 580 $ 526 (2) Occupancy 85% 86% 61% 54% 78% 74% Yield 6.0% 8.5% 3.7% 1.5% 5.5% 5.5% ______________________________________________________________ (1) Gross carrying value represents carrying value gross of accumulated depreciation. (2) Occupancy is as of December 31, 2017 and 2016. Summary of Portfolio Characteristics—As of December 31, 2017, commercial properties within the operating properties portfolio, including equity method investments, included 26 facilities, encompassing 4.1 million square feet located in 10 states. Commercial properties include office, industrial and retail buildings along with hotels and marinas. The Company’s commercial properties were primarily acquired through foreclosure or deed in lieu of foreclosure in connection with the resolution of loans. Portfolio Activity—During the year ended December 31, 2017, the Company received $2.5 million of distributions from its commercial operating property equity method investments. The Company also invested $27.7 million in its commercial operating properties and made contributions of $36.3 million to its commercial operating property equity method investments. 11


  • Page 21

    Table of Contents As of December 31, 2017, lease expirations on commercial properties within the operating properties portfolio, excluding hotels, marinas and other investments, were as follows ($ in thousands): Annualized In- Number of Place % of In-Place Square Feet of Leases Operating Operating % of Total Leases Expiring Year of Lease Expiration Expiring Lease Income Lease Income Revenue(1) (in thousands) 2018(2) 121 $ 5,568 13.8% 1.3% 328 2019 52 2,028 5.0% 0.5% 129 2020 41 2,617 6.5% 0.6% 132 2021 27 9,410 23.3% 2.3% 71 2022 45 3,888 9.6% 0.9% 308 2023 8 1,180 2.9% 0.3% 64 2024 9 1,497 3.7% 0.4% 144 2025 8 1,683 4.2% 0.4% 48 2026 14 2,372 5.9% 0.6% 416 2027 38 6,364 15.8% 1.5% 130 2028 and thereafter 15 3,758 9.3% 0.9% 155 Total 378 $ 40,365 100.0% 9.7% 1,925 Weighted average remaining lease term (in years) 5.4 _______________________________________________________________________________ (1) Reflects the percentage of annualized operating lease income for leases in-place as a percentage of annualized total revenue. (2) Includes office leases expiring in commercial properties as well as month-to-month and short term license agreements within our retail properties. Residential Properties Summary of Portfolio Characteristics—As of December 31, 2017, residential properties within the operating properties portfolio included 6 residential projects with 34 units located within luxury condominium projects in major cities throughout the United States. Portfolio Activity—During the year ended December 31, 2017, the Company sold 23 residential condominiums (excluding fractional units) for net proceeds of $35.3 million resulting in income from sales of real estate of $4.5 million. During the same period, the Company invested $7.4 million of capital expenditures in its residential properties. Land and Development The Company's land and development portfolio included the following ($ in thousands): As of December 31, 2017 2016 Land and development, net $ 860,311 $ 945,565 Other investments 63,855 84,804 Total $ 924,166 $ 1,030,369 Summary of Portfolio Characteristics—As of December 31, 2017, the Company's land and development portfolio, including equity method investments, included 28 properties, comprised of eight master planned community ("MPC") projects, 14 infill land parcels and six waterfront land parcels located throughout the United States. MPCs represent large-scale residential projects that the Company has and/or will entitle, plan and/or develop and may sell through retail channels to home builders or in bulk. The remainder of the Company’s land includes infill and waterfront parcels located in and around major cities that the Company will develop, sell to or partner with commercial real estate developers. Waterfront parcels are generally entitled for residential projects and urban infill parcels are generally entitled for mixed-use projects. 12


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    Table of Contents Portfolio Activity—The following tables present a land and development portfolio rollforward and certain land and development statistics. Land and Development Portfolio Rollforward (in millions) Years Ended December 31, 2017 2016 Beginning balance(1) $ 945.6 $ 1,002.0 Asset sales(2) (175.3) (68.9) Asset transfers in (out)(3) (8.9) (90.7) Capital expenditures 127.0 109.5 Other(4) (28.1) (6.3) Ending balance(1) $ 860.3 $ 945.6 _______________________________________________________________________ (1) As of December 31, 2017 and 2016, excludes $63.9 million and $84.8 million, respectively, of equity method investments. (2) Represents gross book value of the assets sold, rather than proceeds received. (3) Assets transferred into land and development segment or out to another segment. (4) For the years ended December 31, 2017 and 2016, includes $20.5 million and $3.8 million, respectively, of impairments. Land and Development Statistics (in millions) Years Ended December 31, 2017 2016 Land development revenue $ 196.9 $ 88.3 Land development cost of sales 180.9 62.0 Land development revenue less cost of sales $ 16.0 $ 26.3 Earnings from land and development equity method investments 7.3 30.0 Income from sales of real estate(1) — 8.8 Total $ 23.3 $ 65.1 _______________________________________________________________________________ (1) During the year ended December 31, 2016, we sold a land and development asset to a newly formed unconsolidated entity in which we own a 50.0% equity interest and recognized a gain on sale of $8.8 million, reflecting our share of the interest sold. 13


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    Table of Contents As of December 31, 2017, the Company had seven land and development projects in production, eight in development and 13 in the pre-development phase. The Company's land and development projects that contributed to revenues during the year ended December 31, 2017 are listed below ($ in thousands): Anticipated Sales Units Estimated Property Completion 2017 Sold in Cumulative Remaining Project Type Location Date(1) Revenue 2017(2) Units Sold Units(2) Land and development Prince George's Bevard(3) MPC County, MD 2017 $ 114,000 N/A N/A N/A Naples Reserve MPC Naples, FL 2022 22,055 204 364 745 Asbury Monroe Waterfront Park, NJ 2018 17,025 29 29 5 Richmond, Magnolia Green MPC VA 2026 16,598 196 985 2,061 Infill/Mixed Scottsdale, Sage Scottsdale Use AZ 2017 12,534 23 72 — Spring Mountain Ranch Phase 2 Riverside, &3 MPC CA 2020 8,203 96 96 878 Heath at Tetherow MPC Bend, OR 2017 6,464 34 159 — Total land and development 196,879 582 1,705 3,689 Units Estimated (4) Equity in Sold in Cumulative Remaining Land and development equity method investments Earnings 2017(2) Units Sold Units(2) N. Miami Marina Palms(5) Waterfront Beach, FL 2018 2,621 200 433 35 Riverside, Spring Mountain Ranch Phase 1 MPC CA 2017 4,734 52 435 — Other land and development equity method investments Various Various Various (63) N/A N/A N/A Total land and development equity method investments 7,292 252 868 35 Total Land and Development Projects Contributing to Earnings $ 204,171 834 2,573 3,724 _______________________________________________________________________________ (1) Anticipated completion dates are subject to change as a result of factors that may be outside of the Company's control, such as economic conditions, uncertainty with rezoning, obtaining governmental permits and approvals, concerns of community associations and reliance on third party contractors. (2) Units sold in 2017 excludes land bulk parcel sales. Estimated remaining units may include single-family lots, condos, multifamily rental units and hotel keys, as applicable, for the respective properties and are subject to change. (3) Refer to Note 11. (4) These land and development projects are accounted for under the equity method of accounting. (5) Sales activity is the result of percentage of completion accounting at the joint venture during the year ended December 31, 2017. Bevard In connection with the resolution of litigation involving a dispute over the purchase and sale of approximately 1,250 acres of land in Prince George’s County, Maryland ("Bevard"), during the year ended December 31, 2017, we recognized $114.0 million of land development revenue (refer to Note 11). Naples Reserve Naples Reserve is a water-themed master planned community in Naples, FL built on 688 acres. The project comprises 1,100 lakefront residences across 22 interconnected lakes, including a 125-acre navigable recreation lake and adjacent resort-style amenity center as its centerpiece. The community also includes a neighborhood, Parrot Cay, designated for custom homes constructed by local builders in the Naples Market. Naples Reserve sold 204 residential lots for $22.1 million of land development revenue during the year ended December 31, 2017. 14


  • Page 24

    Table of Contents Monroe Monroe is a 34 unit residential condominium development in Asbury Park, NJ. Monroe sold 29 condominium units for $17.0 million of land development revenue during the year ended December 31, 2017. Magnolia Green Magnolia Green is a 3,500 unit multi-generational master planned community just outside of Richmond, Virginia with distinct phases designed for people in different life stages, from first home buyers to empty nesters. Built on nearly 1,900 acres, Magnolia Green is a community with home designs from the area's top builders. The community’s amenity package features an 18-hole Jack Nicklaus designed golf course and a full-service golf clubhouse and aquatic center. There is also a tennis facility which is currently under construction. Magnolia Green sold 196 residential lots for $16.6 million of land development revenue during the year ended December 31, 2017. Sage Scottsdale Sage Scottsdale is an infill development project in Scottsdale, AZ comprised of 72 two- and three-bedroom condominiums. The community is located next to the waterfront canal and Old Town Scottsdale and provides residents with a wide array of luxury amenities such as a resort pool, clubhouse, fitness room and wine cellar / tasting room. Sales at Sage Scottsdale commenced in 2015 and the project sold its remaining 23 condominiums for $12.5 million of land development revenue during the year ended December 31, 2017. Spring Mountain Ranch - Phase 1, 2 & 3 Spring Mountain Ranch is a 785-acre master planned community located four miles from Riverside, CA. Spring Mountain Ranch offers convenient freeway access and proximity to local job centers. The community plan includes a total of 1,400 home sites across several neighborhoods, designed with an emphasis on outdoor recreation with homes marketed towards first time, move up and empty nester purchasers. In late 2013, the Company contributed a portion of its land and entered into a joint venture with a national homebuilder to jointly develop residential lots in Phase 1 of the project, which was comprised of 435 homes. The Company owned a noncontrolling 75.6% interest in Phase 1 of Spring Mountain Ranch, which was completed in 2017 and sold its remaining 52 lots and generated the Company $4.7 million of earnings from equity method investments for the year ended December 31, 2017. Phase 2A is wholly-owned by the Company and includes 315 lots within the Spring Mountain Ranch master planned community and is fully covered under a lot takedown agreement with a national homebuilder. The lot take down agreement requires the homebuilder to close on 32 lots per quarter for a fixed price. The Company sold 96 lots in Phase 2A for $8.2 million of land and development revenue during the year ending December 31, 2017. Heath at Tetherow Tetherow is a 700-acre master planned community located in Bend, OR entitled for 378 residential lots, of which the Company originally acquired 159 lots within the Heath neighborhood. Bend has access to a wide array of recreational activities such as Mount Bachelor and the Cascade Mountains for skiing and hiking, as well as the Deschutes River for kayaking and fishing. In addition, the community’s lodge was named “World’s #1 Resort” on Booking.com and its golf course was ranked among Golf Digest’s “Top 100 Greatest Public Courses.” Heath at Tetherow sold its remaining 34 residential lots for $6.5 million of land development revenue during the year ended December 31, 2017. Marina Palms Marina Palms is a waterfront development in North Miami Beach, FL consisting of 468 residential condominium units within two towers and a 110-slip full-service marina. It is the first luxury condominium and yacht club project in Miami in two decades. Situated on 14 acres and over 750 feet of waterfront, Marina Palms offers views over the Intracoastal Waterway and beyond to the Atlantic Ocean. The Company has partnered with local developers for the development of Marina Palms and contributed its land in return for a 47.5% interest in the venture. As of December 31, 2017, the 234 unit north tower has one unit remaining for sale and the 234 unit south tower has 34 units remaining for sale. 15


