Good day and welcome to iStar Financial's Third Quarter 2008 Earnings Conference Call. (Operator Instructions). As a reminder, today's conference is being recorded. At this time, for opening remarks and introductions, I’d like to turn the conference over to iStar Financial Senior Vice President of Investor Relations and Marketing, Mr. Andrew Backman. Please go ahead, sir.

Thank you Alex, and good morning everyone. Thank you for joining us this morning to review iStar's third quarter 2008 earnings report. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Jay Nydick, our President; and Katie Rice, our Chief Financial Officer. This morning's call is being webcast on our website at istarfinancial.com in the investor relations section. There will be a replay of the call beginning at 12:30 pm Eastern Time today. The dial-in for the replay is 1-800-475-6701 with the confirmation code of 964825. Before I turn the call over to Jay, I'd like to remind everyone that statements in this earnings call, which are not historical facts, may be deemed forward-looking statements. Factors that could cause actual results to differ materially from iStar Financial's expectations are detailed in our SEC reports. Now, let me turn the call over to Jay Sugarman. Jay?

Thanks Andy. Thanks to all of you for joining us today. Let's get straight to it. The last several months have been terrible; terrible for the credit markets, terrible for the financial system, terrible for our company. It's been astonishing to watch the financial pillars of our economy crumble one-by-one, in an almost uncontrolled fashion. Yeah, we remain convinced we can find a way through this crisis and recover our position as a leader in the commercial real estate finance marketplace. How we plan to do that will be the focus of the call today. Let's start with where we are. At the end of the third quarter, we reviewed every asset in the portfolio as we do every quarter. Of the $17 billion in assets we manage, $13 billion looked solid $1.3 billion were on our watch list and $2.5 billion are on our NPL list. Our increased NPLs, reserves and charge offs reflect the worsening reality in the economy and recognition the problems have now become so systemic that the range of possible outcomes has begun to narrow for many of our challenged assets. As a result, earnings in the third quarter were well below expectations. The EPS was negative $285 million or negative $2.15 per share. We continue to be hamstrung by the large number of non-performing loans that are still only part way through the resolution process. Until that logjam clears and we can start shrinking our NPL balances, earnings will remain under significant pressure. Aside from earnings, I think it's pretty clear the market is most focused on the two pivotal issues for all finance companies, liquidity and credit. In our case, the key questions have centered on the ability of borrowers to repay loans in sufficient quantity to meet our funding obligations and the…

Thanks Jay, and good morning everyone. As Jay mentioned, our earnings for the third quarter were lower than we expected, based primarily on increased loan loss provisions and non-cash mark-to-market impairments. The increased provisions and impairments this quarter reflect the unprecedented changes and deterioration we've witnessed in the financial community over the past three months. As well as the increasingly challenging economic environment that all finance companies are facing. I'll go through the details of our reserves and impairments in a couple of minutes. Our results this quarter included a $411 million addition to our loan loss reserve, $88 million of impairments and $20 million of gains from the sale of corporate tenant lease assets. During the quarter, we recognized $68 million of gains associated with the discounted purchase of $241 million par value of both our short and long-term debt. We've also purchased 2.4 million common shares and have the remaining authority to purchase an additional $44 million of shares. Okay, moving on, net investment income for the quarter was $215 million. The 2.4% decrease in this metric from the third quarter of last year was primarily due to an increase in non-performing loans, offset by gains from debt repurchases made in the quarter. Additionally, the year-over-year comparison now includes the impact of the Fremont portfolio in the year ago period. During the quarter, we funded a total of $737 million under new and existing commitments, and received $679 million in gross principal repayments. Of the $679 million, $283 million was used to pay down the A-participation interest in the Fremont portfolio and $396 million was retained by iStar. Principal balance of the A-participation interest at the end of the third quarter was $1.6 billion, down from $1.9 billion last quarter. As you know, 70% of all principal repayments…

