================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1998
Commission file number 1-13223
LNR PROPERTY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 65-0777234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
760 NORTHWEST 107TH AVENUE, MIAMI, FLORIDA 33172
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 485-2000
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 [ ]
Common shares outstanding as of the end of the current fiscal quarter:
Common 25,391,158
Class B Common 10,757,849
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<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
May 31, November 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
----------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 24,803 34,059
Restricted cash 88,450 56,637
Investment securities 385,267 304,660
Mortgage loans, net 87,955 86,849
Operating properties and equipment, net 475,705 228,598
Land held for investment 92,747 83,297
Investments in and advances to partnerships 202,929 159,359
Deferred income taxes 29,078 23,974
Other assets 61,778 45,904
----------------- ---------------
Total assets $ 1,448,712 1,023,337
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 8,201 4,244
Accrued expenses and other liabilities 57,068 36,708
Mortgage notes and other debts payable 754,540 391,171
----------------- ---------------
Total liabilities 819,809 432,123
----------------- ---------------
Minority interests 26,248 22,126
----------------- ---------------
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 25,391 shares issued
and outstanding 2,539 2,515
Class B common stock, $.10 par value, 40,000 shares authorized, 10,758 shares
issued and outstanding 1,076 1,098
Additional paid-in capital 544,546 544,548
Retained earnings 33,068 370
Unrealized gain on available-for-sale securities, net and other 21,426 20,557
----------------- ---------------
Total stockholders' equity 602,655 569,088
----------------- ---------------
Total liabilities and stockholders' equity $ 1,448,712 1,023,337
================= ===============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
Three Months Ended Six Months Ended
May 31, May 31,
------------------------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
----------- ------------ ------------ -----------
<S> <C> <C>
Revenues
Rental income $ 15,270 15,179 29,864 29,978
Interest income 17,819 10,877 34,759 20,630
Equity in earnings of partnerships 14,229 6,287 23,969 19,791
Gains on sales of:
Real estate 5,535 4,469 12,061 6,401
Investment securities - 5,009 1,386 5,009
Management fees 1,927 1,917 4,021 5,977
Other, net 121 673 679 1,385
----------- ----------- ------------ ------------
Total revenues 54,901 44,411 106,739 89,171
----------- ------------ ------------ -----------
Costs and expenses
Cost of rental operations 9,709 8,897 18,820 18,281
General and administrative 6,621 4,830 12,674 11,533
Depreciation 2,226 1,461 4,063 2,915
Minority interests 561 73 1,094 126
----------- ------------ ------------ -----------
Total costs and expenses 19,117 15,261 36,651 32,855
----------- ------------ ------------ -----------
Operating earnings 35,784 29,150 70,088 56,316
Interest expense 9,925 6,392 16,983 13,201
----------- ------------ ------------ -----------
Earnings before income taxes 25,859 22,758 53,105 43,115
Income taxes 8,905 8,876 19,531 16,815
----------- ------------ ------------ -----------
Net earnings $ 16,954 13,882 33,574 26,300
=========== ============ ============ ===========
Weighted average shares outstanding:
Basic 36,140 36,128 36,134 36,128
=========== ============ ============ ===========
Diluted 36,596 36,298 36,432 36,298
=========== ============ ============ ===========
Net earnings per share:
Basic $ 0.47 0.38 0.93 0.73
=========== ============ ============ ===========
Diluted $ 0.46 0.38 0.92 0.72
=========== ============ ============ ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
May 31,
-------------------------
(IN THOUSANDS) 1998 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 33,574 26,300
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation 4,063 2,915
Minority interests 1,094 126
Amortization of discount on mortgage loans and CMBS (2,877) -
Gains on sales of real estate (12,061) (6,401)
Equity in earnings of partnerships (23,969) (19,791)
Gain on sales of investment securities (1,386) (5,009)
Changes in assets and liabilities:
(Increase) decrease in restricted cash (7,224) 31
Increase in other assets and deferred taxes (18,176) (7,641)
Increase in mortgage loans held for sale (827) (6,263)