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    Table of Contents Policies with Respect to Other Activities The Company's investment, financing and corporate governance policies (including conflicts of interests policies) are managed under the ultimate supervision of the Company's Board of Directors. The Company can amend, revise or eliminate these policies at any time without a vote of its shareholders. The Company intends to originate and manage investments in a manner consistent with the requirements of the Internal Revenue Code of 1986, as amended (the "Code") for the Company to qualify as a REIT. Investment Restrictions or Limitations The Company does not have any prescribed allocation among investments or product lines. Instead, the Company focuses on corporate and real estate credit underwriting to develop an analysis of the risk/reward trade-offs in determining the pricing and advisability of each particular transaction. The Company believes that it is not, and intends to conduct its operations so as not to become, regulated as an investment company under the Investment Company Act. The Investment Company Act generally exempts entities that are "primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" (collectively, "Qualifying Interests"). The Company intends to rely on current interpretations of the Securities and Exchange Commission in an effort to qualify for this exemption. Based on these interpretations, the Company, among other things, must maintain at least 55% of its assets in Qualifying Interests and and at least 80% of its assets in Qualifying Interests and other "real estate-related assets" (such as mezzanine loans and unsecured investments in real estate entities) combined. The Company's senior mortgages, real estate assets and certain of its subordinated mortgages generally constitute Qualifying Interests. Subject to the limitations on ownership of certain types of assets and the gross income tests imposed by the Code, the Company also may invest in the securities of other REITs, other entities engaged in real estate activities or other issuers, including for the purpose of exercising control over such entities. Competition The Company operates in a competitive market. See Item 1a—Risk factors—"We compete with a variety of financing and leasing sources for our customers," for a discussion of how we may be affected by competition. Regulation The operations of the Company are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things: (1) regulate credit granting activities; (2) establish maximum interest rates, finance charges and other charges; (3) require disclosures to customers; (4) govern secured transactions; (5) set collection, foreclosure, repossession and claims-handling procedures and other trade practices; (6) govern privacy of customer information; and (7) regulate anti-terror and anti-money laundering activities. Although most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges and on certain collection practices and creditor remedies, and require licensing of lenders and financiers and adequate disclosure of certain contract terms. The Company is also required to comply with certain provisions of the Equal Credit Opportunity Act that are applicable to commercial loans. In the judgment of management, existing statutes and regulations have not had a material adverse effect on the business conducted by the Company. It is not possible at this time to forecast the exact nature of any future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon the future business, financial condition or results of operations or prospects of the Company. The Company has elected and expects to continue to qualify to be taxed as a REIT under Section 856 through 860 of the Code. As a REIT, the Company must generally distribute at least 90% of its net taxable income, excluding capital gains, to its shareholders each year. In addition, the Company must distribute 100% of its net taxable income (including net capital gains) each year to eliminate U.S. corporate federal income taxes payable by it. REITs are also subject to a number of organizational and operational requirements in order to elect and maintain REIT qualification. These requirements include specific share ownership tests and asset and gross income tests. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal income tax (including, for taxable years prior to 2018, any applicable alternative minimum tax) on its net taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to state and local taxes and to U.S. federal income tax and excise tax on its undistributed income. 16


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    Table of Contents Code of Conduct The Company has adopted a code of conduct that sets forth the principles of conduct and ethics to be followed by our directors, officers and employees (the "Code of Conduct"). The purpose of the Code of Conduct is to promote honest and ethical conduct, compliance with applicable governmental rules and regulations, full, fair, accurate, timely and understandable disclosure in periodic reports, prompt internal reporting of violations of the Code of Conduct and a culture of honesty and accountability. A copy of the Code of Conduct has been provided to each of our directors, officers and employees, who are required to acknowledge that they have received and will comply with the Code of Conduct. A copy of the Company's Code of Conduct has been previously filed with the SEC and is incorporated by reference in this Annual Report on Form 10-K as Exhibit 14.0. The Code of Conduct is also available on the Company's website at www.istar.com. The Company will disclose to shareholders material changes to its Code of Conduct, or any waivers for directors or executive officers, if any, within four business days of any such event. As of December 31, 2017, there have been no amendments to the Code of Conduct and the Company has not granted any waivers from any provision of the Code of Conduct to any directors or executive officers. Employees As of February 22, 2018, the Company had 186 employees and believes it has good relationships with its employees. The Company's employees are not represented by any collective bargaining agreements. Other In addition to this Annual Report on Form 10-K, the Company files quarterly and special reports, proxy statements and other information with the SEC. Through the Company's corporate website, www.istar.com, the Company makes available free of charge its annual proxy statement, annual reports to stockholders, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. You may also read and copy any document filed at the public reference facilities at 100 F Street, N.E., Washington, D.C. 25049. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC's electronic data gathering, analysis and retrieval system via electronic means, including on the SEC's homepage, which can be found at www.sec.gov. Item 1a. Risk Factors In addition to the other information in this report, you should consider carefully the following risk factors in evaluating an investment in the Company's securities. Any of these risks or the occurrence of any one or more of the uncertainties described below could have a material adverse effect on the Company's business, financial condition, results of operations, cash flows and market price of the Company's common stock. The risks set forth below speak only as of the date of this report and the Company disclaims any duty to update them except as required by law. For purposes of these risk factors, the terms "our Company," "we," "our" and "us" refer to iStar Inc. and its consolidated subsidiaries, unless the context indicates otherwise. Risks Related to Our Business Changes in general economic conditions may adversely affect our business. Our success is generally dependent upon economic conditions in the United States, and in particular, the geographic areas in which our investments are located. Substantially all businesses, including ours, were negatively affected by the previous economic recession and resulting illiquidity and volatility in the credit and commercial real estate markets. The commercial real estate and credit markets remain volatile and it is not possible for us to predict whether these trends will continue in the future or quantify the impact of these or other trends on our financial results. Deterioration in economic trends could have a material adverse effect on our financial performance, liquidity and our ability to meet our debt obligations. 17


  • Page 27

    Table of Contents Our credit ratings will impact our borrowing costs. Our borrowing costs and our access to the debt capital markets depend significantly on our credit ratings. Our unsecured corporate credit ratings from major national credit rating agencies are currently below investment grade. Having below investment grade credit ratings increases our borrowing costs and caused restrictive covenants in our public debt instruments to become operative. These restrictive covenants are described below in "Covenants in our indebtedness could limit our flexibility and adversely affect our financial condition." These factors have adversely impacted our financial performance and will continue to do so unless our credit ratings improve. Covenants in our indebtedness could limit our flexibility and adversely affect our financial condition. 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 restriction on debt incurrence based upon the effect of the debt incurrence on our fixed charge coverage ratio. 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. Limitations on our ability to incur new indebtedness under the fixed charge coverage ratio may limit the amount of new investments we make. In March 2015, we entered into a secured revolving credit facility with a maximum capacity of $250.0 million (our "2015 Secured Revolving Credit Facility") and we upsized the facility to $325.0 million in September 2017 and added additional lenders to the syndicate. In June 2016, we entered into a senior secured credit facility with a maximum capacity of $450.0 million and in August 2016 we upsized the facility to $500.0 million (our "2016 Senior Secured Credit Facility"). In September 2017, we reduced the 2016 Senior Secured Credit Facility to $400.0 million. Our 2015 Secured Revolving Credit Facility and our 2016 Senior Secured 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, our 2016 Senior Secured Credit Facility requires the Company to maintain collateral coverage of at least 1.25x outstanding borrowings on the facility and our 2015 Secured Revolving Credit Facility requires us to maintain both collateral coverage 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. In addition, for so long as we maintain our qualification as a REIT, our 2016 Senior Secured Credit Facility and 2015 Secured Revolving Credit Facility permit us to distribute 100% of our REIT taxable income on an annual basis (prior to deducting certain cumulative net operating loss carryforwards). We may not pay common dividends if the Company ceases to qualify as a REIT. Our 2016 Senior Secured Credit Facility and 2015 Secured Revolving Credit Facility contain cross default provisions that would allow the lenders to declare an event of default and accelerate our indebtedness to them if we fail to pay amounts due in respect of our 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 our unsecured public debt securities permit the bondholders to declare an event of default and accelerate our indebtedness to them if our other recourse indebtedness in excess of specified thresholds is not paid at final maturity or if such indebtedness is accelerated. A default by us on our indebtedness would have a material adverse effect on our business, liquidity and the market price of our common stock. We have significant indebtedness and funding commitments and limitations on our liquidity and ability to raise capital may adversely affect us. Sufficient liquidity is critical to our ability to grow and to meet our scheduled debt payments and our funding commitments to borrowers. We have relied on proceeds from the issuance of unsecured debt, secured borrowings, repayments from our loan assets and proceeds from asset sales to fund our operations and meet our debt maturities, and we expect to continue to rely primarily on these sources of liquidity for the foreseeable future. While we had access to various sources of capital in 2017, our ability to access capital in 2018 and beyond will be subject to a number of factors, many of which are outside of our control, such as general economic conditions, changes in interest rates and conditions prevailing in the credit and real estate markets. There can be no assurance that we will have access to liquidity when needed or on terms that are acceptable to us. We may also encounter difficulty in selling assets or executing capital raising strategies on acceptable terms in a timely manner, which could impact our ability to make scheduled repayments on our outstanding debt. Failure to repay or refinance our borrowings as they come due would be an event of default under the relevant debt instruments, which could result in a cross default and acceleration of our other outstanding debt obligations. Failure to meet funding commitments could cause us to be in default of our financing commitments to borrowers. Any of the foregoing could have a material adverse effect on our business, liquidity and the market price of our common stock. 18


