UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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. 1-10150
STARWOOD FINANCIAL TRUST
(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, 27th floor 10036
New York, New York (Zip Code)
(Address of principal executive offices)
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:
Class A Shares, $1.00 par American Stock Exchange
value, of Starwood Financial Trust
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] 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 [X].
The aggregate market value of the Class A Shares held by non-affiliates on
March 23, 1998 was approximately $10,492,000.
As of March 23, 1998, there were 314,341,744 shares of Starwood Financial
Trust, Class A, $1.00 par value, outstanding.
Total Pages [18]
<PAGE>
This amendment contains certain statements that may be deemed
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements contained herein include, but are not limited to,
statements relating to the objectives, strategies and plans of Starwood
Financial Trust (the "Trust"), and all statements (other than statements of
historical fact) that address actions, events or circumstances that the Trust or
its management expects, believes or intends will occur in the future.
Forward-looking statements are not guarantees of future performance and involve
risks and uncertainties that could cause actual results to differ materially
from historical results or those anticipated at the time the forward-looking
statements are made, including, without limitation, risks and uncertainties
associated with the following: the Trust's continued ability to qualify for
taxation as a REIT; completion of future acquisitions and dispositions; the
availability of capital for acquisitions and originations; competition within
the specialty finance industry and lending industry; general real estate and
national economic conditions; the ability of the Trust and others with which it
does business to address the Year 2000 issue, and the costs associated
therewith; and the other risks and uncertainties set forth in the annual,
quarterly and current reports and proxy statements of the Trust. The Trust
undertakes no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise
unless so required by law.
PART I
ITEM 1. BUSINESS
In response to comments received from the Securities and Exchange
Commission, the Trust hereby amends Item 1. Business of Part I of the Trust's
Annual Report on Form 10-K for the year ended December 31, 1997 (the "Annual
Report") by:
a. Inserting after the last sentence of the third paragraph under the
caption "Investment Policy" the following:
None of the Trust's assets constitute loans to Starwood Hotels
& Resorts and its affiliates and the Trust currently expects
that none of its businesses will be attributable to Starwood
Hotels & Resorts and its affiliates in the future.
b. Deleting the fifth paragraph under the caption "Investment Policy" and
inserting in lieu thereof the following:
The Trust currently plans to originate and make investments in
various types of income producing commercial real estate and
its investment program will emphasize senior and junior
commercial mortgage loans, including mezzanine financing,
higher yielding senior mortgage loans, non-performing or
sub-performing loans and performing and non-performing
subordinated interests ("Subordinated Interests") in
commercial mortgage-backed securities ("CMBS").
<PAGE>
The Trust anticipates that a majority of the investments to be
held in its portfolio for the long-term will be structured so
that the Trust's investment is subordinate to third party
first mortgage debt but senior to the real estate
owner/operator's equity position. However, the Trust does not
have any prescribed allocation among investments and the Trust
could invest all or any portion of its assets in any
investment that would be included in the Diversified
Portfolio. The Trust anticipates that it will invest in a
diverse array of real estate-related assets and enterprises
that satisfy its investment criteria including but not limited
to the following:
c. Deleting the tenth paragraph under the caption "Investment Policy" and
inserting in lieu thereof the following:
o Subordinated Interests. The Trust may acquire rated
and unrated, short term, medium and long-term real estate
related debt securities, including performing and
non-performing Subordinated Interests in CMBS issued in public
or private transactions. CMBS typically are divided into two
or more classes, sometimes called "tranches." The senior
classes are higher rated securities, which are rated from low
investment grade (BBB) to higher investment grade (AA or AAA).
The junior, subordinated classes typically include a lower
rated, non-investment grade BB and B class, and an unrated,
higher-yielding, credit support class (which generally is
required to absorb the first losses on the underlying mortgage
loans). The Trust currently anticipates that it may invest in
the non-investment grade tranches of CMBS. However, the Trust
had no investments in Subordinated Interests as of March 13,
1998 and currently anticipates that investments in CMBS will
not comprise a significant part of the Trust's assets.