Thanks Katie. So let's get back to the question at hand. How do we recover and steer through the current market chaos? I think the road back relies first and foremost on the core principles we founded this company on at the end of the last deep recession in the early '90s. I'll just run through those quickly; one, build a strong balance sheet to withstand unexpected events. We've always run iStar with lower leverage than most financial companies to give us a wider margin of error. We've always diversified our asset base to reduce concentration risk and keep a core portfolio of safe and relatively liquid assets. Two, don't [land] long and borrow short, we've laddered our debt obligations and made sure our asset maturities were shorter than our debt maturities. As markets overheated, we emphasized short lived assets to create a more favorable reinvestment window. Many of these assets are expected to pay-off in 2009. Three, don't rely on mark-to-market warehouse lines, we've always been concerned that when you most need that liquidity, it probably wouldn't be available. Four, don't rely on unsecured debt, we spent tremendous time and money moving our balance sheet to be almost entirely unencumbered, to create maximum flexibility. That flexibility continues to be very valuable as capital has become scarce. Five, focus on risk reward not just absolute yield. As early as 2005, we began moving into senior debt and away from junior debt, focusing on areas with better risk reward than the monetized lending environment was offering. And lastly six be contrarian, Warren Buffett says it more simply and more elegantly than we can, but we generally try to stay true to our contrarian roots. Be aggressive when everyone is scared, and scared when everyone is aggressive. Now we've made our fair share of mistakes, but I trust these core principles will see us through to a better place, and that our strong foundation will help us overcome the challenges that current market conditions have created. And with that, let's open it up for questions. Operator?

Thank you. (Operator Instructions) And our first question comes from the line Ee Lin See with Credit Suisse. Please go ahead.

Hi, good morning. I have three questions. The first one is why do you think the total loss coverage of $908 million or 36% of NPLs is enough? We're hearing that condo and land values have dropped to around 20% of book value, so an average LTV of 75 would imply 55% loan loss? And the second question is can you please explain what specific assumptions changed to change your '09 in flow compared to the previous projection of $5 billion? And the third question is what is the main reason for the NPL increase? Is it the inability of developers to achieve pre-sales of condos? Or maybe you can talk about what stage of development the projects are in when they become NPLs mostly? Thank you.

Okay. Let's start with the first question, which is what we base our recovery profiles on. As Katie said on the 75% loan to value metric, obviously that's an average. We look at each and every transaction individually very difficult to use rules of thumb on our portfolio. Many transactions have specific credit support it's not going to be apparent in some of the overall metrics. Our NPL list and our reserves against NPLs is based on real-time information coming from the field, on transactions that we see as truly comparable and indications of real value. I would tell you, throughout the portfolio generally the higher quality better sponsored transactions are not receiving $0.20 on the dollar receiving much higher recovery rates. Not to say that's true in every single instance, but overall I think those would be far more conservative even in this tough environment than we would expect to recover. Certainly haven't had the experience yet of seeing that kind of minimal recovery on first mortgages in generally high quality real estate situations. But I think given the toughness of the marketplace, we're certainly watching indications of value every day to make sure we are on top of that.

Yes, Ee Lin, I think your second question was related to sources and uses and why the big change that we're forecasting, particularly in 2009. And I think we monitor this number pretty carefully and we have our asset management teams scrub these numbers and there are two big inputs to the numbers. The first is what are we using the money for? And with that really revolves around our funding schedule for primarily our construction projects. The funding schedule is generally relatively easy to predict. The numbers -- the overall numbers typically don't change, what happens is, as those of you who ever been involved in construction oftentimes construction projects are delayed a little bit. So sometimes the uses of the funds on a quarterly basis move a little bit and typically they simply move out a little bit, but the overall numbers don't change that much if you look sort of over an annual period. So the uses of funds are relatively easy to -- for us to get our hands around. The sources of funds primarily related to repayments of our loans, is the number that we've had great difficulty forecasting over the past several quarters. And obviously our borrowers subjected to the same issues that everyone is in the --with respect to the disruptions in the capital markets, and many of them with very solid projects are having difficulty finding refinancing sources to refinance projects. So we have tried to be on top of this number, but I think as conditions continue to deteriorate from a financing perspective, our borrowers continue to indicate to us that they're going to have trouble repaying us. So the big change that you see in this forecast really relates to that number. And we'll just have to continue to update you over the quarters to give you a sense of how that's changing. Now what has stepped up with respect to sources and we continue to hope will be a larger source of funds is the resolution of NPLs or REO and certain asset monetizations. Several quarters ago, we stepped up that program, and as we've talked about a little bit, NPLs and REOs do take many months to resolve. The foreclosure process can be long. But we have been working on a number of these for several quarters and we're hopeful that in the next couple of quarters many of those will come to fruition and augment our sources of funds in 2009.

