Fitch Revises iStar's Outlook to Positive; Affirms 'BBB-'

NEW YORK--June 22, 2005--Fitch Ratings has revised iStar Financial Inc.'s (iStar) Rating Outlook to Positive from Stable. Fitch also affirmed the following:

-- Senior Unsecured Debt 'BBB-';

-- Preferred Stock 'BB'.

iStar's rating strengths are centered on its high-quality portfolio of triple-net credit tenant leases (CTL) and first mortgages. As of March 31, 2005, nearly 50% of the base rents in the CTL portfolio were from investment grade tenants, while the overall portfolio was 95.2% leased and had a remaining average lease term of 11.5 years. In addition, the weighted average loan-to-value of the company's mortgage portfolio continues to decline and was at 66.0% as of March 31, 2005. These characteristics substantially mitigate many concerns related to high property appraisals in the current commercial real estate market.

iStar's funding and liquidity profile have also shown a significant improvement over the past 18 months. The ratio of secured capital to total capital improved to approximately 20% at March 31, 2005 from 44% at Dec. 3, 20051, 2003. In Fitch's view, the continued migration to an unsecured borrowing profile provides significant benefits from a financial flexibility standpoint. This migration also improved the quality and diversity of iStar's unencumbered asset pool which, in previous years, had significant 'lumpy' concentrations and did not reflect the quality of the overall asset portfolio. As of March 31, 2005, over 71% of the company's total assets were unencumbered, compared to less than 33% at the end of 2003.

iStar's leverage has increased and risk-adjusted capitalization has softened over the past 12 months. This was expected as management had signaled this over 24 months ago. Leverage, defined as debt divided by equity plus accumulated depreciation, was 1.93 times (x) at March 31, 2005; it has historically been below 1.75x. When defined as debt divided by undepreciated book capital, leverage increased to 65.9% as of March 31, 2005 from its historical range of below 64.5%. Although risk-adjusted capitalization has also softened, it remains adequate for the rating category as management has continued to focus on acquiring high-quality assets. Despite these changes, Fitch continues to be comfortable with iStar's capitalization profile.

iStar's operating performance also remains solid as the company has continued to selectively write economical business even in a highly competitive commercial real estate market. Fixed-charge coverage (defined as EBITDA less capital expenditures, straight line rents, and prepayment penalty and gain on sale income divided by the sum of interest expense and preferred dividends) was 1.88x for fiscal 2004 compared to 2.02x in 2003 and 1.83x in 2002. Adjusted to exclude stock compensation and debt prepayment expense, the company's return on average assets and return on average equity metrics improved on a year-over-year basis in spite of margin pressures in the commercial real estate market.

Fitch is comfortable with the company's recent acquisition of Falcon Financial and minority investments in Oak Hill and LNR/Blackacre, although they may dilute operating performance and weaken risk-adjusted capitalization. Fitch believes that these strategic moves will help broaden the company's operating platform and are consistent with iStar's long-held strategy of investing capital in underserved markets.

Weaknesses continue to center on the company's asset concentrations, as iStar's top 10 assets are equal to approximately 70% of total shareholder's equity. While many other REITs and finance companies have similar concentrations, many of iStar's assets tend to be single asset/single tenant or single obligor assets.

While Fitch does view iStar's portfolio quality as strong, investors should be aware that many of the company's assets are highly structured and are not 'cookie cutter' loans that would traditionally fit in the commercial mortgage backed securities (CMBS) market. These are assets that are typically written either on properties or to borrowers/lessees to which other potential financiers would not lend or lease. Both the company's significant structuring acumen and low refinancing risk mitigate this concern.

Fitch also has concerns about the level of competition in the commercial real estate market, which has resulted in iStar being unable to economically (based on management's risk-adjusted return expectations) invest in certain areas. The net result has been a broadening of the company's investment strategy to include transactions such as the acquisition of Falcon Financial, which will emphasize a very specific type of asset and borrower (automobile dealerships) as well as more cash-flow and franchise-value based loans, as opposed to more traditional mortgage investments characterized by modest loan-to-value ratios. Fitch generally views iStar's capacity and willingness to move into less aggressive markets favorably, but is cognizant of the risks involved in these asset classes.

The Rating Outlook revision to Positive reflects that iStar has made significant progress in improving its financial flexibility and safely growing its asset base. Over the next 12- to 24-month period, Fitch will continue to evaluate the ramifications and seasoning of iStar's maturing investment strategy. Fitch also expects, over this period, that the company will continue to maintain solid interest coverage metrics (as previously defined) in the 1.80x to 2.0x range, but that leverage may continue to increase, as defined, toward 2.25x.

Headquartered in New York City, iStar provides structured financing and corporate leasing of high-quality commercial real estate nationwide. iStar leverages its expertise in real estate, capital markets, and corporate finance to serve corporations with sophisticated financing requirements. As of March 31, 2005, loans and other lending investments totaled $4.3 billion and real estate subject to credit tenant leases totaled $3.3 billion.

Fitch's rating definitions are available on the agency's public web site, 'www.fitchratings.com'. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.