d. Deleting the second and third paragraphs under the caption "Advisory
Agreement" and inserting in lieu thereof the following:
Commencing on the 90th day after the consummation of
the Recapitalization Transactions, the Trust will pay the
Advisor a quarterly base management fee of .3125% (1.25% per
annum) of the "Book Equity Value" of the Trust determined as
of the last day of each quarter but estimated and paid in
advance subject to recomputation. "Book Equity Value" is the
excess of the book value of the assets of the Trust over all
liabilities of the Trust determined in accordance with
generally accepted accounting principles ("GAAP") consistently
applied, except that real estate-related depreciation and
amortization (other than amortization of financing costs and
other prepaid expenses to the extent such costs and prepaid
expenses have previously been booked as an asset of the Trust)
shall not operate to reduce the book value of the Trust's
assets for purposes of determining Book Equity Value. For
purposes of determining Book Equity Value, debt obligations,
such as convertible debt, which are exchangeable or
convertible into equity securities shall not be considered
liabilities of the Trust for
-2-
<PAGE>
any applicable period in which the value of the equity
securities into which such debt obligation is convertible or
for which it may be exchanged equals or exceeds the
outstanding balance of such debt obligation as of the last day
of the period (with the value of any such equity securities
for such applicable period as are traded on an exchange to be
deemed to be the average daily closing price of such equity
securities on such exchange over such applicable period for
purposes of making the value determination contemplated by
this sentence). Debt obligations that are excluded as
liabilities of the Trust under the preceding sentence in
determining Book Equity Value are referred to as "Deemed
Equity Obligations." In addition to the foregoing, in the
event and to the extent non-cash assets are contributed to the
Trust or any of its subsidiaries or affiliates in exchange for
equity securities of the Trust, then for purposes of
determining the Trust's "Book Equity Value" following such
contributions, the book value of the assets so contributed
shall be deemed to be increased by the excess, if any, of the
fair market value of the equity securities issued in
consideration of such contributions determined at the time of
such contributions over the book equity value allocable to
such assets by the Trust immediately following such
contributions determined in accordance with GAAP.
In addition, commencing on the 90th day after the
consummation of the Recapitalization Transactions, the Trust
will pay the Advisor a quarterly incentive fee ("Incentive
Fee") of five percent (5%) of the Trust's "Adjusted Net
Income" during each quarter that the Adjusted Net Income for
such quarter restated and annualized as an annualized rate of
return on the Trust's Book Equity Value for such quarter
equals or exceeds the "Benchmark BB Rate." "Adjusted Net
Income" is the Trust's gross income for the applicable quarter
(determined in accordance with GAAP) less the Trust's expenses
for the applicable quarter (determined in accordance with GAAP
and including the Base Fee for such quarter but not the
Incentive Fee for such quarter). In addition, real
estate-related depreciation and amortization (other than
amortization of financing costs and other prepaid expenses to
the extent such costs and prepaid expenses have previously
been booked as an asset of the Trust) shall not be deducted in
determining Adjusted Net Income. For purposes of determining
Adjusted Net Income, any interest expenses for an applicable
period on Deemed Equity Obligations shall not be included as
an expense and, thus, shall not operate to reduce the Trust's
gross income for such applicable period. "Benchmark BB Rate"
for a given quarter means the arithmetic average of the
various weekly average annualized rates of return to maturity
on current pay "BB" rated commercial mortgage-backed
securities during such quarter by domestic U.S. issuers. The
weekly average annualized rates of return on current pay "BB"
rated commercial mortgage-backed securities shall mean the sum
of the rate of return on the 10 year Treasury on the
applicable date and the BB spread as reported in the Morgan
Stanley Dean Witter Weekly Mortgage Research Report. During
any quarter where such rate is not published, the Trust and
the Advisor shall meet in
-3-
<PAGE>
good faith to agree upon another published report or similar
sources. The Advisor will also be reimbursed for certain
expenses it incurs on behalf of the Trust.
As a result of the delayed commencement of the
advisory fee, fees to be incurred in 1998 will be recognized
ratably over the period from March 18, 1998 through December
1998. As a result of this fee deferral, the operating results
of the Trust's calendar 1998 will be greater than they would
have been if the advisory fee had not been deferred and
therefore may not be reflective of future operating results of
the Trust.
The Trust may be subject to conflicts of interest
with the Advisor because the Incentive Fee, which is based on
the Trust's income, may create an incentive for the Advisor to
recommend investments with greater income potential, which
generally are riskier and more speculative, than would be the
case if the fee did not include a "performance component."
e. Inserting after the last paragraph under the caption "Investment
Policy" the following:
Underwriting Policy and Procedures
The Trust acquired substantially all of its assets in March
1998 in the Recapitalization Transactions. The Trust will manage credit
risk through its underwriting procedures, centralized approval of
individual transactions and active portfolio and account management. As
part of its underwriting process, the Trust reviews historical and
projected financial information relating to the properties underlying
its loan investments, analyzes loan-to-value, debt service coverage and
other financial ratios, reviews market feasibility and other
demographic and economic information, and assesses the structural
characteristics of the proposed loans. The primary focus of the Trust's
management of credit risk is on the financial performance, sufficiency
and credit quality of the collateral underlying the Trust's loans and
the ability of the related borrower to meet interest and principal
payments on such loans through cash flows from the collateral.