Increase in accounts payable and accrued liabilities 11,525 7,501
----------- ------------
Net cash used in operating activities (16,264) (8,232)
----------- ------------
Cash flows from investing activities:
Operating properties and equipment
Additions (84,424) (20,340)
Sales 22,826 14,591
Land held for investment
Additions (18,304) (3,032)
Sales 9,829 3,743
Investments in and advances to partnerships (31,042) (1,459)
Distributions from partnerships 17,226 29,141
Purchase of mortgage loans held for investment - (349)
Proceeds from mortgage loans held for investment 222 122
Purchase of investment securities (51,304) (83,329)
Proceeds from sales of investment securities 1,909 93,134
Interest received on CMBS in excess of income recognized 6,771 9,052
Acquisition of AHG, net of cash acquired (70,086) -
----------- ------------
Net cash provided by (used in) investing activities (196,377) 41,274
----------- ------------
Cash flows from financing activities:
Payment of dividends (876) -
Net borrowings under repurchase agreements and revolving credit lines (8,831) (11,428)
Mortgage notes and other debts payable
Proceeds from borrowings 229,527 9,768
Principal payments (3,909) (3,687)
Payments to Lennar Corporation (12,526) (22,496)
----------- ------------
Net cash provided by (used in) financing activities 203,385 (27,843)
----------- ------------
Net increase (decrease) in cash and cash equivalents (9,256) 5,199
Cash and cash equivalents at beginning of period 34,059 2,295
=========== ============
Cash and cash equivalents at end of period $ 24,803 7,494
=========== ============
(Continued)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
Six Months Ended Ended
May 31,
--------------------------
(IN THOUSANDS) 1998 1997
------------ ------------
<S> <C> <C>
Supplemental disclosures of non-cash investing and financing activities:
Purchases of investment securities financed by repurchase agreements $ 29,835 27,406
Increase in CMBS and equity, due to change in unrealized gain on
available-for-sale securities, net of deferred income taxes $ 2,529 5,861
Spin-off of LNR from Lennar Corporation:
Increase in Lennar Corporation's investment due to transfers of assets and
liabilities from Lennar Corporation, prior to the spin-off $ - 5,307
Supplemental disclosure of non-cash transfers:
Transfer of land held for investment to operating properties $ 2,824 1,596
Transfer of investment securities to other assets $ 17 -
Transfer of other assets to accounts payable and accrued expenses $ 700 163
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated condensed financial statements include the
accounts of LNR Property Corporation and its subsidiaries (the "Company"). The
assets, liabilities and results of operations of entities (both corporations and
partnerships) in which the Company has a controlling interest have been
consolidated. The ownership interests of noncontrolling owners in such entities
are reflected as minority interests. The Company's investments in partnerships
(and similar entities) in which less than a controlling interest is held are
accounted for by the equity method (when significant influence can be exerted by
the Company), or the cost method. All significant intercompany transactions and
balances have been eliminated. The financial statements have been prepared by
management without audit by independent public accountants and should be read in
conjunction with the November 30, 1997 audited financial statements in the
Company's Annual Report on Form 10-K for the year then ended. However, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for fair presentation of the accompanying consolidated
condensed financial statements have been made.
2. NET EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" beginning in the first quarter
of 1998. The statement requires that earnings per share be calculated and
presented on a basic and diluted basis. Net earnings per share for all periods
presented have been restated to conform with SFAS No. 128.
Basic net earnings per share is computed by dividing the Company's net earnings
by the weighted average number of shares outstanding during the period. Diluted
net earnings per share is computed by dividing the Company's net earnings by the
weighted average number of shares outstanding and the dilutive impact of common
stock equivalents, primarily stock options. The dilutive impact of common stock
equivalents is determined by applying the treasury stock method.
3. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
condensed financial statements to conform to the current year presentation.
