<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1998
REGISTRATION NO. 333-50017
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LNR PROPERTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6513 65-0777234
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
760 N.W. 107TH AVENUE
MIAMI, FLORIDA 33172
(305) 485-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN J. SAIONTZ
CHIEF EXECUTIVE OFFICER
LNR PROPERTY CORPORATION
760 N.W. 107TH AVENUE
MIAMI, FLORIDA 33172
(305) 485-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
DAVID W. BERNSTEIN, ESQ.
ROGERS & WELLS LLP
200 PARK AVENUE
NEW YORK, NEW YORK 10166
(212) 878-8000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the exchange offer ("Exchange Offer") pursuant to the registration
agreement (the "Registration Agreement") described in the enclosed Prospectus
have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) FEE(2)(3)
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<S> <C> <C> <C> <C>
9 3/8% Series B Senior
Subordinated Notes due 2008.... $200,000,000 100% $200,000,000 $59,000.00
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee under the
Securities Act of 1933.
(2) Calculated pursuant to Rule 457(f)(2).
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
$200,000,000
5.
9 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2008
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON SEPTEMBER 25, 1998 (UNLESS THE EXCHANGE OFFER IS EXTENDED).
LNR Property Corporation ("LNR", and together with its subsidiaries, the
"Company") is offering (the "Exchange Offer") to exchange its 9 3/8% Series B
Senior Subordinated Notes due 2008 ("New Notes") for the identical principal
amount of 9 3/8% Series A Senior Subordinated Notes due 2008 ("Old Notes"). The
outstanding principal amount of the Old Notes, and therefore the principal
amount of New Notes which would be issued if all the Old Notes were exchanged,
is $200,000,000. The terms of the New Notes will be identical with the terms of
the Old Notes, except that the issuance of the New Notes is being registered
under the Securities Act of 1933, as amended (the "Securities Act"), and
therefore the New Notes will not be subject to restrictions on transfer which
apply to the Old Notes. See "Description of New Notes."
The Old Notes were issued in transactions which were exempt from the
registration requirements of the Securities Act solely to Qualified
Institutional Buyers, as that term is defined in Rule 144A under the Securities
Act, or outside the United States in compliance with Regulation S under the
Securities Act. The Exchange Offer is being made in accordance with a
Registration Rights Agreement dated March 24, 1998 among the Company, BT Alex.
Brown Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation.
Based on interpretations by the staff of the Securities and Exchange Commission,
the Company believes a holder (other than a broker-dealer who acquired Old Notes
directly from the Company for resale or an affiliate of the Company) may offer
and sell New Notes issued in exchange for Old Notes without registration under
the Securities Act and without the need to deliver a prospectus, if the holder
acquired the New Notes in the ordinary course of its business and the holder has
no arrangement to participate, and is not otherwise engaged, in a distribution
of the New Notes. See "Description of the New Notes" for information about the
terms of the New Notes.
Prior to the Exchange Offer, there has been no public market for the New
Notes. The Company does not currently intend to list the New Notes on a
securities exchange or seek approval for quotation of the New Notes on an
automated quotation system. Therefore, it is unlikely that an active trading
market for the New Notes will develop.
The Exchange Agent for the Exchange Offer is U.S. Bank Trust National
Association.
SEE "RISK FACTORS," WHICH BEGIN ON PAGE 16, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is August 18, 1998.
<PAGE> 3
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 under the Securities Act
with respect to the securities offered by this Prospectus. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules to it. The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith the Company files periodic reports and other information
with the Commission relating to its business, financial statements and other
matters. The Registration Statement, its schedules and exhibits and the
periodic reports and other information filed by the Company with the Commission
are available for inspection and copying at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661,
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials can be obtained at prescribed rates by addressing written requests
for such copies to the Public Reference Section of the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. The Commission also maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants. The Commission's Web site can be accessed on the World Wide Web,
at http://www.sec.gov.
The obligations of the Company under the Exchange Act to file periodic
reports and other information with the Commission may be suspended, under
certain circumstances, if the Company's Common Stock and New Notes are each held
of record by fewer than 300 holders at the beginning of any fiscal year and are
not listed on a national securities exchange. The Company has agreed that,
whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the New Notes remain outstanding it will
furnish to the holders of the New Notes, and if required by the Exchange Act,
file with the Commission, all annual, quarterly and current reports that the
Company is or would be required to file with the Commission pursuant to Section
13(a) or 15(d) of the Exchange Act. In addition, the Company has agreed that, as
long as any Old Notes remain outstanding, the Company will make the information
required by Rule 144A(d)(4) under the Securities Act available to any
prospective purchaser of Old Notes or beneficial owner of Old Notes in
connection with a sale of them.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, THAT INFORMATION OR THOSE REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the financial statements, including the notes thereto,
appearing elsewhere in or incorporated by reference in this Prospectus. Except
as otherwise indicated in this Prospectus, (i) references to a fiscal year refer
to a fiscal year of the Company which ends on a November 30, (ii) references to
the "Company" are to LNR Property Corporation and its subsidiaries and (iii)
references to "LNR" are to LNR Property Corporation.
LNR was formed by Lennar Corporation ("Lennar") in June 1997 to separate
Lennar's real estate investment and management business from its homebuilding
business. On October 31, 1997, Lennar distributed the stock of LNR to Lennar's
stockholders in a tax-free spin-off (the "Spin-off"). Activities conducted by
Lennar, as predecessor of the Company, of the type currently being conducted by
the Company are treated in this Prospectus as historical activities of the
Company.
THE COMPANY
The Company is a real estate investment and management company, which
structures and makes real estate related investments and, through its expertise
in developing and managing properties, seeks to enhance the value of those
investments. The Company has been engaged in the development, ownership and
management of commercial and multi-family residential properties since 1969.
LNR's Chairman, Chief Executive Officer and President have been with the Company
and have worked together for more than a decade. Over the five years ended
November 30, 1997, the Company's revenues and EBITDA increased at compound
annual growth rates of 27.7% and 30.4%, respectively. The Company's pro forma
revenues and EBITDA for the year ended November 30, 1997, giving effect to the
(i) Affordable Housing Group acquisition and (ii) contributions of Lennar to the
capital of LNR and the formation of Lennar Land Partners (a land partnership
with Lennar), as if they had occurred on December 1, 1996, and adjusting general
and administrative costs to eliminate Spin-off related costs and add incremental
costs for a stand-alone public company, were $195.1 million and $126.1 million,
respectively.
The Company's real estate investment activities primarily consist of
- developing and managing commercial and multi-family residential
properties,
- acquiring, managing and repositioning commercial and multi-family
residential real estate loans and properties,
- acquiring (often in partnership with financial institutions and real
estate funds) and managing portfolios of real estate assets,
- 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 (i.e., to oversee workouts of underperforming and
nonperforming loans) and
- making high yielding real estate related loans and equity investments.
The Company adjusts its investment focus from time to time to adapt to
various phases of the real estate cycle.
3
<PAGE> 5
At May 31, 1998, the Company's assets included the following:
<TABLE>
<CAPTION>
TYPE OF ASSET BOOK VALUE DESCRIPTION/COMMENT
------------- ------------- -------------------
(IN MILLIONS)
<S> <C> <C>
Commercial properties....... $ 568.5 Multi-family apartment buildings, office and industrial
buildings, retail centers, hotels and land.
Real estate loans........... 87.9 Primarily mortgage loans. Also includes loans to
developers and builders, sometimes with profit
participations.
Partnerships................ 202.9 Primarily 15 partnerships which acquired portfolios of
loans and/or properties, including three partnerships
investing in Japanese loan portfolios; and ten
partnership interests from the Affordable Housing Group
acquisition. Also includes a partnership with Lennar
which acquires, develops and sells land.
CMBS........................ 385.3 Unrated or non-investment grade rated tranches of CMBS
pools acquired at significant discounts from face value,
as to which the Company has the right to be special
servicer and therefore can attempt to increase
collections of underlying loans.
Cash and other assets....... 204.1 Cash at May 31, 1998 consisted of $24.8 million
-------- unrestricted and $88.5 million restricted, of which $45.0
million was collateral for a letter of credit and $24.6
million was related to the acquisition of the Affordable
Housing Group. Other assets primarily include deferred
tax credits.
Total............. $1,448.7
========
</TABLE>
RECENT DEVELOPMENTS
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
approximately 6,100 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. 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 prior to the end of fiscal year 1998. 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. Of the apartments, 49% are located in the
Northwestern United States, 17% are located in the Southwest, 15% are located in
the East, 13% are located in the Far West, and the remainder are located in the
Southeast and Midwest. Approximately 82% of the apartments were constructed by
AHG or under its supervision. AHG acquired the other apartments after they were
completed. The Company expects that after the acquisition, AHG, as part of the
Company, will continue developing, acquiring and operating residential
apartments which qualify for low-income tax credits. At May 31, 1998, the
Company's balance sheet included AHG balances as follows: properties of
approximately $179 million, investments in partnerships of approximately $8
million and approximately $129 million of pre-existing property-specific
mortgage financing that is non-recourse to the Company.
4
<PAGE> 6
COMPETITIVE STRENGTHS
The Company believes the following competitive strengths contribute to its
ability to grow and operate profitably:
Real Estate Development, Management and Workout Experience
The Company has developed, redeveloped, repositioned, owned and managed
commercial and multi-family residential real estate since 1969, having
developed, redeveloped, repositioned and/or managed over 500 properties over
this time period. These properties have included multi-family apartment
buildings, office buildings, retail space, hotels, industrial space and land.
The Company also has, over the past seven years, been responsible for workouts
with regard to more than 6,300 real estate loans. Fitch IBCA, Inc., which rates
CMBS special servicers on the basis of management team, organizational
structure, operating history, workout and asset disposition experience and
strategies, information systems, investor reporting capabilities and financial
resources, has given the Company Fitch's highest rating. Based on industry
sources regarding issuances of CMBS, the CMBS as to which the Company had the
right to assume the special servicing represented 17.6% and 12.8% of the CMBS
issued in 1996 and 1997, respectively. In addition to applying the benefits of
its experience to properties it develops, owns or manages, the Company uses this
experience in evaluating potential real estate investments (including asset by
asset evaluations of properties underlying CMBS). It also uses this experience
in redeveloping or rehabilitating properties in order to maximize proceeds from
underperforming or nonperforming assets included in portfolios or single assets
acquired by the Company or partnerships it manages or underlying CMBS in which
the Company invests. The Company believes its combination of real estate and
financial experience gives it an advantage over competing investors who have
financial, but not operating, experience.
Disciplined Investment Approach
The Company performs extensive due diligence before making investments in
order to evaluate investment risks and opportunities to use the Company's skills
to enhance the value of the investments. For example, before bidding for a CMBS
investment, the Company performs a property-by-property evaluation of the assets
underlying the CMBS, including site visits and analyses of rent rolls, vacancy
rates and tenant strength, as well as analyses of the real estate markets in
which the properties are located. The Company's formalized pre-investment
procedures allow its senior management to exercise significant control and
discipline over all investment decisions.
Experienced Management Team
The ten members of LNR's senior management have an average of 16 years of
real estate industry experience. Steven J. Saiontz, LNR's Chief Executive
Officer, and Jeffrey P. Krasnoff, LNR's President, have 14 and 21 years of real
estate industry experience, respectively, and have been with the Company for 14
years and 12 years, respectively. In addition, Stuart A. Miller, LNR's Chairman
of the Board, who devotes approximately 25% of his working time to the Company,
is the chief executive officer of Lennar, a major homebuilder, and has more than
15 years of real estate industry experience. The Company uses incentive based
compensation to retain key members of management, including payment of bonuses
over multi-year periods, and vesting of stock options over periods as long as
nine years.
Significant Equity Ownership by Leonard Miller
Leonard Miller, one of the founders of Lennar and a Director of LNR, owned,
through family partnerships, 9.898 million shares of LNR's Class B Common Stock
at May 31, 1998. Leonard Miller is the father of Stuart A. Miller, the Chairman
of LNR, and the father-in-law of Steven J. Saiontz, the Chief Executive Officer
of LNR.
5
<PAGE> 7
Extensive Asset Monitoring
The Company has developed an extensive asset monitoring program that
includes weekly and monthly reports and meetings at which actual results are
compared against budgets on an asset-by-asset basis. This, combined with
comprehensive systems, procedures and controls, allows management to monitor
asset performance closely.
Significant Strategic Relationships
Through partnerships and otherwise, the Company has developed strategic
relationships with affiliates of many of the leading investment banking firms
and real estate funds, including Banc One/Orix, Blackrock Group, BT Alex. Brown
Incorporated, Credit Suisse First Boston Corporation, Deutsche Morgan Grenfell,
Donaldson, Lufkin & Jenrette Securities Corporation, First Chicago Capital
Corp., Lehman Brothers Inc., Morgan Stanley, Dean Witter, Discover & Co. and
Westbrook Partners. These organizations seek to avail themselves of the
Company's ability to evaluate real estate assets rapidly and effectively and to
apply its asset management skills to enhance the value of assets once they have
been acquired (including overseeing workouts of underperforming assets). The
relationships the Company has developed have, among other things, brought the
Company investment opportunities to which it might not otherwise have had
access.
Receiving Recurring Income from Its Investments
The Company has significant net rental income, interest income and income
from fees earned as special servicer with regard to CMBS and for managing
partnerships in which it participates. During 1997 and the six months ended May
31, 1998, the Company's net revenues from these sources totaled $75.4 million
and $49.8 million, respectively. In addition, through its 50% ownership of
Lennar Land Partners, the Company generates earnings from sales of Lennar Land
Partners' properties, including sales of properties to Lennar for use in
Lennar's homebuilding activities.
Not a REIT
In order not to be subject to federal income taxation, a real estate
investment trust is limited in what it can do and the types of income it can
receive, it must hold assets for minimum periods and it must distribute each
year almost all its earnings. In contrast, the Company can actively manage
properties, earn fee income and other types of non-passive income, dispose of
assets without meeting holding period requirements, and retain and reinvest its
after-tax earnings.
BUSINESS STRATEGY
The Company's business strategy consists of four key elements:
Using Real Estate Expertise to Enhance Real Estate Investments
The Company focuses on investments which it believes can benefit from its
expertise in real estate development and management, including its expertise
regarding workouts of troubled real estate assets. It uses this expertise to
evaluate the risks and potential rewards from particular real estate related
investments and to enhance the value of its investments by overseeing management
of underlying properties. For example, the Company has only invested in CMBS
when it has had the right to be special servicer, which enables it to attempt to
increase proceeds from underperforming or nonperforming assets. The Company
believes its experience in enhancing assets distinguishes it from many other
investors in real estate related financial products.
Identifying Opportunities Attuned to Various Phases of the Real Estate Cycle
During each phase of the real estate cycle, the Company tries to identify
investments which will benefit from being made at that point in the cycle. In
the weak real estate market of the early 1990's, the Company acquired portfolios
of underperforming or nonperforming real estate loans and subordinate classes of
CMBS,
6
<PAGE> 8
at substantial discounts from their face value. During the relatively strong
real estate market of 1997, the Company emphasized investments in development or
redevelopment projects and made loans to property developers and residential
builders, and continued to purchase subordinate classes of CMBS when they were
available at prices the Company believed to be attractive. In purchasing AHG,
the Company acquired a group of companies which develop, own and operate
multi-family apartment complexes that generate low-income tax credits. See
"Business -- Real Estate Investments and Related Activities -- Commercial and
Multi-Family Residential Rental Real Estate." Also, during the six months ended
May 31, 1998, the Company has invested in several portfolios of real estate
loans outside the United States.
Using Strategic Relationships
The Company builds and maintains strategic relationships with leading
investment banking firms and real estate funds which can introduce the Company
to real estate related investment opportunities. Also, by investing in
partnership with these firms and funds, the Company can limit the amount it is
required to invest to acquire interests in large real estate asset portfolios or
other large real estate related investments.
Diversifying its Real Estate Asset Investments
The Company's real estate investments are diversified both in the forms of
the investments and in the types of properties to which they relate. Further,
the Company's investments relate to properties throughout the United States and
elsewhere, and therefore are to an extent protected against factors which affect
only particular geographic areas.
------------------------
LNR's principal executive office is located at 760 N.W. 107th Avenue,
Miami, Florida 33172, and its telephone number is (305) 485-2000. LNR was formed
as a Delaware corporation in 1997.
ISSUANCE OF THE OLD NOTES
The outstanding $200 million principal amount of 9 3/8% Series A Senior
Subordinated Notes due 2008 were sold by LNR (the "Offering") to BT Alex. Brown
Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation (the
"Initial Purchasers") on March 19, 1998 (the "Closing Date") pursuant to a
Purchase Agreement, dated March 19, 1998 (the "Purchase Agreement"), between LNR
and the Initial Purchasers. The Initial Purchasers subsequently resold the Old
Notes in reliance on Rule 144A under the Securities Act and other available
exemptions under the Securities Act. The Company and the Initial Purchasers also
entered into a registration rights agreement (the "Registration Agreement")
pursuant to which the Company agreed to offer to exchange the New Notes which
are registered under the Securities Act for the Old Notes and also granted
holders of Old Notes rights under some circumstances to have resales of Old
Notes registered under the Securities Act. The Exchange Offer is intended to
satisfy certain of the Company's obligations under the Registration Agreement.
See "The Exchange Offer -- Purpose and Effects."
The Old Notes were issued under an indenture dated as of March 24, 1998
(the "Indenture"), between LNR and First Trust of New York National Association,
as trustee (the "Trustee"). The name of the Trustee has subsequently been
changed to "U.S. Bank Trust National Association." The New Notes also are being
issued under the Indenture and are entitled to the benefits of the Indenture.
The form and terms of the New Notes will be identical in all material respects
with the form and terms of the Old Notes, except that (i) the New Notes will
have been registered under the Securities Act and, therefore, will not bear
legends describing restrictions on transferring them, and (ii) holders of New
Notes will not be, and upon the consummation of the Exchange Offer, holders of
Old Notes will no longer be, entitled to certain rights under the Registration
Agreement intended for the holders of unregistered securities. The Exchange
Offer shall be deemed consummated upon the delivery by the Company to the
Exchange Agent under the Indenture of New Notes in the same aggregate principal
amount as the aggregate principal amount of Old Notes that are validly tendered
by holders thereof in response to the Exchange Offer. See "The Exchange
Offer -- Termination of Certain Rights" and "-- Procedures for Tendering" and
"Description of the New Notes."
7
<PAGE> 9
The proceeds received by the Company from the issuance of the Old Notes
were used to repay short-term indebtedness, which bore interest at a weighted
average rate of 6.89% at the Closing Date. This short-term indebtedness was
primarily incurred by the Company to finance the purchase of CMBS. In the future
LNR or its subsidiaries may incur new short-term debt. There will be no proceeds
to the Company from the exchange of New Notes for Old Notes pursuant to the
Exchange Offer.
THE EXCHANGE OFFER
The Exchange Offer............ The Company is offering to exchange its 9 3/8%
Series B Senior Subordinated Notes due 2008 for
identical principal amounts of its 9 3/8%
Series A Senior Subordinated Notes due 2008
(Old Notes, together with the New Notes,
"Notes"). At the date of this Prospectus, $200
million principal amount of Old Notes are
outstanding. See "The Exchange Offer -- Terms
of the Exchange Offer."
Expiration of Exchange
Offer......................... 5:00 p.m., New York time, on September 25,
1998, unless the Exchange Offer is extended
(the day on which the Exchange Offer expires
being the "Expiration Date"). See "The Exchange
Offer -- Expiration Date; Extension;
Termination; Amendments."
Conditions of the Exchange
Offer......................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange
Offer is subject to certain customary
conditions, which may be waived by the Company.
See "The Exchange Offer -- Conditions of the
Exchange Offer."
Accrued Interest on the Old
Notes......................... The New Notes will bear interest at the rate of
9 3/8% per annum from and including their date
of issuance. When the first interest payment is
made with regard to the New Notes, LNR will
also pay interest on the Old Notes which are
exchanged, from the date they were issued or
the most recent Interest Date on which interest
had been paid (if applicable) to, but not
including, the day the New Notes are issued.
Interest on the Old Notes which are exchanged
will cease to accrue on the day prior to the
day on which the New Notes are issued. The
interest rate on the Old Notes may increase
under certain circumstances if the Company is
not in compliance with its obligations under
the Registration Agreement. See "Description of
the New Notes."
Procedures for Tendering Old
Notes......................... A holder of Old Notes who wishes to accept the
Exchange Offer must complete, sign and date a
Letter of Transmittal, or a facsimile of one,
in accordance with the instructions contained
under "The Exchange Offer -- Procedures for
Tendering" and in the Letter of Transmittal,
and deliver the Letter of Transmittal, or
facsimile, together with the Old Notes and any
other required documentation to the Exchange
Agent at the address set forth below. Old Notes
may be delivered physically or by confirmation
of book-entry delivery of the Old Notes to the
Exchange Agent's account at The Depository
Trust Company ("DTC"). By executing a Letter of
Transmittal, a holder will represent to the
Company that, among other things, the person
acquiring the New Notes will be doing so in the
ordinary course of the person's business,
whether or not the person is the holder, that
neither the holder nor any other person is
engaged in, or intends to engage in, or has an
arrangement or
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<PAGE> 10
understanding with any person to participate
in, the distribution of the New Notes and that
neither the holder nor any such other person is
an "affiliate," as defined under Rule 405 of
the Securities Act, of the Company. Each broker
or dealer that receives New Notes for its own
account in exchange for Old Notes which were
acquired by the broker or dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of the New Notes. See "The Exchange
Offer -- Procedures for Tendering" and "Sales
of New Notes Received by Broker-Dealers."
Guaranteed Delivery
Procedures.................... Eligible Holders of Old Notes who wish to
tender their Old Notes and (i) whose Old Notes
are not immediately available or (ii) who
cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal
to the Exchange Agent prior to the Expiration
Date (or complete the procedure for book-entry
transfer on a timely basis), may tender their
Old Notes according to the guaranteed delivery
procedures described in the Letter of
Transmittal. See "The Exchange
Offer -- Guaranteed Delivery Procedures."
Acceptance of Old Notes and
Delivery of New Notes......... Upon satisfaction or waiver of all conditions
to the Exchange Offer, the Company will accept
any and all Old Notes that are properly
tendered in response to the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant
to the Exchange Offer will be delivered
promptly after acceptance of the Old Notes. See
"The Exchange Offer -- Procedures for
Tendering."
Withdrawal Rights............. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on
the Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders."
The Exchange Agent............ U.S. Bank Trust National Association (formerly
named "First Trust of New York, National
Association") is the exchange agent (the
"Exchange Agent"). The address and telephone
number of the Exchange Agent are set forth in
"The Exchange Offer -- Exchange Agent."
Fees and Expenses............. All expenses incident to the Company's
consummation of the Exchange Offer and
compliance with the Registration Agreement will
be borne by the Company. The Company will also
pay any transfer taxes which are applicable to
the Exchange Offer (but not transfer taxes due
to transfers of Old Notes or New Notes by the
holder). See "The Exchange Offer -- Fees and
Expenses."
Resales of the New Notes...... Based on interpretations by the staff of the
Commission set forth in no-action letters
issued to third parties, the Company believes
New Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by the
holder (other than (i) a broker-dealer who
purchased the Old Notes directly from the
Company for resale pursuant to Rule 144A under
the Securities Act or another exemption under
the Securities Act or (ii) a person that is an
affiliate of the Company, as that term is
defined in Rule 405 under the Securities
9
<PAGE> 11
Act), without registration or the need to
deliver a prospectus under the Securities Act,
provided that the holder is acquiring the New
Notes in the ordinary course of business and is
not participating, and has no arrangement or
understanding with any person to participate,
in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its
own account in exchange for Old Notes which Old
Notes were acquired by the broker as a result
of market-making or other trading activities,
must acknowledge that it will deliver a
prospectus in connection with any resale of the
New Notes. See "The Exchange Offer -- Purpose
and Effects" and "Sales of New Notes Received
By Broker-Dealers."
DESCRIPTION OF NEW NOTES
The Exchange Offer applies to $200 million aggregate principal amount of
Old Notes. The terms of the New Notes are identical in all material respects
with those of the Old Notes, except for certain transfer restrictions and rights
relating to the exchange of the Old Notes for New Notes. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indenture under which both the Old Notes were, and the New Notes will be,
issued. See "Description of the New Notes."
Notes Offered................. $200,000,000 aggregate principal amount of
9 3/8% Series B Senior Subordinated Notes due
2008.
Maturity Date................. March 15, 2008.
Interest Payment Dates........ Interest on the New Notes will accrue from
their issue date and will be payable
semi-annually in arrears on March 15 and
September 15 of each year, commencing on
September 15, 1998.
Optional Redemption........... The New Notes will be redeemable in whole or in
part, at LNR's option, on or after March 15,
2003, at the redemption prices set forth under
"Description of the New Notes -- Redemption"
plus accrued and unpaid interest to the date of
redemption. In addition, at any time on or
prior to March 15, 2001, LNR may, at its
option, redeem up to 35% of the aggregate
principal amount of the New Notes originally
issued with the net cash proceeds of one or
more Public Equity Offerings at a redemption
price equal to 109.375% of the aggregate
principal amount of the New Notes to be
redeemed plus accrued interest to the date of
redemption; provided that at least 65% of the
aggregate principal amount of New Notes
originally issued remains outstanding
immediately following such redemption. See
"Description of the New Notes -- Redemption."
Change of Control............. Upon a Change of Control, each holder of New
Notes will have the right to require LNR to
purchase that holder's New Notes at a price
equal to 101% of their principal amount, plus
accrued and unpaid interest to the date of
purchase. See "Description of the New
Notes -- Change of Control."
Ranking....................... The New Notes will be general unsecured
obligations of LNR and will be subordinated in
right of payment to all existing and future
Senior Indebtedness. The New Notes will rank
pari passu in right of payment with any other
senior subordinated indebtedness of LNR and
will rank senior in right of payment to any
other subordinated indebtedness of LNR. In
addition, LNR is a holding company and,
accordingly, the New Notes will be effectively
10
<PAGE> 12
subordinated to all present and future
indebtedness of LNR's subsidiaries. As of May
31, 1998, including the effect of the sale of
the Old Notes and the application of the net
proceeds of that sale, LNR had approximately
$629 million of Senior Indebtedness outstanding
(including $62 million of obligations under
letters of credit, and $101 million of
guarantees of outstanding borrowings under
credit facilities of unconsolidated
partnerships). See "Description of the New
Notes -- Subordination" and "Description of
Certain Indebtedness." The acquisition of AHG
has substantially increased the Company's debt.
Certain Covenants............. The Indenture under which the New Notes will be
issued contains covenants that, subject to
certain exceptions, restrict the ability of LNR
and its subsidiaries to incur Indebtedness or,
in the case of subsidiaries, issue preferred
stock, and limit the ability of LNR to pay
dividends or make other distributions,
repurchase equity interests or subordinated
Indebtedness, or make certain other restricted
payments, incur indebtedness that is
subordinate in right of payment to any Senior
Indebtedness but senior in right of payment to
the New Notes, merge or consolidate with any
other person or sell, lease, or otherwise
dispose of all or substantially all of its
assets. See "Description of the New
Notes -- Certain Covenants."
For additional information regarding the Notes, see "Description of the New
Notes."
USE OF PROCEEDS
There will be no proceeds to LNR from the exchange of New Notes for Old
Notes pursuant to the Exchange Offer. The net proceeds to LNR from the sale of
the Old Notes were used to repay short-term indebtedness. In the future LNR or
its subsidiaries may incur new short-term debt.
ABSENCE OF PUBLIC MARKET
The New Notes will be new securities for which there is no established
trading market. The Company currently does not intend to list the New Notes on
any securities exchange or to arrange for the New Notes to be quoted on any
quotation system. Although the Initial Purchasers have informed the Company that
they currently intend to make a market in the Notes, they are not obligated to
do so and they may discontinue market-making activity at any time without
notice. In addition, such market-making activities may be limited during the
Exchange Offer or the pendency of a Shelf Registration Statement required by the
Registration Agreement, if it is filed. Accordingly, it is not likely that an
active trading market for the New Notes will develop or, if such a market
develops, that it will provide significant liquidity to holders of Notes.
RISK FACTORS
See "Risk Factors" beginning on page 16 for a discussion of certain factors
that should be considered by holders of Old Notes in evaluating the Exchange
Offer.
11
<PAGE> 13
SUMMARY FINANCIAL DATA
The following tables present summary consolidated financial data regarding
the Company. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Prospectus. See "Selected Consolidated Financial Data."
The pro forma statement of earnings information for the six months ended
May 31, 1998 and for the year ended November 30, 1997 have been prepared to
reflect (i) the Company's acquisition of AHG (the "AHG Acquisition") and (ii)
the spin-off (the "Spin-off") of the Company from Lennar Corporation which was
effective October 31, 1997, as though they had occurred at the beginning of the
periods presented. The pro forma information has been prepared assuming that all
of AHG (all interests relative to the 42 properties) have been acquired.