  • Page 28

    Table of Contents We may utilize derivative instruments to hedge risk, which may adversely affect our borrowing cost and expose us to other risks. The derivative instruments we may use are typically in the form of interest rate swaps, interest rate caps and foreign exchange contracts. Interest rate swaps effectively change variable-rate debt obligations to fixed-rate debt obligations or fixed-rate debt obligations to variable-rate debt obligations. Interest rate caps limit our exposure to rising interest rates. Foreign exchange contracts limit or offset our exposure to changes in currency rates in respect of certain investments denominated in foreign currencies. Our use of derivative instruments also involves the risk that a counterparty to a hedging arrangement could default on its obligation and the risk that we may have to pay certain costs, such as transaction fees or breakage costs, if a hedging arrangement is terminated by us. As a matter of policy, we enter into hedging arrangements with counterparties that are large, creditworthy financial institutions typically rated at least "A/A2" by S&P and Moody's, respectively. Developing an effective strategy for dealing with movements in interest rates and foreign currencies is complex and no strategy can completely insulate us from risks associated with such fluctuations. There can be no assurance that any hedging activities will have the desired beneficial impact on our results of operations or financial condition. Significant increases in interest rates could have an adverse effect on our operating results. Our operating results 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 interest earning assets and interest bearing liabilities subject to the impact of interest rate floors and caps, as well as the amounts of floating rate assets and liabilities. Any significant compression of the spreads between interest earning assets and interest bearing liabilities could have a material adverse effect on us. While interest rates remain low by historical standards, rates have recently risen and are generally expected to rise in the coming years, although there is no certainty as to the amount by which they may rise. In the event of a significant rising interest rate environment, rates could exceed the interest rate floors that exist on certain of our floating rate debt and create a mismatch between our floating rate loans and our floating rate debt that could have a significant adverse effect on our operating results. An increase in interest rates could also, 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. In addition, rising interest rates tend to negatively impact the residential mortgage market, which in turn may adversely affect the value of and demand for our land assets, including our residential development projects. 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 are required to make a number of judgments in applying accounting policies, and different estimates and assumptions could result in changes to our financial condition and results of operations. The carrying values of our assets held for investment are not determined based upon the prices at which they could be sold currently. Material estimates that are particularly susceptible to significant change underlie our determination of the reserve for loan losses, which is based primarily on the estimated fair value of loan collateral, as well as the valuation of real estate assets and deferred tax assets. While we have identified those accounting policies that are considered critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could have a material adverse effect on our financial performance and results of operations and actual results may differ materially from our estimates. In addition, as discussed further in the notes to our consolidated financial statements, we record our real estate and land and development assets at cost less accumulated depreciation and amortization. If we hold a property for use or investment, we will only review it for impairment in value if events or changes in circumstances indicate that the carrying amount of the property may not be recoverable, based on management's determination that the aggregate future cash flows to be generated by the asset (taking into account the anticipated holding period of the asset) is less than the carrying value. Management's estimates of cash flows considers factors such as expected future operating income trends, as well as the effects of demand, competition and other economic factors. The carrying values of our real estate and land and development assets are not indicative of the prices at which we would be able to sell the properties, if we had to do so before the end of their intended holding period. If we changed our investment intent and decided to sell a property that was being held for investment, including in distressed circumstances as a means of raising liquidity, there can be no assurance that we would not realize losses on such sales, which losses could have a material adverse effect on our business, financial results, liquidity and the market price of our common stock. Changes in accounting rules will affect our financial reporting. The Financial Accounting Standards Board ("FASB") has issued new accounting standards that will affect our financial reporting. 19


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    Table of Contents 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. 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. 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 from its books 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. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") which supersedes existing industry-specific guidance, including ASC 360-20, Real Estate Sales. The new standard is principles-based and requires more estimates and judgment than current guidance. Certain contracts with customers, including lease contracts and financial instruments and other contractual rights, are not within the scope of the new guidance. Although most of the Company's revenue is operating lease income generated from lease contracts and interest income generated from financial instruments, certain other of the Company's revenue streams will be impacted by the new guidance. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, to defer the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption was permitted beginning January 1, 2017. We will adopt ASU 2014-09 using the modified retrospective approach (refer to Note 3 for more information regarding the impact of ASU 2014-09). Changes in accounting standards could affect the comparability of our reported results with prior periods and our ability to comply with financial covenants under our debt instruments. We may also need to change our accounting systems and processes to enable us to comply with the new standards, which may be costly. For additional information regarding new accounting standards, refer to Note 3 to our consolidated financial statements under the heading "New accounting pronouncements." Our reserves for loan losses may prove inadequate, which could have a material adverse effect on our financial results. We maintain loan loss reserves to offset potential future losses. Our general loan loss reserve reflects management's then- current estimation of the probability and severity of losses within our portfolio. In addition, our determination of asset-specific loan loss reserves relies on material estimates regarding the fair value of loan collateral. Estimation of ultimate loan losses, provision expenses and loss reserves is a complex and subjective process. As such, there can be no assurance that management's judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses. Such losses could be caused by factors including, but not limited to, unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate or markets in which our borrowers or their properties are located. In particular, during the previous financial crisis, the weak economy and disruption of the credit markets adversely impacted the ability and willingness of many of our borrowers to service their debt and refinance our loans to them at maturity. If our reserves for credit losses prove inadequate we may suffer additional losses which would have a material adverse effect on our financial performance, liquidity and the market price of our common stock. We have suffered losses when a borrower defaults on a loan and the underlying collateral value is not sufficient, and we may suffer additional losses in the future. We have suffered losses arising from borrower defaults on our loan assets and we may suffer additional losses in the future. In the event of a default by a borrower on a non-recourse loan, we will only have recourse to the real estate-related assets collateralizing the loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. Conversely, we 20


  • Page 30

    Table of Contents sometimes make loans that are unsecured or are secured only by equity interests in the borrowing entities. These loans are subject to the risk that other lenders may be directly secured by the real estate assets of the borrower. In the event of a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying real estate. In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the borrower prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or managers of the assets. We sometimes obtain individual or corporate guarantees from borrowers or their affiliates. In cases where guarantees are not fully or partially secured, we typically rely on financial covenants from borrowers and guarantors which are designed to require the borrower or guarantor to maintain certain levels of creditworthiness. Where we do not have recourse to specific collateral pledged to satisfy such guarantees or recourse loans, or where the value of the collateral proves insufficient, we will only have recourse as an unsecured creditor to the general assets of the borrower or guarantor, some or all of which may be pledged to satisfy other lenders. There can be no assurance that a borrower or guarantor will comply with its financial covenants, or that sufficient assets will be available to pay amounts owed to us under our loans and guarantees. As a result of these factors, we may suffer additional losses which could have a material adverse effect on our financial performance, liquidity and the market price of our common stock. In the event of a borrower bankruptcy, we may not have full recourse to the assets of the borrower in order to satisfy our loan. In addition, certain of our loans are subordinate to other debts of the borrower. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt receives payment. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through "standstill" periods) and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy and borrower litigation can significantly increase collection costs and losses and the time necessary to acquire title to the underlying collateral, during which time the collateral may decline in value, causing us to suffer additional losses. If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a borrower may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or increasing interest rates may hinder a borrower's ability to refinance our loan because the underlying property cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we could suffer additional loss which may adversely impact our financial performance. We are subject to additional risks associated with loan participations. Some of our loans are participation interests or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control. We are subject to additional risk associated with owning and developing real estate. We own a number of assets that previously served as collateral on defaulted loans. These assets are predominantly land and development assets and operating properties. These assets expose us to additional risks, including, without limitation: We must incur costs to carry these assets and in some cases make repairs to defects in construction, make improvements to, or complete the assets, which requires additional liquidity and results in additional expenses that could exceed our original estimates and impact our operating results. Real estate projects are not liquid and, to the extent we need to raise liquidity through asset sales, we may be limited in our ability to sell these assets in a short-time frame. Uncertainty associated with economic conditions, rezoning, obtaining governmental permits and approvals, concerns of community associations, reliance on third party contractors, increasing commodity costs and threatened or pending litigation may materially delay our completion of rehabilitation and development activities and materially increase their cost to us. The values of our real estate investments are subject to a number of factors outside of our control, including changes in the general economic climate, changes in interest rates and the availability of attractive financing, over-building or decreasing demand in the markets where we own assets, and changes in law and governmental regulations. 21


  • Page 31

    Table of Contents The residential market has experienced significant downturns that could recur and adversely affect us. As of December 31, 2017, we owned land and residential condominiums with a net carrying value of $908.8 million. The housing market in the United States has previously been affected by weakness in the economy, high unemployment levels and low consumer confidence. It is possible another downturn could occur again in the near future and adversely impact our portfolio, and accordingly our financial performance. In addition, rising interest rates tend to negatively impact the residential mortgage market, which in turn may adversely affect the value of and demand for our land assets including our residential development projects. We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their lease obligations. We own properties leased to tenants of our real estate assets and receive rents from tenants during the contracted term of such leases. A tenant's ability to pay rent is determined by its creditworthiness, among other factors. If a tenant's credit deteriorates, the tenant may default on its obligations under our lease and may also become bankrupt. The bankruptcy or insolvency of our tenants or other failure to pay is likely to adversely affect the income produced by our real estate assets. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. If a tenant files for bankruptcy, we may not be able to evict the tenant solely because of such bankruptcy or failure to pay. A court, however, may authorize a tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In addition, certain amounts paid to us within 90 days prior to the tenant's bankruptcy filing could be required to be returned to the tenant's bankruptcy estate. In any event, it is highly unlikely that a bankrupt or insolvent tenant would pay in full amounts it owes us under a lease that it intends to reject. In other circumstances, where a tenant's financial condition has become impaired, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration for a lease termination fee that is likely less than the total contractual rental amount. Without regard to the manner in which the lease termination occurs, we are likely to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant. In any of the foregoing circumstances, our financial performance could be materially adversely affected. We are subject to risks relating to our asset concentration. Our portfolio consists primarily of real estate and commercial real estate loans which are generally diversified by asset type, obligor, property type and geographic location. As of December 31, 2017, approximately 22% of the gross carrying value of our assets related to land and development properties, 20% related to office properties, 12% related to mixed collateral properties, 12% related to entertainment/leisure collateral properties and 11% related to condominium properties. All of these property types were adversely affected by the previous economic recession. In addition, as of December 31, 2017, approximately 36% of the carrying value of our assets related to properties located in the northeastern United States (including 22% in New York), 18% related to properties located in the western United States (including 12% in California), 16% related to properties located in the southeastern United States and 13% related to properties located in the southwestern United States. These regions include areas that were particularly hard hit by the prior downturn in the residential real estate markets. In addition, we have $9.2 million of international assets, which are subject to increased risks due to the economic uncertainty abroad. We may suffer additional losses on our assets due to these concentrations. We underwrite the credit of prospective borrowers and tenants and often require them to provide some form of credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although our loans and real estate assets are geographically diverse and the borrowers and tenants operate in a variety of industries, to the extent we have a significant concentration of interest or operating lease revenues from any single borrower or customer, the inability of that borrower or tenant to make its payment could have a material adverse effect on us. As of December 31, 2017, our five largest borrowers or tenants of net lease assets collectively accounted for approximately 15.0% of our 2017 revenues, of which no single customer accounts for more than 5.7%. Lease expirations, lease defaults and lease terminations may adversely affect our revenue. Lease expirations and lease terminations may result in reduced revenues if the lease payments received from replacement tenants are less than the lease payments received from the expiring or terminating corporate tenants. In addition, lease defaults or lease terminations by one or more significant tenants or the failure of tenants under expiring leases to elect to renew their leases could cause us to experience long periods of vacancy with no revenue from a facility and to incur substantial capital expenditures and/or lease concessions in order to obtain replacement tenants. Leases representing approximately 27.4% of our in-place operating lease income are scheduled to expire during the next five years. 22