4. ACQUISITION
On February 18, 1998, the Company entered into an agreement to purchase from
Pacific Harbor Capital, Inc., a wholly-owned subsidiary of PacifiCorp,
controlling interests in a group of entities as well as certain direct
partnership interests, known as the Affordable Housing Group ("AHG"), which own
multi-family and senior housing properties, many of which qualify for Low-Income
Housing Tax Credits ("LIHTC") under Section 42 of the Internal Revenue Code.
5
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On May 1, 1998, the Company completed the purchase of certain interests which
own 36 of the properties. The remaining six interests are expected to close
during the third quarter. The aggregate amount of consideration will be
approximately $80 million, subject to certain post-closing adjustments, plus the
assumption of approximately $45 million of future equity commitments.
The purchase price paid for the 36 properties acquired on May 1, 1998, was
approximately $70 million and was financed utilizing the Company's unsecured
revolving credit facility. The acquisition has been accounted for under the
purchase method of accounting and the cost of the acquisition has been allocated
on the basis of the estimated fair value of the assets acquired and liabilities
assumed. The consolidated results of operations include the operations
associated with the Company's interests in the 36 properties since the
acquisition date.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CERTAIN STATEMENTS CONTAINED IN THE FOLLOWING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE
"FORWARD-LOOKING STATEMENTS" AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, (i) CHANGES IN
INTEREST RATES, (ii) CHANGES IN DEMAND FOR COMMERCIAL REAL ESTATE NATIONALLY, IN
AREAS IN WHICH THE COMPANY OWNS PROPERTIES, OR IN AREAS IN WHICH PROPERTIES
SECURING MORTGAGES DIRECTLY OR INDIRECTLY OWNED BY THE COMPANY ARE LOCATED,
(iii) INTERNATIONAL, NATIONAL OR REGIONAL BUSINESS CONDITIONS WHICH AFFECT THE
ABILITY OF MORTGAGE OBLIGORS TO PAY PRINCIPAL OR INTEREST WHEN IT IS DUE, AND
(iv) THE CYCLICAL NATURE OF THE COMMERCIAL REAL ESTATE BUSINESS. SEE THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED NOVEMBER 30, 1997, FOR A
FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES APPLICABLE TO THE COMPANY'S
BUSINESS.
1. RESULTS OF OPERATIONS
OVERVIEW
LNR Property Corporation (the "Company") is engaged primarily in (i) developing
and managing commercial and multi-family residential properties, (ii) acquiring,
managing and repositioning commercial and multi-family residential real estate
loans and properties, (iii) acquiring (often in partnership with financial
institutions or real estate funds) and managing portfolios of real estate
assets, (iv) investing in unrated and non-investment grade rated commercial
mortgage-backed securities ("CMBS") as to which the Company has the right to be
special servicer, and (v) making high yielding real estate related loans and
equity investments. For the following discussion, these businesses are grouped
as follows: (a) real estate operations, (b) CMBS and loans and (c) partnerships
and joint ventures.