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31,
(UNAUDITED) FOR THE YEARS ENDED NOVEMBER 30,
---------------------------- ----------------------------------------------------------
PRO FORMA ACTUAL PRO FORMA ACTUAL
--------- ---------------- --------- ----------------------------------------------
1998 1998 1997 1997 1997 1996 1995 1994 1993
--------- ------- ------ --------- ------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues
Rental income................ $ 37,004 29,864 29,978 69,943 56,334 59,215 51,664 45,978 39,381
Equity in earnings of
partnerships............... 22,891 23,969 19,791 42,085 30,149 51,862 31,203 20,710 7,046
Interest income.............. 35,066 34,759 20,630 41,898 41,446 28,726 20,475 11,640 8,694
Gains on sales of:
Real estate................ 12,061 12,061 6,401 18,076 18,076 3,669 15,776 9,085 --
Investment securities...... 1,386 1,386 5,009 5,359 5,359 1,735 513 -- --
Management fees.............. 4,021 4,021 5,977 13,385 13,385 18,229 10,274 12,390 6,565
Other, net................... 965 679 1,385 4,352 2,734 -- 2,910 2,016 1,387
-------- ------- ------ ------- ------- ------- ------- ------- ------
Total revenues............. 113,394 106,739 89,171 195,098 167,483 163,436 132,815 101,819 63,073
-------- ------- ------ ------- ------- ------- ------- ------- ------
Costs and expenses
Cost of rental operations.... 22,816 18,820 18,281 43,464 35,767 38,126 30,890 23,884 18,866
General and administrative... 14,572 12,674 11,533 26,480 26,584 20,756 15,155 14,436 7,806
Depreciation................. 7,102 4,063 2,915 11,417 6,060 5,916 5,671 4,618 4,002
Minority interests........... 426 1,094 126 (985) -- -- -- -- --
Other, net................... -- -- -- -- -- 658 -- -- --
-------- ------- ------ ------- ------- ------- ------- ------- ------
Total costs and expenses....... 44,916 36,651 32,855 80,376 68,411 65,456 51,716 42,938 30,674
-------- ------- ------ ------- ------- ------- ------- ------- ------
Operating earnings............. 68,478 70,088 56,316 114,722 99,072 97,980 81,099 58,881 32,399
Interest expense............... 22,352 16,983 13,201 34,721 26,584 20,513 14,692 5,688 3,378
-------- ------- ------ ------- ------- ------- ------- ------- ------
Earnings before income taxes... 46,126 53,105 43,115 80,001 72,488 77,467 66,407 53,193 29,021
Income taxes................... 10,341 19,531 16,815 19,188 28,270 30,212 25,899 20,695 10,447
-------- ------- ------ ------- ------- ------- ------- ------- ------
Net earnings................... $ 35,785 33,574 26,300 60,813 44,218 47,255 40,508 32,498 18,574
======== ======= ====== ======= ======= ======= ======= ======= ======
Net earnings per share(1):
Basic........................ $ 0.99 0.93 0.73 1.68 1.22 -- -- -- --
======== ======= ====== ======= =======
Diluted...................... $ 0.98 0.92 0.72 1.68 1.22 -- -- -- --
======== ======= ====== ======= =======
</TABLE>
- ---------------
(1) LNR was formed in June 1997 and had no outstanding stock prior to formation;
therefore, net earnings per share have not been calculated for the fiscal
years ended November 30, 1996, 1995, 1994 and 1993.
12
<PAGE> 14
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX
MONTHS ENDED MAY 31,
(UNAUDITED) AS OF AND FOR THE YEARS ENDED NOVEMBER 30,
----------------------------- -----------------------------------------------------------
PRO PRO
FORMA ACTUAL FORMA ACTUAL
------- ------------------- ------- -------------------------------------------------
1998 1998 1997 1997 1997 1996 1995 1994 1993
------- --------- ------- ------- --------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
EBITDA(1)........................ $75,580 74,151 59,231 126,139 105,132 103,896 86,770 63,499 36,401
Depreciation and amortization.... 7,102 4,063 2,915 11,417 6,060 5,916 5,671 4,618 4,002
Ratio of earnings to fixed
charges(2)..................... 2.9x 3.9x 4.1x 4.6x 3.6x 4.8x 5.5x 10.4x 9.6x
Ratio of EBITDA to average
assets(3)...................... 5.5% 6.0% 7.7% 12.5% 11.8% 14.8% 14.5% 14.8% 14.1%
FINANCIAL POSITION(4)
Total assets..................... -- 1,448,712 793,092 -- 1,023,337 752,968 652,400 547,722 310,355
Total mortgage notes and other
debts payable.................. -- 754,540 369,965 -- 391,171 354,406 252,256 119,935 34,163
Total stockholders' equity(5).... -- 602,655 -- -- 569,088 -- -- -- --
Total Parent Company
investment..................... -- -- 384,143 -- -- 367,048 370,903 396,403 266,965
OTHER DATA AND RATIOS ADJUSTED
FOR THE OFFERING
Interest expense(6).............. -- -- -- 39,223 -- -- -- -- --
Total mortgage notes and other
debts payable.................. -- -- -- 526,646 -- -- -- -- --
Ratio of EBITDA to interest
expense........................ -- -- -- 3.2x -- -- -- -- --
Ratio of total mortgage notes and
other debts payable to total
stockholders' equity(7)........ -- -- -- 0.9x -- -- -- -- --
</TABLE>
- ---------------
(1) EBITDA (earnings before interest, taxes, depreciation and amortization) is
used by the Company in analyzing its operating performance, leverage and
liquidity. However, it is not a measure of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to net earnings as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
(2) Outstanding debt of Lennar Land Partners is guaranteed by the Company. See
"Description of Certain Indebtedness -- LNR Guarantees of Partnership Debt."
The amount of fixed charges associated with such debt is excluded from the
computation of these ratios.
(3) Ratio of EBITDA to average assets is calculated by dividing EBITDA by the
average of total assets at the beginning and end of each period presented.
Pro forma average assets as of May 31, 1998 and as of November 30, 1997 is
prepared under the assumption that all 42 AHG properties were acquired as of
these dates.
(4) Actual and pro forma financial position are identical at May 31, 1998 and
November 30, 1997.
(5) In connection with the Spin-off, the assets and liabilities of Lennar and
its subsidiaries were divided between the Company and Lennar and its
homebuilding subsidiaries so that Lennar and its homebuilding subsidiaries
would have a net worth of $200 million (with specified adjustments) and the
remaining net worth was transferred to the Company. See the Company's
consolidated statements of Parent Company investment and stockholders'
equity and notes thereto included elsewhere in this Prospectus.
(6) Reflects the repayment of $194 million of short-term debt, which had an
approximate weighted average interest rate of 6.70% for the year ended
November 30, 1997, using the net proceeds of the Offering, and the issuance
of the Notes at an effective interest rate of 9.445% as of the beginning of
the year.
(7) Total mortgage notes and other debts payable excludes $119 million of
outstanding unconsolidated partnership debt guaranteed by LNR at November
30, 1997. The ratio of total mortgage notes and other debts payable plus
outstanding unconsolidated partnership debt guaranteed by LNR to
stockholders' equity, as adjusted for the Offering, would have been 1.13x at
November 30, 1997.
13
<PAGE> 15
The following is a summary of the Company's actual results of operations
for the six months ended May 31, 1998 and 1997 and the years ended November 30,
1997, 1996, 1995, 1994 and 1993 and pro forma results for the year ended
November 30, 1997, after allocating among the core business lines certain non-
corporate general and administrative expenses. This information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS FOR THE YEARS ENDED NOVEMBER 30,
ENDED MAY 31, --------------------------------------------------------
(UNAUDITED) PRO
ACTUAL FORMA ACTUAL
----------------- ------- ----------------------------------------------
1998 1997 1997 1997 1996 1995 1994 1993
-------- ------ ------- ------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS BY BUSINESS LINE
Revenues
Real estate operations........... $ 41,925 36,379 88,019 74,410 62,884 67,440 55,063 39,381
CMBS and loans................... 38,406 27,844 51,519 51,067 33,207 23,202 12,766 8,694
Partnerships and joint
ventures....................... 25,729 23,563 51,208 39,272 67,345 39,263 31,974 13,611
Corporate and other.............. 679 1,385 4,352 2,734 -- 2,910 2,016 1,387
-------- ------ ------- ------- ------- ------- ------- ------
Total revenues..................... 106,739 89,171 195,098 167,483 163,436 132,815 101,819 63,073
-------- ------ ------- ------- ------- ------- ------- ------
Operating expenses
Real estate operations........... 26,053 22,926 59,033 44,663 46,683 38,296 33,243 25,197
CMBS and loans................... 2,611 2,011 2,547 2,547 1,813 604 555 139
Partnerships and joint
ventures....................... 2,179 2,913 3,307 3,104 6,113 5,339 4,453 1,670
Corporate and other.............. 5,808 5,005 15,489 18,097 10,847 7,477 4,687 3,668
-------- ------ ------- ------- ------- ------- ------- ------
Total operating expenses........... 36,651 32,855 80,376 68,411 65,456 51,716 42,938 30,674
-------- ------ ------- ------- ------- ------- ------- ------
Operating earnings
Real estate operations........... 15,872 13,453 28,986 29,747 16,201 29,144 21,820 14,184
CMBS and loans................... 35,795 25,833 48,972 48,520 31,394 22,598 12,211 8,555
Partnerships and joint
ventures....................... 23,550 20,650 47,901 36,168 61,232 33,924 27,521 11,941
Corporate and other.............. (5,129) (3,620) (11,137) (15,363) (10,847) (4,567) (2,671) (2,281)
-------- ------ ------- ------- ------- ------- ------- ------
Total operating earnings........... 70,088 56,316 114,722 99,072 97,980 81,099 58,881 32,399
Interest expense................... 16,983 13,201 34,721 26,584 20,513 14,692 5,688 3,378
Income tax expense................. 19,531 16,815 19,188 28,270 30,212 25,899 20,695 10,447
-------- ------ ------- ------- ------- ------- ------- ------
Net earnings....................... $ 33,574 26,300 60,813 44,218 47,255 40,508 32,498 18,574
======== ====== ======= ======= ======= ======= ======= ======
</TABLE>
14
<PAGE> 16
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in this Prospectus, including, without limitation,
statements under "Prospectus Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
regarding budgeted capital expenditures, the Company's financial position,
projected results of the Company's real estate investments, possible
environmental liabilities, business strategy and other plans, objectives or
expectations for future operations, are forward-looking statements. Although the
Company believes the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that those expectations will prove to
have been correct, particularly given the cyclical nature of aspects of the
Company's business and the inherent uncertainty in estimating future
fluctuations in the commercial real estate market. There are numerous
uncertainties inherent in predicting future performance of real estate
investments, including many factors beyond the control of the Company, such as
changes in interest rates, 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, international, national or regional business conditions which affect
the ability of mortgage obligors to pay principal or interest when it is due,
and the cyclical nature of the commercial real estate business. Additional
important factors that could cause actual results to differ materially from the
Company's expectations are disclosed under "Risk Factors" and elsewhere in this
Prospectus. Should one or more of these risks or uncertainties occur, the
Company's actual results and plans for 1998 and beyond could differ materially
from those anticipated in forward-looking statements.
15
<PAGE> 17
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered in evaluating the Exchange Offer.
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
The historical financial information about the Company included in this
Prospectus relates almost entirely to periods when the entities which currently
constitute the Company were subsidiaries of Lennar. The Company's results of
operations during those periods were not necessarily the same as they would have
been if LNR and its subsidiaries had operated as a separate, stand-alone group
during those periods.
ABSENCE OF HISTORY AS A STAND-ALONE GROUP
Until November 1, 1997, LNR and its subsidiaries had never operated as a
stand-alone publicly owned group of companies. Therefore, their administrative
costs after that date are likely to be higher than those reflected in the
Company's historical financial statements. Also, until November 1, 1997, none of
the Company's senior executive officers had been engaged in managing a public
parent company (except that its Chairman of the Board, who is not a full time
employee, has for a number of years been a senior executive officer of Lennar
and has since April 1997 been the chief executive officer of Lennar).
RISK OF LEVERAGED INVESTMENT ACTIVITIES
One of the reasons for separating the Company from Lennar was to enable the
Company to increase its borrowings and therefore increase the investments it
could make. While increased leverage can substantially increase the Company's
earnings potential, it also will expose the Company to increased risks if,
because of changes in market conditions, changes in interest rates or for any
other reason, the value of its investments declines.
CYCLICAL NATURE OF THE REAL ESTATE BUSINESS
Most aspects of the United States real estate markets are cyclical. To some
extent, the cycles for different types of real estate assets (such as single
family homes and office buildings) are different. However, all aspects of the
real estate markets are affected by interest rates, with the value of various
types of real estate tending to decline relative to non-real estate assets when
interest rates rise. All aspects of the United States real estate markets also
may be affected by changes in the economy in general. Because a significant
portion of the Company's business involves acquiring mortgages, properties and
real estate related securities at discounted prices, periods of low real estate
values have in the past provided investment opportunities for the Company.
However, although future periods of poor real estate markets may provide
additional acquisition opportunities for the Company, they also may seriously
impair the value of the assets the Company already holds and the Company's
ability to dispose of assets at prices which are acceptable to it.
In accordance with the Company's strategy of trying to enhance the value of
assets it acquires and to sell those assets at a profit, when real estate
markets are strong the Company tends to accelerate the rate at which it sells
assets. Conversely, when real estate markets are strong, there may be fewer
opportunities for the Company to acquire assets at prices which are likely to
generate the combination of yield and appreciation in value which the Company
seeks. While the Company believes there are attractive investment opportunities
even when real estate markets are strong (for example, during 1997 and the first
half of 1998, the Company made several investments in development or
redevelopment projects, which should benefit from a strong real estate market,
and the Company has begun to seek investment opportunities outside the United
States), the Company's rate of asset acquisitions during periods of strong real
estate markets may be slower than during periods of weaker real estate markets.
16
<PAGE> 18
RISKS RELATED TO AHG ACQUISITION
Although the Company has substantial experience in developing multi-family
residential apartments, senior management of the Company has little experience
with acquiring and owning properties which qualify for low-income tax credits
under Section 42 of the Internal Revenue Code and, therefore, there can be no
assurance that the Company will be able to successfully integrate the operations
of AHG with the operations of the Company.
INVESTMENT IN JAPAN; POSSIBLE FUTURE INVESTMENTS IN FOREIGN MARKETS
The Company has formed several partnerships with large financial
institutions to acquire portfolios of distressed real estate loans in Japan,
where the commercial real estate market has declined substantially in recent
years. As of May 31, 1998, the Company's investments in these projects amounted
to approximately $20 million. The Company is considering making additional
investments in Japanese real estate and real estate related assets if attractive
opportunities arise. The Company also may seek investment opportunities
elsewhere outside the United States.
When the Company considers real estate related investments outside the
United States, it usually will do so in conjunction with experts in real estate
or real estate finance where the real estate is located. Nonetheless, until
recently, the senior management of the Company has had no experience in Japan or
other markets outside the United States and this lack of experience could
adversely affect the senior managers' ability to evaluate types of real estate
investments which are available, trends in real estate markets or overall
economic trends in particular countries. Also, real estate related transactions
in a country normally are conducted in the currency of that country. Investments
by the Company denominated in currencies other than the U.S. dollar may be
adversely affected by a decline in the value of the currencies in which the
investments are denominated compared with the value of the U.S. dollar, whether
because of factors affecting the non-U.S. currencies or because of a
strengthening of the U.S. dollar against currencies generally. The Company may
try to hedge against currency risks by buying or selling currency contracts or
options. However, the Company has no experience in hedging against currency
fluctuations.
NO ACCESS TO CREDIT SUPPORT
Until October 31, 1997, the Company had access to Lennar's corporate credit
lines, Lennar guaranteed many of the obligations the Company incurred in
purchasing specific assets (including obligations under repurchase obligations
incurred to finance purchases of CMBS), and creditors had been able to look to
Lennar's cash flows, as well as those of the Company, to satisfy Company
indebtedness guaranteed by Lennar. Since November 1, 1997, the Company has not
had access to Lennar's corporate credit lines or cash flows, and Lennar has not
guaranteed any new indebtedness of the Company. The Company believes its
consolidated net worth (which was $603 million at May 31, 1998), its cash flow,
and the fact that there are active markets for many of the types of assets it
acquires, should enable the Company to obtain the credit lines it will need to
finance its contemplated activities. As of May 31, 1998, the Company had
arranged approximately $619 million of credit lines (in addition to having
borrowed $200 million by selling the Notes). Absence of Lennar credit support
probably has affected, and may continue to affect, both the availability and the
cost of credit to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SIGNIFICANT INDEBTEDNESS
At May 31, 1998, the Company's total indebtedness was $755 million,
representing approximately 56% of its combined total debt and stockholders'
equity. See "Capitalization." This included approximately $199 million at May
31, 1998, of AHG's pre-existing property-specific mortgage financing that is
non-recourse to the Company and indebtedness the Company incurred to finance the
acquisition. LNR also is a guarantor or similarly obligated with regard to up to
$228 million of credit facilities of unconsolidated partnerships, under which
$101 million was outstanding as of May 31, 1998. See "Certain Relationships and
Transactions -- Relationships with Lennar -- Lennar Land Partners" and
"Description of Other Indebtedness."
17
<PAGE> 19
The Company's ability to make scheduled payments of principal or interest on, or
to refinance, its indebtedness (including the Notes) depends on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive and other factors beyond its control. Based upon the
current level of operations and anticipated growth, the Company believes that
available cash flow, together with other sources of liquidity, will be adequate
to meet the Company's anticipated future requirements for working capital,
capital expenditures, scheduled payments of principal and interest on its
indebtedness, including the Notes, and the implementation of its growth
initiatives. However, all or a portion of the principal payments at maturity on
the Notes may require refinancing. There can be no assurance that the Company's
business will generate sufficient cash flow from operations or that future
borrowing will be available in an amount sufficient to enable the Company to
service its indebtedness, including the New Notes, or to make necessary capital
expenditures, or that any required refinancing will be available on commercially
reasonable terms or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company's leverage may have important consequences for the Company and
the holders of the New Notes, including, but not limited to, the following: (i)
the ability of the Company to obtain additional financing for acquisitions,
working capital, capital expenditures or other purposes, if necessary, may be
impaired or financing may not be available on terms favorable to the Company;
(ii) a portion of the Company's cash flow will be used to pay the Company's
interest expense and debt amortization, which will reduce the funds that would
otherwise be available to the Company for its operations and future business
opportunities; (iii) a substantial decrease in net operating cash flows or an
increase in expenses of the Company could make it difficult for the Company to
meet its debt service requirements and force it to dispose of assets prematurely
or otherwise modify its operations; and (iv) the Company's leverage will
increase its vulnerability to a downturn in its business or the economy
generally.
A significant portion of the Company's existing indebtedness bears interest
at variable rates. However, most of the Company's investments generate interest
or rental income at essentially fixed rates. Therefore, a material increase in
the interest rates on the Company's indebtedness could substantially reduce the
Company's cash flow.
SUBORDINATION
LNR's obligations under the New Notes (like those under the Old Notes) will
be subordinated in right of payment to all of its existing and future Senior
Indebtedness. As of May 31, 1998, including the effect of the sale of the Old
Notes and the application of the net proceeds of that sale, LNR had
approximately $629 million of Senior Indebtedness outstanding. Additional Senior
Indebtedness may be incurred by LNR from time to time, subject to certain
restrictions imposed by the Indenture. By reason of the subordination of the New
Notes, in the event of an insolvency, liquidation or other reorganization of
LNR, creditors who are holders of Senior Indebtedness must be paid in full
before any payments may be made to holders of New Notes. There may not be
sufficient assets remaining after payment of prior claims to pay amounts due on
the New Notes. In addition, under certain circumstances, no payments may be made
with respect to the New Notes if a default exists with respect to Senior
Indebtedness. See "Description of the New Notes -- Subordination."
STRUCTURAL SUBORDINATION TO SUBSIDIARY DEBT
The New Notes will be debt obligations of LNR, a holding company whose
primary assets consist of shares of common stock issued to LNR by its
subsidiaries. Accordingly, LNR will be dependent upon the cash flow of, and
receipt of dividends or advances from, its subsidiaries in order to meet its
debt obligations, including LNR's obligations under the New Notes. The New Notes
will not be guaranteed by LNR's subsidiaries, and, consequently, LNR's
subsidiaries are not obligated or required to pay any amounts pursuant to the
New Notes or to make funds available for the New Notes in the form of dividends
or advances to LNR. A significant amount of the Company's indebtedness at May
31, 1998 was indebtedness of subsidiaries of LNR. Creditors of a subsidiary are
entitled to be paid what is due them before assets of the subsidiary become
available for creditors of its parent. Therefore, even liabilities which are not
Senior Indebtedness, and
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preferred stock, of subsidiaries will, in effect, be prior in right of payment
to the New Notes with regard to the assets of those subsidiaries. This can
substantially reduce the portion of the Company's consolidated assets which are
available for payment of the New Notes. Also, any agreements of subsidiaries
which prohibit or limit the subsidiaries' payment of dividends will eliminate or
reduce LNR's access to cash flows of those subsidiaries to pay interest or
principal with regard to the New Notes.
LIMITED RESTRICTIVE COVENANTS
The Indenture contains financial and operating covenants that place limited
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments and investments and to sell or otherwise dispose of assets and merge or
consolidate with other entities. A failure to comply with the obligations
contained in the Indenture could result in an event of default under the
Indenture, which would result in the acceleration of the related debt and the
acceleration of debt under other instruments evidencing indebtedness that may
contain cross-acceleration or cross-default provisions. To the extent events of
default under the Indenture result in defaults with respect to Senior
Indebtedness, the subordination provisions in the Indenture would likely
restrict payments to the holders of New Notes. See "Description of the New
Notes -- Certain Covenants." The Indenture does not contain covenants
specifically designed to protect holders of the New Notes in case there is a
material adverse change in the Company's financial position or in the event of a
highly leveraged transaction involving the Company.
EFFECT OF INABILITY TO REPURCHASE NEW NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, each holder of New Notes (and each holder of Old
Notes) will have the right to require LNR to repurchase the holder's Notes. If a
Change of Control were to occur, and LNR did not have sufficient funds to pay
the repurchase price for all the Notes which are tendered, that failure would be
an event of default under the Indenture. In addition, a Change of Control would
constitute a default under LNR's existing credit facility and is otherwise
restricted by that facility and may be prohibited or limited by, or create an
event of default under, other agreements relating to borrowings which the
Company may enter into from time to time. The borrowings under the credit
facility are, and other borrowings are likely to be, Senior Indebtedness.
Therefore, a Change of Control at a time when LNR cannot pay for Notes which are
tendered as a result of the Change of Control could result in holders of New
Notes receiving substantially less than the principal amount of the New Notes.
See "Description of the New Notes -- Change of Control" and "--Subordination."
INDEMNIFICATION OF LENNAR IN CASE THE SPIN-OFF WAS NOT TAX-FREE
A Separation and Distribution Agreement entered into by LNR and Lennar at
the time of the Spin-off (the "Separation and Distribution Agreement") provides
that if it is ultimately determined that the Spin-off did not qualify as a tax
free transaction, other than because of actions taken by Lennar after completion
of Lennar's merger with Pacific Greystone Corporation (October 31, 1997), and as
a result Lennar incurs any liabilities for taxes, interest or penalties which it
would not have incurred if the Spin-off had been tax free, LNR will pay Lennar
an amount equal to the liabilities incurred for taxes, interest and penalties as
a result of the Spin-off and all related accounting, legal and professional
fees, as well as any costs, expenses or damages Lennar incurs as a result of
stockholder litigation or controversies because the Spin-off was not tax free.
The Internal Revenue Service issued a ruling that the Spin-off was tax free. The
Company believes that, because the Internal Revenue Service issued that ruling,
it is very unlikely that the Internal Revenue Service would assert that the
Spin-off was not tax free and would be successful in that assertion. However, if
it were determined that the ruling was issued on the basis of an inaccurate
statement of facts, or if events occur which Lennar or its principal stockholder
had stated to the Internal Revenue Service would not occur, the Internal Revenue
Service could ignore the ruling and seek to demonstrate that the Spin-off was
not tax free. If it were determined that the Spin-off was not tax free, Lennar
could be taxed on the entire amount by which the fair value of LNR at the time
of the Spin-off exceeded Lennar's basis in the stock of LNR. LNR might be
required to reimburse Lennar for the Federal tax on this amount (probably at a
tax rate of 35%), plus interest and any penalties Lennar is required to pay to
the Internal Revenue Service, as well as any state or other taxes
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resulting from the Spin-off. This could require the Company to dispose of
substantial portions of its assets, and could substantially impair the ability
of the subsidiaries to conduct their activities as LNR currently expects the
subsidiaries to conduct those activities.
COMPANY WOULD BE ADVERSELY AFFECTED IF IT WERE SUBJECT TO THE INVESTMENT COMPANY
ACT
The Company intends to conduct its business at all times so as not to
become regulated as an investment company under the Investment Company Act of
1940 (the "Investment Company Act"). Accordingly, the Company does not expect to
be subject to the restrictive provisions of the Investment Company Act. The
Investment Company Act applies to entities which hold themselves out as being
involved primarily in investing, reinvesting or trading in securities or which
own investment securities having a value exceeding 40% of the value of the
entities' total assets (other than government securities or cash) on an
unconsolidated basis. The Investment Company Act exempts, among others, entities
that are "primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). Under the current interpretation of the staff of the Securities and
Exchange Commission, to qualify for this exemption, the entity must maintain at
least 55% of its assets in ownership of real estate or mortgage loans. Unless
CMBS held by an entity constitute 100% of the interests in the mortgage pools to
which they relate, the CMBS may be treated as not constituting ownership of the
mortgage loans to which the CMBS relate, and therefore not being Qualifying
Interests. An analysis of the Company's assets at November 30, 1997 and May 31,
1998 indicated that (a) less than 40% of LNR's assets, other than Government
securities or cash, on an unconsolidated basis, were investment securities and
(b) more than 55% of the Company's assets were Qualifying Interests. If,
however, due to a change in the Company's assets, or a change in the value of
particular assets, the Company became an investment company which is not exempt
from the Investment Company Act, the Company either would have to restructure
its assets so it would not be subject to the Investment Company Act, or would
have to change materially the way it conducts its activities. Either of these
changes could require the Company to sell substantial portions of its assets at
a time it might not otherwise want to do so, and the Company could incur
significant losses as a result. Further, in order to avoid becoming subject to
the requirements of the Investment Company Act, the Company may be required at
times to forego investments it would like to make or otherwise to act in a
manner other than that which its management believes would maximize its
earnings.
REAL ESTATE INVESTMENT RISKS
General. Investments in real property or real property related assets are
subject to varying degrees of risk. A property owner's ability to service debt
will depend in large part on the amount of income generated, expenses incurred
and capital expenditures required by the properties. The Company's income, both
as an owner of properties and as a holder of investments secured by real
properties (including mortgage loans and CMBS), may be adversely affected by a
number of factors, including the general economic climate and local real estate
conditions, an oversupply of, or a reduction in demand for, space in properties
in the areas where particular properties are located and the attractiveness of
particular properties to prospective tenants. Income from properties also is
affected by such factors as the cost of compliance with government regulations,
including zoning and tax laws and the potential for liability under applicable
laws. Many expenditures associated with properties (such as operating expenses
and capital expenditures) cannot be reduced when there is a reduction in income
from the properties.
Lease expirations could adversely affect the Company's earnings and cash
flow. When leases for space in the Company's properties terminate, the Company
may not be able to re-lease the space on terms as favorable as those of the
terminated leases, or at all, and the Company may incur substantial costs to
obtain new tenants (including the cost of renovations, commissions and rent
concessions). If the Company were unable to re-lease a substantial portion of
the space to which those leases relate at rents at least comparable to those
under the current leases, the Company's earnings and cash flow could be
significantly adversely affected.
Illiquidity of real estate investments could adversely affect the Company's
financial condition. Because real estate investments are relatively illiquid,
the Company's ability to vary its portfolio promptly in response to changes in
economic or other conditions may be limited. That illiquidity, or any other
factor that impedes
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the ability of the Company to respond to adverse changes in the performance of
its investments, could have an adverse effect on the Company's financial
condition and results of operations.
Possible environmental liabilities. Under various federal, state and local
laws, ordinances and regulations, a current or previous owner or operator of a
property may be required to clean up hazardous substances released at the
property, and may be held liable to a governmental entity or to third parties
for property damage and for investigation and cleanup costs incurred by those
parties in connection with the contamination. In addition, some environmental
laws create a lien on a contaminated site in favor of the government for damages
and costs it incurs in connection with the contamination. The presence of
contamination or the failure to remediate contamination may adversely affect the
owner's ability to sell or lease real estate or to borrow using the real estate
as collateral. The owner or operator of a site may be liable under common law to
third parties for damages and injuries resulting from environmental
contamination emanating from the site. Under some circumstances, the holder of a
loan secured by a mortgage on a property may be directly liable for effects of
failure of the property to comply with environmental laws. Therefore, in
addition to the possibility the Company will incur significant costs or
liabilities under environmental laws with regard to properties it owns, the
Company could be adversely affected as a holder of mortgage loans or CMBS, if
costs of complying with environmental laws, or liability for failure to do so,
made property owners unable to meet their debt service obligations, if existence
of contamination or other violations of environmental laws made it difficult to
dispose of properties or reduced the prices for which properties could be sold
upon foreclosure of mortgages, or if property owners incurred direct liability
for failure to comply with environmental laws.