Additionally, the Trust reviews the credit history and character of
each borrower with respect to such borrower's past borrowings. Credit
risk is also actively managed through portfolio diversification by
industry, geographic region and individual borrower exposure, as well
as regular monitoring of collateral performance through intensive
servicing and asset management procedures.
-4-
<PAGE>
f. Deleting the table under the caption "Investment Portfolio" and
inserting in lieu thereof the following:
The following is a summary description of the Assets contributed to the Trust in
the Recapitalization Transactions as of March 18, 1998 (in thousands):
<TABLE>
<CAPTION>
Current Original
Number of Balance of Original Interest
Type of Underlying Borrowers Commitment Balances Ascribed Maturities Accrual
Loan/Borrower Property Type In Class Amount Outstanding Value Dates Rates(4)
- ------------- ------------- -------- ------ ----------- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Senior Mortgages Office/Hotel/ 8 $ 502,114 $445,614 $449,796 1999-2004 Fixed: 8.97 to 16%
Mixed Use/ Variable: LIBOR+
Apartment 1.25 to 3.25%
Subordinated Mortgages Office/Hotel 5 175,375 155,538 184,320 2002 to 2005 Fixed 10.0 to
Resort/Planned 15.25%
Communities
Opportunistic Mortgages Office/Hotel/ 2 166,644 132,427 81,057 1999 and 2007 6.0 to 7.0%
Apartment
Unsecured Notes Office/Hotel 2 27,300 27,300 30,850 2002 and 2004 11.25% to 15.0%
Construction Loans Assisted 2 92,390 85,471 91,985 1999 and 2004 12.0 to 12.5%
Living/Resorts
Real Estate Under Hotels 1 N/A(3) N/A(3) 195,470 N/A(3) N/A(3)
Long-Term Master Lease
Loan Participations Various 3 22,656 22,534 13,660 1999 and 2000 Fixed: 7.13%
Variable: LIBOR+
.58 to 1.75%
Other Real Estate Public bonds 2 43,150 43,150 47,532 2002 and 2007 12.5 to 12.75%
Related Investments ---------- ----------
Total 25 $1,094,670
========== ==========
======================================================[SPLIT TABLE]================================================================
Interest
Type of Payment Principal Participation
Loan/Borrower Rates(4) Amortization Features
- ------------- -------- ------------ --------
<S> <C> <C> <C>
Senior Mortgages Fixed: 8.0-10.82% Yes (1) Yes (2)
Variable: LIBOR+
1.25 to 3.25%
Subordinated Mortgages Fixed 10.0 to Yes (1) Yes (2)
15.25%
Opportunistic Mortgages 6.0 to 7.0% Yes (1) Yes (2)
Unsecured Notes 11.25% to 15.0% No Yes (2)
Construction Loans 10.0 to 12.5% No No
Real Estate Under N/A(3) N/A(3) N/A(3)
Long-Term Master Lease
Loan Participations Fixed: 5.45 to Yes(1) Yes
6.40%
Variable: LIBOR+
.58 to 1.75%
Other Real Estate 12.5 to 12.75% No No
Related Investments
Total
</TABLE>
Explanatory Notes
(1) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity. In addition, one of the loans permits additional
annual prepayments of principal of up to $1.3 million without penalty at
the borrower's option.
(2) Under some of these loans, the lender receives additional payments
representing additional interest for participation in available cash flow
from operations of the property and the proceeds, in excess of a base
amount, arising from a sale or refinancing of the property.
(3) The lease is a triple net lease of 17 hotels under which the lessee pays
all costs associated with the operation of the hotels, including real
estate taxes, insurance, utilities, services and capital expenditures. The
initial term of the lease expires on December 31, 2010, and can be extended
for up to five, five-year terms at lessee's option. Rent payments under the
lease consist of base rent and additional rent based on the amount by which
the aggregate operating revenue for any given year exceeds the aggregate
operating revenue of the twelve months ended September 30, 1996.
(4) All variable rate loans are based on 30-day LIBOR and reprice monthly.