7
<PAGE>
The following is a summary of the Company's actual results of operations for the
three and six month periods ended May 31, 1998 and 1997 and pro forma results
for the three and six month periods ended May 31, 1997, after allocating among
the core business lines certain non-corporate general and administrative
expenses. The pro forma adjustments to the three and six month periods ended May
31, 1997 include (i) the Company's 50% interest in Lennar Land Partners, (ii)
the addition of incremental administrative costs associated with operating as a
stand-alone public company, (iii) reductions in interest expense due to the use
of proceeds from funds advanced by Lennar Corporation ("Lennar") to repay debt,
(iv) removal of costs associated with completing the spin-off of the Company to
Lennar stockholders and (v) the estimated income tax effect of the pro forma
adjustments at the Company's effective tax rate of 39.0%.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
------------------------------------- ------------------------------------
PRO PRO
ACTUAL ACTUAL FORMA ACTUAL ACTUAL FORMA
------ ------ ------ ------ ------ ------
(IN THOUSANDS) 1998 1997 1997 1998 1997 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues
Real estate operations $ 20,805 19,648 19,648 41,925 36,379 36,379
CMBS and loans 19,068 16,936 16,936 38,406 27,844 27,844
Partnerships and
joint ventures 14,907 7,154 9,695 25,729 23,563 27,014
Corporate and other 121 673 673 679 1,385 1,385
------ ------ ------ ------ ------ ------
Total revenues 54,901 44,411 46,952 106,739 89,171 92,622
------ ------ ------ ------ ------ ------
Operating expenses
Real estate operations 13,671 11,070 11,070 26,053 22,926 22,926
CMBS and loans 1,486 774 774 2,611 2,011 2,011
Partnerships and
joint ventures 1,004 1,108 1,108 2,179 2,913 2,913
Corporate and other 2,956 2,309 3,249 5,808 5,005 4,206
------ ------ ------ ------ ------ ------
Total operating expenses 19,117 15,261 16,201 36,651 32,855 32,056
------ ------ ------ ------ ------ ------
Operating earnings
Real estate operations 7,134 8,578 8,578 15,872 13,453 13,453
CMBS and loans 17,582 16,162 16,162 35,795 25,833 25,833
Partnerships and
joint ventures 13,903 6,046 8,587 23,550 20,650 24,101
Corporate and other (2,835) (1,636) (2,576) (5,129) (3,620) (2,821)
------ ------ ------ ------ ------ ------
Total operating earnings 35,784 29,150 30,751 70,088 56,316 60,566
Interest expense 9,925 6,392 6,191 16,983 13,201 12,151
Income tax expense 8,905 8,876 9,578 19,531 16,815 18,881
------ ------ ------ ------ ------ ------
Net earnings $ 16,954 13,882 14,982 33,574 26,300 29,534
====== ====== ====== ====== ====== ======
</TABLE>
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED MAY 31, 1997
Net earnings were $17.0 million and $33.6 million, respectively, for the three
and six month periods ended May 31, 1998 compared to $13.9 million and $26.3
million, respectively for the same periods in 1997. The increases resulted
primarily from greater interest income from investment securities and greater
earnings from the Company's investments in Lennar Land Partners ("LLP").
Additionally, as a result of tax credits from the Affordable Housing Group
("AHG") acquisition, the Company's effective tax rate for the second quarter of
1998 was reduced to 34% compared with 39% for both the first quarter of 1998 and
the first and second quarters of the previous year.
8
<PAGE>
REAL ESTATE OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
------------------------------ --------------------------------
(IN THOUSANDS) 1998 1997 1998 1997
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Rental income $ 15,270 15,179 29,864 29,978
Gains on sales of real estate 5,535 4,469 12,061 6,401
------------- ------------- ------------- ---------------
Total revenues 20,805 19,648 41,925 36,379
------------- ------------- ------------- ---------------
Cost of rental operations 9,709 8,897 18,820 18,281
Other operating expenses 1,736 712 3,170 1,730
Depreciation 2,226 1,461 4,063 2,915
------------- ------------- ------------- ---------------
Total operating expenses 13,671 11,070 26,053 22,926
------------- ------------- ------------- ---------------
Operating earnings $ 7,134 8,578 15,872 13,453
============= ============= ============ ===============
</TABLE>
Total revenues from real estate operations include the rental income from
operating properties plus gains on sales of those properties. Total operating
expenses include the direct costs of operating those properties and the overhead
associated with managing them.
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED MAY 31, 1997
Overall, operating earnings from real estate properties decreased to $7.1
million and increased to $15.9 million for the three and six month periods ended
May 31, 1998, respectively, from $8.6 million and $13.5 million, for the same
periods in 1997. The quarter over quarter decrease was primarily due to the
Company selling stabilized operating properties and adding replacement
properties which are not yet stabilized. These new assets are undergoing
development or repositioning and initially produce lower amounts of revenues and
higher operating expenses as a percentage of revenues, until they reach
stabilized occupancy levels. The increase for the six month period ended May 31,
1998 versus the same period in 1997 was due primarily to greater gains on sales
of real estate assets in the first three months in 1998 versus the same period
in 1997.