The Company could be required to incur significant costs to comply with the
Americans with Disabilities Act. The Company's properties are subject to the
requirements of the Americans with Disabilities Act (the "ADA"), which generally
requires that public accommodations, including office buildings and in some
instances, facilities in multi-family residential buildings, be made accessible
to disabled persons. The Company believes its properties are in substantial
compliance with the ADA and that it will not be required to make substantial
capital expenditures to meet the requirements of the ADA. However, compliance
with the ADA could require removal of access barriers and noncompliance could
result in imposition of fines by the Federal government or the award of damages
to private litigants. If the Company were required to make substantial
alterations to a number of its properties to comply with the ADA, the Company's
earnings and cash flow could be adversely affected.
Investment risks. The Company intends to continue to invest directly or
through partnerships, to originate and acquire mortgage loans, to acquire CMBS,
and otherwise to invest in commercial and residential multi-family rental real
estate in the United States and, at least to a limited extent, elsewhere in the
world. This entails risks that investments will fail to perform in accordance
with expectations and that judgments with respect to the costs of improvements
to bring properties up to market standards will prove inaccurate, as well as
general investment risks associated with any real estate investment.
RISKS OF INVESTING IN SUBORDINATED CMBS
Risks of subordination. To date the Company has purchased only
substantially subordinated classes of CMBS. It has done this because those
classes can be purchased at substantial discounts from their face amounts, and
present the potential for significant profits to the extent collections of
underlying loans exceed those anticipated when the Company purchases them.
However, if collections are lower than anticipated, the payments to the holders
of the most subordinate classes of CMBS, which are the classes in which the
Company invests, will be substantially reduced, and possibly eliminated
entirely.
Risks of repurchase obligation financing. The Company finances most of its
CMBS purchases with repurchase obligations, which are in effect borrowings
secured by the CMBS. The repurchase obligation arrangements require that, if the
market value of the CMBS falls below specified percentages of the repurchase
obligations, the Company provide additional collateral, reduce the loan balance
or liquidate CMBS positions. Therefore, in a period when, due to a substantial
increase in interest rates, a depressed real estate market or otherwise, the
market value of the Company's CMBS were to fall significantly, the Company could
be required to make a significant additional investment in its CMBS (in the form
of increased collateral for
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the repurchase obligations) or to sell the CMBS at a time when it may be very
inopportune for the Company to do that.
CONTROLLING STOCKHOLDER
LNR has two classes of stock: common stock, which is entitled to one vote
per share, and Class B Common Stock, which is entitled to ten votes per share.
At May 31, 1998, there were 25.391 million outstanding shares of common stock
and 10.758 million outstanding shares of Class B Common Stock. Leonard Miller
owned, through family partnerships, 9.898 million shares of the Class B Common
Stock, and therefore was entitled to cast approximately 74% of the combined
votes which could be cast by the holders of the common stock and the Class B
Common Stock. That gives Mr. Miller the power to elect all LNR's directors and
to approve most matters which are presented to the stockholders, even if no
other stockholders vote in favor of them. In addition, as long as Mr. Miller
owns a substantial portion of the Class B Common Stock, his ownership of Class B
Common Stock would make it impossible for anyone to acquire enough shares to
obtain voting control of LNR. Therefore, Mr. Miller's ownership of Class B
Common Stock probably would discourage any non-negotiated tender offers or other
non-negotiated efforts to take over LNR.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
If the New Notes are traded after their initial issuance, they may trade at
a discount from their initial offering price, depending upon prevailing interest
rates, the market for similar securities, the performance of the Company and
certain other factors. Historically, the market for non-investment grade debt
has been subject to disruptions that have caused substantial volatility in the
prices of securities similar to the New Notes. There can be no assurance that if
a market for the New Notes develops, that market will not be subject to similar
disruptions. Any such disruptions may have an adverse effect on holders of the
New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes in
response to the Exchange Offer will continue to be subject to the restrictions
on transfer of the Old Notes resulting from the fact that the issuance of the
Old Notes was not registered under the Securities Act or registered or qualified
under any state securities laws. In general, the Old Notes may not be offered or
sold, unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that, except in limited circumstances specified in the Registration Agreement,
it will register the Old Notes under the Securities Act. New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred (other than by a holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided the holder acquired the New Notes in the
ordinary course of the holder's business and the holder has no arrangement with
any person to participate in the distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of those New Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes which the
broker-dealer acquired as a result of market-making activities or other trading
activities. The Company will make this Prospectus available to any such
broker-dealer for use in connection with resales of New Notes. See "Sales of New
Notes Received By Broker-Dealers." However, under the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in those jurisdictions or an
exemption from registration or qualification is available. To the extent that
Old Notes are exchanged as a result of the Exchange Offer, the ability to trade
untendered and tendered but unaccepted Old Notes may be adversely affected.
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THE EXCHANGE OFFER
PURPOSE AND EFFECTS
The Old Notes were issued by the Company on March 24, 1998 to the Initial
Purchasers, who resold the Old Notes to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and other institutional
"accredited investors" (as defined in Rule 501(a) under the Securities Act). In
connection with the sale of the Old Notes, the Company and the Initial
Purchasers entered into the Registration Agreement pursuant to which the Company
agreed to file with the Commission within 45 days after the Old Notes were
issued a registration statement (the "Exchange Offer Registration Statement")
with respect to an offer to exchange New Notes for the Old Notes. In addition,
the Company agreed to use its best efforts to cause the Exchange Offer
Registration Statement to become effective under the Securities Act within 150
days after the Old Notes were issued and to issue the New Notes pursuant to the
Exchange Offer. A copy of the Registration Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
The Exchange Offer is being made pursuant to the Registration Agreement.
Holders of Old Notes who do not tender their Old Notes or whose Old Notes are
tendered but not accepted would have to rely on exemptions from registration
requirements under the securities laws, including the Securities Act, if they
wish to sell their Old Notes.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to persons unrelated to the Company, the Company
believes the New Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for sale, sold and otherwise transferred by any holder
(other than a person that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act and except as set forth in the next paragraph)
without registration or the delivery of a prospectus under the Securities Act,
provided the holder acquires the New Notes in the ordinary course of the
holder's business and the holder is not participating and does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes.
If a person were to participate in the Exchange Offer for the purpose of
distributing securities in a manner not permitted by the Commission's
interpretation, (i) the position of the staff of the Commission enunciated in
the no-action letters would not be applicable to the person and (ii) the person
would be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a sale of the New Notes.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes which the broker-dealer acquired as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any sale of those New Notes. See "Sales of New
Notes Received by Broker-Dealers."
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes with addresses in any
jurisdiction in which the Exchange Offer or the issuance of New Notes pursuant
to it would violate applicable securities or blue sky laws. Prior to the
Exchange Offer, however, the Company will register or qualify, or cooperate with
the holders of the Old Notes and their respective counsel in connection with the
registration or qualification of, the New Notes for offer and sale under the
securities or blue sky laws of such jurisdictions as are necessary to permit
consummation of the Exchange Offer and do anything else which is necessary or
advisable to enable the offer and issuance of the New Notes in those
jurisdictions.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will issue New Notes
in exchange for all Old Notes which are validly tendered prior to 5:00 p.m., New
York City time, on the Expiration Date (as defined below) and not withdrawn. The
principal amount of the New Notes issued in the exchange will be the same as the
principal amount of the Old Notes for which they are exchanged. Holders may
tender some or all of their Old Notes in response to the Exchange Offer.
However, Old Notes may be tendered only in multiples of $1,000. See "Description
of the New Notes."
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The form and terms of the New Notes will be the same in all material
respects as the form and terms of the Old Notes, except that (i) the New Notes
will be registered under the Securities Act and hence will not bear legends
regarding restrictions on transfer and (ii) because the New Notes will be
registered, holders of New Notes will not be, and upon the consummation of the
Exchange Offer, except under limited circumstances, holders of Old Notes will no
longer be, entitled to rights under the Registration Agreement intended for
holders of unregistered securities.
Old Notes which are not tendered for exchange or are tendered but not
accepted in the Exchange Offer will remain outstanding and be entitled to the
benefits of the Indenture, but will not be entitled to any registration rights
under the Registration Agreement.
The Company will be deemed to accept all the Old Notes which are validly
tendered and not withdrawn when the Company gives oral or written notice to that
effect to the Exchange Agent. The Exchange Agent will act as agent for the
tendering holders for the purpose of receiving New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or otherwise, certificates for those Old Notes will be returned,
without expense, to the tendering holder as promptly as practicable after the
Expiration Date.
Holders who tender Old Notes in response to the Exchange Offer will not be
required to pay brokerage commissions or fees or, except as described in the
instructions in the Letter of Transmittal, transfer taxes. The Company will pay
all charges and expenses, other than certain taxes described below, in
connection with the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 p.m., New York City time, on
September 25, 1998, unless it is extended by the Company by notice to the
Exchange Agent. The Company reserves the right to extend the Exchange Offer at
its discretion. If the Company extends the Exchange Offer, the term "Expiration
Date" will mean the time and date on which the Exchange Offer as extended will
expire. The Company will notify the Exchange Agent of any extension by oral or
written notice and will make a public announcement of any extension, not later
than 9:00 a.m., New York City time, on the business day after the previously
scheduled Expiration Date.
TERMINATION OF CERTAIN RIGHTS
The Registration Agreement provides that, with certain exceptions, if
(i)(A) the Exchange Offer Registration Statement has not been filed with the
Commission on or prior to the 45th calendar day following the date of original
issue of the Old Notes, or (B) the Shelf Registration Statement has not been
filed with the Commission on or prior to the 30th day after a Shelf Notice is
required to be delivered under the Registration Agreement (the "Shelf
Registration Statement Filing Date"); (ii)(A) the Exchange Offer Registration
Statement has not been declared effective on or prior to the 150th calendar day
following the date of original issue of the Old Notes, or (B) the Shelf
Registration Statement has not been declared effective on or prior to the 75th
day following the Shelf Registration Filing Date; (iii)(A) the Exchange Offer is
not consummated on or prior to the 195th day following the date of original
issue of the Old Notes, or (B) after the Shelf Registration Statement has been
declared effective, the Shelf Registration Statement ceases to be effective or
usable in connection with resales of the Notes at any time when the Company is
obligated by the Registration Agreement to maintain its effectiveness (each
event referred to in clauses (i) through (iii) above being a "Registration
Default"), the interest rate on the Old Notes will be increased by one half of
one percent per annum when the Registration Default occurs and will increase by
an additional one half of one percent at the end of 90 days that additional
interest continues to accrue, with an aggregate maximum increase in the interest
rate equal to two percent (2%) per annum. Following the cure of all Registration
Defaults, the accrual of additional interest will cease.
Holders of New Notes will not be and, upon consummation of the Exchange
Offer, holders of Old Notes will no longer be, entitled to rights under the
Registration Agreement intended for holders of Old Notes which
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<PAGE> 26
are restricted as to transferability. The Exchange Offer will be deemed
consummated when the Company delivers to the Exchange Agent New Notes in the
same aggregate principal amount as that of the Old Notes which are validly
tendered and not withdrawn.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender Old Notes in response to the Exchange
Offer. To tender Old Notes, the holder must complete, sign and date the Letter
of Transmittal, or a facsimile of one, have the signatures guaranteed if
required by the Letter of Transmittal, and mail or otherwise deliver the Letter
of Transmittal or facsimile of one, together with the Old Notes (unless the
tender is being effected using the procedure for book-entry transfer described
below) and any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility System may make book-entry delivery of Old Notes by causing
DTC to transfer the Old Notes into the Exchange Agent's account in accordance
with DTC's transfer procedure. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at DTC, the Letter
of Transmittal (or a facsimile of one), with any required signature guarantees
and any other required documents, must be transmitted to and received or
confirmed by the Exchange Agent at its addresses as set forth under the caption
"-- Exchange Agent" below prior to 5:00 p.m., New York City time, on the
Expiration Date. DELIVERY OF A DOCUMENT TO DTC DOES NOT CONSTITUTE DELIVERY TO
THE EXCHANGE AGENT.
A tender of Old Notes by a holder will constitute an agreement by the
holder to transfer the Old Notes to the Company in exchange for New Notes on the
terms and subject to the conditions set forth in this Prospectus and in the
Letter of Transmittal.
The method of delivering Old Notes and the Letter of Transmittal and any
other required documents to the Exchange Agent is at the election and risk of
the holder. It is recommended that holders use overnight or hand delivery
services. In all cases, sufficient time should be allowed to assure delivery to
the Exchange Agent before the Expiration Time. No Letter of Transmittal or Old
Notes should be sent to the Company. Holders may ask their brokers, dealers,
commercial banks, trust companies or nominees to assist them in effecting
tenders.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution unless the Old Notes
are being tendered for the account of an Eligible Institution. An "Eligible
Institution" is a bank, broker, dealer, credit union, savings association or
other entity which is a member in good standing of the Securities Transfer
Agents Medallion Program.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, they
should so indicate when signing, and the Company may require that evidence
satisfactory to the Company of their authority to sign be submitted with the
Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance and withdrawal of tendered Old Notes will be determined
by the Company in its sole discretion, and that determination will be final and
binding. The Company reserves the right to reject any Old Notes which are not
properly tendered or the acceptance of which the Company believes might be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes, without being
required to waive the same defects, irregularities or conditions as to other Old
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured by the Expiration Date, or by
such later time as the Company may determine. Although the Company intends to
request the Exchange Agent to notify holders of defects or irregularities with
respect to tenders of Old Notes, none of the Company, the Exchange Agent nor any
other person will incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to
25
<PAGE> 27
have been made until all defects and irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
The Company has the right (subject to limitations contained in the
Indenture) (i) to purchase or make offers for any Old Notes that remain
outstanding after the Expiration Date and (ii) to the extent permitted by
applicable law, to purchase Old Notes in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, a holder will be representing to the Company that the person
who will acquire the New Notes being issued as a result of the Exchange Offer
(whether or not that is the holder) will be acquiring them in the ordinary
course of that person's business and that neither the holder nor any such other
person has an arrangement or understanding with any person to participate in a
distribution of the New Notes or is an "affiliate" of the Company (as defined in
Rule 405 under the Securities Act). If the holder is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes that were
acquired as result of market-making activities or other trading activities, the
holder will, by tendering, acknowledge that it will deliver a prospectus in
connection with any resale of those New Notes.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes or any other
required documents to the Exchange Agent or cannot complete the procedure for
book-entry transfer prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from the
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand) setting forth
the name and address of the Eligible Holder, the certificate number(s) of
the Old Notes (if available) and the principal amount of Old Notes
tendered, together with a duly executed Letter of Transmittal (or a
facsimile of one), stating that the tender is being made by that Notice of
Guaranteed Delivery and guaranteeing that, within five business days after
the Expiration Date, the certificate(s) representing the Old Notes (or
confirmation of a book-entry transfer into the Exchange Agent's account at
DTC) and any other documents required by the Letter of Transmittal will be
delivered to the Exchange Agent; and
(c) The certificate(s) representing all the tendered Old Notes (or
confirmation of a book-entry transfer into the Exchange Agent's account at
DTC) and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within five business days after the
Expiration Date.
Upon request to the Exchange Agent, a form of Notice of Guaranteed Delivery
will be sent to holders who wish to use the guaranteed delivery procedures
described above.
WITHDRAWAL OF TENDERS
Except as otherwise described below, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless the Old Notes have already been accepted for exchange.
To withdraw a tender of Old Notes, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent prior to 5:00 p.m.,
New York City time, on the Expiration Date, and before the Old Notes have been
accepted for exchange by the Company. Any notice of withdrawal must (i) specify
the name of the person who deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate numbers and principal amounts of the Old Notes), (iii) be signed by
the Depositor in the same manner as the signature on the Letter of Transmittal
by which the Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of
26
<PAGE> 28
transfer sufficient to have the Trustee register the transfer of the Old Notes
into the name of the person who withdraws the tender, and (iv) specify the name
in which the withdrawn Old Notes are to be registered, if different from that of
the Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of withdrawal notices will be determined by the Company in its
sole discretion, and that determination will be final and binding on all
parties. Any Old Notes which are withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer, and no New Notes will be
issued with respect to those Old Notes unless they are validly re-tendered. Any
Old Notes which have been tendered but which are not accepted for exchange or
which are withdrawn will be returned to the holder without cost to the holder as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be re-tendered at any time
prior to the Expiration Date.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation of tenders is being made by
mail. However, solicitations also may be made by telecopy, telephone or in
person by officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others for
soliciting acceptances of the Exchange Offer. The Company will, however, pay the
Exchange Agent reasonable and customary fees for its services and reimburse it
for its reasonable out-of-pocket expenses in connection with the Exchange Offer.
The Company may also reimburse brokerage houses and other custodians, nominees
and fiduciaries for the reasonable out-of-pocket expenses they incur in
forwarding copies of this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Old Notes and in handling or
forwarding tenders for exchange. The Company will pay the other expenses
incurred in connection with the Exchange Offer, including fees and expenses of
the Trustee, accounting and legal fees and printing costs.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes for New Notes pursuant to the Exchange Offer. If, however,
certificates representing New Notes or Old Notes for principal amounts which are
not tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, a person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of a person
other than the person who signs the Letter of Transmittal, or if a transfer tax
is imposed for any other reason, other than the exchange of Old Notes for New
Notes pursuant to the Exchange Offer, the tendering holder must pay the transfer
taxes (whether imposed on the registered holder or any other person). Unless
satisfactory evidence of payment of transfer taxes or exemption from the need to
pay them is submitted with the Letter of Transmittal, the amount of the transfer
taxes will be billed directly to the tendering holder. The Company may refuse to
issue New Notes in exchange for Old Notes, or to return certificates evidencing
Old Notes which are not exchanged, until the Company receives evidence
satisfactory to it that any transfer taxes payable by the holder have been paid.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The exchange of the Old Notes for the New Notes in the Exchange Offer
should not constitute an exchange for federal income tax purposes. Consequently,
(i) no gain or loss should be realized by a U.S. Holder upon receipt of a New
Note; (ii) the holding period of the New Note should include the holding period
of the Old Note for which it is exchanged; and (iii) the adjusted tax basis of
the New Note should be the same as the adjusted tax basis of the Old Note for
which it is exchanged, immediately before the exchange. Even if the exchange of
an Old Note for a New Note were treated as an exchange, the exchange should
constitute a tax-free recapitalization for federal income tax purposes.
Accordingly, a New Note should have the same issue price as an Old Note and a
U.S. Holder should have the same adjusted basis and holding period in the New
Note as it had in the Old Note immediately before the exchange. A "U.S. Holder"
means a person who is, for United States federal income tax purposes, (i) a
citizen or resident of the United States; (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision of the United States; or (iii) an estate or trust the
income of which is subject to United States federal income taxation regardless
of its source.
27
<PAGE> 29
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
If a holder does not exchange Old Notes for New Notes in response to the
Exchange Offer, the Old Notes will continue to be subject to the restrictions on
transfer described in the legend on the certificate evidencing the Old Notes,
and will not have the benefit of any agreement by the Company to register Old
Notes under the Securities Act. In general, the Old Notes may not be offered or
sold, unless the sale is registered under the Securities Act, or unless the
offer and sale are exempt from, or not subject to, the Securities Act or any
applicable state securities laws.
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept the Exchange Offer and tender their Old
Notes. Holders of Old Notes are urged to consult their financial and tax
advisors in making their own decisions on what action to take.
ACCOUNTING TREATMENT
The New Notes will be recorded in the Company's accounting records at the
same carrying value as the Old Notes on the date of the exchange. Accordingly,
the Company will not recognize any gain or loss for accounting purposes as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized by the Company over the term of the New Notes.
EXCHANGE AGENT
U.S. Bank Trust National Association (formerly "First Trust of New York,
National Association") has been appointed as Exchange Agent for the Exchange
Offer. All correspondence in connection with the Exchange Offer and the Letter
of Transmittal should be addressed to the Exchange Agent, as follows:
<TABLE>
<S> <C> <C>
BY FACSIMILE: BY OVERNIGHT COURIER: BY REGISTERED OR CERTIFIED MAIL:
(212) 514-7431 U.S. Bank Trust U.S. Bank Trust
Corporate Trust Department National Association National Association
U.S. Bank Trust Corporate Trust Department Corporate Trust Department
National Association 100 Wall Street, Suite 2000 100 Wall Street, Suite 2000
Telephone: (212) 361-2546 New York, New York 10005 New York, New York 10005
Attn: Cathy Donohue Attn: Cathy Donohue
</TABLE>
Requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
28
<PAGE> 30
CAPITALIZATION
Set forth below is the short-term debt and capitalization of the Company at
May 31, 1998. This table should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included elsewhere in
the Prospectus. See also "Description of Certain Indebtedness."
<TABLE>
<CAPTION>
MAY 31, 1998
--------------
(IN THOUSANDS)
<S> <C>
DEBT:
Short-term debt, including current portion of long-term
debt(1)................................................ $ 280,683
Existing long-term debt(2)................................ 274,742
The Notes (net of $885 discount).......................... 199,115
----------
Total debt........................................ 754,540
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 150,000 shares authorized,
25,391 shares issued and outstanding................... 2,539
Class B common stock, $.10 par value, 40,000 shares
authorized, 10,758 shares issued and outstanding....... 1,076
Additional paid-in capital................................ 544,546
Retained earnings......................................... 33,068
Unrealized gains on available-for-sale securities, net and
other.................................................. 21,426
----------
Total stockholders' equity........................ 602,655
----------
Total debt and stockholders' equity............... $1,357,195
==========
</TABLE>
- ---------------
(1) Short-term debt consists of $219,380 of borrowings under repurchase
agreements secured by CMBS and a mortgage loan and $20,000 of borrowings
under revolving credit lines secured by CMBS and mortgage loans. Current
portion of long-term debt at May 31, 1998 was $41,303.
(2) Existing long-term debt consists of secured mortgage notes on operating
properties and land.
29
<PAGE> 31
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
The unaudited pro forma consolidated condensed statements of earnings for
the six months ended May 31, 1998 and the year ended November 30, 1997, have
been prepared to reflect (1) the Company's acquisition of Affordable Housing
Group (the "AHG Acquisition") and (2) the spin-off (the "Spin-off") of the
Company from Lennar Corporation which was effective October 31, 1997. The pro
forma consolidated condensed statements of earnings have been prepared assuming
that all of AHG (all interests relative to the 42 properties) have been
acquired. Pro forma financial information related to the Spin-off has previously
been supplied in the Company's filings and is presented here to provide a more
meaningful comparison of the results of operations between the periods.
The unaudited pro forma consolidated condensed statements of earnings for
the six month period ended May 31, 1998 and for the year ended November 30, 1997
have been prepared as if the AHG Acquisition and the Spin-off had occurred on
December 1, 1996. The unaudited pro forma consolidated condensed financial
information has been prepared utilizing the accounting policies outlined in the
historical financial statements elsewhere in this Prospectus. The AHG
Acquisition is accounted for using the purchase method of accounting.
The pro forma consolidated condensed financial information have been
prepared under the Securities and Exchange Commission ("SEC") rules. As a
result, the pro forma acquisition adjustments assume interest expense was
incurred for the year ended November 30, 1997 and the six month period ended May
31, 1998, on the full amount of consideration paid for the AHG Acquisition.
Although the SEC requires that interest expense be included on the full amount
of consideration paid, this amount would have been lower had AHG been acquired
by the Company at the beginning of the periods presented due to the amount of
tax credits that were available to purchase at that time. Therefore, management
believes that the accompanying pro forma consolidated condensed statements of
earnings are not indicative of the results that AHG is expected to achieve as a
result of the acquisition.
The following information should be read in conjunction with the Company's
consolidated financial statements and the notes thereto, Management's Discussion
and Analysis of Financial Condition and Results of Operations and other
financial information included elsewhere in this Prospectus. The unaudited pro
forma consolidated condensed financial information does not necessarily reflect
what the results of operations and financial position would have been had the
AHG Acquisition and the Spin-off occurred as assumed in preparing the unaudited
pro forma consolidated condensed financial information, nor do they necessarily
reflect the future results or financial position of the Company.
30
<PAGE> 32
LNR PROPERTY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
FOR THE SIX MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
THE COMPANY AHG ACQUISITION
HISTORICAL HISTORICAL(J) ADJUSTMENTS PRO FORMA
----------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues
Rental income........................... $ 29,864 11,854 (4,714)(a) 37,004
Equity in earnings of partnerships...... 23,969 -- (1,078)(a) 22,891
Interest income......................... 34,759 307 35,066
Gains on sales of:
Real estate.......................... 12,061 -- 12,061
Investment securities................ 1,386 -- 1,386
Management fees......................... 4,021 -- 4,021
Other, net.............................. 679 1,762 (84)(a) 965
(1,392)(e)
-------- ------ ------ -------
Total revenues.................. 106,739 13,923 (7,268) 113,394
-------- ------ ------ -------
Costs and expenses
Cost of rental operations............... 18,820 6,280 (2,284)(a) 22,816
General and administrative.............. 12,674 1,648 250(d) 14,572
Depreciation............................ 4,063 4,421 (1,682)(a) 7,102
300(e)
Minority interests...................... 1,094 (828) 160(a) 426
-------- ------ ------ -------
Total costs and expenses........ 36,651 11,521 (3,256) 44,916
-------- ------ ------ -------
Operating earnings/(loss)................. 70,088 2,402 (4,012) 68,478
Interest expense........................ 16,983 6,287 (2,042)(a) 22,352
2,337(b)
(1,137)(c)
(76)(e)
-------- ------ ------ -------
Earnings/(loss) before income taxes....... 53,105 (3,885) (3,094) 46,126
Income tax benefit/(expense).............. (19,531) 8,562 (579)(a) (10,341)
1,207(f)
-------- ------ ------ -------
Net earnings/(loss)....................... $ 33,574 4,677 (2,466) 35,785
======== ====== ====== =======
Net earnings per share:
Basic................................... $ 0.93 0.99
======== =======
Diluted................................. $ 0.92 0.98
======== =======
Weighted average pro forma shares
outstanding:
Basic................................... 36,134 36,134
======== =======
Diluted................................. 36,432 36,432
======== =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
information.
31
<PAGE> 33
LNR PROPERTY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
FOR THE YEAR ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THE COMPANY AHG ACQUISITION SPIN-OFF
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
----------- ---------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues
Rental income.......................... $ 56,334 23,707 (10,098)(a) 69,943
Equity in earnings of partnerships..... 30,149 -- (1,356)(a) 13,292(g) 42,085
Interest income........................ 41,446 452 41,898
Gains on sales of:
Real estate......................... 18,076 -- 18,076
Investment securities............... 5,359 -- 5,359
Management fees........................ 13,385 -- 13,385
Other, net............................. 2,734 6,090 (1,088)(a) 4,352
(3,384)(e)
-------- ------ ------- ------ -------
Total revenues................. 167,483 30,249 (15,926) 13,292 195,098
-------- ------ ------- ------ -------
Costs and expenses
Cost of rental operations.............. 35,767 12,796 (5,099)(a) 43,464
General and administrative............. 26,346 3,942 600(d) (4,408)(h) 26,480
Depreciation........................... 6,060 8,445 (3,808)(a) 11,417
720(e)
Minority interests..................... 238 (1,608) 385(a) (985)
-------- ------ ------- ------ -------
Total costs and expenses....... 68,411 23,575 (7,202) (4,408) 80,376
-------- ------ ------- ------ -------
Operating earnings/(loss)................ 99,072 6,674 (8,724) 17,700 114,722
Interest expense....................... 26,584 10,270 (4,434)(a) (2,100)(i) 34,721
5,572(b)
(1,021)(c)
(150)(e)
-------- ------ ------- ------ -------
Earnings/(loss) before income taxes...... 72,488 (3,596) (8,691) 19,800 80,001
Income tax benefit/(expense)............. (28,270) 14,801 (1,387)(a) (7,721)(f) (19,188)
3,389(f)
-------- ------ ------- ------ -------
Net earnings/(loss)...................... $ 44,218 11,205 (6,689) 12,079 60,813
======== ====== ======= ====== =======
Net earnings per share:
Basic.................................. $ 1.22 1.68
======== =======
Diluted................................ $ 1.22 1.68
======== =======
Weighted average pro forma shares
outstanding:
Basic.................................. 36,129 36,129
======== =======
Diluted................................ 36,269 36,269
======== =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
information.
32
<PAGE> 34
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL INFORMATION
Adjustments to the historical results to arrive at the pro forma results are as
follows:
(a) Represents adjustments to reflect the interests in ten properties which will
be accounted for on the equity method that were consolidated in the AHG
financial statements. This also includes the removal of one property which
was part of AHG's historical financial statements which will not be acquired
by the Company.
(b) Represents interest expense on debt incurred in connection with the
acquisition of AHG.
(c) Represents the elimination of interest expense from AHG's former parent
company on intercompany balances.
(d) Represents incremental costs associated with establishing certain
administrative and support activities that were previously provided by AHG's
former parent company.
(e) Represents the income statement effect of adjustment of the carrying value
of AHG's assets and liabilities to fair market value on the acquisition
date.
(f) Represents the estimated income tax effect of the pro forma adjustments at
the Company's effective tax rate of 39.0%, before consideration of the tax
credits.
(g) Represents the Company's 50% interest in the earnings of Lennar Land
Partners.
(h) Represents the elimination of costs related to the Spin-off and addition of
incremental administrative costs associated with operating as a stand-alone
public company.
(i) Represents the reduction in interest expense due to the use of proceeds from
funds advanced by Lennar in connection with the Spin-off to repay debt.
(j) The AHG historical column includes financial results related to all 42
properties acquired or expected to be acquired by the Company for the five
months ended April 30, 1998. Because the column for the Company's historical
results also includes one month of financial results for 36 properties that
were acquired on May 1, 1998, the AHG historical column includes one month
of financial results for the remaining six properties, allowing for a full
six months of financial results for all 42 properties in the pro forma
financial statements.