  • Page 32

    Table of Contents We compete with a variety of financing and leasing sources for our customers. The financial services industry and commercial real estate markets are highly competitive and have become more competitive in recent years. Our competitors include finance companies, other REITs, commercial banks and thrift institutions, investment banks and hedge funds, among others. Our competitors may seek to compete aggressively on a number of factors including transaction pricing, terms and structure. We may have difficulty competing to the extent we are unwilling to match our competitors' deal terms in order to maintain our interest margins and/or credit standards. To the extent that we match competitors' pricing, terms or structure, we may experience decreased interest margins and/or increased risk of credit losses, which could have a material adverse effect on our financial performance, liquidity and the market price of our common stock. We face significant competition within our net leasing business from other owners, operators and developers of properties, many of which own properties similar to ours in markets where we operate. Such competition may affect our ability to attract and retain tenants and reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may result in their owners offering lower rental rates than we would or providing greater tenant improvement allowances or other leasing concessions. This combination of circumstances could adversely affect our revenues and financial performance. We are subject to certain risks associated with investing in real estate, including potential liabilities under environmental laws and risks of loss from weather conditions, man-made or natural disasters, climate change and terrorism. Under various U.S. federal, state and local environmental laws, ordinances and regulations, a current or previous owner of real estate (including, in certain circumstances, a secured lender that succeeds to ownership or control of a property) may become liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property. Those laws typically impose cleanup responsibility and liability without regard to whether the owner or control party knew of or was responsible for the release or presence of such hazardous or toxic substances. The costs of investigation, remediation or removal of those substances may be substantial. The owner or control party of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners of real properties for personal injuries associated with asbestos-containing materials. While a secured lender is not likely to be subject to these forms of environmental liability, when we foreclose on real property, we become an owner and are subject to the risks of environmental liability. Additionally, our net lease assets require our tenants to undertake the obligation for environmental compliance and indemnify us from liability with respect thereto. There can be no assurance that our tenants will have sufficient resources to satisfy their obligations to us. Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts, fires and other environmental conditions can damage properties we own. As of December 31, 2017, approximately 18% of the carrying value of our assets was located in the western and northwestern United States, geographic areas at higher risk for earthquakes. Additionally, we own properties located near the coastline and the value of our properties will potentially be subject to the risks associated with long-term effects of climate change. A significant number of our properties are located in major urban areas which, in recent years, have been high risk geographical areas for terrorism and threats of terrorism. Certain forms of terrorism including, but not limited to, nuclear, biological and chemical terrorism, political risks, environmental hazards and/or Acts of God may be deemed to fall completely outside the general coverage limits of our insurance policies or may be uninsurable or cost prohibitive to justify insuring against. Furthermore, if the U.S. Terrorism Risk Insurance Program Reauthorization Act is repealed or not extended or renewed upon its expiration, the cost for terrorism insurance coverage may increase and/or the terms, conditions, exclusions, retentions, limits and sublimits of such insurance may be materially amended, and may effectively decrease the scope and availability of such insurance to the point where it is effectively unavailable. Future weather conditions, man-made or natural disasters, effects of climate change or acts of terrorism could adversely impact the demand for, and value of, our assets and could also directly impact the value of our assets through damage, destruction or loss, and could thereafter materially impact the availability or cost of insurance to protect against these events. Although we believe our owned real estate and the properties collateralizing our loan assets are adequately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance to our tenants. Any weather conditions, man-made or natural disasters, terrorist attack or effect of climate change, whether or not insured, could have a material adverse effect on our financial performance, liquidity and the market price of our common stock. In addition, there is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to claims payments due to a deterioration in its financial condition. 23


  • Page 33

    Table of Contents From time to time we make investments in companies over which we do not have sole control. Some of these companies operate in industries that differ from our current operations, with different risks than investing in real estate. From time to time we make debt or equity investments in other companies that we may not control or over which we may not have sole control. Although these businesses generally have a significant real estate component, some of them may operate in businesses that are different from our primary business segments. Consequently, investments in these businesses, among other risks, subject us to the operating and financial risks of industries other than real estate and to the risk that we do not have sole control over the operations of these businesses. From time to time we may make additional investments in or acquire other entities that may subject us to similar risks. Investments in entities over which we do not have sole control, including joint ventures, present additional risks such as having differing objectives than our partners or the entities in which we invest, or becoming involved in disputes, or competing with those persons. In addition, we rely on the internal controls and financial reporting controls of these entities and their failure to maintain effectiveness or comply with applicable standards may adversely affect us. Declines in the market values of our equity investments may adversely affect periodic reported results. Most of our equity investments are in funds or companies that are not publicly traded and their fair value may not be readily determinable. We may periodically estimate the fair value of these investments, based upon available information and management's judgment. Because such valuations are inherently uncertain, they may fluctuate over short periods of time. In addition, our determinations regarding the fair value of these investments may be materially higher than the values that we ultimately realize upon their disposal, which could result in losses that have a material adverse effect on our financial performance, the market price of our common stock and our ability to pay dividends. Quarterly results may fluctuate and may not be indicative of future quarterly performance. Our quarterly operating results could fluctuate; therefore, reliance should not be placed on past quarterly results as indicative of our performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others, variations in loan and real estate portfolio performance, levels of non-performing assets and related provisions, market values of investments, costs associated with debt, general economic conditions, the state of the real estate and financial markets and the degree to which we encounter competition in our markets. Our ability to retain and attract key personnel is critical to our success. Our success depends on our ability to retain our senior management and the other key members of our management team and recruit additional qualified personnel. We rely in part on equity compensation to retain and incentivize our personnel. In addition, if members of our management join competitors or form competing companies, the competition could have a material adverse effect on our business. Efforts to retain or attract professionals may result in additional compensation expense, which could affect our financial performance. Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer. In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations and the services we provide to customers, and damage our reputation, which could have a material adverse effect on our business. We may change certain of our policies without stockholder approval. Our charter does not set forth specific percentages of the types of investments we may make. We can amend, revise or eliminate our investment financing and conflict of interest policies at any time at our discretion without a vote of our shareholders. A change in these policies could have a material adverse effect on our financial performance, liquidity and the market price of our common stock. 24


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    Table of Contents Certain provisions in our charter may inhibit a change in control. Generally, to maintain our qualification as a REIT under the Code, not more than 50% in value of our outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of our taxable year. The Code defines "individuals" for purposes of the requirement described in the preceding sentence to include some types of entities. Under our charter, no person may own more than 9.8% of our outstanding shares of stock, with some exceptions. The restrictions on transferability and ownership may delay, deter or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interest of the security holders. We would be subject to adverse consequences if we fail to qualify as a REIT. We believe that we have been organized and operated in a manner so as to qualify for taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 1998. Our qualification as a REIT, however, has depended and will continue to depend on our ability to meet various requirements concerning, among other things, the ownership of our outstanding stock, the nature of our assets, the sources of our income and the amount of our distributions to our shareholders. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our income and assets on an ongoing basis. Our ability to satisfy these asset tests depends upon our analysis of the characterization of our assets for U.S. federal income tax purposes and fair market values of our assets. The fair market values of certain of our assets are not susceptible to a precise determination. If we were to fail to qualify as a REIT for any taxable year, we would not be allowed a deduction for distributions to our shareholders in computing our net taxable income and would be subject to U.S. federal income tax, including, for taxable years prior to 2018, any applicable alternative minimum tax on our net taxable income at regular corporate rates and applicable state and local taxes. We would also be disqualified from treatment as a REIT for the four subsequent taxable years following the year during which our REIT qualification was lost unless we were entitled to relief under certain Code provisions and obtained a ruling from the IRS. If disqualified and unable to obtain relief, we may need to borrow money or sell assets to pay taxes. As a result, cash available for distribution would be reduced for each of the years involved. Furthermore, it is possible that future economic, market, legal, tax or other considerations may cause our REIT qualification to be revoked. This could have a material adverse effect on our business and the market price of our common stock. Our 2016 Senior Secured Credit Facility and 2015 Secured Revolving Credit Facility (see Item 8—"Financial Statements and Supplemental Data—Note 10") prohibit us from paying dividends on our common stock if we no longer qualify as a REIT. To qualify as a REIT, we may be forced to borrow funds, sell assets or take other actions during unfavorable market conditions. To qualify as a REIT, we generally must distribute to our shareholders at least 90% of our net taxable income, excluding net capital gains each year, and we will be subject to U.S. federal income tax, as well as applicable state and local taxes, to the extent that we distribute less than 100% of our net taxable income each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. In the event that principal, premium or interest payments with respect to a particular debt instrument that we hold are not made when due, we may nonetheless be required to continue to recognize the unpaid amounts as taxable income. In addition, we may be allocated taxable income in excess of cash flow received from some of our partnership investments. For taxable years beginning after December 31, 2017, we will generally be required to take certain amounts into income no later than the time such amounts are reflected on our financial statements (this rule will apply to debt instruments issued with original issue discount for taxable years beginning after December 31, 2018). Also, in certain circumstances our ability to deduct interest expenses for U.S. federal income tax purposes may be limited. From these and other potential timing differences between income recognition or expense deduction and cash receipts or disbursements, there is a significant risk that we may have substantial taxable income in excess of cash available for distribution. In order to qualify as a REIT and avoid the payment of income and excise taxes, we may need to borrow funds or take other actions to meet our REIT distribution requirements for the taxable year in which the phantom income is recognized. Complying with the REIT requirements may cause us to forego and/or liquidate otherwise attractive investments. In order to meet the income, asset and distribution tests under the REIT rules, we may be required to take or forego certain actions. For instance, we may not be able to make certain investments and we may have to liquidate other investments. In addition, we may be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. These actions could have the effect of reducing our income and amounts available for distribution to our shareholders. 25