The second quarter of 1998 also includes $.7 million of net rental income,
representing one month of operations from the 36 AHG property investments that
closed on May 1, 1998. Pre-tax operating margins for properties that qualify for
Low-Income Housing Tax Credits are generally lower than for market rate rentals.
However, the Company receives its desired yield from these investments after
adding in the impact of lower income taxes as a result of these credits and
other related tax deductions.
Although the Company sold real estate with carrying values of $14.3 million and
$20.7 million during the three month and six month periods ended May 31, 1998,
the total book value of operating properties and equipment and land held for
investment increased by $204.9 million and $256.6 million, respectively, during
these same three month and six month periods primarily as a result of the AHG
acquisition and other asset purchases. The AHG acquisition increased operating
properties by approximately $179 million. A majority of the other asset
purchases were of operating properties which are being developed or where the
Company believes it can improve net operating earnings and/or ultimate sales
value, although there can be no assurance that the Company will be successful.
As of May 31, 1998, approximately 43% of the Company's operating property
portfolio, based on book value, had not yet reached stabilized occupancy and the
anticipated improvements in their operating earnings will not be recognized
until future periods.
9
<PAGE>
Total rental income remained relatively constant during the three month and six
month periods of 1998 and 1997, as the revenues from newly developed or acquired
properties offset revenues from properties sold. The cost of rental operations
as a percentage of revenue was higher during the three and six month periods in
1998 as assets undergoing development or repositioning initially produce higher
operating expenses as a percentage of revenue until a stabilized occupancy level
is achieved.
Other operating expenses, which represent an allocation of salary, professional
and other administrative expenses, increased to $1.7 million and $3.2 million,
respectively, for the three and six month periods ended May 31, 1998 from $.7
million and $1.7 million, for the same periods in 1997, primarily due to
increases in personnel and general overhead costs necessary to analyze, acquire
and manage new properties and the acquisition of AHG.
NOTE: ACTUAL AND PRO FORMA RESULTS ARE IDENTICAL FOR 1997.
CMBS AND LOANS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
---------------------------- ----------------------------
(IN THOUSANDS) 1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income - CMBS $ 12,843 7,639 24,784 15,299
Interest income - loans 4,298 3,238 8,337 5,331
Interest income - other 678 - 1,638 -
Gains on sales of investment
securities - 5,009 1,386 5,009
Servicing fees 1,249 1,050 2,261 2,205
------------ ------------ ------------ ------------
Total revenues 19,068 16,936 38,406 27,844
Operating expenses 1,486 774 2,611 2,011
------------ ------------ ------------ ------------
Operating earnings $ 17,582 16,162 35,795 25,833
============ ============ ============ ============
</TABLE>
Revenues from CMBS and loans include interest income, gains on sales of these
assets and fees from acting as special servicer for CMBS transactions. Related
operating expenses include the direct costs of investing in and originating CMBS
and loans, and servicing the CMBS portfolio.
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED MAY 31, 1997
Overall, operating earnings from CMBS and loans increased to $17.6 million and
$35.8 million for the three month and six month periods ended May 31, 1998,
respectively, from $16.2 million and $25.8 million, for the same periods in
1997. Earnings were higher largely due to the growth of the Company's CMBS and
loan portfolios and the greater recognition of earnings due to actual
performance exceeding original expectations. In the second quarter of 1997, the
Company earned $5.0 million from the sale of securities through a "RE-REMIC"
securitization, and there was no such corresponding transaction for the 1998
period. The increase in earnings without this gain was 58% and 72% for the three
and six month periods ended May 31, 1998, respectively. The Company's CMBS
portfolio grew to $385.3 million at May 31, 1998 from approximately $286.5
million at May 31, 1997. During the six months ended May 31, 1998, the Company
purchased $137 million of face amount of securities for approximately $81
million.