33
<PAGE> 35
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data regarding
the Company. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
The pro forma statement of earnings information for the six months ended
May 31, 1998 and for the year ended November 30, 1997 have been prepared to
reflect (i) the AHG Acquisition and (ii) the Spin-off of the Company from Lennar
Corporation which was effective October 31, 1997, as though they had occurred at
the beginning of the periods presented. The pro forma information has been
prepared assuming that all of AHG (all interests relative to the 42 properties)
have been acquired.
During most of the periods to which the following financial information
relates, LNR and its subsidiaries were subsidiaries of Lennar. The consolidated
financial statements of the Company have been prepared and are presented to
reflect the Company as a separate combined group for all periods presented and
have been extracted from the financial statements of Lennar using Lennar's
historical results of operations and historical cost basis of its assets and
liabilities which are used in the businesses being operated by the Company
(including some assets and liabilities which were not recorded as belonging to
current LNR subsidiaries, but which were used primarily in connection with their
businesses). Expenses which related both to the businesses operated by the
Company and the businesses retained by Lennar have been allocated on a basis
which both Lennar and the Company believe is reasonable. However, the expenses
allocated to the Company are not necessarily the same as those the Company would
have incurred if it had operated independently, and in general, the results of
operations reflected in the consolidated financial statements of LNR and its
subsidiaries are not necessarily the same as those which would have been
realized if the Company had been operated independently of Lennar during the
periods to which those financial statements relate.
34
<PAGE> 36
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31,
(UNAUDITED) FOR THE YEARS ENDED NOVEMBER 30,
---------------------------- ----------------------------------------------------------
PRO FORMA ACTUAL PRO FORMA ACTUAL
--------- ---------------- --------- ----------------------------------------------
1998 1998 1997 1997 1997 1996 1995 1994 1993
--------- ------- ------ --------- ------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues
Rental income................ $ 37,004 29,864 29,978 69,943 56,334 59,215 51,664 45,978 39,381
Equity in earnings of
partnerships............... 22,891 23,969 19,791 42,085 30,149 51,862 31,203 20,710 7,046
Interest income.............. 35,066 34,759 20,630 41,898 41,446 28,726 20,475 11,640 8,694
Gains on sales of:
Real estate................ 12,061 12,061 6,401 18,076 18,076 3,669 15,776 9,085 --
Investment securities...... 1,386 1,386 5,009 5,359 5,359 1,735 513 -- --
Management fees.............. 4,021 4,021 5,977 13,385 13,385 18,229 10,274 12,390 6,565
Other, net................... 965 679 1,385 4,352 2,734 -- 2,910 2,016 1,387
-------- ------- ------ ------- ------- ------- ------- ------- ------
Total revenues........ 113,394 106,739 89,171 195,098 167,483 163,436 132,815 101,819 63,073
-------- ------- ------ ------- ------- ------- ------- ------- ------
Costs and expenses
Cost of rental operations.... 22,816 18,820 18,281 43,464 35,767 38,126 30,890 23,884 18,866
General and administrative... 14,572 12,674 11,533 26,480 26,584 20,756 15,155 14,436 7,806
Depreciation................. 7,102 4,063 2,915 11,417 6,060 5,916 5,671 4,618 4,002
Minority interests........... 426 1,094 126 (985) -- -- -- -- --
Other, net................... -- -- -- -- -- 658 -- -- --
-------- ------- ------ ------- ------- ------- ------- ------- ------
Total costs and
expenses............ 44,916 36,651 32,855 80,376 68,411 65,456 51,716 42,938 30,674
-------- ------- ------ ------- ------- ------- ------- ------- ------
Operating earnings............. 68,478 70,088 56,316 114,722 99,072 97,980 81,099 58,881 32,399
Interest expense............... 22,352 16,983 13,201 34,721 26,584 20,513 14,692 5,688 3,378
-------- ------- ------ ------- ------- ------- ------- ------- ------
Earnings before income taxes... 46,126 53,105 43,115 80,001 72,488 77,467 66,407 53,193 29,021
Income taxes................... 10,341 19,531 16,815 19,188 28,270 30,212 25,899 20,695 10,447
-------- ------- ------ ------- ------- ------- ------- ------- ------
Net earnings................... $ 35,785 33,574 26,300 60,813 44,218 47,255 40,508 32,498 18,574
======== ======= ====== ======= ======= ======= ======= ======= ======
Net earnings per share(1)
Basic........................ $ 0.99 0.93 0.73 1.68 1.22 -- -- -- --
======== ======= ====== ======= =======
Diluted...................... $ 0.98 0.92 0.72 1.68 1.22 -- -- -- --
======== ======= ====== ======= =======
Dividends per common share..... $ 0.0125 0.0125 -- 0.0125 0.0125 -- -- -- --
</TABLE>
- ---------------
(1) LNR was formed in June 1997 and had no outstanding stock prior to formation;
therefore, net earnings per share have not been calculated for the fiscal
years ended November 30, 1996, 1995, 1994 and 1993.
35
<PAGE> 37
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX
MONTHS ENDED MAY 31,
(UNAUDITED) AS OF AND FOR THE YEARS ENDED NOVEMBER 30,
----------------------------- -----------------------------------------------------------
PRO PRO
FORMA ACTUAL FORMA ACTUAL
------- ------------------- ------- -------------------------------------------------
1998 1998 1997 1997 1997 1996 1995 1994 1993
------- --------- ------- ------- --------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
EBITDA(1)........................ $75,580 74,151 59,231 126,139 105,132 103,896 86,770 63,499 36,401
Depreciation and amortization.... 7,102 4,063 2,915 11,417 6,060 5,916 5,671 4,618 4,002
Ratio of earnings to fixed
charges(2)..................... 2.9x 3.9x 4.1x 4.6x 3.6x 4.8x 5.5x 10.4x 9.6x
Ratio of EBITDA to average
assets(3)...................... 5.5% 6.0% 7.7% 12.5% 11.8% 14.8% 14.5% 14.8% 14.1%
FINANCIAL POSITION(4)
Total assets..................... -- 1,448,712 793,092 -- 1,023,337 752,968 652,400 547,722 310,355
Total mortgage notes and other
debts payable.................. -- 754,540 369,965 -- 391,171 354,406 252,256 119,935 34,163
Total stockholders' equity(5).... -- 602,655 -- -- 569,088 -- -- -- --
Total Parent Company
investment..................... -- -- 384,143 -- -- 367,048 370,903 396,403 266,965
</TABLE>
- ---------------
(1) EBITDA (earnings before interest, taxes, depreciation and amortization) is
used by the Company in analyzing its operating performance, leverage and
liquidity. However, it is not a measure of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to net earnings as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
(2) Outstanding debt of Lennar Land Partners is guaranteed by the Company. See
"Description of Certain indebtedness--LNR Guarantees of Partnership Debt."
The amount of fixed charges associated with such debt is excluded from the
computation of these ratios.
(3) Ratio of EBITDA to average assets is calculated by dividing EBITDA by the
average of total assets at the beginning and end of each period presented.
Pro forma average assets as of May 31, 1998 and as of November 30, 1997 is
prepared under the assumption that all 42 AHG properties were acquired as of
these dates.
(4) Actual and pro forma financial position are identical at May 31, 1998 and
November 30, 1997.
(5) In connection with the Spin-off, the assets and liabilities of Lennar and
its subsidiaries were divided between the Company and Lennar and its
homebuilding subsidiaries so that Lennar and its homebuilding subsidiaries
would have a net worth of $200 million (with specified adjustments) and the
remaining net worth was transferred to the Company. See the Company's
consolidated statements of Parent Company investment and stockholders'
equity and notes thereto included elsewhere in this Prospectus.
36
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains information which constitutes forward-looking
statements. Forward-looking statements inherently involve risks and
uncertainties. The factors, among others, that could cause actual results to
differ materially from the forward-looking statements in this Management's
Discussion and Analysis of Financial Condition and Results of Operations include
the items described under "Risk Factors" and "Forward-Looking Statements."
OVERVIEW
LNR was formed by Lennar in June 1997 to separate Lennar's real estate
investment and management business from its homebuilding business. Lennar
contributed to LNR all of the Lennar subsidiaries which were engaged in
businesses described in the following paragraph and assets of other Lennar
subsidiaries which were used primarily in connection with those businesses. On
October 31, 1997, Lennar distributed the stock of LNR to Lennar's stockholders
in the Spin-off. LNR and Lennar have entered into the Separation and
Distribution Agreement, and may enter into other agreements, providing for the
separation of the companies into independent groups and governing various
relationships between them.
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 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: (i) real estate operations, (ii) CMBS and loans and (iii)
partnerships and joint ventures.
The combined results of operations of the Company for the periods prior to
November 1, 1997, were extracted from the financial statements of Lennar using
the historical results of operations and historical cost basis of the assets and
liabilities of Lennar's real estate investment and management businesses.
Additionally, the results of operations include revenues and expenses that were
not historically recorded as part of those businesses, but were primarily
associated with them. Management believes the assumptions underlying the
Company's results of operations are reasonable. However, those results may not
reflect the results of operations the Company would have realized if it had
operated as a separate stand-alone group during the periods presented, rather
than as part of the larger Lennar enterprise.
RESULTS OF OPERATIONS
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 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%.
37
<PAGE> 39
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, SIX MONTHS ENDED MAY 31,
---------------------------- ----------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
---------------- --------- ---------------- ---------
1998 1997 1997 1998 1997 1997
------- ------ --------- ------- ------ ---------
(IN THOUSANDS)
<S> <C> <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.
The following is a summary of the Company's results of operations for the
years ended November 30, 1997, 1996 and 1995 after allocating among the core
business lines certain non-corporate general and administrative expenses. The
pro forma financial information has been prepared to reflect the effect, as
though they had occurred on December 1, 1996, of (i) the Company's 50% interest
in the earnings of Lennar Land Partners, (ii) the elimination of costs related
to the Spin-off and 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 to repay debt, (iv) the
estimated income tax effect of the pro forma adjustments to the Company's
effective tax rate of 39.0%.
38
<PAGE> 40
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------------------
PRO FORMA ACTUAL
--------- -----------------------------
1997 1997 1996 1995
--------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Real estate operations........................... $ 74,410 74,410 62,884 67,440
CMBS and loans................................... 51,067 51,067 33,207 23,202
Partnerships and joint ventures.................. 52,564 39,272 67,345 39,263
Corporate and other.............................. 2,734 2,734 -- 2,910
-------- ------- ------- -------
Total revenues..................................... 180,775 167,483 163,436 132,815
-------- ------- ------- -------
Operating expenses
Real estate operations........................... 44,663 44,663 46,683 38,296
CMBS and loans................................... 2,547 2,547 1,813 604
Partnerships and joint ventures.................. 3,104 3,104 6,113 5,339
Corporate and other.............................. 13,689 18,097 10,847 7,477
-------- ------- ------- -------
Total operating expenses........................... 64,003 68,411 65,456 51,716
-------- ------- ------- -------
Operating earnings
Real estate operations........................... 29,747 29,747 16,201 29,144
CMBS and loans................................... 48,520 48,520 31,394 22,598
Partnerships and joint ventures.................. 49,460 36,168 61,232 33,924
Corporate and other.............................. (10,955) (15,363) (10,847) (4,567)
-------- ------- ------- -------
Total operating earnings........................... 116,772 99,072 97,980 81,099
Interest expense................................... 24,484 26,584 20,513 14,692
Income tax expense................................. 35,991 28,270 30,212 25,899
-------- ------- ------- -------
Net earnings....................................... $ 56,297 44,218 47,255 40,508
======== ======= ======= =======
</TABLE>
PRO FORMA YEAR ENDED NOVEMBER 30, 1997 COMPARED TO ACTUAL YEAR ENDED NOVEMBER
30, 1997
Pro forma net earnings for the year ended November 30, 1997 were $56.3
million, or $1.55 per share compared with actual net earnings of $44.2 million,
or $1.21 per share. The increase over actual resulted from pro forma adjustments
made to reflect the Spin-off and formation of Lennar Land Partners as of the
beginning of the year.
ACTUAL YEAR ENDED NOVEMBER 30, 1997 COMPARED TO YEAR ENDED NOVEMBER 30, 1996
Net earnings for the year ended November 30, 1997 were $44.2 million. This
represented a decrease of 6.4% from the prior year net earnings of $47.3
million. The decrease resulted primarily from (i) lower earnings from
partnerships and joint ventures as some of the more mature partnerships wind
down, (ii) the costs associated with the Spin-off offset by increases in (a)
interest income and servicing fees derived from the Company's growing CMBS
portfolio and (b) higher gains on sales of real estate properties and CMBS.
Operating earnings were generated from the Company's three core business
lines in the following proportions: 26% from real estate operations, 42% from
CMBS and loans and 32% from partnerships and joint ventures. This compares with
15%, 29% and 56%, respectively, for the prior year. The shift in these
percentages from 1996 to 1997 was the result of higher gains from the sale of
real estate assets, higher net income from a growing CMBS portfolio and lower
earnings from the more mature partnerships and joint ventures during 1997.
YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995
Net earnings for the year ended November 30, 1996 were $47.3 million. This
represented an increase of 16.7% over the prior year net earnings of $40.5
million. The increase resulted primarily from increased
39
<PAGE> 41
earnings from partnerships and joint ventures due to higher sales of and gains
on operating properties and loans within the partnerships and higher interest
income and servicing fees resulting from purchases of CMBS, partially offset by
lower gains on sales of real estate properties.
Operating earnings were generated from the Company's three core business
lines in the following proportions: 15% from real estate operations, 29% from
CMBS and loans and 56% from partnerships and joint ventures. This compares with
34%, 26% and 40%, respectively, for the prior year. The shift in these
percentages from 1995 to 1996 was the result of lower gains on sales of real
estate, offset by (i) substantially higher earnings from partnerships and joint
ventures due to substantially higher sales of and gains on assets within the
partnerships, and (ii) higher interest income resulting from purchases of CMBS.
REAL ESTATE OPERATIONS
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
------------------- ----------------
1998 1997 1998 1997
-------- ------- ------ ------
(IN THOUSANDS)
<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>
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
40
<PAGE> 42
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.
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 the three and six month
periods ended May 31, 1997.
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Rental income............................................... $56,334 59,215 51,664
Gains on sales of real estate............................... 18,076 3,669 15,776
------- ------ ------
Total revenues.................................... 74,410 62,884 67,440
------- ------ ------
Cost of rental operations................................... 35,767 38,784 30,890
Other operating expenses.................................... 2,836 1,983 1,735
Depreciation................................................ 6,060 5,916 5,671
------- ------ ------
Total operating expenses.......................... 44,663 46,683 38,296
------- ------ ------
Operating earnings................................ $29,747 16,201 29,144
======= ====== ======
</TABLE>
- ---------------
Note: Actual and pro forma results are identical for the year ended November 30,
1997.
YEAR ENDED NOVEMBER 30, 1997 COMPARED TO YEAR ENDED NOVEMBER 30, 1996
Overall, operating earnings from real estate properties increased to $29.7
million for the year ended November 30, 1997 from $16.2 million for 1996. The
increase was due primarily to greater gains on sales of real estate properties
in 1997 as the Company sold those properties it believed had reached their
optimal values. In addition, the stronger real estate economy in 1997
contributed to the higher sales prices for those assets sold. The increases were
also due to the shift in investments over the past few years from large
portfolios of assets in off-balance sheet partnerships and joint ventures to
individual asset acquisitions that are recorded directly on the Company's
balance sheet and statement of earnings.
Although sales of real estate property were approximately $82.4 million
during 1997, the balance of operating properties and equipment, net and land
held for investment increased by $17.5 million during the year primarily as a
result of approximately $101.3 million in acquisitions. A majority of those
acquisitions were for 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 November 30, 1997, approximately 48% of the Company's operating property
portfolio based on book value had not reached stabilized occupancy and the
anticipated improvements in operating earnings will not be recognized until
future periods.
Total rental income decreased to $56.3 million in 1997 from $59.2 million
in 1996. Rental income consisted of $27.0 million and $28.9 million from
commercial properties (office, retail and industrial), $19.5 million and $19.9
million from multi-family residential properties and $9.8 million and $10.4
million from
41
<PAGE> 43
hotels and other properties, in 1997 and 1996, respectively. The decreases in
rental income were attributable to the sales of real estate properties described
above. This was offset, to a lesser degree, by the inclusion of rental income
from newer properties added during 1996 and 1997. Overall occupancy and rental
rates were similar in the two years for stabilized operating properties.
Similarly, the cost of rental operations decreased to $35.8 million in 1997 from
$38.8 million in 1996, primarily due to the aforementioned sale of real estate
properties.
Other operating expenses increased to $2.8 million for 1997 from $2.0
million for 1996, primarily due to increased acquisition, development and
repositioning activities.
YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995
Overall, operating earnings from real estate properties decreased to $16.2
million for the year ended November 30, 1996 from $29.1 million for 1995. The
decrease was due primarily to lower gains on sales of real estate properties,
which decreased $12.1 million during 1996.
Total rental income increased to $59.2 million in 1996 from $51.7 million
in 1995. Rental income consisted of $28.9 million and $21.7 million from
commercial properties (office, retail and industrial), $19.9 million and $20.1
million from multi-family residential properties and $10.4 million and $9.9
million from hotels and other properties, in 1996 and 1995, respectively. The
increase in rental income from commercial properties (and total rental income)
was due primarily to the acquisition of a 36-story office building in downtown
Atlanta during the first quarter of 1996. Overall occupancy and rental rates
were similar in the two years for stabilized operating properties. The cost of
rental operations increased to $38.8 million in 1996 from $30.9 million in 1995,
due primarily to the acquisition of the office building and an overall increase
in repairs and maintenance expense during 1996.
Gains on sales of real estate properties were $3.7 million in 1996 compared
with $15.8 million in 1995. Gross sales of real estate properties were $15.9
million in 1996 compared with $38.2 million in 1995. The 1995 sales of real
estate properties and gains on those sales were substantially affected by a sale
of a recreational facility in 1995 for $16.5 million. There were no sales of
comparable size in 1996.
Other operating expenses did not change significantly in 1996 from 1995.
COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS) AND LOANS
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
------------------- ----------------
1998 1997 1998 1997
-------- ------- ------ ------
(IN THOUSANDS)
<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>
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
42
<PAGE> 44
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
month period 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 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.
43
<PAGE> 45
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 the three and six month
periods ended May 31,1997.
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income -- CMBS..................................... $29,919 20,713 12,631
Interest income -- loans.................................... 11,527 8,013 7,844
Gains on sales of investment securities..................... 5,359 1,735 513
Servicing fees.............................................. 4,262 2,746 2,214
------- ------ ------
Total revenues............................................ 51,067 33,207 23,202
Operating expenses.......................................... 2,547 1,813 604
------- ------ ------
Operating earnings........................................ $48,520 31,394 22,598
======= ====== ======
</TABLE>
- ---------------
Note: Actual and pro forma results are identical for the year ended November 30,
1997.
YEAR ENDED NOVEMBER 30, 1997 COMPARED TO YEAR ENDED NOVEMBER 30, 1996
Overall, operating earnings from CMBS and loans increased to $48.5 million
in 1997 from $31.4 million in 1996. Revenue was higher primarily due to the
growth of the Company's CMBS portfolio to $304.7 million at November 30, 1997
from $263.8 million at November 30, 1996, and to a lesser extent, the
origination and/or purchase of new loans. During 1997, the Company purchased
$146.7 million of CMBS in comparison with $121.9 million in 1996.
Special servicing fees earned from the CMBS portfolio increased during 1997
to $4.3 million from $2.7 million earned in 1996. These fees increased because
of an increased number of CMBS transactions (36 at November 30, 1997 versus 25
at November 30, 1996) for which the Company acts as special servicer.
In addition, results for 1997 include $5.4 million in gains from sales of
CMBS, primarily as a result of a Re-REMIC securitization transaction. The
Re-REMIC transaction was the securitization of the cash flows from pre-existing
CMBS bonds. In that transaction, the Company sold approximately $140 million of
non-investment grade rated CMBS bonds to a trust to which two other parties sold
approximately $320 million of similar bonds. Over 42% of the new securities
created by pooling this $460 million portfolio of non-investment grade bonds
were rated as investment grade. Most of the bonds in the new securitization were
sold to third parties and the Company also retained and/or purchased
approximately $63 million of face value of the non-investment grade securities.
In recording CMBS interest income, the Company follows generally accepted
accounting principles and records interest received plus amortization of the
difference between the carrying value and the face amount of the securities to
achieve a level yield. To date, this has resulted in less recognition of
interest income than interest received. The excess interest received is applied
to reduce the Company's investment. In 1997 and 1996, this excess of cash
received over income recorded was $21.2 million and $10.1 million, respectively.
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, changes to original estimated yields will result in improved
earnings from these transactions in future periods. The Company believes these
improvements resulted from (i) its ability to conservatively underwrite these
transactions, (ii) its workout and real estate expertise in these transactions
and (iii) an improving real estate economy. The Company, however, makes no
44
<PAGE> 46
representation at this time that such positive experience on these older
transactions will translate into yield improvements on newer investments.
The increase in interest income from mortgage loans to $11.5 million in
1997 from $8.0 million in 1996 was due primarily to the higher investment in
mortgage loans, which increased to $86.8 million at November 30, 1997 from $64.4
million at November 30, 1996, and gains realized on the early payoff of certain
loans which had been purchased at discounts.
Operating expenses increased to $2.5 million for 1997 from $1.8 million for
1996 as a result of the additional investments made by the Company.
YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995
Overall, operating earnings from CMBS and loans increased to $31.4 million
in 1996 from $22.6 million in 1995. Revenue was higher primarily due to the
growth of the Company's CMBS portfolio to $263.8 million at November 30, 1996
from $163.3 million at November 30, 1995, and to a lesser extent the origination
and/or purchase of new loans. During 1996, the Company purchased $121.9 million
of CMBS in comparison with $81.6 million in 1995.
Special servicing fees earned from the CMBS portfolio increased during 1996
to $2.7 million from $2.2 million earned in 1995. These fees increased because
of an increased number of CMBS transactions (25 at November 30, 1996 versus 14
at November 30, 1995) for which the Company acts as special servicer.
In 1996 and 1995, respectively, the excess of cash received on CMBS over
income recorded was $10.1 million and $5.8 million, respectively.
Operating expenses increased to $1.8 million for 1996 from $0.6 million for
1995 as a result of the additional investments made by the Company.
PARTNERSHIPS AND JOINT VENTURES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, SIX MONTHS ENDED MAY 31,
----------------------------- -----------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
---------------- --------- ---------------- ---------
1998 1997 1997 1998 1997 1997
------- ----- --------- ------ ------ ---------
(IN THOUSANDS)
<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>
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.
45
<PAGE> 47
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.
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
---------------------------------------
PRO FORMA ACTUAL
--------- --------------------------
1997 1997 1996 1995
--------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equity in earnings from partnerships
"Distressed portfolios"............................. $28,591 28,591 51,804 31,488
Lennar Land Partners................................ 13,570 278 -- --
Other............................................... 1,280 1,280 58 (285)
Management fees....................................... 9,123 9,123 15,483 8,060
------- ------ ------ ------
Total revenues...................................... 52,564 39,272 67,345 39,263
Operating expenses.................................... 3,104 3,104 6,113 5,339
------- ------ ------ ------
Operating earnings.................................. $49,460 36,168 61,232 33,924
======= ====== ====== ======
</TABLE>
The Company's interests in partnerships and joint ventures range from 15%
to 50%. The 50% or less partnerships are not consolidated in the Company's
consolidated financial statements and the results are reflected on the line item
"Equity in earnings of partnerships." Many of the Company's larger partnership
investments in distressed portfolios were made between 1992 and 1996. Because
the purchase price of assets acquired by the partnerships is allocated among the
assets on the basis of their relative values at the time of the purchase, there
is generally little profit from dispositions of partnership assets shortly after
they are acquired. Therefore, the partnerships in which the Company invests tend
to generate greater profits as they mature, at least while real estate markets
are strong and until the partnerships become significantly liquidated.
As the U.S. real estate markets strengthened in 1996 and 1997,
substantially fewer large distressed real estate portfolios became available at
what the Company viewed as attractive prices; and therefore the Company has not
purchased any such portfolio subsequent to August, 1996. Approximately 20% to
25% of each portfolio is turned over each year, therefore it is expected that
operating earnings from the Company's U.S. distressed portfolio investments will
continue to decrease over the next three to four years.
46
<PAGE> 48
The Company, however, has continued to acquire individual underperforming
real estate assets, both in partnership, for the larger assets, and directly. In
addition, subsequent to November 30, 1997, the Company entered into a
partnership to acquire a portfolio of nonperforming commercial mortgage loans in
Japan, where the Company has opened an office to oversee its loan workout and
real estate asset management operations. At this point, there can be no
assurance that these new investments will achieve the same level of results for
the Company as the U.S. distressed portfolio business did.
Prior to the Spin-off, Lennar and the Company transferred to a new
partnership, Lennar Land Partners, parcels of land or interests in land and
other assets which had a total book value on the partnership's books at November
30, 1997 of $376.4 million. This new partnership, which is owned 50% by the
Company and 50% by Lennar, is expected to have a significant impact in
offsetting some, but probably not all, of the decreases in future operating
earnings from the Company's U.S. distressed portfolio business.
Pro forma operating earnings from partnerships and joint ventures for the
year ended November 30, 1997 were $49.5 million compared to $36.2 million on an
actual basis. This difference was due to the inclusion of the Company's equity
in the earnings of Lennar Land Partners from December 1, 1996 through October
31, 1997.
YEAR ENDED NOVEMBER 30, 1997 COMPARED TO YEAR ENDED NOVEMBER 30, 1996
Operating earnings from partnerships and joint ventures decreased to $36.2
million in 1997 from $61.2 million in 1996. The decrease was primarily due to
reduced earnings and management fees related to the Company's larger distressed
portfolios. Equity in earnings from LW Real Estate Investments, L.P. and
subsidiaries ("LW Real Estate") decreased to $10.5 million in 1997 from $23.6
million in 1996 and equity in earnings from Lennar Florida Partners I, L.P. and
qualified affiliates ("Lennar Florida Partners") decreased to $8.7 million in
1997 from $20.0 million in 1996. Both of these partnerships were the largest
contributors of actual equity in earnings for both 1997 and 1996. As these
partnerships continue to liquidate their remaining portfolios of assets, their
future contributions to earnings should decrease in comparison with total equity
in earnings. The decreases in the earnings from these two partnerships were
partially offset by additional earnings from some of the Company's other smaller
partnerships and joint ventures.
Partnership distributions received by the Company in 1997 were $79.7
million in comparison with $95.4 million for 1996, a decrease of $15.7 million.
This decrease was primarily due to lower distributions from LW Real Estate of
$35.5 million, resulting from lower dispositions of partnership assets during
the current year. This decrease was partially offset by higher distributions
from several of the other partnerships, a portion of which was due to proceeds
from refinancing of unencumbered partnership assets. Future distributions from
these partnerships may not achieve their 1997 level due to the refinancings. The
1997 distributions were $49.6 million higher than the Company's actual equity in
earnings of the partnerships of $30.1 million. This was because as assets were
liquidated, the partnerships received and could distribute a significant portion
of the liquidating proceeds whereas partnership earnings are only based on net
liquidation proceeds in excess of the book basis. The Company's overall
investments in and advances to partnerships increased approximately 45% during
1997 to $159.4 million at the end of that year. This was primarily due to (i)
the addition of Lennar Land Partners, as part of the Spin-off, which increased
investments in and advances to partnerships by $92.3 million, and (ii) equity in
earnings of the partnerships of $30.1 million, offset by partnership
distributions of $79.7 million. The largest distributions were made by LW Real
Estate, Lennar Florida Partners and Lennar U.S. Partners and were in excess of
the Company's equity in their earnings ($58.4 million of distributions compared
with $23.1 million of equity in earnings).
The Company did not receive any distributions from Lennar Land Partners
during 1997 and future distributions are limited until the repayment of the
partnership's debt, which is projected to occur in approximately 2 years.
Management fees decreased to $9.1 million in 1997 from $15.5 million in
1996. These fees typically are based on the amount of assets managed, the
performance of assets or partnerships, or both. Management fees decreased during
1997 due to a reduction in partnership assets. Also contributing to the decrease
during 1997 was the receipt during 1996 of incentive fees from partnerships
managed by the Company (including an
47
<PAGE> 49
incentive fee of $9.6 million received from one partnership which liquidated a
significant portion of its assets in 1996).
YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995
Operating earnings from partnerships and joint ventures increased to $61.2
million in 1996 from $33.9 million in 1995. This was because of increased
earnings of the partnerships resulting from increases in the collections from
distressed loans, foreclosed properties and other assets which had been acquired
by the partnerships, resulting to some extent from an improvement in the real
estate market, and to some extent from management of the assets.
In particular, the Company's equity in earnings of LW Real Estate increased
to $23.6 million in 1996 from $12.1 million in 1995 because of an increase in
the Company's percentage interest due to an additional investment in the fourth
quarter of 1995. Its equity in the earnings of Lennar Florida Partners was
essentially the same in 1996 as in 1995 ($20.0 million compared with $19.5
million).