-5-
<PAGE>
The following summarizes information relating to concentration and significant
terms within the portfolio of assets contributed in the Recapitalization
Transactions based on ascribed values:
Concentration by size:
<TABLE>
<CAPTION>
Ascribed Value %
------------------------------ -----------
(In thousands)
<S> <C> <C>
RLH (operating lease) $ 195,470 17.9%
Borrower A (senior and subordinate) 127,450 11.6%
Borrower B (senior and subordinate) 116,137 10.6%
------------------------------ -----------
All other loans/investments 655,613 59.9%
------------------------------ -----------
$ 1,094,670 100.0%
============================== ===========
</TABLE>
The RLH operating lease is discussed in detail under "Real Estate Under
Long-Term Operating Lease" as the sole asset group in that class.
The loans to Borrower A represent five first mortgage notes and a second
mortgage residual note which are cross-collateralized by over 1.1 million square
feet of office properties located in Seattle, WA and are personally guaranteed
by the borrower. The loans mature on December 31, 1999. In addition to the five
primary assets, additional collateral includes second or third mortgages on
three office buildings also located in Seattle. The subordinated loan was
acquired at a substantial discount to its face amount. Of the total principal
amount, $97 million was allocated to the first mortgage positions, while $54
million was allocated to a residual note. The $97 million first mortgage
amortizes on a 25-year schedule and bears interest at the rate of LIBOR plus 125
basis points. The second mortgage bears interest at the rate of 7%. The loans
are prepayable at any time without penalty.
The non-recourse loans to Borrower B mature on April 30, 2002 and are secured by
office properties containing 1.1 million square feet located in San Diego, CA.
The loans consist of a $74.3 million variable rate senior mortgage and a $34.8
million subordinate mortgage bearing interest at 12.0%. The loans are prepayable
subject to certain yield maintenance provisions on the subordinate mortgage.
Concentration by underlying asset/collateral type:
Ascribed Value %
------------------------------ -----------
(In thousands)
Office $ 516,099 47.1%
Hotel/Resorts 379,842 34.7%
Residential 118,029 10.8%
---------------------------------- -----------
Other 80,700 7.4%
---------------------------------- -----------
$ 1,094,670 100.0%
================================== ===========
For this purpose, the ascribed values for certain loans secured by mixed use
property were allocated by management based on estimated relative values of the
underlying collateral components.
-6-
<PAGE>
Concentration by location:
State Ascribed
Value %
------------------------- ------------------
(In Thousands)
California $ 237,316 21.7%
Washington 203,273 18.6%
New York 123,352 11.3%
Texas 108,679 9.9%
Florida 91,985 8.4%
Massachusetts 60,485 5.5%
Maryland 60,440 5.5%
Colorado 59,767 5.5%
All other states combined 85,021 7.8%
------------------------- ------------------
Corporate obligations 64,352 5.9%
------------------------- -------------------
$ 1,094,670 100.0%
========================= ==================
Summary of recourse provisions:
<TABLE>
<CAPTION>
Ascribed
Value %
-------------------------- --------------
(In thousands)
<S> <C> <C>
Non-recourse - secured by real estate $ 676,940 61.8%
Recourse (including operating lease assets) 339,348 31.0%
Corporate obligations 64,352 5.9%
-------------------------- --------------
Non-recourse - secured by partnership interests 14,030 1.3%
-------------------------- --------------
$ 1,094,670 100.0%
========================== ==============
-7-
<PAGE>
Summary of prepayment terms:
</TABLE>
<TABLE>
<CAPTION>
Ascribed
Value %
-------------------------- --------------
(In thousands)
<S> <C> <C>
Long-term operating lease - generally not prepayable $ 195,470 17.9%
Lock-out for greater than 70% of original term with
yield maintenance or other prepayment premiums on
a substantial portion of remaining term 249,670 22.8%
Lock-out for greater than 70% of original term,
prepayable thereafter without premium 24,489 2.2%
Yield maintenance 142,565 13.0%
Other prepayment premiums 129,920 11.9%
------------------------ --------------
No significant prepayment protection 352,556 32.2%
------------------------ --------------
$ 1,094,670 100.0%
======================== ==============
</TABLE>
The loans without substantial prepayment protection primarily represent variable
rate senior mortgages or opportunistic loans/loan participations acquired at
discounts to face values, which would result in gains upon repayment. The
properties underlying the long-term lease may be purchased at fair market value
by the lessee in limited circumstances, including catastrophic loss or
condemnation of the property.