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    Table of Contents Certain of our business activities may potentially be subject to the prohibited transaction tax, which could reduce the return on your investment. For so long as we qualify as a REIT, our ability to dispose of certain properties may be restricted under the REIT rules, which generally impose a 100% penalty tax on any gain recognized on "prohibited transactions," which refers to the disposition of property that is deemed to be inventory or held primarily for sale to customers in the ordinary course of our business, subject to certain exceptions. Whether property is inventory or otherwise held primarily for sale depends on the particular facts and circumstances. The Code provides a safe harbor that, if met, allows a REIT to avoid being treated as engaged in a prohibited transaction. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with the safe harbor. The 100% tax does not apply to gains from the sale of foreclosure property or to property that is held through a taxable REIT subsidiary ("TRS") or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates. We intend to structure our activities to avoid prohibited transaction characterization. Certain of our activities, including our use of TRSs, are subject to taxes that could reduce our cash flows. Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay some U.S. federal, state, local and non-U.S. taxes on our income and property, including taxes on any undistributed income, taxes on income from certain activities conducted as a result of foreclosures, and property and transfer taxes. We would be required to pay taxes on net taxable income that we fail to distribute to our shareholders. In addition, we may be required to limit certain activities that generate non-qualifying REIT income, such as land development and sales of condominiums, and/or we may be required to conduct such activities through TRS. We hold a significant amount of assets in our TRS, including assets that we have acquired through foreclosure, assets that may be treated as dealer property and other assets that could adversely affect our ability to qualify as a REIT if held at the REIT level. As a result, we will be required to pay income taxes on the taxable income generated by these assets. Furthermore, we will be subject to a 100% penalty tax to the extent our economic arrangements with our TRS are not comparable to similar arrangements among unrelated parties. We will also be subject to a 100% tax to the extent we derive income from the sale of assets to customers in the ordinary course of business other than through our TRS. To the extent we or our TRS are required to pay U.S. federal, state, local or non-U.S. taxes, we will have less cash available for distribution to our shareholders. We have substantial net operating loss carry forwards which we use to offset our tax and distribution requirements. We fully utilized our net capital loss carry forward during the year ended December 31, 2017. Net operating losses arising in taxable years beginning after December 31, 2017 will only be able to offset 80% of our net taxable income (prior to the application of the dividends paid deduction) and may not be carried back. In the event that we experience an "ownership change" for purposes of Section 382 of the Code, our ability to use these losses will be limited. An "ownership change" is determined through a set of complex rules which track the changes in ownership that occur in our common stock for a trailing three year period. We have experienced volatility and significant trading in our common stock in recent years. The occurrence of an ownership change is generally beyond our control and, if triggered, may increase our tax and distribution obligations for which we may not have sufficient cash flow. A failure to comply with the limits on our ownership of and relationship with our TRS would jeopardize our REIT qualification and may result in the application of a 100% excise tax. No more than 20% (25% for taxable years beginning after July 30, 2008 and before December 31, 2017) of the value of a REIT's total assets may consist of stock or securities of one or more TRS. This requirement limits the extent to which we can conduct activities through TRS or expand the activities that we conduct through TRS. The values of some of our assets, including assets that we hold through TRSs may not be subject to precise determination, and values are subject to change in the future. In addition, we hold certain mortgage and mezzanine loans within one or more of our TRS that are secured by real property. We treat these loans as qualifying assets for purposes of the REIT asset tests to the extent that such mortgage loans are secured by real property and such mezzanine loans are secured by an interest in a limited liability company that holds real property. We received from the IRS a private letter ruling which holds that we may exclude such loans from the limitation that securities from TRS must constitute no more than 20% (25% for taxable years beginning after July 30, 2008 and before December 31, 2017) of our total assets. We are entitled to rely upon this private letter ruling only to the extent that we did not misstate or omit a material fact in the ruling request and that we continue to operate in accordance with the material facts described in such request, and no assurance can be given that we will always be able to do so. To the extent that any loan is recharacterized as equity, it would increase the amount of non-real estate securities that we have in our TRS and could adversely affect our ability to meet the limitation described above. If we were not able to exclude such loans to our TRS from the limitation described above, our ability to meet the REIT asset tests and other REIT requirements could be adversely affected. Accordingly, there can be no assurance that we have met or will be able to continue to comply with the TRS limitation. 26


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    Table of Contents In addition, we may from time to time need to make distributions from a TRS in order to keep the value of our TRS below the TRS limitation. TRS dividends, however, generally will not constitute qualifying income for purposes of the 75% REIT gross income test. While we will monitor our compliance with both this income test and the limitation on the percentage of our total assets represented by TRS securities, and intend to conduct our affairs so as to comply with both, the two may at times be in conflict with one another. For example, it is possible that we may wish to distribute a dividend from a TRS in order to reduce the value of our TRS to comply with limitation, but we may be unable to do so without simultaneously violating the 75% REIT gross income test. Although there are other measures we can take in such circumstances to remain in compliance with the requirements for REIT qualification, there can be no assurance that we will be able to comply with both of these tests in all market conditions. Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from C corporations, which could adversely affect the value of our common stock. The maximum U.S. federal income tax rate for certain qualified dividends payable by C corporations to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced qualified dividend rate. However, for taxable years beginning after December 31, 2017 and before January 1, 2026, under the recently enacted Tax Cuts and Jobs Act, noncorporate taxpayers may deduct up to 20% of certain qualified business income, including "qualified REIT dividends" (generally, dividends received by a REIT shareholder that are not designated as capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S. federal income tax rate of 29.6% on such income. Although the reduced U.S. federal income tax rate applicable to qualified dividends from C corporations does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends, together with the recently reduced corporate tax rate (21%), could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock. Legislative or regulatory tax changes related to REITs could materially and adversely affect us. The U.S. federal income tax laws and regulations governing REITs and their stockholders, as well as the administrative interpretations of those laws and regulations, are constantly under review and may be changed at any time, possibly with retroactive effect. No assurance can be given as to whether, when, or in what form, the U.S. federal income tax laws applicable to us and our stockholders may be enacted. Changes to the U.S. federal income tax laws and interpretations of U.S. federal tax laws could adversely affect an investment in our common stock. The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, made significant changes to the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their stockholders. Certain key provisions of the Tax Cuts and Jobs Act could impact the Company and its stockholders, beginning in 2018, including the following: Reduced Tax Rates. The highest individual U.S. federal income tax rate on ordinary income is reduced from 39.6% to 37% (through taxable years ending in 2025), and the maximum corporate income tax rate is reduced from 35% to 21%. In addition, individuals, trust, and estates that own the Company's stock are permitted to deduct up to 20% of dividends received from the Company (other than dividends that are designated as capital gain dividends or qualified dividend income), generally resulting in an effective maximum U.S. federal income tax rate of 29.6% on such dividends (through taxable years ending in 2025). Further, the amount that the Company is required to withhold on distributions to non-U.S. stockholders that are treated as attributable to gains from the Company's sale or exchange of U.S. real property interests is reduced from 35% to 21%. Net Operating Losses. The Company may not use net operating losses generated beginning in 2018 to offset more than 80% of the Company's taxable income (prior to the application of the dividends paid deduction). Net operating losses generated beginning in 2018 can be carried forward indefinitely but can no longer be carried back. Limitation on Interest Deductions. The amount of net interest expense that each of the Company and its TRSs may deduct for a taxable year is limited to the sum of (i) the taxpayer's business interest income for the taxable year, and (ii) 30% of the taxpayer's "adjusted taxable income" for the taxable year. For taxable years beginning before January 1, 2022, adjusted taxable income means earnings before interest, taxes, depreciation, and amortization ("EBITDA"); for taxable years beginning on or after January 1, 2022, adjusted taxable income is limited to earnings before interest and taxes ("EBIT"). Certain electing businesses, including electing real estate businesses, may elect out of the foregoing limitation. Alternative Minimum Tax. The corporate alternative minimum tax is eliminated. 27


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    Table of Contents Income Accrual. The Company is required to recognize certain items of income for U.S. federal income tax purposes no later than the Company would report such items on its financial statements. As discussed in Item 1a-Risk factors-"To qualify as a REIT, we may be forced to borrow funds, sell assets or take other actions during unfavorable market conditions", earlier recognition of income for U.S. federal income tax purposes could impact the Company's ability to satisfy the REIT distribution requirements. This provision generally applies to taxable years beginning after December 31, 2017, but will apply with respect to income from a debt instrument having "original issue discount" for U.S. federal income tax purposes only for taxable years beginning after December 31, 2018. Prospective investors are urged to consult with their tax advisors regarding the effects of the Tax Cuts and Jobs Act or other legislative, regulatory or administrative developments on an investment in the Company's common stock. Our Investment Company Act exemption limits our investment discretion and loss of the exemption would adversely affect us. We believe that we currently are not, and we intend to operate our company so that we will not be, regulated as an investment company under the Investment Company Act because we are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." Specifically, we are required to invest at least 55% of our assets in "qualifying real estate assets" (that is, real estate, mortgage loans and other qualifying interests in real estate), and at least 80% of our assets in "qualifying real estate assets" and other "real estate-related assets" (such as mezzanine loans and unsecured investments in real estate entities) combined. We will need to monitor our assets to ensure that we continue to satisfy the percentage tests. Maintaining our exemption from regulation as an investment company under the Investment Company Act limits our ability to invest in assets that otherwise would meet our investment strategies. If we fail to qualify for this exemption, we could not operate our business efficiently under the regulatory scheme imposed on investment companies under the Investment Company Act, and we could be required to restructure our activities. This would have a material adverse effect on our financial performance and the market price of our securities. Actions of the U.S. government, including the U.S. Congress, Federal Reserve, U.S. Treasury and other governmental and regulatory bodies, to stabilize or reform the financial markets, or market responses to those actions, may not achieve the intended effect and may adversely affect our business. The U.S government, including the U.S. Congress, the Federal Reserve, the U.S Treasury and other governmental and regulatory bodies have increased their focus on the regulation of the financial industry in recent years. A changing presidential administration is likely to effect its own regulatory changes. New or modified regulations and related regulatory guidance may have unforeseen or unintended adverse effects on the financial industry. Laws, regulations or policies, including tax laws and accounting standards and interpretations, currently affecting us may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may also be adversely affected by future changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement. Various legislative bodies have also considered altering the existing framework governing creditors' rights and mortgage products including legislation that would result in or allow loan modifications of various sorts. Such legislation may change the operating environment in substantial and unpredictable ways. We cannot predict whether new legislation will be enacted, and if enacted, the effect that it or any regulations would have on our activities, financial condition, or results of operations. Item 1b. Unresolved Staff Comments None. Item 2. Properties The Company's principal executive and administrative offices are located at 1114 Avenue of the Americas, New York, NY 10036. Its telephone number and web address are (212) 930-9400 and www.istar.com, respectively. The lease for the Company's principal executive and administrative offices expires in February 2021. The Company's principal regional offices are located in the Atlanta, Georgia; Dallas, Texas; Hartford, Connecticut; San Francisco, California and Los Angeles, California metropolitan areas. See Item 1—"Net Lease," and "Operating Properties" for a discussion of properties held by the Company for investment purposes and Item 8—"Financial Statements and Supplemental Data—Schedule III," for a detailed listing of such properties. 28