Partnership distributions received by the Company in 1996 were $95.4
million, of which distributions of $50.4 million were from LW Real Estate and
$26.6 million were from Lennar Florida Partners. Distributions from these two
partnerships were primarily from the net proceeds of asset sales. These
distributions were substantially greater than the Company's equity in earnings
of the partnerships of $51.9 million. This was because as assets were
liquidated, the partnerships received and could distribute a significant portion
of the liquidating proceeds whereas partnership earnings are only based on net
liquidation proceeds in excess of the book basis.
Management fees increased to $15.5 million in 1996 from $8.1 million in
1995. The 1996 increase was due primarily to incentive fees received from
partnerships managed by the Company (including an incentive fee of $9.6 million
received from one partnership which liquidated a significant portion of its
assets in 1996).
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.
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.
48
<PAGE> 50
YEAR ENDED NOVEMBER 30, 1997 COMPARED TO YEAR ENDED NOVEMBER 30, 1996
Actual corporate general and administrative expenses increased to $18.1
million in 1997 from $10.8 million in 1996 primarily due to Spin-off expenses of
approximately $6.2 million incurred during 1997. Lower corporate reserves and
bonus expenses in 1997 were largely offset by higher costs during the latter
half of the year associated with operating as a stand-alone company.
Pro forma corporate general and administrative expenses for the year ended
November 30, 1997 were $13.7 million compared to $18.1 million on an actual
basis. This difference was 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 of $26.6 million and $20.5 million was incurred during
1997 and 1996, respectively. Interest amounts incurred and charged to expense in
1997 were greater than those in 1996 due to higher debt levels. The higher debt
levels, in turn, reflected increased borrowings to finance the expansion of the
Company's core business lines.
Pro forma interest expense for the year ended November 30, 1997 was $24.5
million compared to $26.6 million on an actual basis. This difference was due to
the use of proceeds from funds advanced by Lennar to repay debt on October 31,
1997, as if such debt had been repaid on December 1, 1996.
YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995
Corporate general and administrative expenses increased to $10.8 million in
1996 from $7.5 million in 1995. This increase was attributable to a general
increase in the Company's operating costs, primarily relating to personnel
costs, including bonuses, and an increase in corporate level reserves.
During 1996 and 1995, interest expense of $20.5 million and $14.7 million,
respectively, were incurred by the Company. Interest amounts incurred and
charged to expense in 1996 were greater than those in 1995 due to higher debt
levels. The higher debt levels, in turn, reflected increased borrowings to
finance the expansion of the Company's core business lines.
LIQUIDITY AND FINANCIAL RESOURCES
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1998 COMPARED TO THE THREE MONTHS AND
SIX MONTHS
ENDED MAY 31, 1997
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.
49
<PAGE> 51
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.
YEAR ENDED NOVEMBER 30, 1997 COMPARED TO YEAR ENDED NOVEMBER 30, 1996
Prior to the Spin-off on October 31, 1997, the Company obtained the funds
it used in its activities primarily from its cash flows, from borrowings and
from funds advanced by Lennar. While the Company was part of Lennar, borrowings
consisted of repurchase agreements and loans secured by particular assets of the
Company and borrowings under Lennar's and other revolving credit lines. As part
of the Spin-off, the Company has entered into its own debt agreements, including
its own revolving lines of credit.
The Company used $56.3 million of cash in operating activities in 1997
compared with $11.8 million in 1996. The increase during 1997 was primarily due
to the funding of restricted cash accounts of $10.0 million and increases in
other assets and deferred income taxes of $26.0 million and $9.4 million,
respectively. The increased restricted cash deposits relate primarily to an
increase in funds held in trust for asset purchases.
The fact that operating activities were a net user of cash also resulted
from the fact that the net earnings of the Company in those years included
non-cash equity in earnings of partnerships of $30.1 million in 1997 and $51.9
million in 1996. However, in those years, cash distributions by those
partnerships totaled $79.7 million and $95.4 million, respectively.
Distributions from partnerships are classified as cash provided by investing
activities, not as cash from operating activities. This is because as assets are
liquidated, the partnerships receive and can distribute a significant portion of
the liquidating proceeds whereas partnership earnings are only based on net
liquidation proceeds in excess of the book basis.
Cash flows provided by investing activities totaled $70.0 million in 1997
compared with $3.5 million in 1996. The increase is primarily attributable to
substantially higher proceeds from sales of real estate, which increased $66.5
million during 1997, higher proceeds from the sale of investment securities of
$102.1 million, including proceeds from the Re-REMIC transaction previously
discussed, and lower purchases of loans which decreased $15.6 million.
Offsetting these increases were lower partnership distributions, which decreased
$15.7 million, increased expenditures for operating property and equipment and
land held for investment of $78.3 million (primarily for investments in
development and redevelopment projects), and increased expenditures for other
investments of $21.9 million.
The Company also received cash from financing activities of $18.1 million
in 1997 compared with $6.4 million in 1996. The increase in 1997 was primarily
due to increased borrowings under mortgage notes and other debts payable, lower
cash borrowings under repurchase agreements for the purchase of CMBS (most CMBS
acquisitions during 1997 were financed at the same time as the purchase and did
not affect cash flows) and lower payments to Lennar.
Because many of the Company's interest bearing assets have fixed interest
rates while the Company's borrowings have been primarily at variable rates, the
Company's profits could be reduced by rising interest rates. Also, the value of
the Company's fixed rate assets will fall when interest rates rise. This could
require the Company to provide additional collateral for its borrowings or to
sell assets to repay borrowings. The Company closely monitors interest rate
risks and uses interest rate swaps and similar instruments to reduce the risks
of rising variable rates. The Company intends to increase long term fixed rate
borrowings which would reduce its need to make variable rate borrowings and
therefore would reduce its exposure to rising variable rates.
The Company believes the combination of its liquid assets and cash flows
and its ability to obtain borrowings will provide all the funds the Company
requires to meet its short- and long-term needs based upon its currently
anticipated levels of growth.
50
<PAGE> 52
YEAR 2000
The Company utilizes a number of software systems in conjunction with its
operations. The Company has and will continue to make certain investments in its
software systems and applications to ensure the Company is Year 2000 compliant.
The financial impact of becoming Year 2000 compliant has not been and is not
expected to be material to the Company's financial position or results of
operations in a given year.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." This statement is effective for the Company
beginning with the first quarter of 1998 and earlier adoption is not permitted.
This statement requires that the current calculations of earnings per share be
replaced by basic and diluted earnings per share calculations. Under the new
guidance, basic and diluted earnings per share would be $1.22 for 1997.
Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." SFAS No. 129, which applies to all
entities that have issued securities, requires in summary form, the pertinent
rights and privileges of the various securities outstanding. Examples of
information that must be disclosed are dividend and liquidation preferences,
participation rights, call prices and dates, conversion or exercise prices or
rates and pertinent dates, sinking-fund requirements, unusual voting rights and
significant terms of contracts to issue additional shares. SFAS No. 129 is
effective for financial statements issued for periods ending after December 15,
1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement is effective for fiscal
years beginning after December 15, 1997, and requires reclassification of
comparative purpose financial statements for all earlier periods presented.
51
<PAGE> 53
BUSINESS
OVERVIEW
The Company is a real estate investment and management company, which
structures and makes real estate related investments and, through its expertise
in developing and managing properties, seeks to enhance the value of those
investments. The Company has been engaged in the development, ownership and
management of commercial and multi-family residential properties since 1969.
LNR's Chairman, Chief Executive Officer and President have been with the Company
and have worked together for more than a decade. Over the five years ended
November 30, 1997, the Company's revenues and EBITDA increased at compound
annual growth rates of 27.7% and 30.4%, respectively. The Company's pro forma
revenues and EBITDA for the year ended November 30, 1997, giving effect to the
(i) Affordable Housing Group acquisition and (ii) contributions of Lennar to the
capital of LNR and the formation of Lennar Land Partners as if they had occurred
on December 1, 1996, and adjusting general and administrative costs to eliminate
Spin-off related costs and add incremental costs for a stand-alone public
company, were $195.1 million and $126.1 million, respectively.
LNR was formed by Lennar in June 1997 to separate Lennar's real estate
investment and management business from its homebuilding business. On October
31, 1997, Lennar distributed the stock of LNR to Lennar's stockholders in a
tax-free Spin-off. Activities conducted by Lennar, as predecessor of the
Company, of the type currently being conducted by the Company are treated below
as historical activities of the Company.
The Company's real estate investment activities primarily consist of
- developing and managing commercial and multi-family residential
properties,
- acquiring, managing and repositioning commercial and multi-family
residential real estate loans and properties,
- acquiring, (often in partnership with financial institutions and real
estate funds) and managing portfolios of real estate assets,
- investing in unrated and non-investment grade rated CMBS as to which the
Company has the right to be special servicer (i.e., to oversee workouts
of underperforming and nonperforming loans) and
- making high yielding real estate related loans and equity investments.
The Company adjusts its investment focus from time to time to adapt to
various phases of the real estate cycle. The Company does not have specific
policies as to the type of real estate related assets it will acquire, the
percentage of its assets it will invest in particular types of real estate
related assets or the percentage of the interests in particular entities it will
acquire. Instead, it reviews, at least monthly, the types of real estate related
investment opportunities which may at that time be available, the market factors
which may affect various types of real estate related investments (including the
likelihood of changes in interest rates or availability of investment capital)
and other factors which may affect the attractiveness of particular investment
opportunities.
52
<PAGE> 54
At May 31, 1998, the Company's assets included the following:
<TABLE>
<CAPTION>
TYPE OF ASSET BOOK VALUE DESCRIPTION/COMMENT
------------- ------------- -------------------
(IN MILLIONS)
<S> <C> <C>
Commercial properties....... $ 568.5 Multi-family apartment buildings, office and industrial
buildings, retail centers, hotels and land.
Real estate loans........... 87.9 Primarily mortgage loans. Also includes loans to
developers and builders, sometimes with profit
participations.
Partnerships................ 202.9 Primarily 15 partnerships which acquired portfolios of
loans and/or properties, including three partnerships
investing in Japanese loan portfolios; and ten
partnership interests from the Affordable Housing Group
acquisition. Also includes a partnership with Lennar
which acquires, develops and sells land.
CMBS........................ 385.3 Unrated or non-investment grade rated tranches of CMBS
pools acquired at significant discounts from face
value, as to which the Company has the right to be
special servicer and therefore can attempt to increase
collections of underlying loans.
Cash and other assets....... 204.1 Cash at May 31, 1998 consisted of $24.8 million
-------- unrestricted and $88.5 million restricted, of which
$45.0 million was collateral for a letter of credit and
$24.6 million was related to the acquisition of the
Affordable Housing Group. Other assets primarily
include deferred tax credits.
Total............. $1,448.7
========
</TABLE>
At the time of the Spin-off, LNR entered into the Separation and
Distribution Agreement with Lennar under which, among other things, they agreed
that at least until 2002, they would not engage in the respective businesses in
which, when the Separation and Distribution Agreement was signed, the other of
them was engaged, or anticipated becoming engaged, except in limited areas in
which their then activities, or anticipated activities, overlapped. The
Separation and Distribution Agreement is described in detail under "Certain
Relationships and Transactions -- Relationships With Lennar."
COMPETITIVE STRENGTHS
The Company believes the following competitive strengths contribute to its
ability to grow and operate profitably:
Real Estate Development, Management and Workout Experience
The Company has developed, redeveloped, repositioned, owned and managed
commercial and multi-family residential real estate since 1969, having
developed, redeveloped, repositioned and managed over 500 properties over this
time period. These properties have included multi-family apartment buildings,
office buildings, retail space, hotels, industrial space and land. The Company
also has, over the past seven years, been responsible for workouts with regard
to more than 6,300 real estate loans. Fitch IBCA, Inc., which rates CMBS special
servicers on the basis of management team, organizational structure, operating
history, workout and asset disposition experience and strategies, information
systems, investor reporting capabilities and financial resources, has given the
Company its highest rating. Based on industry sources regarding issuances of
CMBS, the CMBS as to which the Company had the right to assume the special
servicing represented 17.6% and 12.8% of the CMBS issued in 1996 and 1997,
respectively. In addition to applying the benefits of its experience to
properties it develops, owns or manages, the Company uses this experience in
evaluating potential real estate investments (including asset by asset
evaluations of properties underlying CMBS). It also uses this experience in
redeveloping or rehabilitating properties in order to maximize proceeds from
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<PAGE> 55
underperforming or nonperforming assets included in portfolios or single assets
acquired by the Company or partnerships it manages or underlying CMBS in which
the Company invests. The Company believes its combination of real estate and
financial experience gives the Company an advantage over competing investors who
have financial, but not operating, experience.
Disciplined Investment Approach
The Company performs extensive due diligence before making investments in
order to evaluate investment risks and opportunities to use the Company's skills
to enhance the value of the investments. For example, before bidding for a CMBS
investment, the Company performs a property-by-property evaluation of the assets
underlying the CMBS, including site visits and analyses of rent rolls, vacancy
rates and tenant strength, as well as analyses of the real estate markets in
which the properties are located. The Company's formalized pre-investment
procedures allow its senior management to exercise significant control and
discipline over all investment decisions.
Experienced Management Team
The ten members of LNR's senior management have an average of 16 years of
real estate industry experience. Steven J. Saiontz, LNR's Chief Executive
Officer, and Jeffrey P. Krasnoff, LNR's President, have 14 and 21 years of real
estate industry experience, respectively, and have been with the Company for 14
years and 12 years, respectively. In addition, Stuart A. Miller, LNR's Chairman
of the Board, who devotes approximately 25% of his working time to the Company,
is the chief executive officer of Lennar, a major homebuilder, and has more than
15 years of real estate industry experience. The Company uses incentive based
compensation to retain key members of management, including payment of bonuses
over several year periods, and vesting of stock options over periods as long as
nine years.
Significant Equity Ownership by Leonard Miller
Leonard Miller, one of the founders of Lennar and a Director of LNR, owned,
through family partnerships, 9.898 million shares of LNR's Class B Common Stock
at May 31, 1998. Leonard Miller is the father of Stuart A. Miller, the Chairman
of LNR, and the father-in-law of Steven J. Saiontz, the Chief Executive Officer
of LNR.
Extensive Asset Monitoring
The Company has developed an extensive asset monitoring program that
includes weekly and monthly reports and meetings at which actual results are
compared against budgets on an asset-by-asset basis. This, combined with
comprehensive systems, procedures and controls, allows management to monitor
asset performance closely.
Significant Strategic Relationships
Through partnerships and otherwise, the Company has developed strategic
relationships with affiliates of many of the leading investment banking firms
and real estate funds, including Banc One/Orix, Blackrock Group, BT Alex. Brown
Incorporated, Credit Suisse First Boston Corporation, Deutsche Morgan Grenfell,
Donaldson, Lufkin & Jenrette Securities Corporation, First Chicago Capital
Corp., Lehman Brothers Inc., Morgan Stanley, Dean Witter, Discover & Co. and
Westbrook Partners. These organizations seek to avail themselves of the
Company's ability to evaluate real estate assets rapidly and effectively and to
apply its asset management skills to enhance the value of assets once they have
been acquired (including overseeing workouts of underperforming assets). The
relationships the Company has developed have, among other things, brought the
Company investment opportunities to which it might not otherwise have had
access.
Receiving Recurring Income from its Investments
The Company has significant net rental income, interest income and income
from fees earned as special servicer with regard to CMBS and for managing
partnerships in which it participates. During 1997 and the six
54
<PAGE> 56
months ended May 31, 1998, the Company's net revenues from these sources totaled
$75.4 million and $49.8 million, respectively. In addition, through its 50%
ownership of Lennar Land Partners, the Company generates earnings from sales of
Lennar Land Partners' properties, including sales of properties to Lennar for
use in Lennar's homebuilding activities.
Not a REIT
In order not to be subject to federal income taxation, a real estate
investment trust is limited in what it can do and the types of income it can
receive, must hold assets for minimum periods and must distribute each year
almost all its earnings. In contrast, the Company can actively manage
properties, earn fee income and other types of non-passive income, dispose of
assets without meeting holding period requirements, and retain and reinvest its
after-tax earnings.
BUSINESS STRATEGY
The Company's business strategy consists of four key elements:
Using Real Estate Expertise to Enhance Real Estate Investments
The Company focuses on investments which it believes can benefit from its
expertise in real estate development and management, including its expertise
regarding workouts of troubled real estate assets. It uses this expertise to
evaluate the risks and potential rewards from particular real estate related
investments and to enhance the value of its investments by overseeing management
of properties underlying financial investments. For example, the Company has
only invested in CMBS when it has had the right to be special servicer, which
enables it to attempt to increase proceeds from underperforming or
non-performing assets. The Company believes its ability to enhance assets
distinguishes it from many other investors in real estate related financial
products.
Identifying Opportunities Attuned to Various Phases of Real Estate Cycle
During each phase of the real estate cycle, the Company tries to identify
investments which will benefit from being made at that point in the cycle. In
the weak real estate market of the early 1990's, the Company acquired portfolios
of underperforming or nonperforming real estate loans and subordinated classes
of CMBS, at substantial discounts from their face value. During the relatively
strong real estate market of 1997, the Company made investments in development
or redevelopment projects and made loans to property developers and residential
builders, and continued to purchase subordinated classes of CMBS when they were
available at prices the Company believed to be attractive. In purchasing AHG,
the Company acquired a group of companies engaged in developing and operating
multi-family apartment complexes which generate low-income tax credits. See
"-- Real Estate Investments and Related Activities -- Commercial and
Multi-Family Residential Rental Real Estate." Also, during the six months ended
May 31, 1998, the Company has invested in several portfolios of real estate
loans located outside the United States.
Using Strategic Relationships
The Company builds and maintains strategic relationships with leading
investment banking firms and real estate funds which can introduce the Company
to real estate related investment opportunities. Also, by investing in
partnership with these firms and funds, the Company can limit the amount it has
to invest to acquire interests in large real estate asset portfolios or other
large real estate related investments.
Diversifying its Real Estate Asset Investments
The Company's real estate investments are diversified both in the forms of
the investments and in the types of properties to which they relate. Further,
the Company's investments relate to properties throughout the United States and
elsewhere, and therefore are to an extent protected against factors which affect
only particular geographical areas.
55
<PAGE> 57
REAL ESTATE INVESTMENTS AND RELATED ACTIVITIES
Commercial and Multi-Family Residential Rental Real Estate
In 1969 Lennar began engaging in the development, ownership and management
of commercial and residential multi-family rental real estate. Its initial
activities of this type included acquiring an apartment complex, and building
and operating small office buildings, local regional shopping centers and other
commercial and industrial facilities on properties being developed as part of
Lennar's homebuilding operations. Gradually, this was expanded to general
development, acquisition and active management of commercial and residential
multi-family rental real estate, as well as acquiring land for development and
sale or leasing for commercial uses. Among other things, these activities helped
offset the cyclical nature of Lennar's homebuilding business. The Company has
developed a staff of in-house real estate professionals to engage in those
activities, including on-site management, leasing and maintenance personnel, and
accounting and management personnel located at several offices. It also, in some
instances, has used outside management companies to perform day-to-day
activities. In those instances, employees of the Company have closely supervised
the operation of the commercial properties and the activities of the outside
management companies. At May 31, 1998, the Company's portfolio included 13
shopping centers with 1.1 million square feet of rentable space, seven office
buildings with 1.6 million square feet of rentable space, two industrial
properties, 8,848 apartment units, a mobile home park and two hotels.
The shopping centers the Company owns and operates include seven small
regional shopping centers (sometimes referred to as "strip centers") with
between 12,000 square feet and 36,400 square feet of store space, as well as
parking areas and public areas, and six larger shopping centers, with 72,000
square feet to 462,000 square feet of store space. All the small regional
centers are located in Florida. Of the larger shopping centers, four are in
Florida and two are in Arizona.
The Company's seven office buildings range from one to 36 stories and have
an aggregate of 1.6 million square feet of rentable office space. Three of the
office buildings are in Florida, one is in Georgia, two are in California and
one is in Louisiana. The Company's industrial properties are located in Florida
and California and consist of 80,000 square feet and 382,000 square feet,
respectively, of usable floor space. The Company's forty-four apartment
properties range in size from 40 to 712 units. The apartment properties are
geographically located as follows:
<TABLE>
<CAPTION>
STATE NUMBER OF PROPERTIES
- ----- --------------------
<S> <C>
Washington............................... 12
Florida.................................. 8
Oregon................................... 5
California............................... 2
Colorado................................. 2
Montana.................................. 2
Nevada................................... 2
New Mexico............................... 2
Pennsylvania............................. 2
Arizona.................................. 1
Georgia.................................. 1
Illinois................................. 1
Indiana.................................. 1
Maryland................................. 1
Tennessee................................ 1
Virginia................................. 1
--
44
==
</TABLE>
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<PAGE> 58
The two hotels owned by the Company have a total of 462 rooms. One is
managed by the Company and the other is managed by a national chain under a
management contract which can be terminated by either party on 10 days' notice.
In addition to the Company's operating properties, the Company owns
commercially zoned land, 1.6 million square feet of which is leased under ground
leases, and 1,313.8 acres of which is to be used for specific projects or sold.
The Company maintains a program of liability, property loss and damage and
other insurance which covers all the Company's properties and which the Company
believes is adequate to protect it against all reasonably foreseeable material
insurable risks.
The net book value at May 31, 1998 and the annualized operating results for
the six month period ended on that date with regard to various types of
properties owned by the Company, and related furniture, furnishings and
equipment, were as follows:
<TABLE>
<CAPTION>
ANNUALIZED
ANNUALIZED NOI AS A % OF
NET BOOK OCCUPANCY NET OPERATING NET BOOK
VALUE RATE INCOME (NOI) VALUE
-------- --------- -------------- -------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Stabilized operating properties
Commercial......................... $ 67,496 92% 11,400 17%
Multi-family....................... 33,142 90% 8,249 25%
AHG multi-family(1)................ 147,092 90% 8,604 6%
Hotel and other.................... 16,177 76% 3,519 22%
Under development or repositioning
Commercial......................... 101,698 2,086
Multi-family....................... 104,744 1,488
-------- ------
Total operating properties........... 470,349 35,346
-------- ------
Furniture, fixtures and equipment.... 5,356 --
Land held for investment............. 92,747 --
-------- ------
Total operating properties and
equipment.......................... $568,452 35,346
======== ======
</TABLE>
- ---------------
(1) Annualized NOI and annualized NOI as a % of net book value excludes the
annualized effect of tax credits; if included, annualized NOI and annualized
NOI as a % of net book value would have been $18,766 and 13%, respectively.
The Company's financing strategy with regard to its real estate portfolio
is normally to obtain financing secured by specific assets when the Company
acquires them. This type of financing usually is short- or intermediate-term.
However, the Company sometimes seeks more permanent financing in cases where the
market for an asset makes long-term debt an attractive option and the loan can
be assumed or prepaid.
In the AHG Acquisition, the Company agreed to acquire AHG, a group of
entities which owns or is currently developing 42 multi-family and senior
housing properties, with approximately 6,100 residential rental apartments, many
of which qualify for low-income tax credits under Section 42 of the Internal
Revenue Code. On May 1, 1998, the Company completed the purchase of certain of
the entities which comprise AHG and which own 36 of the AHG properties. The
Company anticipates purchasing the remaining interests representing six
properties prior to the end of fiscal year 1998. Of the apartments, 49% are
located in the Northwestern United States, 17% are located in the Southwest, 15%
are located in the East, 13% are located in the Far West, and the remainder are
located in the Southeast and Midwest. Approximately 82% of the apartments were
constructed by AHG or under its supervision. AHG acquired the other apartments
after they were completed. 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.
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<PAGE> 59
The Company expects that after the acquisition of the remaining AHG entities,
AHG, as part of the Company, will continue developing, acquiring and operating
residential apartments which qualify for low-income tax credits. At May 31,
1998, the Company's balance sheet included AHG balances as follows: properties
of approximately $179 million, investments in partnerships of approximately $8
million and approximately $129 million of pre-existing property-specific
mortgage financing that is non-recourse to the Company.
Portfolios of Commercial Mortgage Loans and Owned Real Estate
In 1992, the Company began acquiring, directly and through partnerships,
portfolios of commercial mortgage loans and related pools of owned real estate
assets. Its first transaction of this type was a partnership with The Morgan
Stanley Real Estate Fund, which acquired from Resolution Trust Corporation a
portfolio of almost $1 billion face value of assets consisting of more than
1,000 mortgage loans and 65 properties. Since 1992, the Company has formed 11
additional partnerships with several different investment banking firms and real
estate funds to purchase and handle workout activities regarding portfolios of
distressed commercial loans and related real estate. The Company's partners in
these additional partnerships included affiliates of Banc One/Orix, Blackrock
Group, BT Alex. Brown Incorporated, Credit Suisse First Boston Corporation,
Deutsche Morgen Grenfell, Donaldson, Lufkin & Jenrette Securities Corporation,
First Chicago Capital Corp., Lehman Brothers Inc., Morgan Stanley, Dean Witter,
Discover & Co. and Westbrook Partners. Involvement of these partners both gave
the Company access to investment opportunities it might not otherwise have had
and reduced the amount the Company had to invest to acquire interests in large
portfolios.
In each of these partnerships, a subsidiary formed by the Company acts as
the managing general partner and conducts the business of the partnership. The
partnership portfolio acquisitions in 1993 included a portfolio of real estate
assets with a face amount of more than $2 billion, in what the Company believes
is one of the largest real estate portfolio acquisitions ever to take place in
the United States. The Company earns management fees and asset disposition fees
from the partnerships and has carried interests in cash flow and sale proceeds
once the partners have recovered their capital and achieved specified returns.
The Company's investments ranged from 15% to 50% of the partnerships' capital
and totaled $165 million, out of a total of $684 million invested in the
partnerships. By May 31, 1998, the partnerships had distributed a total of $1.2
billion to the partners, of which $347 million had been distributed to the
Company. Distributions to the Company included management and asset disposition
fees totaling approximately $52 million. As the U.S. real estate markets
strengthened in 1996 and 1997, substantially fewer large real estate portfolios
become available at what the Company viewed as attractive prices. The Company
has not participated in a partnership which acquired a portfolio of
underperforming real estate assets in the United States since August 1996
(although the Company became part of several partnerships to acquire portfolios
of underperforming and nonperforming commercial mortgage loans in Japan).
However, it has continued to acquire individual underperforming real estate
assets. Currently, the partnerships the Company formed are engaged primarily in
enhancing and disposing of assets in the portfolios they acquired, as well as
collecting sums paid with regard to portfolio assets. Since June 1992, the
Company has also acquired directly three portfolios of real estate assets with
face amounts of between $21 million and $75 million.
The portfolio loans consist primarily, but not entirely, of fixed rate
first mortgage loans secured by office and industrial buildings, shopping
centers and multi-family residential properties. They are not covered by credit
insurance.
The principal activity of the Company with respect to distressed portfolios
(whether owned by partnerships or directly owned by the Company) is to manage
the workout of nonperforming loans, including negotiating new or modified
financing terms and foreclosing on defaulted loans. The assets generally are
held only as long as is required to enhance their value and prepare them for
sale. Approximately 20% to 25% of each portfolio is turned over each year. The
Company believes its workout and property rehabilitation skills are the
principal reasons financial institutions have sought the Company as a partner in
acquiring portfolios of distressed assets and have given the Company management
control of the partnerships.
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<PAGE> 60
Debt financing for partnerships' acquisitions of real estate related asset
portfolios has usually been on a non-recourse basis and with no guaranties by
the Company or any other of the partners. In some cases, the lender must be
repaid in full before a partnership can make cash distributions to the Company
and its partners. The Company's financing strategy with regard to real estate
related asset portfolios in which it invests directly is to seek short-term
floating rate financing which matches the underlying loans. This type of
financing usually gives lenders recourse to the LNR subsidiaries which acquire
particular asset portfolios.
Investments in CMBS
As a further use of its loan and real estate workout capabilities, the
Company acquires unrated and non-investment grade rated subordinated CMBS and
provides "special servicing" for the mortgage pools to which they relate. Fitch
IBCA, Inc., which rates special servicers of CMBS on the basis of management
team, organizational structure, operating history, workout and asset disposition
experience and strategies, information systems, investor reporting capabilities
and financial resources, has given the Company Fitch's highest rating. At May
31, 1998, the Company was entitled to be the special servicer with regard to 41
securitized commercial mortgage pools and owned unrated junior CMBS related to
37 of those pools. Special servicing is the business of managing and working out
the problem assets in a pool of commercial mortgages or other assets. For
example, when a mortgage in a securitized pool goes into default, the special
servicer negotiates with the borrower on behalf of the pool to resolve the
situation. The Company uses as special servicer essentially the same workout
skills it applies with regard to its distressed assets portfolios. Because the
holders of the unrated CMBS receive everything that is collected after the more
senior levels of CMBS have been paid in full, the Company and other holders of
unrated CMBS are the principal beneficiaries of increased collections.
Therefore, ownership of the unrated CMBS gives the Company an opportunity to
profit from its special servicing in addition to receiving fees for being
special servicer. The Company has not purchased unrated CMBS unless it has had
the right to be the special servicer of the mortgage pools to which they relate.
The Company also, in some instances, purchases non-investment grade rated
subordinated CMBS relating to commercial mortgage pools as to which the Company
will act as special servicer. The Company expects to receive a yield on these
securities based on the stated interest and amortization of the Company's
purchase discount. However, if, as senior CMBS issued with regard to a pool
begin to be paid down, the performance of the pool exceeds initial expectations,
then the ratings of the subordinated CMBS are sometimes upgraded by the rating
agencies. This increases their market values and gives the Company an
opportunity to achieve gains on sale of the securities, as well as receiving the
stated interest while it holds them. Therefore, purchases of non-investment
grade rated subordinated securities, like purchases of unrated junior
securities, are a means for the Company to profit from its workout skills.