And just picking up on the last piece of that, why are the NPLs up? We conducted our three day risk rating meetings on every single asset in the portfolio amidst an S&P and Dow that was down nine days out of 10. We began to see absolute air pockets throughout the credit markets from the corporate finance world to the money market world to basically anything that wasn't government guaranteed. Those are pretty frightening, and definitely [joined] us about the ability of borrowers to repay and where cap rates are going to go and what ultimate values are likely to be. And despite having some performing loans and having borrower expectations remain somewhat high, the reality is of the situation as we take those indicators of value and those indicators of credit availability and build them into our thought process. And deals that in the second quarter may have looked like they would get by and had bids and had lenders lined up, we saw a number of those transactions fall away. So, I think our thought process about the future definitely ratcheted it down. That seems to be a continuing theme unfortunately throughout the marketplace. But we saw again some things that were almost unimaginable take place in the last weeks of September and first weeks of October. And I think being somewhat sobered by those events led us to just take the NPLs now because we can no longer believe that the range of outcomes includes full repayment, full interest on a timely basis.

We have a next question please.

Our next question from the line of Matt Burnell with Wachovia. Please go ahead.

Good morning. Let me ask you, I guess, a couple of bigger picture questions. In terms of what's going on with the recapitalization of the banking system, what's your expectation, if any of getting even a modest amount of relief for banks potentially funding some of your borrowers? Is there any reason to think that there would be some benefit from that program for iStar, if not directly then indirectly?

This is a critical four week period, really, the question that's on our minds is, does the liquidity that's being infused into the system in massive amounts, not just domestically but now pretty much globally, and the indirect cash is trash focus that's going to make short term rates go very, very low, does that offset the fundamental deterioration we are still likely to see regardless of all the liquidity moving into the market. I think our view is -- it's unknowable right now. We're going to watch the next four weeks the battle between liquidity being infused. Can it pull people off the sidelines? Can it pull cash off the sidelines? Do people perceive enough stability entering the marketplace to say, I can earn 0% to 1% in pure safe short term instruments, but if I just step out the risk curve slightly, I can make extraordinary returns, 5,6,7,800 over or ostensibly almost risk free investments and 12% or 13%,14%, 15% for taking risks that as little as six or nine months ago we’ve been priced at a fraction of that? We've seen this dynamic before, obviously never in the confluence of events that have happened over the last 12 months. But that dynamic is one that we will watch very carefully to see does some of this liquidity start showing up and trying to take at least a modest advantage of some of the extraordinary investment opportunities we see or are people just so stunned that and so afraid of what the real fundamental aftershock of the credit crisis are. The people are just going to sit on their hands for awhile just to see if the world is going to make it through on a reasonable basis. We are certainly hopeful that the money being infused makes its way more than likely indirectly in a way that benefits us. We don't really see any direct link to some of the programs being available to us. But I would tell you we feel like the both the federal action, the government actions and now the global actions are meant to restore at least a modicum of liquidity in the marketplace and we're hoping that begins to offset some of the just complete shutdown we've seen in the credit markets for the last three weeks.

Katie, you mentioned project delays related I guess to your sources and uses calculations. But are you seeing greater numbers of projects simply being canceled? If not -- at the beginning stages before ground is broken but even after ground has been broken, where just funding has either dried up or the sponsors have just decided that it's not worth throwing additional money at projects that may not work out?

No, I think most of the projects that we or Fremont were involved in that we're not going to fund the developer came and said this project doesn't make sense. That most of that activity has occurred quite a while ago. What I meant delay is typically construction can be delayed just for almost weather there are just a variety of reasons subcontractors can be delayed. So it's not an issue around things that are being withdrawn. It's more typical construction delays, and I don't think either we or our borrowers ever believe that not completing a project is in the best, in their best interests or in our best interests. So, we will continue to fund projects according to our documents and see projects through to the end even despite obviously weakening economic conditions.

And my last question focuses on the weakening of markets. I think most of us on the call appreciate what's going on in Florida and California and Las Vegas. But are there other markets that three months ago, perhaps even six months ago were far stronger than they are now that are not on that fairly short list?