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    Table of Contents Item 3. 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 its real estate and real estate related business activities, including loan foreclosure and foreclosure- related proceedings. In addition to such matters, the Company is a party to the following legal proceedings: 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. Item 4. Mine Safety Disclosures Not applicable. PART II Item 5. Market for Registrant's Equity and Related Share Matters The Company's common stock trades on the New York Stock Exchange ("NYSE") under the symbol "STAR." The high and low sales prices per share of common stock are set forth below for the periods indicated. 2017 2016 Quarter Ended High Low High Low December 31 $ 12.22 $ 11.13 $ 12.83 $ 10.45 September 30 $ 12.26 $ 11.16 $ 11.21 $ 9.10 June 30 $ 12.68 $ 11.27 $ 10.68 $ 8.74 March 31 $ 12.74 $ 10.95 $ 11.64 $ 7.59 On February 22, 2018, the closing sale price of the common stock as reported by the NYSE was $10.33. The Company had 1,720 holders of record of common stock as of February 22, 2018. Dividends The Company's Board of Directors has not established any minimum distribution level. In order to maintain its qualification as a REIT, the Company intends to pay dividends to its shareholders that, on an annual basis, will represent at least 90% of its taxable income (which may not necessarily equal net income as calculated in accordance with accounting principles generally accepted in the United States ("GAAP")), determined without regard to the deduction for dividends paid and excluding any net capital gains. The Company has recorded net operating losses ("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. Holders of common stock and certain unvested restricted stock awards will be entitled to receive distributions if, as and when the Company's Board of Directors authorizes and declares distributions. However, rights to distributions may be subordinated to the rights of holders of preferred stock, when preferred stock is issued and outstanding. In addition, the 2016 Senior Secured Credit Facility and 2015 Secured Revolving Credit Facility (see Item 8—"Financial Statements and Supplemental Data—Note 10") permit the Company to distribute 100% of its REIT taxable income on an annual basis for so long as the Company maintains its qualification as a REIT. The 2016 Senior Secured Credit Facility and 2015 Secured Revolving Credit Facility generally restrict the Company from paying any common dividends if it ceases to qualify as a REIT. In any liquidation, dissolution or winding up of the Company, each outstanding share of common stock will entitle its holder to a proportionate share of the assets that remain after the Company pays its liabilities and any preferential distributions owed to preferred shareholders. The Company did not declare or pay dividends on its common stock for the years ended December 31, 2017 and 2016. The Company declared and paid dividends of $8.0 million, $8.3 million, $5.9 million, $6.1 million and $9.4 million on its Series D, E, F, G and I Cumulative Redeemable Preferred Stock during the year ended December 31, 2017. In addition, in October 2017, the Company redeemed its Series E and Series F Preferred Stock and paid dividends through the redemption date of $1.1 million 29


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    Table of Contents and $0.8 million, respectively. The Company declared and paid dividends of $8.0 million, $11.0 million, $7.8 million, $6.1 million and $9.4 million on its Series D, E, F, G and I Cumulative Redeemable Preferred Stock during the year ended December 31, 2016. The Company declared and paid dividends of $9.0 million on its Series J Convertible Perpetual Preferred Stock during the years ended December 31, 2017 and 2016. The character of the 2017 dividends was 100% capital gain distribution, of which 27.90% represented unrecaptured section 1250 gain and 72.10% long term capital gain. The character of the 2016 dividends was as follows: 47.30% was a capital gain distribution, of which 76.15% represented unrecaptured section 1250 gain and 23.85% long term capital gain, and 52.70% was ordinary income. There are no dividend arrearages on any of the preferred shares currently outstanding. Distributions to shareholders will generally be taxable as ordinary income, although all or a portion of such distributions may be designated by the Company as capital gain or may constitute a tax-free return of capital. The Company annually furnishes to each of its shareholders a statement setting forth the distributions paid during the preceding year and their characterization as ordinary income, capital gain or return of capital. No assurance can be given as to the amounts or timing of future distributions, as such distributions are subject to the Company's taxable income after giving effect to its NOL carryforwards, financial condition, capital requirements, debt covenants, any change in the Company's intention to maintain its REIT qualification and such other factors as the Company's Board of Directors deems relevant. The Company may elect to satisfy some of its REIT distribution requirements, if any, through qualifying stock dividends. Issuer Purchases of Equity Securities The following table sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the three months ended December 31, 2017. Total Number of Maximum Dollar Average Price Shares Purchased as Value of Shares that Total Number of Paid per Part of a Publicly May Yet be Purchased Shares Purchased(1) Share Announced Plan Under the Plans(1) October 1 to October 31, 2017 — $ — — $ — November 1 to November 30, 2017 — $ — — $ — December 1 to December 31, 2017 — $ — — $ 50,000,000 _______________________________________________________________________________ (1) The Company is authorized to repurchase up to $50.0 million of common stock from time to time in the open market and privately negotiated purchases, including pursuant to one or more trading plans. In December 2017, the Company entered into a 10b5-1 plan (the "10b5-1 Plan") in accordance with Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended, to facilitate repurchases. Whether and how many shares will be repurchased is uncertain and dependent on prevailing market prices and trading volumes, which we cannot predict. Disclosure of Equity Compensation Plan Information (c) Number of securities (a) (b) remaining available for Number of securities to Weighted-average future issuance under be issued upon exercise exercise price of equity compensation plans of outstanding options, outstanding options, (excluding securities Plans Category warrants and rights warrants and rights reflected in column (a)) Equity compensation plans approved by security holders- restricted stock awards(1)(2) 599,342 N/A 3,300,642 _______________________________________________________________________________ (1) Restricted Stock—The amount shown in column (a) includes 281,678 unvested restricted stock units which may vest in the future based on the employees' continued service to the Company (see Item 8—"Financial Statements and Supplemental Data—Note 14" for a more detailed description of the Company's restricted stock grants). Substantially all of the restricted stock units included in column (a) are required to be settled on a net, after-tax basis (after deducting shares for minimum required statutory withholdings); therefore, the actual number of shares issued will be less than the gross amount of the awards. The amount shown in column (a) also includes 317,664 of common stock equivalents and restricted stock awarded to our non-employee directors in consideration of their service to the Company as directors. Common stock equivalents represent rights to receive shares of common stock at the date the common stock equivalents are settled. Common stock equivalents have dividend equivalent rights beginning on the date of grant. The amount in column (c) represents the aggregate amount of stock options, shares of restricted stock units or other performance awards that could be granted under compensation plans approved by the Company's security holders after giving effect to previously issued awards of stock options, shares of restricted stock units and other performance awards (see Item 8—"Financial Statements and Supplemental Data—Note 14" for a more detailed description of the Company's Long-Term Incentive Plans). (2) The amount shown in column (a) does not include a currently indeterminable number of shares that may be issued upon the satisfaction of performance and vesting conditions of awards made under the Company's Performance Incentive Plan ("iPIP") approved by shareholders. In no event may the number of shares issued exceed the amount available in column (c) unless shareholders authorize additional shares (see Item 8—"Financial Statements and Supplemental Data—Note 14" for a more detailed description of iPIP.) 30


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    Table of Contents Item 6. Selected Financial Data The following table sets forth selected financial data on a consolidated historical basis for the Company. This information should be read in conjunction with the discussions set forth in Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations." For the Years Ended December 31, 2017 2016 2015 2014 2013 (In thousands, except per share data and ratios) OPERATING DATA: Operating lease income $ 187,684 $ 191,180 $ 211,207 $ 229,672 $ 221,434 Interest income 106,548 129,153 134,687 122,704 108,015 Other income 188,091 46,514 49,924 77,583 48,208 Land development revenue 196,879 88,340 100,216 15,191 — Total revenue 679,202 455,187 496,034 445,150 377,657 Interest expense 194,686 221,398 224,639 224,483 266,225 Real estate expense 147,617 137,522 146,509 162,829 156,574 Land development cost of sales 180,916 62,007 67,382 12,840 — Depreciation and amortization 49,033 51,660 62,045 70,375 68,070 General and administrative 98,882 84,027 81,277 88,287 92,114 Provision for (recovery of) loan losses (5,828) (12,514) 36,567 (1,714) 5,489 Impairment of assets 32,379 14,484 10,524 34,634 12,589 Other expense 20,954 5,883 6,374 6,340 8,050 Total costs and expenses 718,639 564,467 635,317 598,074 609,111 Income (loss) before earnings from equity method investments and other items (39,437) (109,280) (139,283) (152,924) (231,454) Loss on early extinguishment of debt, net (14,724) (1,619) (281) (25,369) (33,190) Earnings from equity method investments 13,015 77,349 32,153 94,905 41,520 Loss on transfer of interest to unconsolidated subsidiary — — — — (7,373) Income (loss) from continuing operations before income taxes (41,146) (33,550) (107,411) (83,388) (230,497) Income tax benefit (expense) 948 10,166 (7,639) (3,912) 659 Income (loss) from continuing operations (40,198) (23,384) (115,050) (87,300) (229,838) Income (loss) from discontinued operations 4,939 18,270 15,077 13,122 9,714 Gain from discontinued operations 123,418 — — — 22,233 Income from sales of real estate 92,049 105,296 93,816 89,943 86,658 Net income (loss) 180,208 100,182 (6,157) 15,765 (111,233) Net (income) loss attributable to noncontrolling interests (4,526) (4,876) 3,722 704 (718) Net income (loss) attributable to iStar Inc. 175,682 95,306 (2,435) 16,469 (111,951) Preferred dividends (64,758) (51,320) (51,320) (51,320) (49,020) Net (income) loss allocable to HPU holders and Participating Security holders(1) — (14) 1,080 1,129 5,202 Net income (loss) allocable to common shareholders $ 110,924 $ 43,972 $ (52,675) $ (33,722) $ (155,769) Per common share data(2): Income (loss) attributable to iStar Inc. from continuing operations: Basic $ (0.25) $ 0.35 $ (0.79) $ (0.55) $ (2.20) Diluted $ (0.25) $ 0.35 $ (0.79) $ (0.55) $ (2.20) Net income (loss) attributable to iStar Inc.: Basic $ 1.56 $ 0.60 $ (0.62) $ (0.40) $ (1.83) Diluted $ 1.56 $ 0.60 $ (0.62) $ (0.40) $ (1.83) Dividends declared per common share $ — $ — $ — $ — $ — 31