Particularly in periods of falling interest rates, there often are
prepayments of mortgages underlying CMBS. Because the Company usually purchases
CMBS at significant discounts from their face amounts, prepayments tend to
increase the Company's yield as a percentage of its investment.
The Company is currently financing its purchases of CMBS through short-term
repurchase obligations and under its short-term revolving credit lines. The
Company repaid a portion of these repurchase obligations with the proceeds from
the sale of the Old Notes.
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<PAGE> 61
The following are the CMBS held by the Company at May 31, 1998:
<TABLE>
<CAPTION>
% OF
FACE INTEREST BOOK FACE CASH BOOK
AMOUNT RATE VALUE AMOUNT YIELD(1) YIELD(2)
-------- -------- -------- ------ -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
BB rated or above................. $122,561 8.23% $103,862 84.7% 9.4% 13.0%
B rated........................... 158,559 7.48% 115,250 72.7% 11.0% 13.3%
Unrated........................... 543,333 8.02% 124,532 22.9% 31.7% 24.5%
Unrealized gains on securities and
other........................... -- -- 41,623 -- -- --
-------- ---- -------- ---- ---- ----
Total CMBS portfolio.... $824,453 8.00% $385,267 46.7% 18.0% 17.3%
======== ==== ======== ==== ==== ====
</TABLE>
- ---------------
(1) Cash yield is determined by annualizing the actual cash received during the
month ended May 31, 1998, and dividing the result by the book value at May
31, 1998.
(2) Book yield is determined by annualizing the interest income for the month
ended May 31, 1998, and dividing the result by the book value at May 31,
1998.
Commercial Real Estate Lending
The Company holds mortgage loans made with regard to commercial properties
or properties being developed as residential communities, and loans made to the
developers and builders themselves. At May 31, 1998, the Company held nine
mortgage loans with a total outstanding principal balance of $74.1 million and
five loans to developers and builders with a total outstanding principal balance
of $22.2 million. The states in which the properties securing the Company's
mortgage loans were located were as follows:
<TABLE>
<CAPTION>
STATE PRINCIPAL AMOUNT OF LOANS
----- -------------------------
(IN THOUSANDS)
<S> <C>
Nevada................................. $53,986
California............................. 31,571
New Jersey............................. 4,500
Texas.................................. 3,704
Florida................................ 2,560
-------
$96,321
=======
</TABLE>
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<PAGE> 62
The mortgage loans are primarily first mortgage loans secured by office
buildings, shopping centers, hotels or land acquired for development. The
mortgage loans on residential communities are usually subordinate to
construction loans, and provide the Company, in addition to interest income,
participation in profits after the developer or builder has achieved specified
financial targets. The types of loans held by the Company at May 31, 1998, were
as follows:
<TABLE>
<CAPTION>
TYPE OF LOAN PRINCIPAL AMOUNT OF LOANS
------------ -------------------------
(IN THOUSANDS)
<S> <C>
Mortgage loans
Convention center.................... $45,000
Office buildings..................... 17,330
Hotel................................ 4,500
Shopping center...................... 3,704
Industrial park...................... 1,671
Residential land..................... 1,361
Recreation facility.................. 299
Warehouse............................ 287
Developer and builder loans............ 22,169
-------
$96,321
=======
</TABLE>
The Company identifies opportunities to make commercial and residential
development loans through brokers and relationships with other real estate
companies and developers.
The Company evaluates possible loans with in-house personnel, who perform
site visits and do market, demographic and financial analyses with regard to the
collateral for the loans. The Company applies guidelines, which change from time
to time depending on the type of property and market conditions, relating to
loan-to-value ratio, debt coverage and other financial ratios. In most instances
the guidelines the Company has applied have been similar to those applied in
evaluating commercial mortgages for inclusion in mortgage securitizations
(although the Company has not to date securitized any of the commercial loans it
originated for its own account). Sometimes the Company has made subordinated
loans to which it applies other guidelines, but which bear interest at rates
which are higher than those on senior commercial mortgage loans, and some of
which provide the Company participation in profits from the underlying
properties.
Lennar Land Partners
Before the Spin-off, Lennar and the Company transferred to Lennar Land
Partners (the "Land Partnership"), which is 50% owned by the Company and 50%
owned by Lennar, parcels of land or interests in land and other assets which had
a total book value on Lennar's books at October 31, 1997 of approximately $372.4
million. This land was acquired by Lennar primarily to be used for residential
home development. The parcels of land or interests in land contributed by the
Company had been contributed to the Company by Lennar so the Company could
contribute them to the Land Partnership and receive a 50% interest in the Land
Partnership. From November 1, 1997 through May 31, 1998, the Land Partnership
had land sale revenues of $80.5 million, of which $53.7 million was from sales
to Lennar. During that period, the Land Partnership has obtained control of
approximately 8,000 additional homesites, primarily through partnership
arrangements. At May 31, 1998, the Land Partnership's land consisted of
approximately 27,260 potential home sites in 32 communities, of which 19
communities with 18,008 potential home sites are in Florida, two communities
with 663 potential home sites are in Arizona, five communities with 4,115
potential home sites are in Texas and six communities with 4,474 potential home
sites are in California. Approximately 8% of the land was developed and ready to
be built upon, 50% of the land was in various stages of development and 42% of
the land was totally undeveloped.
When Lennar contributed that land to the Company and to the Land
Partnership, Lennar retained options to purchase up to approximately 22% of the
contributed land at prices it established. The remaining
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<PAGE> 63
land is available for sale to independent homebuilders or to Lennar at prices
determined from time to time, which, as is discussed below, must be approved by
LNR.
The Land Partnership has an agreement with Lennar under which Lennar, for a
fee, administers all day-to-day activities of the Land Partnership, including
overseeing planning and development of properties and overseeing sales of land
to Lennar and other builders.
The Land Partnership is governed by an Executive Committee consisting of
representatives of Lennar and of the Company, with Lennar's representatives and
the Company's representatives each having in total one vote. This, in effect,
gives each of Lennar and the Company a veto with regard to matters presented to
the Executive Committee. LNR's by-laws require that all significant decisions
relating to the Land Partnership be approved by a Board of Directors committee
consisting entirely of directors who have no relationship with Lennar.
Lennar may, but will be under no obligation to, offer additional properties
to the Land Partnership. Lennar will be free to acquire properties for itself
without any consideration of whether those properties might have been
appropriate for the Land Partnership. The Company will, in effect, be able to
veto any proposals that the Land Partnership acquire properties proposed by
Lennar. See "Certain Relationships and Transactions -- Lennar Land Partners."
Arrangements with regard to particular properties might include, (i) options to
Lennar to purchase all or portions of properties, (ii) rights of first refusal
for Lennar to acquire lots if other builders propose to acquire them, or
buy/sell arrangements under which, if Lennar wanted to purchase lots on which it
did not have an option, it would propose a purchase price and the Company would
have the option to approve the sale to Lennar at that price or itself to
purchase the lots for that price (probably in order to resell them to someone
who would be willing to pay a higher price).
The Company might seek to acquire commercial portions of properties owned
or acquired by the Land Partnership or options relating to them. If it did,
Lennar could, if it wanted to do so, veto acquisitions by the Company.
The Land Partnership has a $125 million revolving line of credit, and a
$100 million term loan, each of which matures in 2001. If the Land Partnership
defaults under those credit facilities, the lenders have the right to require
LNR, together with Lennar, to purchase the Land Partnership's obligations to the
lenders, or a portion of them. However, if the default is failure to meet
financial covenants, the lenders must give LNR and Lennar the opportunity to
cure the default. Many of the Land Partnership assets are subject to
non-recourse mortgage loans. The revolving line of credit is available to
supplement financing which is available with regard to specific properties. As
of May 31, 1998, there was $4 million outstanding under the revolving line of
credit, and $81 million outstanding under the term loan.
COMPETITION
In virtually all aspects of its activities, the Company competes with a
variety of real estate development companies, real estate investment trusts,
investment firms, investment funds and others. The principal area of competition
is for the purchase of real estate assets and securities at prices which the
Company can achieve its desired returns. As the real estate markets have
improved over the past two years, the Company has encountered increased
competition in several of the markets in which it competes, including the
purchase of certain types of real estate and CMBS as well as real estate
lending. The Company believes that its access to investment opportunities
through its relationships and presence in markets across the country, its
ability to quickly underwrite and evaluate those opportunities and its expertise
in real estate workout and management helps the Company to compete effectively
in the purchase of such assets. In addition, the Company's experience in adding
value to real estate and its top rating as a special servicer to CMBS
transactions often attracts other investors with attractive investment
opportunities but who do not have those skills.
Competitive conditions relating to shopping centers, office buildings,
industrial properties, residential apartment buildings and hotels owned or
operated by the Company vary depending on the locations of particular
properties. Most often these facilities compete for tenants or other users based
on their locations, the facilities provided and the pricing of the leases or
room rates. As general economic conditions have improved
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<PAGE> 64
over the past year, occupancies have generally increased in many of the
Company's markets, which has helped to reduce the amount of competition in
existing properties and has allowed for, in certain instances, new development.
Although properties owned by the Company may be significant competitors in
some of the areas in which they are located, the Company is not a significant
national competitor with regard to any of the properties it owns or any type of
real estate securities, except that, based on industry sources regarding
issuances of CMBS, the CMBS as to which the Company had the right to assume the
special servicing represented 17.6% and 12.8% of all the CMBS issued in 1996 and
1997, respectively.
REGULATION
Commercial properties owned by the Company or partnerships in which it
participates must comply with a variety of state and local regulations relating
to, among other things, zoning, treatment of waste, construction materials which
must be used and some aspects of building design.
In its loan workout activities, the Company is required to comply with a
number of Federal and state laws designed to protect debtors against overbearing
loan collection techniques. However, in most instances, laws of this type apply
to consumer level loans (including home mortgages), but do not apply to
commercial loans.
The Company's hotels have to be licensed to conduct various aspects of
their businesses, including sales of alcoholic beverages.
EMPLOYEES
At May 31, 1998, the Company had 400 full time and 48 part time employees,
of whom 10 were senior management, 40 were corporate staff, 131 were hotel
personnel and 267 were engaged in asset acquisitions, loan workouts and
rehabilitation and disposition of properties.
None of the Company's employees are members of unions. The Company believes
its relationships with its employees are good.
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 most of which are covered by insurance. LNR believes these
suits will not, in aggregate, have a material adverse effect upon the Company.
PROPERTIES
The Company maintains its principal executive offices at 760 N.W. 107th
Avenue, Miami, Florida, in a building which was built and is owned by the
Company. Those offices occupy approximately 11,240 square feet. Additional
Company offices are located in various office buildings owned by the Company and
in one leased facility.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF LNR
The following table lists the directors and executive officers of LNR, all
of whom will serve until the next annual meeting of stockholders.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION
- ---- --- ------------------
<S> <C> <C>
Stuart A. Miller...................... 40 Chairman of the Board; Director
Steven J. Saiontz..................... 40 Chief Executive Officer; Director
Jeffrey P. Krasnoff................... 43 President; Director
Shelly Rubin.......................... 36 Financial Vice President
Michelle R. Simon..................... 34 Secretary and Corporate Counsel
Robert Cherry......................... 36 Vice President
Steven I. Engel....................... 51 Vice President
Mark A. Griffith...................... 42 Vice President
David G. Levin........................ 42 Vice President
Ronald E. Schrager.................... 36 Vice President
David O. Team......................... 38 Vice President
Margaret A. Jordan.................... 47 Treasurer
John T. McMickle...................... 41 Controller
Leonard Miller........................ 65 Director
Sue M. Cobb........................... 61 Director
Carlos M. de la Cruz.................. 57 Director
Brian L. Bilzin....................... 53 Director
</TABLE>
Stuart A. Miller is the Chairman of the Board of LNR. Mr. Miller became the
Chairman of the Board of LNR when it was formed in June 1997. Mr. Miller has
been the President and Chief Executive Officer of Lennar since April 1997. For
more than five years prior to April 1997, Mr. Miller was a vice president of
Lennar and held various executive positions with Lennar subsidiaries, including
being the president of its principal homebuilding subsidiary from December 1991
to April 1997 and the president of its principal real estate investment and
management division (the predecessor to a substantial portion of the Company's
business) from April 1995 to April 1997.
Steven J. Saiontz is the Chief Executive Officer of LNR. Mr. Saiontz became
the Chief Executive Officer and a Director of LNR when it was formed in June
1997. For more than five years prior to that, he was the president of Lennar
Financial Services, Inc., a wholly owned subsidiary of Lennar. Mr. Saiontz is
currently a Director of Lennar. He is the brother-in-law of Stuart A. Miller and
the son-in-law of Leonard Miller.
Jeffrey P. Krasnoff is the President of LNR. Mr. Krasnoff became the
President of LNR when it was formed in June 1997 and became a Director in
December 1997. From 1987 until June 1997, he was a vice president of Lennar.
From 1990 until he became the President of LNR, Mr. Krasnoff was involved almost
entirely in Lennar's real estate investment and management division (the
predecessor to a substantial portion of the Company's business).
Shelly Rubin is the Financial Vice President of LNR. She became the
Financial Vice President of LNR when it was formed in June 1997. From May 1994
until June 1997, she was the principal financial officer of Lennar's real estate
investment and management division (the predecessor to a substantial portion of
the Company's business). From 1991 until May 1994, Ms. Rubin was employed by
Burger King Corporation as the controller for its real estate division.
Michelle R. Simon is the Secretary and Corporate Counsel of LNR. She became
the Secretary and Corporate Counsel of LNR when it was formed in June 1997. From
1994 until June 1997, she was the counsel to Lennar's real estate investment
division (the predecessor to a substantial portion of the Company's
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<PAGE> 66
business). From 1992 to 1994, Ms. Simon was an associate and then a vice
president in the investment banking division, special execution group, of
Goldman, Sachs & Co.
Robert Cherry is a Vice President of LNR, responsible for sourcing and
evaluating new investment opportunities. From March 1995 until October 1997, Mr.
Cherry had similar responsibilities for LNR and Lennar's real estate investment
and management division (the predecessor to a substantial portion of the
Company's business). From March 1994 until February 1995, he was a vice
president of G. Soros Realty Advisors/Quantum North America Realty Fund. Prior
to that he was a senior analyst at Moody's Investor Service. Before joining
Moody's, Mr. Cherry was an associate at the law firm of Sullivan & Cromwell.
Steven I. Engel is a Vice President of LNR, directing the special servicing
of the CMBS portfolio. From 1992 until 1997, Mr. Engel had similar
responsibilities for LNR and Lennar's real estate investment and management
division (the predecessor to a substantial portion of the Company's business).
From 1987 to 1992, Mr. Engel owned and managed his own single family
construction company with projects in Broward, Collier and Lee counties in
Florida.
Mark A. Griffith is a Vice President of LNR, responsible for managing the
Eastern Regional Division. From February 1990 until October 1997, Mr. Griffith
had similar responsibilities for LNR and Lennar's real estate investment and
management division (the predecessor to a substantial portion of the Company's
business).
David G. Levin is a Vice President of LNR, responsible for managing Lennar
Capital Services, an LNR subsidiary. From February 1992 until early 1997, Mr.
Levin was responsible for managing the Miami Division of Lennar's real estate
investment and management division (the predecessor to a substantial portion of
the Company's business), which was at that time primarily focused on
partnerships with the Morgan Stanley Real Estate Fund. Prior to that he had
various positions with commercial real estate firms including managing director
of Bear Stearns Real Estate Group.
Ronald E. Schrager is a Vice President of LNR, responsible for managing the
Miami Division of LNR, which is primarily focused on CMBS/special servicing.
From September 1992 until early 1997, he held several positions in Lennar's real
estate investment and management division (the predecessor to a substantial
portion of the Company's business), managing various areas. Prior to that he
served as a vice president of Chemical Bank's Real Estate Finance Group.
David O. Team is a Vice President of LNR, responsible for the Western
Regional Division. From April 1996 until October 1997, Mr. Team had similar
responsibilities for LNR and Lennar's real estate investment and management
division (the predecessor to a substantial portion of the Company's business).
From 1994 to 1996, Mr. Team was the owner and president of Windward Realty
Group, a real estate development firm. From 1992 to 1993, he was a senior vice
president with American Real Estate Group.
Margaret A. Jordan is the Treasurer of LNR. Ms. Jordan joined LNR in
September 1997. From February 1993 to August 1997, Ms. Jordan worked as an
independent contractor and financial consultant to real estate businesses. From
June 1987 to January 1993, Ms. Jordan was employed by Atlantic Gulf Communities
Corporation, serving as assistant treasurer and then senior vice president and
treasurer.
John T. McMickle is the Controller of LNR. Mr. McMickle joined LNR in July
1997. From 1994 to June 1997, Mr. McMickle was responsible for financial
reporting at Ryder System. Prior to that he was employed as a senior manager by
Price Waterhouse LLP.
Leonard Miller is the Chairman of the Board of Lennar. He has been the
President or Chairman of the Board, or both, of Lennar since it was founded in
1969. From the time Lennar was founded until April 1997, Mr. Miller was the
chief executive officer of Lennar. Leonard Miller is the father of Stuart A.
Miller and the father-in-law of Steven J. Saiontz.
Sue M. Cobb is and for more than five years has been, Managing Director and
General Counsel of Cobb Partners, Inc. and affiliated companies, a privately
owned group of companies involved in investments, real estate and resort
development. She was the founding partner of the Public Finance Department in
the law firm of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., with
whom she was associated from 1978
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until early 1998. From 1993 to 1996, she was also Vice President and General
Counsel of Pan American World Airways, Inc. She is currently a Director of
Enterprise Florida Capital Development Corp., a public/private development
organization in the State of Florida; and a Director of Kirkwood Associates,
Inc., a closely held ski and summer resort company headquartered in Kirkwood,
California. From 1982 to 1988, she was a member of the Board of Directors of the
Federal Reserve Bank of Atlanta, Miami Branch, and served three terms as
Chairman of that Board.
Carlos M. de la Cruz is, and for more than five years has been, the
Chairman of the Board of Eagle Brands, Inc. (a beverage wholesaler), Coca-Cola
Puerto Rico Bottlers and the Miami Honda, Central Hyundai, Sunshine Ford and
Central Kia automobile dealerships.
Brian L. Bilzin is, and since February 1, 1998 has been, a partner in the
law firm of Bilzin Sumberg Dunn Price & Axelrod LLP. For more than five years
prior to February 1, 1998, Mr. Bilzin was a partner in Rubin Baum Levin Constant
Friedman & Bilzin, a law firm.
LNR has an Audit Committee, consisting entirely of directors who are not
employees, officers or former officers of LNR or any of its subsidiaries or
divisions, are not relatives of any of its principal executive officers, and are
not individual members of organizations which act as advisors, consultants or
legal counsel to LNR which receive compensation on a continuing basis from LNR.
The functions of the Audit Committee will be to recommend to the full Board of
Directors the engagement of independent auditors, review the scope of non-audit
services performed for LNR or its subsidiaries by the independent auditors,
review the independent auditors' recommendations for improvements of internal
controls and review the scope of work, findings and conclusions of LNR's
Internal Audit Department. The members of this Committee are Ms. Sue M. Cobb and
Mr. Carlos M. de la Cruz.
LNR's By-Laws require that LNR have, until 2002, an Independent Directors
Committee consisting of three or more directors, none of whom is an officer or
employee of LNR or a subsidiary, and none of whom is a director, officer or
employee of Lennar Corporation or a subsidiary of Lennar Corporation. LNR's
By-Laws state that, unless the action has been approved by the Independent
Directors Committee, LNR may not, and its Board of Directors may not approve or
authorize it to, (i) instruct or permit the representatives of its subsidiary on
the Executive Committee of the Land Partnership to vote or consent with regard
to any action which requires the unanimous vote of that Executive Committee,
(ii) enter into, or permit any of its subsidiaries to enter into, any
transaction with Lennar Corporation or any of its subsidiaries, or (iii) agree
to any amendment of, or give any waiver or consent under, the Separation and
Distribution Agreement. The members of this Committee are Mr. Brian L. Bilzin,
Ms. Sue M. Cobb and Mr. Carlos M. de la Cruz.
LNR has (a) a Compensation Committee, which determines the compensation of
its chief executive officer and other executive officers and reviews the
compensation of its other key employees, (b) a Stock Option Committee, which
grants, and determines the terms of, options under the Company's Employee Stock
Option Plans, except grants to directors or officers of LNR and (c) a Directors
and Officers Stock Option Committee, which approves grants, and the terms of,
options granted to directors or officers of LNR (in addition to approval by
LNR's Board of Directors of grants of options to LNR's directors and officers).
The members of this Committee are Messrs. Leonard Miller and Brian L. Bilzin.
LNR uses incentive compensation to encourage key employees to remain with
the Company, as well as to reward performance. Thus, 50% of bonuses to key
employees are paid when they are earned, with the remaining 50% payable over the
following five years, and most stock options are ten year options which become
exercisable in 10% increments on the first through ninth anniversaries of their
dates of grant.
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PRINCIPAL STOCKHOLDERS
The Company is authorized to issue 150,000,000 shares of common stock, par
value $.10 per share ("Common Stock"). As of May 31, 1998, 25,391,158 shares of
Common Stock were issued and outstanding, and 198,309 shares issuable on
exercise of currently exercisable stock options.
In addition, the Company is authorized to issue 40,000,000 shares of Class
B common stock ("Class B Common Stock"). As of May 31, 1998, 10,757,849 shares
of Class B Common Stock were issued and outstanding.
The following table sets forth certain information as of February 26, 1998,
with respect to the shares of Common Stock of the Company beneficially owned by
each person or group that is known by the Company to be a beneficial owner of
more than 5% of the outstanding Common Stock or Class B Common Stock and all
directors and executive officers of the Company.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENTAGE
NAME AND ADDRESS OWNERSHIP(1) OF TOTAL
OF BENEFICIAL OWNER TITLE OF CLASS (NUMBER OF SHARES) IN CLASS
------------------- -------------- -------------------- -----------
<S> <C> <C> <C>
Leonard Miller.......................... Class B Common Stock 9,897,930(2)(4) 91.8
23 Star Island Common Stock 9,597 *
Miami Beach, FL 33139
Goldman, Sachs & Co..................... Common Stock 3,524,100(3) 13.9
The Goldman Sachs Group, L.P.
85 Broad Street
New York, NY 10004
Cohen & Steers Capital Management,
Inc. ................................. Common Stock 1,949,600(3) 7.7
757 Third Avenue
New York, NY 10017
FMR Corp 82............................. Common Stock 1,867,418 7.4
Devonshire Street
Boston, MA 02109-3614
Brian L. Bilzin......................... Common Stock 7,820(5) *
LNR Property Corporation
760 N.W. 107th Avenue
Miami, FL 33172
Sue M. Cobb............................. Common Stock 20,000(6) *
LNR Property Corporation
760 N.W. 107th Avenue
Miami, FL 33172
Carlos M. de la Cruz.................... Common Stock 220,000 *
LNR Property Corporation
760 N.W. 107th Avenue
Miami, FL 33172
Stuart A. Miller........................ Common Stock 129,093(4) *
LNR Property Corporation
760 N.W. 107th Avenue
Miami, FL 33172
Steven J. Saiontz....................... Common Stock 130,347(4)(7) *
LNR Property Corporation
760 N.W. 107th Avenue
Miami, FL 33172
Jeffrey P. Krasnoff..................... Common Stock 29,146 *
LNR Property Corporation
760 N.W. 107th Avenue
Miami, FL 33172
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENTAGE
NAME AND ADDRESS OWNERSHIP(1) OF TOTAL
OF BENEFICIAL OWNER TITLE OF CLASS (NUMBER OF SHARES) IN CLASS
- ------------------- -------------- -------------------- -----------
<S> <C> <C> <C>
Mark A. Griffith........................ Common Stock 6,615(8) *
LNR Property Corporation
760 N.W. 107th Avenue
Miami, FL 33172
David G. Levin.......................... Common Stock 4,188 *
LNR Property Corporation
760 N.W. 107th Avenue
Miami, FL 33172
All executive officers and directors as
group
(17 persons).......................... Class B Common Stock 9,897,930 90.1
Common Stock 566,863 2.3
</TABLE>
- ---------------
(*) Less than 1%.
(1) Includes currently exercisable stock options and stock options which become
exercisable within sixty days after January 23, 1998 as follows: Stuart A.
Miller (52,500), Steven J. Saiontz (28,772), Jeffrey P. Krasnoff (25,893),
Mark A. Griffith (4,192), David G. Levin (411), all directors and executive
officers (118,138). Also includes shares held by the Company's Employee
Stock Ownership/401(k) Plan for the accounts of the named persons.
(2) Leonard Miller's shares are owned by two limited partnerships. A corporation
wholly-owned by Mr. Miller is the sole general partner of those
partnerships. The limited partners consist of Mr. Miller, his wife and a
trust of which Mr. Miller is the primary beneficiary. Does not include
30,000 shares of Class B Common Stock owned by Miller Family Foundation,
Inc., a charitable foundation of which Mr. Miller is the President.
(3) Based on information contained in Schedule 13Gs dated February 14, 1998 with
respect to Goldman, Sachs & Co. and The Goldman Sachs Group, L.P. and dated
February 9, 1998 with respect to Cohen & Steers Capital Management, Inc.
(4) Stuart Miller is the trustee, and Stuart Miller and Mr. Saiontz's wife are
beneficiaries of a trust which holds limited partnership interests in a
partnership which owns 5,500,000 shares of Class B Common Stock. Because
Leonard Miller is the principal beneficiary of the trust and owns the
corporation which is the sole general partner of the partnership, Leonard
Miller is shown as the beneficial owner of the 5,500,000 shares and neither
Stuart Miller nor Mr. Saiontz is shown as a beneficial owner of those
shares.
(5) Includes 415 shares owned by Mr. Bilzin's wife as to which he has no voting
or investment power and 1,405 shares owned by Mr. Bilzin's sons as to which
he has no voting or investment power and as to which he disclaims beneficial
ownership.
(6) Does not include 30,000 shares owned by Ms. Cobb's husband as to which she
has no voting or investment power.
(7) Does not include 9,000 shares held in a trust for Mr. Saiontz's wife.
(8) Includes five shares owned by Mr. Griffith's son as to which he shares
voting and investment power.
On February 26, 1998, The Depository Trust Company owned of record
24,827,379 shares of Common Stock, constituting 97.94% of the outstanding Common
Stock and 799,834 shares of Class B Common Stock, constituting 7.42% of the
outstanding Class B Common Stock. The Company understands those shares were held
beneficially for members of the New York Stock Exchange, some of whom may in
turn have been holding shares beneficially for customers.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
RELATIONSHIPS WITH LENNAR
In connection with the Spin-off, LNR and Lennar entered into a Separation
and Distribution Agreement and other agreements. Also, Lennar leases office
space from the Company and Lennar and the Company are the two partners in Lennar
Land Partners.
The Separation and Distribution Agreement
The Separation and Distribution Agreement has a number of provisions
relating to the Spin-off and relationships between LNR and Lennar after the
Spin-off. Under the Separation and Distribution Agreement:
Lennar contributed to LNR prior to the Spin-off all the Lennar
subsidiaries which were engaged wholly or primarily in the real estate
investment and management business and any assets of other subsidiaries
which were not used or expected to be used wholly or primarily in
connection with Lennar's homebuilding business. LNR must transfer back to
Lennar any assets of LNR subsidiaries which were used primarily in
connection with Lennar's homebuilding business.
Lennar contributed to LNR cash or additional assets so that, after
LNR's assumption of all Lennar's obligations which related primarily to its
real estate investment and management business, and after an adjustment
described below, Lennar's net worth at the effective time of Lennar's
merger with Pacific Greystone (October 31, 1997) was $200 million plus an
amount approximating the anticipated earnings of Lennar and its
homebuilding subsidiaries from September 1, 1997 to the effective time of
the Pacific Greystone merger.
LNR assumed all the obligations of Lennar and its subsidiaries which
related primarily to its real estate investment and management business,
including the obligations under specified contracts and specified
obligations for borrowed money.
LNR issued to Lennar the shares Lennar required to complete the
Spin-off. LNR then offered, during a limited period after the Spin-off, to
issue LNR Class B Stock in exchange for LNR Common Stock (which resulted in
10.984 million shares of Class B Stock being issued in exchange for Common
Stock). LNR agreed to issue to Lennar any shares of LNR Common Stock Lennar
is required to distribute to holders of stock options which were granted by
Lennar prior to the date of the Spin-off.
Lennar agreed that, at least until 2002, Lennar and its homebuilding
(including home mortgage) subsidiaries will not engage in the business of
(i) acquiring and actively managing commercial and residential multi-family
rental real estate other than as an incident to, or otherwise in connection
with, their homebuilding business, (ii) acquiring portfolios of commercial
mortgage loans or real estate assets acquired through foreclosures of
mortgage loans, other than real estate acquired as sites for homes to be
built or sold as part of their homebuilding business, (iii) making or
acquiring mortgage loans, other than mortgage loans secured by detached or
attached homes or residential condominium units, (iv) constructing office
buildings or other commercial or industrial buildings, other than small
shopping centers, professional office buildings and similar facilities
which will be adjuncts to their residential developments, (v) purchasing
commercial mortgage-backed securities or real estate asset backed
securities or (vi) acting as a servicer or special servicer with regard to
securitized commercial mortgage pools. Lennar and its homebuilding
subsidiaries will not, however, be prevented from owning or leasing office
buildings in which they occupy a majority of the space; acquiring
securities backed by pools of residential mortgages; acquiring an entity
which, when it is acquired, is engaged in one of the prohibited activities
as an incidental part of its activities; owning as a passive investor an
interest of less than 10% of a publicly traded company which is engaged in
a prohibited business; acquiring commercial paper or short-term debt
instruments of entities engaged in one or more of the prohibited
businesses; or owning an interest in, and managing, the Land Partnership.