Summary of interest characteristics:
<TABLE>
<CAPTION>
Ascribed
Value %
-------------------------- --------------
(In thousands)
<S> <C> <C>
Fixed rate investments $ 750,511 68.6%
------------------------ ---------------
Variable rate investments 344,159 31.4%
------------------------ ---------------
$ 1,094,670 100.0%
======================== ===============
</TABLE>
For this purpose, fixed rate investments are considered to include the real
estate assets under long-term operating lease under which the Trust receives a
fixed annual base rental revenue and 7.5% of annual operating revenue for the
underlying leased hotels in excess of a defined base amount. Variable rate loan
investments are generally based on 30-day LIBOR and reset monthly.
-8-
<PAGE>
Summary of subordination and default characteristics:
The Company holds both the senior and the subordinated mortgages with respect to
the non-recourse loans to Borrower A and Borrower B. The Company has all rights
as a mortgage holder and under the uniform commercial code with respect to the
properties underlying these mortgages in the event of a default. The Company's
rights with respect to the property underlying these investments are not
subordinated to any other lender of borrowed money.
g. Adding the following paragraph after the last paragraph under the
caption "Investment Portfolio - Real Estate Under Long-Term Operating
Lease":
The underlying real estate is comprised of the following hotel properties:
For the year ended December 31, 1997
------------------------------------
Number of Average Daily Average
Property Location Rooms Rate Occupancy
- ----------------- --------- ------------- ---------
Seattle, Washington 850 $ 93.59 71.3%
Salt Lake City, Utah 497 101.96 78.5%
Sacramento, California 376 67.05 77.1%
San Diego, California 300 96.36 75.4%
Sonoma, California 245 88.54 68.1%
Medford, Oregon 186 63.80 64.8%
Boise, Idaho 182 58.16 74.4%
Pendleton, Oregon 168 65.09 52.7%
Kelso, Washington 162 65.25 60.5%
Vancouver, Washington 160 81.86 67.2%
Durango, Colorado 159 98.44 59.7%
Wenatchee, Washington 149 48.42 75.0%
Coos Bay, Oregon 143 61.51 62.7%
Eugene, Oregon 137 63.45 64.3%
Astoria, Oregon 124 68.02 45.2%
Missoula, Montana 76 50.15 67.5%
Bend, Oregon 75 59.34 63.8%
-----------------
3,989
=================
-9-
<PAGE>
h. Deleting the paragraph under the caption "Competition" and inserting in
lieu thereof the following:
The Trust is engaged in a highly competitive business. In
acquiring assets, the Trust competes with numerous public and private
companies, including other finance companies, REITs, mortgage banks,
pension funds, savings and loan associations, insurance companies,
institutional investors, investment banking firms and other lenders and
industry participants, as well as individual investors. In addition,
there are several finance companies and REITs with investment
objectives similar to the Trust, and others may be organized in the
future. The effect of new entrants may be to increase competition for
the available supply of investments suitable for acquisition or
origination by the Trust. A proliferation of new entrants may increase
the competition for equity capital and thereby adversely affect the
market price of the Class A Shares. In addition, adverse publicity
affecting this sector of the capital markets or significant operating
failures of competitors may adversely affect the market price of the
Class A Shares. Certain of the Trust's anticipated competitors are
larger than the Trust, have longer operating histories, may have access
to greater capital and other resources, may have management personnel
with more experience than the officers of the Trust, and may have other
advantages over the Trust in conducting certain businesses and
providing certain services.
PART II
ITEM 6. SELECTED FINANCIAL DATA
In response to comments received from the Securities and Exchange
Commission, the Trust hereby amends Item 6. Selected Financial Data of Part II
of the Annual Report by deleting all of the information under such Item and
inserting in lieu thereof the following:
The following tables set forth the selected financial information for
the Trust on a historical and pro forma basis. As more fully described in Note 8
to the Consolidated Financial Statements, pro forma information includes the
effects of the following: (i) the Recapitalization Transactions; (ii) the
exchange of each outstanding Unit held by holders other than the Trust for one
Class A Share; (iii) liquidation and termination of the Partnership; and (iv)
borrowings necessary to consummate the aforementioned transactions
(collectively, the "Transactions"). The pro forma operating data for the year
ended December 31, 1997 is presented as if the Transactions had been completed
on January 1, 1997 and the pro forma balance sheet due data is presented as if
the Transactions had been completed on December 31, 1997.