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    Table of Contents For the Years Ended December 31, 2017 2016 2015 2014 2013 (In thousands, except per share data and ratios) SUPPLEMENTAL DATA: Ratio of earnings to fixed charges(3) — — — — — Ratio of earnings to fixed charges and preferred dividends(3) — — — — — Weighted average common shares outstanding—basic 71,021 73,453 84,987 85,031 84,990 Weighted average common shares outstanding— diluted 71,021 73,835 84,987 85,031 84,990 Cash flows from (used in): Operating activities $ 80,212 $ 21,455 $ (58,229) $ 10,908 $ (166,367) Investing activities 269,485 466,543 184,028 159,793 893,447 Financing activities (20,725) (870,362) 112,763 (212,208) (469,856) As of December 31, 2017 2016 2015 2014 2013 (In thousands) BALANCE SHEET DATA: Total real estate(4) $ 1,350,619 $ 1,624,805 $ 1,776,890 $ 1,987,843 $ 2,227,711 (4) Land and development, net 860,311 945,565 1,001,963 978,962 932,034 Loans receivable and other lending investments, net 1,300,655 1,450,439 1,601,985 1,377,843 1,370,109 Total assets 4,731,078 4,825,514 5,597,792 5,426,483 5,608,604 Debt obligations, net 3,476,400 3,389,908 4,118,823 3,986,034 4,124,718 Total equity 914,249 1,059,684 1,101,330 1,248,348 1,301,465 _______________________________________________________________________________ (1) All of the Company's outstanding HPUs were repurchased and retired on August 13, 2015 (see Item 8—"Financial Statements and Supplemental Data —Note 13). Participating Security holders are non-employee directors who hold unvested common stock equivalents and restricted stock awards granted under the Company's Long Term Incentive Plans that are eligible to participate in dividends (see Item 8—"Financial Statements and Supplemental Data—Note 14 and 15). (2) See Item 8—"Financial Statements and Supplemental Data—Note 15." (3) This ratio of earnings to fixed charges is calculated in accordance with SEC Regulation S-K Item 503. For the years ended December 31, 2017, 2016, 2015, 2014 and 2013, earnings were not sufficient to cover fixed charges by $20,579, $67,976, $114,902, $103,070 and $249,982, respectively, and earnings were not sufficient to cover fixed charges and preferred dividends by $85,337, $119,296, $166,222, $154,390 and $299,002, respectively. The Company's unsecured debt securities have a fixed charge coverage covenant which is calculated differently in accordance with the terms of the agreements governing such securities. (4) Prior to December 31, 2015, land and development assets were recorded in total real estate. Prior year amounts have been reclassified to conform to the current period presentation. 32


  • Page 42

    Table of Contents Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity during the three-year period ended December 31, 2017. This discussion should be read in conjunction with our consolidated financial statements and related notes for the three-year period ended December 31, 2017 included elsewhere in this Annual Report on Form 10-K. These historical financial statements may not be indicative of our future performance. 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. Introduction We finance, invest in and develop real estate and real estate related projects as part of our fully-integrated investment platform. We also provide management services for our 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 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. Real Estate Finance: Our real estate finance portfolio is comprised of senior and mezzanine real estate loans that may be either fixed-rate or variable-rate and are structured to meet the specific financing needs of borrowers. Our portfolio also includes preferred equity investments and senior and subordinated loans to business entities, particularly entities engaged in real estate or real estate related businesses, and may be either secured or unsecured. Our loan portfolio includes whole loans and loan participations. Net Lease: The net lease portfolio is primarily comprised of properties owned by us and leased to single creditworthy tenants where the properties are subject to long-term leases. Most of the leases provide for expenses at the facilities to be paid by the tenants on a triple net lease basis. The properties in this portfolio are diversified by property type and geographic location. In addition to net lease properties owned by us, we partnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets (the "Net Lease Venture"). We invest in new net lease investments primarily through the Net Lease Venture, in which we hold a non-controlling 51.9% interest. In 2017, we also conceived and ultimately launched a new, publicly traded REIT focused exclusively on the ground lease ("Ground Lease") asset class called Safety, Income & Growth Inc. ("SAFE"). 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 triple net leased by the fee owner of the land to the owners/operators of the real estate projects built thereon. As of December 31, 2017, we owned approximately 37.6% of SAFE's common stock outstanding which had a market value of $120.2 million at that date. Operating Properties: The operating properties portfolio is comprised of commercial and residential properties which represent a diverse pool of assets across a broad range of geographies and property types. We generally seek to reposition or redevelop our transitional properties with the objective of maximizing their value through the infusion of capital and/or concentrated asset management efforts. The commercial properties within this portfolio include office, retail, hotel and other property types. The residential properties within this portfolio are generally luxury condominium projects located in major U.S. cities where our strategy is to sell individual condominium units through retail distribution channels. Land & Development: The land and development portfolio is primarily comprised of land entitled for master planned communities as well as waterfront and urban infill land parcels located throughout the United States. Master planned communities represent large-scale residential projects that we will entitle, plan and/or develop and may sell through retail channels to homebuilders or in bulk.Waterfront parcels are generally entitled for residential projects and urban infill parcels are generally entitled for mixed-use projects. We may develop these properties ourself, or in partnership with commercial real estate developers, or may sell the properties. 33


  • Page 43

    Table of Contents Executive Overview In 2017, our real estate finance, net lease and land and development segments performed well and all contributed positively to earnings. In our continuing effort to find untapped investment opportunities in real estate, we conceived and ultimately launched a new, publicly traded REIT focused exclusively on the Ground Lease asset class. We also received upgrades to our corporate credit ratings from all three major ratings agencies when we completed a comprehensive set of capital markets transactions designed to enhance our capital structure and improve our earnings profile. Operating Results During the year ended December 31, 2017, three of our four business segments, including real estate finance, net lease and land and development, contributed positively to our earnings. Our continued strategy to find selective investment opportunities in our core net lease and real estate finance businesses contributed to an increase in our earnings as compared to 2016. We also received a favorable judgment in a matter concerning a land transaction that had a material positive impact on our 2017 earnings (see "Bevard" below). 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 with the objective of increasing the contribution of these assets to our earnings in the future. For the year ended December 31, 2017, we recorded net income allocable to common shareholders of $110.9 million, compared to net income of $44.0 million during the prior year. Adjusted income allocable to common shareholders for the year ended December 31, 2017 was $214.6 million, compared to $112.6 million during the prior year (see "Adjusted Income" for a reconciliation of adjusted income to net income). 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 underlying earnings by approximately $37 million, or $0.43 per diluted share; lowered our cost of capital by approximately 35 basis points; 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. The table below summarizes the components, sources and uses of the capital markets transactions (in millions) (refer also to Liquidity and Capital Resources): Uses Amount Sources Amount Repay 2016 Senior Secured Credit Facility $ 473 Amended 2016 Senior Secured Credit Facility $ 400 Repay 4.0% senior unsecured notes due November 550 Issue 4.625% senior unsecured notes due 400 2017 September 2020 Repay 7.125% senior unsecured notes due February 300 Issue 5.25% senior unsecured notes due 400 2018 September 2022 Repay 4.875% senior unsecured notes due July 300 Issue 3.125% senior unsecured convertible notes 250 2018 due September 2022 Redeem 7.875% series E preferred stock 140 Cash on hand 510 Redeem 7.8% series F preferred stock 100 Repurchase common stock 46 Fees, expenses, interest and dividends 51 Total uses $ 1,960 Total sources $ 1,960 As of December 31, 2017, we had $657.7 million of cash which we expect to use primarily to repay debt and fund future investment activities. 34


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    Table of Contents Safety, Income & Growth Inc. In 2017, we conceived and ultimately launched a new, publicly traded REIT focused exclusively on the Ground Lease asset class. 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. Ground Leases afford investors the opportunity for safe, growing income derived from (i) a Ground Lease's senior position in the commercial real estate capital structure; (ii) long-term leases with periodic contractual increases in rent; and (iii) growth in the value of the ground over time. Capital appreciation is realized when, at the end of the life of the lease, the commercial real estate property reverts back to the lessor, as landlord, and it is able to realize the value of the leasehold, which may be substantial. Ground Leases share similarities with triple net leases in that typically the lessor is not responsible for any operating or capital expenses over the life of the lease, making the management of a Ground Lease portfolio relatively simple, with limited working capital needs. In April 2017, institutional investors acquired from us a controlling interest in SAFE's predecessor which held our Ground Lease business. 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). The acquiring entity was a newly formed unconsolidated entity named Safety, Income & Growth Inc. The carrying value of our Ground Lease assets was approximately $161.1 million. Shortly before the Acquisition Transactions, we completed the $227.0 million 2017 Secured Financing on our Ground Lease assets (refer to Note 10). We received all of the proceeds of the 2017 Secured Financing. We received an additional $113.0 million of proceeds in the Acquisition Transactions, including $55.5 million that we contributed to SAFE in its initial capitalization. As a result of the Acquisition Transactions, we deconsolidated the 12 properties and the associated 2017 Secured Financing. We account for our investment in SAFE as an equity method investment (refer to Note 7). We 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 our retained interest in SAFE. In June 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 paid organization and offering costs in connection with these transactions, including commissions payable to the underwriters and other offering expenses. Subsequent to the initial public offering and through December 31, 2017, we purchased 1.8 million shares of SAFE's common stock for $34.1 million, at an average cost of $18.85 per share, pursuant to two 10b5-1 plans (the “10b5-1 Plans") in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended, under which we could buy in the open market up to 39.9% of SAFE’s common stock. As of December 31, 2017, we owned approximately 37.6% of SAFE's common stock outstanding which had a market value of $120.2 million at that date. In addition, one of our wholly-owned subsidiaries is the external manager of SAFE, our Chairman and Chief Executive Officer is a director and the Chairman and Chief Executive Officer of SAFE and our other executive officers hold similarly titled positions with SAFE. Bevard In April 2017, we received a favorable judgment from the U.S. Court of Appeals for the Fourth Circuit, affirming a prior district court judgment relating to a dispute with Lennar over the purchase and sale of Bevard, a master planned community located in Maryland. On April 21, 2017, we conveyed the property to Lennar and received $234.3 million of net proceeds after payment of $3.3 million in documentary transfer taxes, comprised of the remaining purchase price of $114.0 million and $123.4 million of interest and real estate taxes, net of costs. A portion of the net proceeds received by us has been paid to the third party which holds a 4.3% participation interest in all proceeds received by us. Lennar filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of two specific issues decided in our favor by the lower courts. We filed a brief in opposition to the petition. On December 4, 2017, the U.S. Supreme Court issued an order denying Lennar’s petition for a writ of certiorari. The amount of attorneys’ fees and costs to be recovered by us will be determined through further proceedings before the District Court. We have applied for attorney’s fees in excess of $17.0 million. A hearing on our application for attorney’s fees has not yet been scheduled. 35