In recording CMBS interest income, the Company follows generally accepted
accounting principles and records interest received plus the amortization of the
difference between the carrying value and the face amount of the securities to
achieve a level yield. To date, this has
10
<PAGE>
resulted in less recognition of interest income than interest received. The
excess interest received is applied to reduce the Company's investment. During
the three and six month periods ended May 31, 1998, this excess of cash received
over income recorded was $3.8 million and $6.8 million, respectively, and $4.6
million and $9.1 million, respectively, for the same periods in 1997. The
Company's initial and ongoing estimates of its returns on CMBS investments are
based on a number of assumptions that are subject to certain business and
economic conditions, the most significant of which is the timing and magnitude
of credit losses on the underlying mortgages.
Actual loss experience to date, particularly for older transactions (3 to 4
years in age) is significantly lower than originally underwritten by the
Company. Therefore, the Company believes changes to original estimated yields
have, and should continue to, result in improved earnings from these
transactions. The Company believes these improvements resulted from (i) its
having conservatively underwritten these transactions, (ii) its workout and real
estate expertise and (iii) an improving real estate economy. However, the
positive experience on these older transactions will not necessarily translate
into yield improvements on newer investments.
The increase in interest income from mortgage loans to $4.3 million and $8.3
million during the three month and six month periods ended May 31, 1998,
respectively, from $3.2 million and $5.3 million, respectively, for the same
periods in 1997 was primarily attributable to the higher investment in mortgage
loans, which increased 21% to $88.0 million at May 31, 1998 from $72.6 million
at May 31, 1997.
Other interest income increased during the three and six month periods ended May
31, 1998, primarily due to investments made during the fourth quarter of 1997.
The first quarter of 1998 also included interest earned from temporary
investments made with cash received from Lennar in connection with the spin-off.
Operating expenses increased to $1.5 million and $2.6 million during the three
and six month periods ended May 31, 1998, respectively, from $.8 million and
$2.0 million, for the same periods in 1997, as a result of additional salary and
out-of-pocket expenses incurred related to the growth of the CMBS business.
NOTE: ACTUAL AND PRO FORMA RESULTS ARE IDENTICAL FOR 1997.
PARTNERSHIPS AND JOINT VENTURES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
-------------------------------------------------------------------------------
PRO PRO
ACTUAL FORMA ACTUAL FORMA
------------------------ ---------- ----------------------- ----------
(IN THOUSANDS) 1998 1997 1997 1998 1997 1997
---------- ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Equity in earnings from
partnerships
Portfolios $ 6,338 5,785 5,785 10,899 19,032 19,032
Lennar Land Partners 6,453 - 2,541 11,884 - 3,451
Other 1,438 502 502 1,186 759 759
Management fees 678 867 867 1,760 3,772 3,772
---------- ---------- ---------- --------- --------- ----------
Total revenues 14,907 7,154 9,695 25,729 23,563 27,014
Operating expenses 1,004 1,108 1,108 2,179 2,913 2,913
---------- ---------- ---------- --------- --------- ----------
Operating earnings $ 13,903 6,046 8,587 23,550 20,650 24,101
========== ========== ========== ========= ========= ==========
</TABLE>
11
<PAGE>
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED MAY 31, 1997
Operating earnings from partnerships and joint ventures increased to $13.9
million and $23.6 million for the three and six month periods ended May 31,
1998, respectively, from $6.0 million and $20.7 million, for the same periods in
1997. Although the Company's investments in its older partnerships have
decreased, they have been replaced with the Company's 50% share of LLP's
results, which amounted to $6.5 million and $11.9 million for the three month
and six month periods ended May 31, 1998, respectively. The Company expects LLP
to continue to provide significant recurring earnings at least over the next
several years although the level of LLP's earnings will be dependent upon
general economic conditions and housing starts.