Yes, I guess the one we look at out our window everyday is the New York market benefited from obviously strong foreign currency relative to the dollar. There was some underpinnings from that foreign buyer. I think again the full aftershocks of what's happened on Wall Street have not yet rippled through this market entirely. We continue to see a reasonable number of projects closing in the Tri-State area. So there's definitely been a slowdown. And so I guess New York probably had the highest perch from which to fall, so there's still plenty of cushion there. But I think we are, as other people are trying to really determine what is the near term and intermediate term future for the New York market. The devastation in some of these other markets has been played out and everybody is well aware of it. I think New York has been one of the islands of security that we think it still has a little bit way to go down before you can actually read the tea leaves and say how bad is this going to be.

Great, thank you.

Thanks Matt. Next question, Alex?

(Operator Instructions) And we go now to the line of Michael Dimler with UBS. Please go ahead.

Good morning. I was wondering with respect to your NPLs and watch list assets specifically, what the average LTVs in those two categories would be? And as you consider projects for the watch list, what primary drivers influence that decision?

Yes, I mean, I think it's safe to assume with respect to NPLs, the LTVs are plus or minus roughly 100%. So and obviously we're reserving for those NPLs to ensure that we're properly covered. Watch lists and the criteria for the watch lists is really a little different. Watch list loans are those that we are concerned that over the next six to nine months will potentially go NPL, have difficulty refinancing us, project fundamentals are slowing, our market fundamentals are slowing. So we saw a slight decrease in that list this quarter vis-a-vis last quarter. I do not think that is a trend yet, I think eventually you will see watch lists come down as we move through our credit cycle and that will be an indicator because that's the early warning system, that our total NPL watch list and REOs should be declining overtime. I don't think the decline this quarter was anything more than mix or, I just don't think it was a trend yet. But I don't have the specific statistics on the LTVs on the watch list. But they're probably a little higher than average they're probably in the high 90 range.

Okay. Thanks.

Thanks Mike. Next question, Alex?

And our next question comes from the line of Joshua Barber with Stifel Nicolaus. Please go ahead.

Hi. Good morning. I was just wondering, how many loans that you guys have funded in the last 12 months are currently on the NPL or the watch list?

Partially funding? Because --

Yes, partially funding.

I'd say a good number of them.

Josh, I don't know the exact number. It's Andy. I'll talk to you offline about it.

Okay.

I think if you walk through the statistics that I gave you on the NPLs, some of those are condo construction projects. Some of them might be complete, but some of them, as I mentioned earlier, we continue to fund because a finished project is a far better project than an unfinished project.

Right. Thanks.

Alex, next question?

And our final question comes from the line of Omotayo Okusanya with UBS. Please go ahead.

Hi. Yes, good morning. Katie, quick question, is there any way, just kind of given all the moving parts, that you can help us in regards to trying to figure out differences between adjusted EPS and your taxable EPS? So we can get some sense of if it's possible that the dividend could return in 2009?

Yeah. I think it would be hard for a third party to try to figure this out. I think it's primarily related to the timing. Just like your own personal taxable income versus GAAP income if you will. A lot of it relates to the timing of when losses are actually incurred, and when specific reserves actually represent from a taxable perspective an impairment. So it's not easy to give you -- w e can't give you a good estimate. I think it would be tough for you to actually look into the portfolio and figure that out as well. But right now we do think that particularly given the specific reserves that we took this quarter, that we probably will be in a position where if there is a fourth quarter dividend, it would be very minimal and most likely not at all, based on the reserve levels that we have.

Got it. And then you may have given us this number before and I missed it, but of the $411 million of provision expenses this quarter. How much of it was specific reserves versus general reserves?

Yes, it was actually, walked through that in my script. It's about $456 million of specifics, and actually general reserves went down this quarter. As loans move from performing to non-performing, they actually move out of our general reserve calculation. General reserves are based on our performing loan portfolio.

Okay.

And that actually went down a little bit.

Alright. Great, thanks very much.

Thanks Tayo. With that being our last question, I want to thank Jay and Katie for joining us today and I'd like to thank everybody on the phones joining us as well this morning. If you should have any additional questions on today's earnings release please feel free to contact me directly here in New York. Alex, would you please give the conference call replay instructions once again. And thanks again everybody.

Ladies and gentlemen this conference will be available for replay after 12:30 pm today until November 13, at midnight. You may access the AT&T executive playback service at anytime by dialing 1-800-475-6701 and entering the access code of 964825. International participants may dial 1-320-365-3844 and with the access code of 964825. That does conclude our conference for today. Thank you for your participation and using AT&T executive teleconference service. You may now disconnect.