  • Page 45

    Table of Contents Portfolio Overview As of December 31, 2017, based on carrying values gross of accumulated depreciation and general loan loss reserves, our total investment portfolio has the following characteristics: 36


  • Page 46

    Table of Contents As of December 31, 2017, based on carrying values gross of accumulated depreciation and general loan loss reserves, our total investment portfolio has the following property/collateral type and geographic characteristics ($ in thousands): Real Estate Operating Land & % of Property/Collateral Types Finance Net Lease Properties Development Total Total Land and Development $ — $ — $ — $ 932,547 $ 932,547 22.1% Office / Industrial 48,900 673,424 128,368 — 850,692 20.1% Mixed Use / Mixed Collateral 306,625 — 196,667 — 503,292 11.9% Entertainment / Leisure — 489,497 — — 489,497 11.5% Condominium 421,787 — 48,519 — 470,306 11.1% Hotel 291,929 — 104,415 — 396,344 9.3% Other Property Types 223,458 — 11,837 — 235,295 5.5% Retail 25,456 57,348 138,928 — 221,732 5.2% Ground Leases(1) — 129,154 — — 129,154 3.0% Strategic Investments — — — — 13,618 0.3% Total $ 1,318,155 $ 1,349,423 $ 628,734 $ 932,547 $ 4,242,477 100.0% Real Estate Operating Land & % of Geographic Region Finance Net Lease Properties Development Total Total Northeast $ 798,357 $ 414,373 $ 47,557 $ 268,953 $ 1,529,240 36.0% West 38,137 286,222 66,398 366,672 757,429 17.9% Southeast 181,074 253,960 140,635 114,266 689,935 16.3% Southwest 93,509 162,684 256,248 22,292 534,733 12.6% Central 181,621 79,701 82,161 31,500 374,983 8.8% Mid-Atlantic — 149,618 35,735 128,864 314,217 7.4% Various(2) 25,457 2,865 — — 28,322 0.7% Strategic Investments(2) — — — — 13,618 0.3% Total $ 1,318,155 $ 1,349,423 $ 628,734 $ 932,547 $ 4,242,477 100.0% _______________________________________________________________________________ (1) Primarily represents the market value of our equity method investment in SAFE. (2) Strategic investments and the various category include $9.2 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 December 31, 2017, our real estate finance portfolio totaled $1.3 billion, gross of general loan loss reserves. The portfolio included $1.1 billion of performing loans with a weighted average maturity of 2.0 years. 37


  • Page 47

    Table of Contents The tables below summarize our loans and the reserves for loan losses associated with our loans ($ in thousands): December 31, 2017 Reserve for Loan Gross Reserve Losses as a % of Carrying for Loan Carrying % of Gross Carrying Number Value Losses Value Total 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% December 31, 2016 Reserve for Loan Gross Reserve Losses as a % of Carrying for Loan Carrying % of Gross Carrying Number Value Losses Value Total Value Performing loans 35 $ 1,202,127 $ (23,300) $ 1,178,827 86.0% 1.9% Non-performing loans 6 253,941 (62,245) 191,696 14.0% 24.5% Total 41 $ 1,456,068 $ (85,545) $ 1,370,523 100.0% 5.9% Performing Loans—The table below summarizes our performing loans gross of reserves ($ in thousands): December 31, 2017 December 31, 2016 Senior mortgages $ 709,809 $ 854,805 Corporate/Partnership loans 332,387 333,244 Subordinate mortgages 9,495 14,078 Total $ 1,051,691 $ 1,202,127 Weighted average LTV 67% 64% Yield 9.8% 8.9% 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 December 31, 2017, we had non-performing loans with an aggregate carrying value of $176.9 million compared to non-performing loans with an aggregate carrying value of $191.7 million as of December 31, 2016. 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 $78.5 million as of December 31, 2017, or 6.1% of total loans, compared to $85.5 million or 5.9% as of December 31, 2016. For the year ended December 31, 2017, the recovery of loan losses included a reduction in the general reserve of $5.8 million due to an overall improvement in the risk ratings and a decrease in size of our loan portfolio. 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 December 31, 2017, asset-specific reserves decreased to $61.0 million compared to $62.2 million as of December 31, 2016. 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 38


  • Page 48

    Table of Contents resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional 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 $17.5 million or 1.7% of performing loans as of December 31, 2017, compared to $23.3 million or 1.9% of performing loans as of December 31, 2016. The decrease was primarily attributable to an overall improvement in the risk ratings and a decrease in size of our loan portfolio. 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 (refer to Note 7). The Net Lease Venture's investment period expires on March 31, 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. 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, we deconsolidated the 12 properties and associated liabilities and we began to record our investment in SAFE as an equity method investment. 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 June 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. Subsequent to the initial public offering and through December 31, 2017, we purchased 1.8 million shares of SAFE's common stock for $34.1 million, at an average cost of $18.85 per share, pursuant to two 10b5-1 plans (the “10b5-1 Plans") in accordance with Rules 10b5-1 and 10b-18 under the Securities and Exchange Act of 1934, as amended, under which we could buy in the open market up to 39.9% of SAFE’s common stock. As of December 31, 2017, we owned approximately 37.6% of SAFE's common stock outstanding which had a market value of $120.2 million at that date. As of December 31, 2017, our consolidated net lease portfolio totaled $1.1 billion gross of $292.3 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 $1.3 billion. The table below provides certain statistics for our net lease portfolio. Consolidated Net Lease Real Estate SAFE Venture Ownership % 100.0% 37.6% 51.9% (1) (1) Net book value (millions) $ 816 $ 490 $ 597 Accumulated depreciation (millions) 292 7 48 Gross carrying value (millions) $ 1,108 $ 497 $ 645 Occupancy 97.9% 100.0% 100.0% Square footage (thousands) 11,322 3,849 4,238 Weighted average lease term (years) 14.0 60.6 19.0 (2) Weighted average yield 8.9% 5.0% 8.5% _______________________________________________________________________________ (1) Net book value represents the net book value of real estate and real estate-related intangibles. (2) Represents the annualized asset yield. 39


  • Page 49

    Table of Contents Operating Properties As of December 31, 2017, our operating property portfolio, including equity method investments, totaled $628.7 million gross of $55.1 million of accumulated depreciation, and was comprised of $580.2 million of commercial and $48.5 million of residential real estate properties. Commercial Operating Properties Our commercial operating properties represent a diverse pool of assets across a broad range of geographies and collateral types including office, retail and hotel properties. We generally seek to reposition our transitional properties with the objective of maximizing their values through the infusion of capital and/or intensive asset management efforts resulting in value realization upon sale. The table below provides certain statistics for our commercial operating property portfolio. Commercial Operating Property Statistics ($ in millions) (1) Stabilized Operating Transitional Operating(1) Total December 31, December 31, December 31, December 31, December 31, December 31, 2017 2016 2017 2016 2017 2016 Gross carrying value ($mm)(2) $ 427 $ 337 $ 153 $ 189 $ 580 $ 526 (3) Occupancy 85% 86% 61% 54% 78% 74% Yield 6.0% 8.5% 3.7% 1.5% 5.5% 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 gross of accumulated depreciation. (3) Occupancy is as of December 31, 2017 and 2016. Residential Operating Properties As of December 31, 2017, our residential operating portfolio was comprised of 25 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) For the Years Ended December 31, 2017 December 31, 2016 Condominium units sold 23 91 Proceeds $ 35.3 $ 96.2 Income from sales of real estate $ 4.5 $ 26.1 40


  • Page 50

    Table of Contents Land and Development As of December 31, 2017, our land and development portfolio, including equity method investments, totaled $932.5 million with seven projects in production, eight in development and 13 in the pre-development phase. These projects are collectively entitled for approximately 12,500 lots and units. The following tables presents certain statistics for our land and development portfolio. Land and Development Portfolio Rollforward (in millions) Years Ended December 31, 2017 December 31, 2016 Beginning balance $ 945.6 $ 1,002.0 Asset sales(1) (175.3) (68.9) Asset transfers in (out)(2) (8.9) (90.7) Capital expenditures 127.0 109.5 Other(3) (28.1) (6.3) Ending balance(4) $ 860.3 $ 945.6 _______________________________________________________________________ (1) Represents gross carrying value of the assets sold, rather than proceeds received. (2) Assets transferred into land and development segment or out to another segment. (3) For the years ended December 31, 2017 and 2016, includes $20.5 million and $3.8 million, respectively, of impairments. (4) Excludes $63.9 million and $84.8 million, respectively, of equity method investments as of December 31, 2017 and 2016. Land and Development Statistics (in millions) Years Ended December 31, 2017 December 31, 2016 Land development revenue $ 196.9 $ 88.3 Land development cost of sales 180.9 62.0 Land development revenue less cost of sales $ 16.0 $ 26.3 Earnings from land development equity method investments 7.3 30.0 Income from sales of real estate(1) — 8.8 Total $ 23.3 $ 65.1 _______________________________________________________________________ (1) During the year ended December 31, 2016, we sold a land and development asset to a newly formed unconsolidated entity in which we own a 50.0% equity interest and recognized a gain of $8.8 million, reflecting our share of the interest sold to a third party, which was recorded as "Income from sales of real estate" in our consolidated statement of operations. 41

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