-10-
<PAGE>
The selected financial information on the following page should be read
in conjunction with the discussions set forth in "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the financial
statements included elsewhere in this filing. The pro forma information is not
necessarily indicative of what the actual financial position and results of
operations of the Trust would have been as of and for the periods indicated, nor
does it purport to represent the future position or results of operations for
future periods.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------
Pro Forma Historical
--------- ------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Operating Data (1)
Interest income $ 61,956 $ 896 $ 478 $ 145 $ 296 $ 2,185
Prepayment and participation income 25,137 985 - - - -
Gain from sale of mortgages - - - - - 2,545(2)
Rental income 15,311 - - - - -
Other income 887 6 10 3 - -
--------- --------- --------- --------- --------- ---------
Total revenue 103,291 1,887 488 148 296 4,730
--------- --------- --------- --------- --------- ---------
Interest expense 23,151 - 272 - 270 -
Depreciation and amortization 6,875 - - - - -
General and administrative expense 1,510 461 639 283 356 982
Management/advisory fee 8,143 - - - - -
Other expenses 2,117 - - - - -
--------- --------- --------- --------- --------- ---------
Total expenses 41,796 461 911 283 626 982
--------- --------- --------- --------- --------- ---------
Net income (loss) before minority
interest in Partnership 61,495 1,426 (423) (135) (330) 3,748
Minority interest in Partnership (3) - (1,415) (154) - - -
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 61,495 $ 11 (577) (135) (330) 3,748
========= ========= ========= ========= ========= =========
Earnings per Class A Share (4) $ 0.20 $ 0.00 $ (0.22) $ (0.05) $ (0.13) $ 1.45
========= ========= ========= ========= ========= =========
Supplemental Data:
- -----------------
Funds from operations (5) (6) 70,087 1,426 (423) (135) (330) 1,203
Cash flows from:
Operating activities 3,166 (227) (184) (397) 2,531
Investing activities (6,013) (522) 175 (1,371) 39,400
Financial activities 3,029 - - 101 (39,503)
Dividends - - - - 38,639
Dividends per share $ - $ - $ - $ - $ 15.00(7)
-11-
<PAGE>
As of December 31,
-----------------------------------------------------------------------------------
Pro Forma Historical
--------- ------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate investments $ 1,073,877 $ 11,175 $ 5,481 $ 1,196 $ 1,371 $ -
Total assets 1,096,676 13,441 5,674 2,194 2,372 2,680
Debt obligations 350,000 - - - - -
Minority interest in consolidation - 5,175 3,917 - - -
entities
Shareholders' equity 742,206 6,351 1,578 2,155 2,290 2,519
</TABLE>
Explanatory Notes:
- -----------------
(1) As a result of the sale of a substantial portion of the Trust's assets
and related distribution of the proceeds in 1993, the Trust's ongoing
investment operations were substantially reduced.
(2) During 1993, the Trust sold its entire remaining portfolio then
consisting of four mortgages loans resulting in proceeds in excess of
carrying values and obligations of approximately $2.5 million.
(3) Represents the minority interests in the Partnership which were converted
into Class A Shares on March 18, 1998, upon which date the Partnership
was liquidated and terminated.
(4) Earnings per Class A Share is calculated base on the weighted average
shares outstanding during each of the periods after deduction for the
Class B Shares 1% interest.
(5) Management generally considers funds from operations ("FFO") to be one
measure of the financial performance of a REIT which provides a
relevant basis for comparisons among REITs and it is presented to
assist investors in analyzing the performance of the Trust. In 1995,
the National Association of Real Estate Investment Trusts ("NAREIT")
established new guidelines clarifying its definition of FFO and
requested that REITs adopt this new definition beginning in 1996. FFO
is defined as income before minority interest (computed in accordance
with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of property, provisions for
losses and real estate related depreciation and amortization (excluding
amortization of financing costs). FFO does not represent cash generated
from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash
available to fund cash needs. FFO should not be considered an
alternative to net income as an indication of the Trust's financial
performance or as an alternative to cash flows from operating,
investing, and financing as measures of liquidity.
(6) Pro forma FFO may differ from actual cash available for distribution to
shareholders because of certain non-cash or non-recurring items
included in income for generally accepted accounting purposes which are
not adjusted for or eliminated under the NAREIT definition of FFO.
These include such items as amortization of premiums or discounts on
loan investments, gains from sales of assets, or deferred interest
arising from differences between loan accrual and payment rates.
Accordingly, FFO is not necessarily indicative of cash available to
fund cash needs or to pay dividends to shareholders.