Partnership distributions received by the Company during the three month and six
month periods ended May 31, 1998 were $12.5 million and $17.2 million,
respectively, in comparison with $12.6 million and $29.1 million, for the same
periods in 1997. For the three month and six month periods ended May 31, 1998,
respectively, distributions were $1.7 million and $6.7 million lower than the
Company's actual equity in earnings of the partnerships of $14.2 million and
$24.0 million, respectively. Lower distributions were primarily due to LLP,
which until the repayment of the partnership's debt, is not expected to make
distributions.
The Company's overall investments in and advances to partnerships increased
approximately 98% to $202.9 million at May 31, 1998 from $102.3 million at May
31, 1997. This was primarily due to the creation of LLP which was $108.9 million
of the Company's investments in and advances to partnerships balance at May 31,
1998. Additionally, the AHG acquisition increased investments in and advances to
partnerships and joint ventures by approximately $8.1 million at May 31, 1998.
During the quarter, the Company completed its fourth portfolio purchase with
partners of non-performing commercial mortgage real estate loans in Japan,
bringing its total investment at May 31, 1998 to approximately $20 million.
Management fees decreased to $.7 million and $1.8 million for the three and six
month periods ended May 31, 1998, respectively, from $.9 million and $3.8
million, for the same periods in 1997, due to lower disposition fees as there
were fewer sales of partnership assets.
PRO FORMA OPERATING EARNINGS FROM PARTNERSHIPS AND JOINT VENTURES FOR THE THREE
AND SIX MONTH PERIODS ENDED MAY 31, 1997 WERE $8.6 MILLION AND $24.1 MILLION,
RESPECTIVELY, COMPARED TO $6.0 MILLION AND $20.7 MILLION ON AN ACTUAL BASIS.
THESE DIFFERENCES WERE DUE TO THE INCLUSION OF LLP'S PRO FORMA INCOME FOR THE
THREE AND SIX MONTH PERIODS ENDED MAY 31, 1997.
CORPORATE, OTHER AND INTEREST EXPENSES
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1998 COMPARED TO THE THREE MONTHS AND
SIX MONTHS ENDED MAY 31, 1997
Corporate and other operating expenses increased to $2.8 million and $5.1
million for the three and six month periods ended May 31, 1998, respectively,
from $1.6 million and $3.6 million for the same periods in 1997, primarily due
to higher incremental costs for operating as a stand-alone public company and a
lower level of other income (which is netted against corporate, general and
administrative expenses for business line reporting). Partially offsetting these
increases was the absence of a charge incurred in the first quarter of 1997 for
spin-off related expenses.
12
<PAGE>
PRO FORMA CORPORATE AND OTHER OPERATING EXPENSES FOR THE THREE AND SIX MONTH
PERIODS ENDED MAY 31, 1997 WERE $2.6 MILLION AND $2.8 MILLION, RESPECTIVELY,
COMPARED TO $1.6 MILLION AND $3.6 MILLION ON AN ACTUAL BASIS. THESE DIFFERENCES
WERE DUE TO THE REMOVAL OF SPIN-OFF RELATED COSTS INCURRED IN 1997, OFFSET BY
INCREMENTAL COSTS FOR OPERATING AS A STAND-ALONE PUBLIC COMPANY.
Interest expense increased to $9.9 million and $17.0 million for the three and
six month periods ended May 31, 1998, respectively, from $6.4 million and $13.2
million, during the same periods in 1997. This increase was directly
attributable to the Company's mortgage notes and other debts payable increasing
to $755 million at May 31, 1998 from $370 million at May 31, 1997, as described
in further detail below under "Liquidity and Financial Resources."