LNR agreed that, at least until 2002, the Company will not engage in
the business of (i) building or selling single family detached or attached
homes or condominium units in low-rise residential buildings,
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(ii) developing properties primarily as sites for homes or condominium
units (other than properties included in portfolios acquired by the Company
or partnerships in which it is a partner which Lennar elects not to acquire
for the prices paid by LNR or the partnerships), (iii) providing first
mortgage financing for the purchases of homes or condominium units or (iv)
providing first mortgage refinancing of loans secured by homes or
condominium units. The Company is not, however, precluded from developing
properties acquired upon default of mortgages or as incidental portions of
real estate portfolios until they can be disposed of in an orderly manner;
selling as condominium units apartments in multi-family buildings which,
when the buildings or mortgages secured by them were acquired by the
Company, were being operated as rental buildings; acquiring securities
backed by pools of residential mortgages; providing financing to
homebuilders or land developers, acquiring their properties upon default
and overseeing their operations until they or their properties can be
disposed of in an orderly manner, owning as a passive investor an interest
of less than 10% in a publicly traded company which is engaged in a
prohibited business; acquiring an entity which, at the time it is acquired
by the Company, is engaged in one or more of the prohibited activities as
an incidental part of its activities; acquiring commercial paper or other
short-term debt instruments of entities engaged in one or more of the
prohibited businesses; or owning an interest in Lennar Land Partners.
All indebtedness of Lennar or any of its homebuilding subsidiaries to
the Company, and all indebtedness of the Company to Lennar or any of its
homebuilding subsidiaries, was eliminated immediately before the date of
the Spin-off.
Lennar agreed to indemnify the Company against any liabilities or
expenses relating to (i) Lennar's homebuilding business, (ii) any Lennar
obligations for borrowings incurred before the date of the Spin-off which
were not assumed by LNR, or (iii) any registration statement, proxy
statement, press release or other document issued by Lennar in connection
with the Pacific Greystone merger (except with regard to information about
LNR provided in writing by LNR).
LNR agreed to indemnify Lennar and each of its homebuilding
subsidiaries against any liabilities or expenses relating to (i) the real
estate investment and management business, (ii) any obligations assumed by
LNR or any of its subsidiaries, (iii) the Spin-off, (iv) the Information
Statement relating to the Spin-off, (v) any press release or any document
issued by LNR with regard to the Spin-off, (vi) any obligations, including
contingent obligations, of Lennar or any of its past or current
subsidiaries or affiliates existing on or before the date of the Spin-off
that did not arise exclusively or primarily in the conduct of Lennar's
homebuilding business (except that indemnification with regard to Lennar
corporate financings or other Lennar corporate activities which did not
specifically relate to any aspects of its operations was limited to 71.5%
of the liability or expense) and (vii) any actual or contingent liabilities
of Lennar or any of its past or current subsidiaries or affiliates existing
on or before the date of the Spin-off relating to any business or line of
business which at any time was treated on Lennar's consolidated financial
statements as a discontinued operation or a discontinued line of business,
or which was divested by Lennar or any of its current or former
subsidiaries prior to the date of the Spin-off.
LNR agreed that if, other than because of actions taken by Lennar
after its October 31, 1997 merger with Pacific Greystone Corporation, it is
determined that the Spin-off did not qualify as a transaction in which the
LNR stock distributed to the Lennar stockholders did not result in income
or gain to the Lennar stockholders and did not require Lennar to recognize
income or gain, and as a result Lennar incurs any liabilities for taxes,
interest or penalties to any taxing jurisdiction which it would not have
incurred if the Spin-off had been tax free, LNR will pay Lennar an amount
equal to the liabilities incurred for taxes, interest and penalties as a
result of the Spin-off and all related accounting, legal and professional
fees, as well as any costs, expenses or damages Lennar incurs as a result
of stockholder litigation or controversies because the Spin-off was not tax
free. See "Risk Factors."
LNR and Lennar agreed that all transactions between Lennar or any of
its homebuilding subsidiaries and the Company must be on substantially the
same terms as those which would prevail in a transaction between
unaffiliated persons. Neither Lennar nor any of its homebuilding
subsidiaries may enter into any transaction with the Company which will
involve a payment or loan of more than $5 million unless
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Lennar receives a copy of a resolution of LNR's Board of Directors in which
that Board of Directors determines that the transaction is on substantially
the same terms as those which would prevail in a transaction between
unaffiliated persons. The Company may not enter into any transaction with
Lennar or any of its homebuilding subsidiaries which will involve a payment
or loan of more than $5 million unless the Company receives a copy of a
resolution of Lennar's Board of Directors in which that Board of Directors
determines that the transaction or loan is on substantially the same terms
as those which would prevail in a transaction between unaffiliated persons.
The requirement that transactions be on substantially the same terms as
those which would prevail in a transaction between unaffiliated persons
does not include transactions with Lennar Land Partners.
LNR agreed to pay Lennar an amount equal to its share of Lennar's
total income tax liability for the period from December 1, 1996 to the date
of the Spin-off (October 31, 1997), allocating income to the Company on a
basis provided in the Treasury Regulations as if Lennar and LNR had been
separately incorporated members of the same consolidated group during that
period and LNR had owned and operated Lennar's real estate investment and
management business during the period. Lennar and LNR must give one another
access to their books and records and knowledgeable personnel in order to
permit the other of them to prepare financial statements and tax returns,
in connection with audits of tax returns, and for other business purposes.
LNR and Lennar agreed that if, after an audit required by the Pacific
Greystone Merger Agreement, it was determined that Lennar's net worth at
the Effective Time of the Pacific Greystone merger (October 31, 1997) was
less or more than $200 million plus an amount approximating the anticipated
earnings of Lennar and its homebuilding subsidiaries from September 1, 1997
to the date of the Pacific Greystone merger, LNR would return to Lennar a
portion of Lennar's capital contributions to LNR equal to the amount by
which Lennar's net worth was less than that amount, or Lennar would make
additional capital contributions to LNR equal to the amount by which
Lennar's net worth was more than that amount (this obligation was satisfied
in December 1997 by LNR's returning to Lennar $12.6 million of Lennar's
capital contribution).
Lennar Land Partners
Lennar and LNR, through wholly owned subsidiaries, each owns 50% of the
Land Partnership. The purpose of the Land Partnership is to have Lennar and LNR
share the risks and profits of ownership of some real property which had been
acquired by Lennar for use in its homebuilding activities, and possibly
additional properties which will be acquired in the future. Prior to formation
of the Land Partnership, Lennar transferred to the Company approximately 50% in
value of the original properties which were to be contributed to the Land
Partnership. Lennar and LNR then contributed all the original properties to the
Land Partnership in exchange for 50% interests in the Land Partnership.
Lennar manages the day-to-day activities of the Land Partnership under a
management agreement. Lennar is reimbursed by the Land Partnership for all
direct out-of-pocket expenses plus an agreed monthly amount ($500,000 per month
in 1997 and in 1998) for certain indirect expenses. The reimbursement is subject
to adjustment in the Land Partnership's annual business plan.
The Land Partnership is governed by an Executive Committee of not more than
three members designated by each partner, with all the members designated by a
partner acting as representatives of that partner (without fiduciary or other
obligations to the other partner) and together having a single vote. Actions of
the Executive Committee must be by majority vote (based upon one vote per
partner). Therefore, while the LNR and Lennar subsidiaries are the only
partners, each of them will have a veto over all matters presented to the
Executive Committee. Even if there were additional partners, a number of matters
would require the unanimous vote of the Executive Committee (based upon one vote
per partner), including (i) the acquisition by the Land Partnership of real
property, other than the original properties contributed by Lennar and LNR, (ii)
the sale of any real property to a partner or an affiliate of a partner, other
than upon exercise of an option or under a purchase agreement which had been
approved by the Executive Committee, (iii) the adoption of an annual business
plan, (iv) approval of a master plan relating to a property owned by the Land
Partnership,
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(v) a borrowing from or loan to any person, including a partner or its
affiliate, (vi) any amendment to the Management Agreement with Lennar, (vii) any
requirement that the partners make additional capital contributions to the Land
Partnership, or (viii) any agreement with a partner or an affiliate of a partner
which is not otherwise subject to the requirement of unanimous Executive
Committee approval.
Although Lennar may recommend that the Land Partnership acquire additional
properties, Lennar will be under no obligation to do so, and Lennar will be free
to acquire properties itself without considering whether they would be suitable
for the Land Partnership. Conversely, because of the requirements discussed
above for unanimous Executive Committee approval of acquisitions of properties,
LNR could, in effect, veto any future property acquisitions by the Land
Partnership. If Lennar failed to recommend that the Land Partnership acquire
additional properties, or LNR vetoed all proposed acquisitions of additional
properties by the Land Partnership, the activities of Land Partnership would be
limited to developing and disposing of the original properties which were
contributed to it when it was formed.
LNR's Bylaws provide that its representatives on the Executive Committee of
the Land Partnership may not vote in favor of any action specified to require
the unanimous vote of the Executive Committee without approval of the
Independent Directors Committee of LNR's Board of Directors, none of the members
of which may be an officer or employee of the Company or a director, officer or
employee of Lennar or any subsidiary of Lennar.
Other Relationships
There are a number of relationships between Lennar and LNR, in addition to
those arising under the Separation and Distribution Agreement or relating to the
Land Partnership. Among other things, immediately after the Spin-off, all the
stockholders of LNR were persons who had been stockholders of Lennar on the
record date for the Spin-off. More importantly, Leonard Miller, who has voting
control of Lennar, also has voting control of LNR through his ownership of LNR
Class B Common Stock. Also, Stuart A. Miller, the Chairman of the Board of LNR,
is the chief executive officer of Lennar, Steven J. Saiontz, the Chief Executive
Officer of LNR, is a director of Lennar, and Leonard Miller, who is a director
and has voting control of LNR, is the Chairman of the Board of Lennar. In
addition, LNR and Lennar will, for a period, share some computers and related
equipment and computer service personnel, Lennar will provide construction
management with regard to four properties owned by the Company until the
properties are completed and Lennar leases office space from LNR. Finally,
because all LNR's employees immediately after the Spin-off were people who were
previously employees of Lennar, LNR had to assume many of Lennar's benefit
obligations with regard to the people who became employees of LNR.
RELATIONSHIP WITH DIRECTOR
Brian L. Bilzin was a partner in the law firm of Rubin Baum Levin Constant
Friedman & Bilzin, which firm was retained by the Company during the fiscal year
ended November 30, 1997. Mr. Bilzin is currently a partner in the law firm of
Bilzin Sumberg Dunn Price & Axelrod LLP, a law firm that the Company currently
retains.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following table sets forth the Company's mortgage notes and other debts
payable at May 31, 1998.
<TABLE>
<CAPTION>
MAY 31, 1998
--------------
(IN THOUSANDS)
<S> <C>
Secured debt without recourse to LNR
Mortgage notes on operating properties and land with fixed
interest rates of 4.9% to 11%, due through April
2036................................................... $110,189
Mortgage notes on operating properties and land with a
floating interest rate (7.4% to 9.5% at May 31, 1998),
due through 2027....................................... 72,099
Repurchase agreement with a floating interest rate of 6.6%
at May 31, 1998,
due June 1998.......................................... 33,750
--------
Total secured debt without recourse to LNR........ 216,038
--------
Secured debt with recourse to LNR
Mortgage notes on operating properties and land with fixed
interest rates of 7.3% to 8.0%, due through 2004....... 26,919
Mortgage notes on operating properties and land with
floating interest rates (4.0% to 9.2% at May 31, 1998),
due through December 2010.............................. 36,838
Repurchase agreements with floating interest rates (6.4%
to 6.9% at May 31, 1998), secured by CMBS, due through
October 1998........................................... 185,630
Revolving credit line with a floating interest rate of
6.7% at May 31, 1998, secured by CMBS, due August
1998................................................... 20,000
--------
Total secured debt with recourse to LNR........... 269,387
--------
Unsecured debt with recourse to LNR
Revolving credit line with a floating interest rate of
6.8% at May 31, 1998, due December 2000................ 70,000
Senior Subordinated Debt with a fixed interest rate of
9.4% at May 31, 1998, due March 2008................... 199,115
--------
Total unsecured debt with recourse to LNR......... 269,115
--------
Total mortgage notes and other debts payable...... $754,540
========
</TABLE>
Information concerning the Company's more significant debt instruments is
as follows:
Mortgage and/or Developer Notes on Operating Properties
The Company, through certain subsidiaries, has 68 mortgage and/or developer
notes on operating properties, 33 of which have scheduled principal and interest
payments, and the remainder of which only have scheduled interest payments, with
the principal due at maturity.
Repurchase Agreements
The Company, through certain subsidiaries, has entered into three reverse
repurchase agreements through which it finances selected CMBS and a mortgage
loan. The agreements have an aggregate commitment of $344 million under which
$219 million was outstanding at May 31, 1998. Interest is variable and is based
on LIBOR plus specified percentages. The agreements mature during 1998 and are
expected to be refinanced or extended on substantially the same terms as the
existing agreements. LNR has guaranteed the obligations of its subsidiaries
under two of these agreements and the agreements are collateralized by the CMBS
and the mortgage loan.
Revolving Credit Lines
The Company, through certain subsidiaries, has two secured revolving credit
lines with an aggregate commitment of $75 million under which $20 million was
outstanding at May 31, 1998. Interest is variable and
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is based on LIBOR plus specified percentages. The lines are collateralized by
CMBS and mortgage loans. The lines mature during 1998 and 1999 and are expected
to be refinanced or extended on substantially the same terms as the existing
lines. The agreements also contain certain financial tests and restrictive
covenants, none of which are currently expected to restrict the Company's
activities. LNR has guaranteed the obligations of its subsidiaries under these
agreements.
UNSECURED REVOLVING CREDIT NOTES PAYABLE
On December 5, 1997, the Company, and certain of its subsidiaries, entered
into a $200 million unsecured revolving credit agreement which expires on
December 31, 2000, with the option of a one year extension. The unsecured
revolving credit notes payable were amended and restated on March 27, 1998 under
principally the same terms and conditions. Interest is calculated at LIBOR plus
a margin, which varies based on the Company's leverage and debt ratings. At May
31, 1998, there was $70 million outstanding under the Revolving Credit
Agreement. At May 31, 1998, the interest rate was 6.8%. The agreement contains
certain financial tests and restrictive covenants, including maximum leverage
ratio, minimum net worth, minimum interest and fixed charge coverage ratios and
limits on the incurrence of unsecured senior debt and subordinated debt. In
addition, the Company is required to maintain a borrowing base. None of the
covenants is currently expected to restrict the Company's activities.
LNR GUARANTEES OF PARTNERSHIP DEBT
LNR is a guarantor or similarly obligated with regard to $225 million of
credit facilities, under which $85 million was outstanding at May 31, 1998. If
the Land Partnership defaults under those credit facilities, the lenders have
the right to require LNR, together with Lennar, to purchase the Land
Partnership's obligations to the lenders, or a portion of them. However, if the
default is failure to meet financial convenants, the lenders must give LNR and
Lennar the opportunity to cure the default. See "Certain Relationships and
Transactions -- Relationships with Lennar -- Lennar Land Partners."
In addition, LNR was the guarantor of up to $21 million of additional
credit facilities of unconsolidated partnerships, under which $16 million was
outstanding at May 31, 1998.
DEBT PLACEMENT
On March 19, 1998, LNR sold $200,000,000 principal amount of 9 3/8% Old
Notes, the proceeds of which were used to repay short-term indebtedness.
DESCRIPTION OF THE NEW NOTES
The New Notes will be issued under an indenture (the "Indenture"), dated as
of March 24, 1998 between LNR and U.S. Bank Trust National Association (formerly
"First Trust of New York, National Association"), as trustee (the "Trustee").
Upon the issuance of the New Notes, if any, or the effectiveness of a Shelf
Registration Statement, the Indenture will be subject to the Trust Indenture Act
of 1939, as amended (the "TIA"). The following summary of certain provisions of
the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the TIA, and to all of the provisions
of the Indenture, including the definitions of certain terms in the Indenture
and the definitions made a part of the Indenture by reference to the TIA as in
effect on the date of the Indenture. A copy of the Indenture may be obtained
from LNR. The definitions of certain capitalized terms used in the following
summary are set forth below under "-- Certain Definitions." References to
"interest" will be deemed to include Additional Interest, as described under
"Exchange Offer; Termination of Certain Rights" unless the context requires
otherwise.
The New Notes will be unsecured obligations of LNR, ranking subordinate in
right of payment to all Senior Indebtedness of LNR.
The New Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as Paying Agent and Registrar for the New Notes. Subject to
the provisions described under "The Exchange Offer," the Old Notes may be
presented for
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<PAGE> 76
registration or transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. LNR may change any
Paying Agent and Registrar without notice to holders of the New Notes (the
"Holders"). LNR will pay principal (and premium, if any) on the New Notes at the
Trustee's corporate office in New York, New York. At LNR's option, interest may
be paid at the Trustee's corporate trust office or by check mailed to the
registered address of Holders. Any Old Notes that remain outstanding after the
completion of the Exchange Offer, together with the New Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Indenture authorizes the issuance from time to time of not more than
$350,000,000 in aggregate principal amount of 9 3/8% Senior Subordinated Notes
due 2008 consisting of either Series A or Series B Notes having identical terms
(except, in certain cases, for the date from which interest will accrue). The
New Notes offered by this Prospectus are limited in aggregate principal amount
to $200,000,000, and will mature on March 15, 2008. Interest on the New Notes
will accrue at the rate of 9 3/8% per annum and will be payable semiannually in
arrears on each March 15 and September 15, commencing on September 15, 1998, to
the persons who are registered Holders at the close of business on the fifteenth
day immediately preceding the applicable interest payment date. Interest on the
New Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from and including the date of issuance.
The New Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
Optional Redemption
The New Notes will be redeemable, at LNR's option, in whole or in part at
any time, or from time to time, on or after March 15, 2003 upon not less than 30
nor more than 60 days' notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-
month period commencing on March 15 of the years set forth below, plus, in each
case, accrued and unpaid interest thereon, if any, to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003.............................................. 104.688%
2004.............................................. 103.516
2005.............................................. 102.344
2006.............................................. 101.172
2007 and thereafter............................... 100.000
</TABLE>
Optional Redemption upon Public Equity Offerings
Notwithstanding the foregoing, at any time, or from time to time, on or
prior to March 15, 2001, LNR may, at its option, redeem, with the net cash
proceeds of one or more Public Equity Offerings (as defined), up to 35% of the
aggregate principal amount of the New Notes originally issued, at a redemption
price equal to 109.375% of the principal amount of the New Notes to be redeemed,
plus accrued interest, if any, to the date of redemption; provided that at least
65% of the aggregate principal amount of the New Notes originally issued remains
outstanding immediately following such redemption. In order to effect the
foregoing redemption with the proceeds of a Public Equity Offering, LNR must
make the redemption not more than 60 days after the consummation of the Public
Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of LNR pursuant to an
effective registration statement filed with the Commission in accordance with
the Securities Act.
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SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the New Notes are to be redeemed at any
time, selection of such New Notes or portions thereof to be redeemed will be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which such New Notes are listed or, if
such New Notes are not then listed on a national securities exchange, by lot, on
a pro rata basis, or by such method as the Trustee shall deem fair and
appropriate; provided, however, that no New Notes of a principal amount of
$1,000 or less shall be redeemed in part; provided further, that if a partial
redemption is made with the proceeds of a Public Equity Offering, selection of
the New Notes or portions thereof to be redeemed shall be made by the Trustee
only on a pro rata basis or on as nearly a pro rata basis as is practicable
(subject to DTC procedures), unless such method is otherwise prohibited. Notice
of redemption shall be mailed by first-class mail at least 30 but not more than
60 days before the redemption date to each Holder of New Notes to be redeemed at
its registered address. If any New Note is to be redeemed in part only, the
notice of redemption that relates to such New Note shall state the portion of
the principal amount thereof to be redeemed. A replacement New Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original New Note. On and
after the redemption date, interest will cease to accrue on New Notes or
portions thereof called for redemption as long as LNR has deposited with the
paying agent funds in satisfaction of the applicable redemption price pursuant
to the Indenture.
SUBORDINATION
The payment of all Obligations on the New Notes will be subordinated in
right of payment to the prior payment in full in cash or cash equivalents of all
Obligations on Senior Indebtedness, whether outstanding on the Issue Date or
thereafter incurred, including without limitation LNR's obligations under the
Credit Agreement. Upon any payment or distribution of assets of LNR of any kind
or character, whether in cash, property or securities, to creditors upon any
total or partial liquidation, dissolution, winding-up, reorganization,
assignment for the benefit of creditors or marshaling of assets of LNR or in a
bankruptcy, reorganization, insolvency, receivership or other similar proceeding
relating to LNR or its property, whether voluntary or involuntary, all
Obligations upon all Senior Indebtedness shall first be paid in full in cash or
cash equivalents, or such payment duly provided for to the satisfaction of the
holders of Senior Indebtedness, before any payment or distribution of any kind
or character is made on account of any Obligations on the New Notes, or for the
acquisition of any of the New Notes for cash or property or otherwise. If any
default occurs and is continuing in the payment when due, whether at maturity,
upon any redemption, by declaration or otherwise, of any principal of, interest
on, unreimbursed drawings for letters of credit issued in respect of, or
regularly accruing fees with respect to, any Senior Indebtedness, no payment of
any kind or character shall be made by or on behalf of LNR or any other Person
on its or their behalf with respect to any Obligations on the New Notes or to
acquire any of the Notes for cash or property or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Indebtedness, as such event of default is
defined in the instrument creating or evidencing such Designated Senior
Indebtedness, permitting the holders of such Designated Senior Indebtedness then
outstanding to accelerate the maturity thereof and if the Representative for
that issue of Designated Senior Indebtedness gives written notice of the event
of default to the Trustee (a "Default Notice"), then, unless and until all
events of default with respect to that issue of Designated Senior Indebtedness
have been cured or waived or have ceased to exist or the Trustee receives notice
from the Representative for that issue of Designated Senior Indebtedness
terminating the Blockage Period (as defined below), during the 180 days after
the delivery of such Default Notice (the "Blockage Period"), neither LNR nor any
Subsidiary of LNR or any obligor under the Notes shall (x) make any payment of
any kind or character with respect to any Obligations on the New Notes or (y)
acquire any of the New Notes for cash or property or otherwise. Notwithstanding
anything herein to the contrary, in no event will a Blockage Period extend
beyond 180 days from the date the payment on the New Notes was due and only one
such Blockage Period may be commenced with respect to all issues of Designated
Senior Indebtedness within any 360 consecutive days. No event of default which
existed or was continuing on the date of the commencement of any Blockage Period
with respect to the Designated Senior
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Indebtedness shall be, or be made, the basis for commencement of a second
Blockage Period by the Representative of such Designated Senior Indebtedness,
whether or not within a period of 360 consecutive days, unless such event of
default shall have been cured or waived for a period of not less than 90
consecutive days (it being acknowledged that any subsequent action, or any
breach of any financial covenants for a period commencing after the date of
commencement of such Blockage Period that, in either case, would give rise to an
event of default pursuant to any provisions under which an event of default
previously existed or was continuing shall constitute a new event of default for
this purpose).
By reason of such subordination, in the event of the insolvency of LNR,
creditors of LNR who are not holders of Senior Indebtedness, including the
Holders of the New Notes, may recover less, ratably, than holders of Senior
Indebtedness.
As of May 31, 1998, giving effect to the sale of Old Notes and the
application of the estimated net proceeds therefrom, the aggregate amount of
Senior Indebtedness outstanding was approximately $629 million.
LNR is principally a holding company whose primary assets consist of shares
of Common Stock issued by its Subsidiaries. Accordingly, LNR will be dependent
upon the cash flows of, and receipt of dividends and advances from, or
repayments of advances by, its Subsidiaries in order to meet its debt
obligations including LNR's obligations under the New Notes. The New Notes will
not be guaranteed by LNR's Subsidiaries, and, consequently, LNR's Subsidiaries
are not obligated or required to pay any amounts pursuant to the New Notes or to
make funds available therefor in the form of dividends or advances. See "Risk
Factors -- Structural Subordination to Subsidiary Debt."
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that LNR purchase all or a portion of
such Holder's New Notes pursuant to the offer described below (the "Change of
Control Offer"), at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date of purchase.
Within 30 days following the date upon which a Change of Control occurs,
LNR must send, by first class mail, a notice to each Holder at such Holder's
last registered address, with a copy to the Trustee, which notice shall govern
the terms of the Change of Control Offer. Such notice shall state, among other
things, the purchase date, which must be no earlier than 30 days nor later than
45 days from the date such notice is mailed, other than as may be required by
law (the "Change of Control Payment Date"). Holders electing to have a New Note
purchased pursuant to a Change of Control Offer will be required to surrender
the New Note, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the New Note completed, to the paying agent at the address specified
in the notice prior to the close of business on the third business day prior to
the Change of Control Payment Date.
In connection with any Change of Control, LNR will within 30 days following
any Change of Control, (i) obtain the consents under the Credit Agreement and
all other Senior Indebtedness required to permit the repurchase of the New Notes
pursuant to a Change of Control Offer or (ii) repay in full all Indebtedness,
and terminate all commitments, under the Credit Agreement and all other Senior
Indebtedness the terms of which would prohibit the purchase of the New Notes
pursuant to a Change of Control Offer.
If LNR is obligated to make a Change of Control Offer, there can be no
assurance that LNR will be able to obtain all required consents under Senior
Indebtedness or have available funds sufficient to repay Senior Indebtedness and
to pay the Change of Control purchase price for all the New Notes that might be
delivered by Holders seeking to accept the Change of Control Offer. In the event
LNR is required to purchase outstanding Notes pursuant to a Change of Control
Offer, LNR would need to seek third party financing to the extent it does not
have available funds to meet its purchase obligations. However, there can be no
assurance that LNR would be able to obtain any such financing.
Neither the Board of Directors of LNR nor the Trustee may waive the
covenant relating to LNR's obligation to repurchase New Notes upon a Change of
Control. That obligation, as well as restrictions in the
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Indenture on the ability of LNR and its Subsidiaries to incur additional
Indebtedness, to grant liens on its property and to make Restricted Payments may
also make more difficult or discourage a takeover of LNR, whether favored or
opposed by the management of LNR. Consummation of any such transaction in
certain circumstances may require redemption or repurchase of the New Notes, and
there can be no assurance that LNR or the acquiring party will have sufficient
financial resources to effect such redemption or repurchase. Such obligations
and restrictions, and the restrictions on transactions with Affiliates, may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
LNR or any of its Subsidiaries by the management of LNR. However, the Indenture
may not afford the Holders of New Notes protection in all circumstances from the
adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction.
The Indenture provides that a Change of Control will occur on, among other
events, the sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the assets of each of LNR and its Subsidiaries taken as a
whole. Although there is case law interpreting the phrase "substantially all,"
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a Holder of New Notes to require LNR to repurchase
such Notes as a result of a sale, lease, transfer, conveyance or other
disposition of less than all of the assets of LNR and its Subsidiaries taken as
a whole to another Person or group may be uncertain.
LNR will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of New Notes
pursuant to a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Change of Control" provisions
of the Indenture, LNR shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Change of Control" provisions of the Indenture by virtue thereof.
LNR will not be required to make a Change of Control Offer if a third party
makes the Change of Control Offer in compliance with the requirements of the
Indenture and purchases all New Notes validly tendered and not withdrawn under
such Change of Control Offer in response to such Change of Control Offer.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. LNR will not, and
will not cause or permit any of its Subsidiaries to, directly or indirectly,
create, incur, assume, guarantee, acquire, become liable, contingently or
otherwise, with respect to, or otherwise become responsible for payment of
(collectively, "incur"), any Indebtedness (including, without limitation,
Acquired Indebtedness) other than Permitted Indebtedness. Notwithstanding the
foregoing, if no Default or Event of Default shall have occurred and be
continuing at the time of or as a consequence of the incurrence of any such
Indebtedness, LNR and its Subsidiaries may incur Indebtedness (including,
without limitation, Acquired Indebtedness) if on the date of the incurrence of
such Indebtedness, after giving effect to the incurrence thereof:
(i) the Consolidated Fixed Charge Coverage Ratio of LNR is greater
than 1.5 to 1.0;
(ii) the ratio of the aggregate amount of Recourse Indebtedness
outstanding on a consolidated basis to the Consolidated Net Worth of LNR is
less than 5.0 to 1.0;
(iii) the ratio of the aggregate amount of Senior Recourse
Indebtedness outstanding on a consolidated basis to the sum of (A) the
Consolidated Net Worth of LNR and (B) the aggregate amount of the
Subordinated Indebtedness outstanding on a consolidated basis is less than
3.5 to 1.0; and
(iv) the ratio of the aggregate amount of Subordinated Indebtedness
outstanding on a consolidated basis to the Consolidated Net Worth of LNR is
less than 1.0 to 1.0.