(7) Includes a $14.50 per Class A Share distribution paid in November 1993
from the proceeds as a result of the sale of substantially all of the
Trust's remaining real estate loan investments.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In response to comments received from the Securities and Exchange
Commission, the Trust hereby amends Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations of Part II of the Annual Report
by:
a. Deleting the last paragraph under the caption "General" and
inserting in lieu thereof the following:
The Trust consummated the Recapitalization Transactions in
March 1998. The Recapitalization Transactions were approved by the
Trust's shareholders at a meeting held on March 13, 1998. Prior to the
consummation of the Recapitalization Transactions, the Trust's assets
primarily consisted of approximately $11.0 million in short-term,
liquid real estate investments, cash and cash-equivalents. The
Recapitalization Transactions were primarily undertaken for a number of
reasons including the following business purposes: (i) the consummation
of the Recapitalization Transactions increased the real estate loan and
related assets held by the Trust from approximately $10 million to over
$1 billion and were accretive to the net tangible book value per Class
A Share; (ii) the belief that the implementation of the
Recapitalization Transactions would provide the Shareholders with a
potential for growth of their investment and overall return; and (iii)
the ability of the Trust to implement its investment policy and purpose
as a result of the consummation of the Recapitalization Transactions.
The Recapitalization Transactions and other related
transactions will materially impact the future operations of the Trust.
Accordingly the reported financial information is not believed to be
indicative of the Trust's future operating results or financial
condition.
b. Deleting the information under the caption "Fiscal Year 1997 Compared
to Fiscal Year 1996" and inserting in lieu thereof the following:
As discussed in Note 4 to the Consolidated Financial Statements,
revenue for fiscal 1997 includes a gain of approximately $985,000 from the
October 1997 prepayment of a mortgage note on the Warwick Hotel contributed to
the Partnership by Starwood Mezzanine in September 1996, which had been
reflected at Starwood Mezzanine's basis upon contribution. A portion of this
gain resulted from the use of predecessor basis. Since Starwood Mezzanine owned
91.95% of the Partnership, the majority of this gain was allocated to Starwood
Mezzanine as minority interest in the Partnership in the Consolidated Financial
Statements.
Consolidated revenue for fiscal 1997 also increased as a result of
the investment by the Trust of the proceeds received from the exercise of the
Class A Warrants and from a longer relative holding period for the Warwick
mortgage in 1997 through its repayment by the
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<PAGE>
borrower in October compared to the period from contribution to the Partnership
in September 1996 through December 31, 1996.
During 1997 general and administrative expenses decreased 28%
compared with 1996 due to a reduction in legal fees and proxy costs combined
with the elimination of payroll, office rental costs, and reduced professional
fees. During 1997, $1.9 million of costs were incurred in connection with the
Recapitalization Transactions and related transactions described below. These
costs were capitalized as deferred proxy costs and will be offset against the
incremental shareholder equity generated by the Recapitalization Transactions.
Total assets, excluding $1.9 million in deferred transaction costs
relating to the Recapitalization Transactions, increased from the year end 1996
to the year end 1997 by $5.9 million primarily due to the $4.9 million received
from the exercise of the warrants and $1.4 million of undistributed net income
(before minority interest for fiscal 1997).
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS
In response to comments received from the Securities and Exchange
Commission, the Trust hereby amends Item 8. Financial Statements of Part II of
the Annual Report by:
a. Deleting the information under the caption "Starwood Financial Trust
Consolidated Statements of Operations" and inserting in lieu thereof
the following:
Starwood Financial Trust
Consolidated Statements of Operations
(in thousands except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Interest income from mortgage notes $ 486 $ 166 $ -
Gain from early loan repayment 985 - -
Interest income from investments 410 312 145
Other income 6 10 3
---------- ---------- ----------
Total revenue 1,887 488 148
---------- ---------- ----------
Costs and expenses:
Interest expense - 272 -
General and administrative 461 639 283
---------- ---------- ----------
Total costs and expenses 461 911 283
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Minority Interest (1,415) (154) -
---------- ---------- ----------
Net income (loss) $ 11 $ (577) $ (135)
---------- ---------- ----------
Net income (loss) per Class A Share $ 0.00 $ (0.22) $ (0.05)
---------- ---------- ----------
Weighted average number of Class A
Shares outstanding (in thousands) 7,244 2,550 2,550
========== ========== ==========
The accompanying notes are an integral part of the financial
statements.
</TABLE>
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<PAGE>
b. Deleting the information in Note 8 - Subsequent Events under the
caption "Recapitalization Transactions" and inserting in lieu thereof
the following:
As more fully discussed in Note 5, pursuant to a series of transactions
beginning in March 1994 and including the exercise of certain warrants in
January 1997, Starwood Mezzanine and certain entities affiliated with the
general partners of Starwood Mezzanine (collectively, Starwood Mezzanine,
Starwood Opportunity Fund IV, L.P. and other affiliates are referred to as
"Starwood") acquired joint ownership of 70% and 100% of the outstanding Class A
Shares and Class B Shares of the Trust, respectively, through which they
controlled approximately 80% of the voting interest in the Trust as of December
31, 1997. Prior to the consummation of the Recapitalization Transactions
(defined below), Starwood Mezzanine also owned 4,568,944 Units which represents
the remaining 91.95% of the Partnership not held by the Trust, which were
convertible into either cash, and additional 4,568,944 Class A Shares of the
Trust, or a combination of the two, as determined by the Trust.