PRO FORMA INTEREST EXPENSE FOR THE THREE AND SIX MONTH PERIODS ENDED MAY 31,
1997 WAS $6.2 MILLION AND $12.2 MILLION, RESPECTIVELY, COMPARED TO $6.4 MILLION
AND $13.2 MILLION, RESPECTIVELY, ON AN ACTUAL BASIS. THIS DIFFERENCE WAS DUE TO
THE PRO FORMA USE OF PROCEEDS FROM FUNDS ADVANCED BY LENNAR ON OCTOBER 31, 1997,
TO REPAY DEBT AS IF SUCH DEBT HAD BEEN REPAID ON DECEMBER 1, 1996.
2. LIQUIDITY AND FINANCIAL RESOURCES
The Company used $16.3 million of cash in operating activities during the six
months ended May 31, 1998 compared with $8.2 million for the same period in
1997. The increase during the first six months of 1998 was primarily due to
increases in other assets and deferred taxes of $18.2 million and restricted
cash of $7.2 million, offset by an increase in accounts payable and accrued
expenses of $11.5 million.
Cash flows used in investing activities totaled $196.4 million during the six
months ended May 31, 1998 compared with $41.3 million of cash flows provided by
investing activities for the same period in 1997. The use of cash in investing
activities during the six months ended May 31, 1998 is primarily attributable to
the AHG acquisition, amounting to $70.1 million, and substantially higher
purchases of operating properties and land held for investment, greater
investments in and advances to partnerships and significantly less proceeds from
sales of investment securities.
The Company received cash from financing activities of $203.4 million during the
six months ended May 31, 1998 compared with $27.8 million of cash used for the
same period in 1997. The increase was primarily due to increased borrowings
under mortgage notes and other debts payable, which were utilized to fund the
purchase or redevelopment/construction of operating properties, as well as the
purchase of investment securities.
In March 1998, the Company issued $200 million principal amount of long-term
fixed rate senior subordinated notes, due 2008. The notes bear interest at a
fixed rate of 9 3/8%. Proceeds from these notes were used to reduce short-term
floating rate borrowings to better match the maturities of the Company's assets
with its liabilities.
In April 1998, the Company completed the syndication of a $200 million unsecured
revolving credit agreement, which expires on December 31, 2000, with the option
of a one-year extension. At May 31, 1998, there was approximately $70 million in
borrowings under this loan agreement at an interest rate of 6.8%.
In May 1998, in conjunction with the acquisition of the Affordable Housing
Group, the Company utilized approximately $70 million of its unsecured revolving
credit facility to finance the purchase. Additionally, AHG's balance sheet
included approximately $129 million of pre-existing property-specific mortgage
financing that is non-recourse to the Company.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not subject to any legal proceedings other than suits relating to
properties it owns which the Company views as an ordinary part of its business,
and at least most of which are covered by insurance. Management believes these
suits will not, in the aggregate, have a material adverse effect upon the
Company.
ITEMS 2-5. NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K, dated May 18, 1998, was filed by the
registrant with respect to the acquisition of the
Affordable Housing Group on May 1, 1998.
A report on Form 8-K/A, dated July 14, 1998, was filed by
the registrant with respect to pro forma information for
the acquisition of the Affordable Housing Group.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
SIGNATURE AND TITLE DATE
------------------- ----
/S/ SHELLY RUBIN July 15, 1998
- -----------------------------------
Shelly Rubin
Chief Financial Officer (Principal
Financial Officer)
15
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule.
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the 10-Q and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> NOV-30-1997
<PERIOD-END> MAY-31-1998
<CASH> 113,253
<SECURITIES> 385,267
<RECEIVABLES> 87,955
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 475,705
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,448,712
<CURRENT-LIABILITIES> 0
<BONDS> 754,540
0
0
<COMMON> 3,615
<OTHER-SE> 599,040
<TOTAL-LIABILITY-AND-EQUITY> 602,655
<SALES> 0
<TOTAL-REVENUES> 54,901
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,117
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,925
<INCOME-PRETAX> 25,859
<INCOME-TAX> 8,905
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,954
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.46
</TABLE>