On March 18, 1998, each outstanding Unit held by Starwood Mezzanine was
exchanged for one Class A Share of the Trust and, concurrently, the Partnership
was liquidated through a distribution of its net assets to the Trust, then its
sole Partner.
Simultaneously, Starwood Mezzanine and Starwood Opportunity Fund IV,
L.P. ("SOF IV") (an affiliate of the general partners of Starwood Mezzanine)
consummated the transactions contemplated by the contribution agreement
("Contribution Agreement") among Mezzanine, SOF IV and the Trust to
substantially recapitalize and increase the size of the Trust's assets and
operations. Pursuant to the Contribution Agreement, Starwood Mezzanine
contributed various real estate loan investments to the Trust in exchange for
55,148,000 Class A Shares and $25.5 million in cash, as adjusted. SOF IV
contributed real estate loans and investments, $17.9 million in cash and certain
letters of intent in exchange for 247,074,800 Class A Shares of the Trust and a
cash payment of $324.3 million. Concurrently, the holders of the Class B Shares
who are affiliates of the general partners of Starwood Mezzanine and SOF IV
acquired 153,395,872 additional Class B Shares sufficient to maintain existing
voting preferences pursuant to the Trust's Amended and Restated Declaration of
Trust (the "Declaration of Trust"). Immediately after these transactions,
Starwood and its affiliates owned approximately 99.3% of the outstanding Class A
Shares of the Trust and 100% of the Class B Shares. (Collectively, the
transactions described in this note are the "Recapitalization Transactions".)
Assets acquired from Starwood Mezzanine will be reflected using step acquisition
accounting at predecessor basis adjusted to fair value to the extent of
post-transaction third-party ownership. Assets acquired from SOF IV will be
reflected at their fair market value.
c. Deleting the information the first two paragraphs in Note 8 -
Subsequent Events under caption "1996 Share Incentive Plan" and
inserting in lieu thereof the following:
The Trust amended and restated its stock option plan to provide a means
of incentive compensation for officers, key employees, Trustees, consultants and
advisors. Stock options,
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<PAGE>
restricted stock awards and other performance awards may be granted under the
Starwood Financial Trust 1996 Share Incentive Plan (the "Plan"). Under the
amended Plan, up to a maximum of 9.0% of the outstanding Class A Shares on a
fully-diluted basis, as adjusted for subsequent issuances of Class A Shares, are
reserved for issuance under the Plan. All grants of shares under the Plan, other
than automatic grants to non-employee Trustees, will be at the sole discretion
of the Board of Trustees or a specifically designated sub-committee of such
Trustees. Approximately 14,963,057 options to purchase Class A Shares at $2.50
per share that are immediately exercisable were granted to the Advisor under the
Plan upon consummation of the Recapitalization Transactions and future grants
may be made to the Advisor or employees of the Trust in the future.
An independent financial advisory firm estimated the value of these
options at the date of grant to be approximately $0.40 per share using a
Black-Scholes valuation model. In the absence of comparable historical market
information for the Trust, the advisory firm utilized assumptions consistent
with activity of a comparable peer group of companies including an estimated
option life of five years, a 27.5% volatility rate and an estimated dividend
rate of 8.5%. Options issued to employees will be accounted for using the
intrinsic method and, accordingly, no earnings charge will be reflected for
options issued to direct employees since the exercise price approximates the
concurrent exchange transaction price at date of grant. Options issued to the
Advisor will be accounted for under the option value method and, accordingly,
result in a charge to earnings upon consummation of the Recapitalization
Transaction equal to the number of options allocated to the Advisor multiplied
by the estimated value at consummation. The charge of approximately $6.0 million
will be reflected in the Trust's first quarter 1998 financial results, however,
such charge has been excluded from the pro forma financial information presented
in this note, as it represents a non-recurring charge. Future charges may be
taken to the extent of additional option grants, which are at the discretion of
the Board of Trustees.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Trust has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STARWOOD FINANCIAL TRUST
Registrant
Date: January 19, 1999 /s/ Jay Sugarman
------------------------------------
Jay Sugarman
Chief Executive Officer and President
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