No Indebtedness incurred pursuant to the preceding sentence shall be included in
calculating any limitation set forth in the definition of Permitted
Indebtedness. Neither the accrual of interest nor the accretion of original
issue discount shall be deemed an incurrence of Indebtedness. Prior to any
incurrence of Indebtedness
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pursuant to the second sentence of this paragraph (other than an advance under a
committed facility), LNR shall deliver to the Trustee an Officers' Certificate
setting forth the calculations by which such incurrence was determined to be
permitted. If, during any month, LNR incurs Indebtedness pursuant to the second
sentence of this paragraph through advances under a committed facility, LNR
shall deliver to the Trustee on the last day of such month an officers'
certificate setting forth the calculations by which each such incurrence was
determined to be permitted.
Limitation on Restricted Payments. LNR will not, and will not cause or
permit any of its Subsidiaries to, directly or indirectly, (a) declare or pay
any dividend or make any distribution (other than dividends or distributions
made to LNR or any Subsidiary of LNR and, if such Subsidiary is not a Wholly
Owned Subsidiary, to such Subsidiary's other stockholders or interest holders on
a pro rata basis, and other than any dividend or distribution payable solely in
Qualified Capital Stock of LNR) on or in respect of shares of LNR's Capital
Stock to holders of such Capital Stock; (b) purchase, redeem or otherwise
acquire or retire for value any Capital Stock of LNR or any warrants, rights or
options to purchase or acquire shares of any class of such Capital Stock (other
than the exchange of such Capital Stock or any warrants, rights or options to
acquire shares of any class of Capital Stock of LNR for Qualified Capital Stock
of LNR); or (c) make any principal payment on, purchase, defease, redeem,
prepay, decrease or otherwise acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund payment,
any Indebtedness of LNR or a Subsidiary that is subordinate or junior in right
of payment to the New Notes or any guarantee thereof (each of the foregoing
actions set forth in clauses (a), (b) and (c) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or an Event of Default shall have occurred and be
continuing or (ii) LNR is not able to incur at least $1.00 of additional
Indebtedness (other than additional Permitted Indebtedness) in compliance with
the "Limitation on Incurrence of Additional Indebtedness" covenant above, or
(iii) the aggregate amount of all Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Issue Date (the amount expended for
such purposes, if other than in cash, being the fair market value of such
property as determined reasonably and in good faith by the Board of Directors of
LNR) shall exceed the sum of: (A) 50% of the cumulative Consolidated Net Income
(or if cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss) of LNR earned during the period beginning on the first day of the fiscal
quarter including the Issue Date and ending on the last day of the most recent
fiscal quarter ending at least 30 days prior to the date the Restricted Payment
occurs (the "Reference Date") (treating such period as a single accounting
period); plus (B) 100% of the aggregate net cash proceeds received by LNR from
any Person (other than a Subsidiary of LNR) from the issuance and sale
subsequent to the Issue Date and on or prior to the Reference Date of Qualified
Capital Stock of LNR, including treasury stock; plus (C) without duplication of
any amounts included in clause (B) above, 100% of the aggregate net cash
proceeds of any equity contribution received by LNR from a holder of LNR's
Capital Stock subsequent to the Issue Date and on or prior to the Reference Date
(excluding, in the case of clauses (B) and (C), any net cash proceeds from a
Public Equity Offering to the extent used to redeem the New Notes); plus (D)
$75,000,000.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph shall not prohibit: (1) the payment of any dividend or the
consummation of any irrevocable redemption within 60 days after the date of
declaration of such dividend or the giving of such irrevocable redemption notice
if the dividend or redemption would have been permitted on the date of
declaration or giving of irrevocable redemption notice; (2) if no Default or
Event of Default shall have occurred and be continuing, the acquisition of any
shares of Capital Stock of LNR, either (i) solely in exchange for shares of
Qualified Capital Stock of LNR or (ii) through the application of net proceeds
of a substantially concurrent sale for cash (other than to a Subsidiary of LNR)
of shares of Qualified Capital Stock of LNR; (3) if no Default or Event of
Default shall have occurred and be continuing, the acquisition of any
Indebtedness of LNR that is subordinate or junior in right of payment to the New
Notes either (i) solely in exchange for shares of Qualified Capital Stock of LNR
or (ii) through the application of net proceeds of a substantially concurrent
sale for cash (other than to a Subsidiary of LNR) of (A) shares of Qualified
Capital Stock of LNR or (B) Refinancing Indebtedness; and (4) if no Default or
Event of Default shall have occurred and be continuing, the repurchase of shares
of, or options to purchase shares of, Common Stock of LNR from employees, former
employees, directors or former directors of LNR pursuant to the terms of
agreements or plans approved by the Board of
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Directors of LNR under which such individuals purchased or sold, or were granted
the option to purchase or sell shares of Common Stock, provided, however, that
the aggregate amount of such repurchases or Restricted Payments shall not exceed
$250,000 in any calendar year. In determining the aggregate amount of Restricted
Payments made subsequent to the Issue Date in accordance with clause (iii) of
the immediately preceding paragraph, amounts expended pursuant to clauses (1),
(2)(ii) and (3)(ii)(A) shall be included in such calculation.
Not later than three business days before making any Restricted Payment,
LNR shall deliver to the Trustee an officers' certificate stating that such
Restricted Payment complies with the Indenture and setting forth in reasonable
detail the basis upon which the required calculations were computed.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. LNR will not, and will not cause or permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary of LNR to (a) pay dividends or make any other distributions on or in
respect of its Capital Stock; (b) make loans or advances or pay any Indebtedness
or other obligation owed to LNR or any other Subsidiary of LNR; or (c) transfer
any of its property or assets to LNR or any other Subsidiary of LNR, except for
such encumbrances or restrictions existing under or by reason of: (1) applicable
law; (2) the Indenture; (3) the Credit Agreement; (4) nonassignment provisions
of any contract or any lease governing a leasehold interest of any Subsidiary of
LNR; (5) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person or the properties or assets of the Person so
acquired; (6) agreements existing on the Issue Date to the extent and in the
manner such agreements are in effect on the Issue Date; (7) restrictions on the
transfer of assets subject to any Lien permitted under the Indenture to secure
Non-Recourse Indebtedness imposed by the holder of such Lien; (8) restrictions
imposed by any agreement to sell assets permitted under the Indenture to any
Person pending the closing of such sale; (9) any agreement or instrument
governing Capital Stock of any Person that is acquired; or (10) an agreement
governing Indebtedness incurred to Refinance the Indebtedness issued, assumed or
incurred pursuant to an agreement referred to in clause (2), (3), (5) or (6)
above, provided, however, that the provisions relating to such encumbrance or
restriction contained in any such Indebtedness incurred to Refinance the
Indebtedness are not less favorable to LNR in any material respect as determined
by the Board of Directors of LNR in their reasonable and good faith judgment
than the provisions relating to such encumbrance or restriction contained in
agreements referred to in such clause (2), (3), (5) or (6), respectively.
Limitation on Preferred Stock of Subsidiaries. LNR will not permit any of
its Subsidiaries to issue any Preferred Stock (other than to LNR or to a Wholly
Owned Subsidiary of LNR) or permit any Person (other than LNR or a Wholly Owned
Subsidiary of LNR) to own any Preferred Stock of any Subsidiary of LNR.
Limitation on Liens and Guarantees. LNR will not, and will not cause or
permit any of its Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens securing Indebtedness of LNR that is
expressly subordinate or junior in right of payment to the Notes or is pari
passu in right of payment to New Notes against or upon any property or assets of
LNR or any of its Subsidiaries (whether owned on the Issue Date or acquired
after the Issue Date), or any proceeds therefrom, or assign or otherwise convey
any right to receive income or profits therefrom, or to grant any guarantees of
such Indebtedness, unless (i) in the case of Liens securing Indebtedness of LNR
that is expressly subordinate or junior in right of payment to the New Notes,
the New Notes are secured by a Lien on such property, assets or proceeds that is
senior in priority to such Liens, (ii) in the case of guarantees of Indebtedness
of LNR that is expressly subordinate or junior in right of payment to the New
Notes, the New Notes are subject to a guarantee from the same guarantor or
guarantors that is senior in priority to such guarantees, and (iii) in all other
cases, the New Notes are equally and ratably secured or guaranteed as
applicable. For purposes of clarification, any Lien against property, assets,
proceeds or rights to receive income or profits securing Indebtedness which has
been guaranteed will be considered to be a Lien securing the Indebtedness and
not a Lien securing the guarantee.
Prohibition on Incurrence of Senior Subordinated Debt. LNR will not incur
or suffer to exist Indebtedness that by its terms (or by the terms of any
agreement governing such Indebtedness) is senior in
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right of payment to the New Notes and expressly subordinate in right of payment
to any other Indebtedness of LNR.
Merger, Consolidation and Sale of Assets. LNR will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of LNR's assets (determined on a consolidated basis for LNR
and its Subsidiaries) unless: (i) either (1) LNR shall be the surviving or
continuing corporation or (2) the Person (if other than LNR) formed by such
consolidation or into which LNR is merged or the Person which acquires by sale,
assignment, transfer, lease, conveyance or other disposition the properties and
assets of LNR and its Subsidiaries substantially as an entirety (the "Surviving
Entity") (x) shall be a corporation organized and validly existing under the
laws of the United States or any State thereof or the District of Columbia and
(y) shall expressly assume, by supplemental indenture (in form and substance
satisfactory to the Trustee), executed and delivered to the Trustee, the due and
punctual payment of the principal of, premium, if any, and interest on all of
the New Notes and the performance of every covenant of the New Notes, the
Indenture and the Registration Rights Agreement on the part of LNR to be
performed or observed, as the case may be; (ii) immediately after giving effect
to such transaction and the assumption contemplated by clause (i)(2)(y) above
(including giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred in connection with or in respect of such
transaction), LNR or such Surviving Entity, as the case may be, (1) shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
LNR immediately prior to such transaction and (2) shall be able to incur at
least $1.00 of additional Indebtedness (other than additional Permitted
Indebtedness) pursuant to the "-- Limitation on Incurrence of Additional
Indebtedness" covenant; (iii) immediately before and immediately after giving
effect to such transaction and the assumption contemplated by clause (i)(2)(y)
above (including, without limitation, giving effect to any Indebtedness and
Acquired Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default or
Event of Default shall have occurred or be continuing; and (iv) LNR or the
Surviving Entity, as the case may be, shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable provisions
of the Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Subsidiaries of
LNR, the Capital Stock of which constitutes all or substantially all of the
properties and assets of LNR shall be deemed to be the transfer of all or
substantially all of the properties and assets of LNR.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of LNR in accordance
with the foregoing, in which LNR is not the continuing corporation, the
successor Person formed by such consolidation or into which LNR is merged or to
which such conveyance, lease or transfer is made shall (upon the required
assumption described above) succeed to, and be substituted for, and may exercise
every right and power of, LNR under the Indenture and the New Notes with the
same effect as if such surviving entity had been named as such.
Limitations on Transactions with Affiliates. (a) LNR will not, and will
not cause or permit any of its Subsidiaries to, directly or indirectly, enter
into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable to LNR or such Subsidiary than those that
might reasonably have been obtained or are obtainable in a comparable
transaction at such time on an arm's-length basis from a Person that is not an
Affiliate of LNR or such Subsidiary. All Affiliate Transactions (and each series
of related Affiliate Transactions which are similar or part of a common plan)
involving aggregate payments or other property with a fair market value in
excess of $5.0 million shall be approved by the Board of Directors of LNR or
such Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors (including a majority of the
directors who do not have any interest in the Affiliate
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Transaction) has determined that such transaction complies with the foregoing
provisions. In addition, if LNR or any Subsidiary of LNR enters into an
Affiliate Transaction (or a series of related Affiliate Transactions related to
a common plan) involving aggregate payments or other property with a fair market
value in excess of $7.5 million, LNR or such Subsidiary, as the case may be,
shall, prior to the consummation thereof, obtain a favorable opinion as to the
fairness of such transaction or series of related transactions to LNR or the
relevant Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees, consultants or agents of LNR or any Subsidiary
of LNR as determined in good faith by LNR's Board of Directors or senior
management; (ii) transactions between or among LNR and any of its Wholly Owned
Subsidiaries or between or among such Wholly Owned Subsidiaries provided such
transactions are not otherwise prohibited by the Indenture; (iii) any agreement
as in effect as of the Issue Date or any amendment thereto or any transaction
contemplated thereby (including pursuant to any amendment thereto) or in any
replacement agreement thereto so long as any such amendment or replacement
agreement is not more disadvantageous to the Holders in any material respect
than the original agreement as in effect on the Issue Date; (iv) Restricted
Payments permitted by the Indenture; and (v) transactions between or among LNR
or any Subsidiaries of LNR and the Land Partnership, provided such transactions
are permitted by and are effected in accordance with the terms of the
Partnership Agreement of the Land Partnership and the By-laws of LNR, in each
case, as in effect on the Issue Date.
Conduct of Business. LNR will, and will cause its Subsidiaries to, engage
primarily in the businesses of acquiring, developing, selling, owning, managing,
operating, leasing, credit enhancing and insuring commercial and multi-family
residential real estate, real estate related lending, acquiring, owning,
servicing and collecting real estate related loans and other underperforming
debt securities, investing in real estate related securities and securities of
companies engaged primarily in real estate related activities, and other
activities related to or arising out of any of those activities.
Reports to Holders. LNR will deliver to the Trustee within 15 days after
the filing of the same with the Commission, copies of the quarterly and annual
reports and of the information, documents and other reports, if any, which LNR
is required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act. Notwithstanding that LNR may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, LNR will file with the
Commission, to the extent permitted, and provide the Trustee and the Holders
with such annual reports and such information, documents and other reports
specified in Sections 13 and 15(d) of the Exchange Act. LNR will also comply
with the other provisions of 314(a) of the TIA. The Company shall file with the
Commission and provide the Trustee and holders of new Notes with the
information, documents and reports described herein whether or not the Exchange
Offer Registration Statement (as defined under "The Exchange Offer; Termination
of Certain Rights") has been filed or declared effective.
EVENTS OF DEFAULT
Each of the following events is defined in the Indenture as an "Events of
Default":
(i) the failure to pay interest (including Additional Interest, if
any) on any Notes when the same becomes due and payable and the default
continues for a period of 30 days, whether or not such failure shall be due
to the subordination provisions of the Indenture or agreements with respect
to any other Indebtedness or any other reason;
(ii) the failure to pay the principal on any New Notes, when such
principal becomes due and payable, at maturity, upon acceleration, upon
redemption or otherwise (including the failure to make a Change of Control
Offer or make a payment to purchase New Notes tendered pursuant to a Change
of Control Offer), whether or not such failure shall be due to the
subordination provisions of the Indenture or agreements with respect to any
other Indebtedness or any other reason;
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(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days after LNR receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the New
Notes (except in the case of a default with respect to the "Merger,
Consolidation and Sale of Assets" covenant, which will constitute an Event
of Default with such notice requirement but without such passage of time
requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Recourse Indebtedness of LNR or any Subsidiary of LNR, or the
acceleration of the final stated maturity of any such Recourse Indebtedness
if the aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Recourse Indebtedness in default for
failure to pay principal at final maturity or which has been accelerated,
aggregates $5.0 million or more at any time;
(v) one or more judgments in an aggregate amount in excess of $5.0
million shall have been rendered against LNR or any of its Subsidiaries and
remain undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and nonappealable; and
(vi) certain events of bankruptcy affecting LNR or any of its
Subsidiaries.
The Events of Default described in clauses (iv), (v) and (vi) above with
respect to a Subsidiary shall not apply if such Person was not a Subsidiary at
the time such event or condition occurred unless, in the case of clause (iv) or
(v) above, LNR or another Subsidiary thereof assumes or otherwise becomes liable
for the liability referred to therein or the liabilities generally of such
Person.
If an Event of Default (other than an Event of Default specified in clause
(vi) above) shall occur and be continuing, the Trustee or the Holders of at
least 25% in principal amount of outstanding New Notes may declare the principal
of and accrued interest on all the New Notes to be due and payable by notice in
writing to LNR and, if such notice is given by Holders, the Trustee specifying
the respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Credit Agreement,
shall become immediately due and payable upon the first to occur of an
acceleration under the Credit Agreement or five (5) business days after receipt
by LNR and the Representative under the Credit Agreement of such Acceleration
Notice but only if such Event of Default is then continuing. If an Event of
Default specified in clause (vi) above occurs and is continuing with respect to
LNR, then all unpaid principal of, and premium, if any, and accrued and unpaid
interest on all of the outstanding New Notes shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the New Notes as described in the preceding
paragraph, the Holders of a majority in aggregate principal amount of the New
Notes may rescind and cancel such declaration and its consequences (i) if the
rescission would not conflict with any judgment or decree, (ii) if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of such acceleration, (iii) if
interest on overdue installments of interest (to the extent the payment of such
interest is lawful) and on overdue principal, which has become due otherwise
than by such declaration of acceleration, has been paid, (iv) if LNR has paid
the Trustee its reasonable compensation and reimbursed the Trustee for its
expenses, disbursements and advances and (v) in the event of the cure or waiver
of an Event of Default of the type described in clause (iv) of the description
above of Events of Default, the Trustee shall have received an officers'
certificate and an opinion of counsel that such Event of Default has been cured
or waived. No such rescission shall affect any subsequent Default or impair any
right consequent thereto.
The Holders of a majority in aggregate principal amount of the New Notes
may waive any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any New Notes.
Holders of the New Notes may not enforce the Indenture or the New Notes
except as provided in the Indenture and under the TIA. Subject to the provisions
of the Indenture relating to the duties of the Trustee,
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the Trustee is under no obligation to exercise any of its rights or powers under
the Indenture at the request, order or direction of any of the Holders, unless
such Holders have offered to the Trustee reasonable indemnity. Subject to all
provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the then outstanding New Notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
Under the Indenture, LNR is required to provide an officers' certificate to
the Trustee promptly upon LNR's obtaining knowledge of any Default or Event of
Default (provided that LNR shall provide such certification at least annually
whether or not it knows of any Default or Event of Default) that has occurred
and, if applicable, describe such Default or Event of Default and the status
thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
LNR may, at its option and at any time, elect to have its obligations
discharged with respect to the outstanding New Notes ("Legal Defeasance"). Such
Legal Defeasance means that LNR shall be deemed to have paid and discharged the
entire indebtedness represented by the outstanding New Notes, except for (i) the
rights of Holders to receive payments in respect of the principal of, premium,
if any, and interest on the Notes when such payments are due, (ii) LNR's
obligations with respect to the New Notes concerning issuing temporary New
Notes, registration of New Notes, replacement of mutilated, destroyed, lost or
stolen New Notes and the maintenance of an office or agency for payments, (iii)
the rights, powers, trust, duties and immunities of the Trustee and LNR's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, LNR may, at its option and at any time, elect to
have the obligations of LNR released with respect to certain covenants that are
described in the Indenture, including the covenants relating to a Change of
Control ("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the New Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the New Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
LNR must irrevocably deposit with the Trustee, in trust, for the benefit of the
Holders cash in United States dollars, noncallable United States government
obligations, or a combination thereof, in such amounts as will be sufficient
without reinvestment, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest on the Notes on the stated dates for payment thereof or on the
applicable redemption date, as the case may be; (ii) in the case of Legal
Defeasance, LNR shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that (A) LNR has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, LNR shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that the Holders
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are concerned,
at any time in the period ending on the 91st day after the date of deposit
(other than a Default or Event of Default resulting from the incurrence of
Indebtedness all or a portion of the proceeds of which will be used to defease
the New Notes concurrently with such incurrence); (v) such Legal Defeasance or
Covenant Defeasance shall not result in a breach or violation of, or constitute
a default under, the Indenture or any other material agreement or instrument to
which LNR or any of its Subsidiaries is a party or by which LNR or any
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of its Subsidiaries is bound; (vi) LNR shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by LNR with the
intent of preferring the Holders over any other creditors of LNR or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
LNR or others; (vii) LNR shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance, as the case may be, have been complied with; (viii) LNR shall have
delivered to the Trustee an opinion of counsel to the effect that, after the
91st day following the deposit, assuming that no bankruptcy related default or
Event of Default has occurred and is continuing on such day, (A) the trust funds
will not be subject to any rights of holders of Indebtedness of LNR other than
the New Notes and (B) the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and (ix) certain other customary conditions
precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
New Notes, as expressly provided for in the Indenture) as to all outstanding New
Notes when (i) either (a) all the New Notes theretofore authenticated and
delivered (except lost, stolen or destroyed New Notes which have been replaced
or paid and New Notes for whose payment money has theretofore been deposited in
trust or segregated and held in trust by LNR and thereafter repaid to LNR or
discharged from such trust) have been delivered to the Trustee for cancellation
or (b) all New Notes not theretofore delivered to the Trustee for cancellation
have become due and payable and LNR has irrevocably deposited or caused to be
deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire Indebtedness on the New Notes not theretofore delivered to the
Trustee for cancellation, for principal of, premium, if any, and interest on the
New Notes to the date of deposit together with irrevocable instructions from LNR
directing the Trustee to apply such funds to the payment thereof; (ii) LNR has
paid all other sums payable under the Indenture by LNR; and (iii) LNR has
delivered to the Trustee an officers' certificate and an opinion of counsel
stating that all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, LNR and the Trustee, without the consent of the Holders,
may amend the Indenture for certain specified purposes, including curing
ambiguities, defects or inconsistencies, so long as such change does not, in the
opinion of the Trustee, adversely affect the rights of any of the Holders in any
material respect. In formulating its opinion on such matters, the Trustee will
be entitled to rely on such evidence as it deems appropriate, including, without
limitation, solely on an opinion of counsel. Other modifications, waivers and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding New Notes issued under the
Indenture, except that, without the consent of each Holder affected thereby, no
amendment or waiver may: (i) reduce the amount of New Notes whose Holders must
consent to an amendment; (ii) reduce the rate of or change or have the effect of
changing the time for payment of interest, including defaulted interest, on any
New Notes; (iii) reduce the principal of or change or have the effect of
changing the fixed maturity of any New Notes, or change the date on which any
New Notes may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor; (iv) make any New Notes payable in money other
than that stated in the New Notes; (v) make any change in provisions of the
Indenture protecting the right of each Holder to receive payment of principal of
and interest on such New Note on or after the due date thereof or to bring suit
to enforce such payment, or permitting Holders of a majority in principal amount
of New Notes to waive Defaults or Events of Default; (vi) amend, change or
modify in any material respect the obligation of LNR to make and consummate a
Change of Control Offer in the event of a Change of Control or modify any of the
provisions or definitions with respect thereto; or (vii) modify or change any
provision of the Indenture or the related definitions affecting the
subordination or ranking of the New Notes in a manner which adversely affects
the Holders.
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GOVERNING LAW
The Indenture provides that it and the New Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man or woman would
exercise or use under the circumstances in the conduct of his or her own
affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of LNR, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided, however,
that if the Trustee acquires any conflicting interest as described in the TIA,
it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Subsidiary of LNR or at
the time it merges or consolidates with or into LNR or any of its Subsidiaries
or assumed by LNR or any of its Subsidiaries in connection with the acquisition
of assets from such Person.
"Adjusted Consolidated EBITDA" means, with respect to any Person for any
period, the sum of Consolidated EBITDA plus any non-refundable housing tax
credits used by such Person and its Consolidated Subsidiaries to reduce the
amount of income taxes that would have been otherwise been payable by such
Person and its Consolidated Subsidiaries for such period.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Asset Acquisition" means (a) an Investment by LNR or any Subsidiary of LNR
in any other Person pursuant to which such Person shall become a Subsidiary of
LNR, or shall be merged with or into LNR or any Subsidiary of LNR, or (b) the
acquisition by LNR or any Subsidiary of LNR of the assets of any Person (other
than a Subsidiary of LNR) which constitute all or substantially all of the
assets of such Person or comprise any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by LNR or any of its
Subsidiaries (including any sale and leaseback transaction) to any Person other
than LNR or a Wholly Owned Subsidiary of LNR of (a) any Capital Stock of any
Subsidiary of LNR, or (b) any other property or assets of LNR or any Subsidiary
of LNR other than in the ordinary course of business.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
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"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether voting or nonvoting) of corporate stock, including each
class of Common Stock and Preferred Stock of such Person and (ii) with respect
to any Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of LNR
or Leisure Colony to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of the
Indenture), other than, in the case of Leisure Colony, a transaction with LNR or
any Wholly Owned Subsidiary of LNR; (ii) the approval by the holders of Capital
Stock of LNR of any plan or proposal for the liquidation or dissolution of LNR
(whether or not otherwise in compliance with the provisions of the Indenture);
(iii) any Person or Group (other than Leonard Miller and any Permitted
Transferees of Leonard Miller) shall become the owner, directly or indirectly,
beneficially or of record, of shares representing more than 50% of the aggregate
ordinary voting power represented by the issued and outstanding Capital Stock of
LNR; (iv) Leisure Colony shall cease being a Wholly Owned Subsidiary of LNR; or
(v) a majority of the members of the Board of Directors of LNR are persons who
were not directors on the Issue Date and whose election was not approved by a
vote of at least a majority of the members of the Board of Directors of LNR in
office at the time of the election who either were members of such Board of
Directors on the Issue Date or whose election as members of such Board of
Directors was previously approved by such a majority.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or non-voting) of such Person's common stock, whether
outstanding on the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person for any period, the
sum (without duplication) of (i) Consolidated Net Income plus (ii) to the extent
Consolidated Net Income has been reduced thereby, (A) all income taxes of such
Person and its Subsidiaries paid or accrued in accordance with GAAP for such
period (other than income taxes attributable to extraordinary, unusual or
nonrecurring gains or losses or taxes attributable to sales or dispositions
outside the ordinary course of business), (B) Consolidated Interest Expense and
(C) Consolidated Non-cash Charges less any non-cash items increasing
Consolidated Net Income for such period, all as determined on a consolidated
basis for such Person and its Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Adjusted Consolidated EBITDA of such Person during the four
full fiscal quarters (the "Four Quarter Period") ending on or prior to the date
of the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Subsidiaries (and the
application of the proceeds thereof) giving rise to the need to make such
calculation and any incurrence or repayment of other Indebtedness (and the
application of the proceeds thereof), other than the incurrence or repayment of
Indebtedness in the ordinary course of business for working capital purposes
pursuant to working capital facilities, occurring during the Four Quarter Period
or at any time
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subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may be (and
the application of the proceeds thereof), occurred on the first day of the Four
Quarter Period and (ii) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Subsidiaries (including any
Person who becomes a Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness and also including
any Consolidated EBITDA (including any pro forma expense and cost reductions
calculated on a basis consistent with Regulation S-X under the Securities Act as
in effect on the Issue Date) (provided that such Consolidated EBITDA shall be
included only to the extent includible pursuant to the definition of
"Consolidated Net Income") attributable to the assets which are the subject of
the Asset Acquisition or Asset Sale occurring during the Four Quarter Period or
at any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period. If such
Person or any of its Subsidiaries directly or indirectly guarantees Indebtedness
of a third Person, the preceding sentence shall give effect to the incurrence of
such guaranteed Indebtedness as if such Person or any Subsidiary of such Person
had directly incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio," (1) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on the Transaction
Date; (2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the Transaction Date will be deemed to have
been in effect during the Four Quarter Period; and (3) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Swap
Obligations shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, including without limitation, (a)
any amortization of debt discount, (b) the net costs under Interest Swap
Obligations, (c) all capitalized interest and (d) the interest portion of any
deferred payment obligation; and (ii) the interest component of Capitalized
Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such
Person and its Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP, minus amortization or write off of deferred
financing costs.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate net income (or loss) of such Person and its Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP; provided,
however, that there shall be excluded therefrom (a) gains (and losses) on an
after-tax effected basis from Asset Sales or abandonments or reserves relating
thereto, (b) items classified as extraordinary or nonrecurring gains or losses
on an after tax-effected basis, (c) the net income or loss of any Person
acquired in a "pooling of interests" transaction accrued prior to the date it
becomes a Subsidiary of the referent Person or is merged or consolidated with
the referent Person or any Subsidiary of the referent Person, (d) the net income
(but not loss) of any Subsidiary of the referent Person to the extent that the
declaration of dividends or similar distributions by that Subsidiary of that
income is restricted, directly or indirectly, by operation of the terms of its
charter or constituent documents or any agreement, instrument, judgment, law,
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order, statute, rule, or governmental regulation or for any other reason
whatsoever, (e) the net income or loss of any other Person, other than a
Consolidated Subsidiary of the referent Person, except (A) to the extent (in the
case of net income) of cash dividends or distributions paid to the referent
Person, or to a Wholly Owned Subsidiary of the referent Person (other than a
Subsidiary described in clause (d) above), by such other Person or (B) that the
referent Person's share of any net income or loss of such other Person under the
equity method of accounting for Affiliates shall not be excluded, (f) any
restoration to income of any contingency reserve of an extraordinary,
nonrecurring or unusual nature, except to the extent that provision for such
reserve was made out of Consolidated Net Income accrued at any time following
the Issue Date, (g) income or loss attributable to discontinued operations
(including, without limitation, operations disposed of during such period
whether or not such operations were classified as discontinued), and (h) in the
case of a successor to the referent Person by consolidation or merger or as a
transferee of the referent Person's assets, any earnings of the successor prior
to such consolidation, merger or transfer of assets.
"Consolidated Net Worth" means, with respect to any Person, the
consolidated stockholders' equity of such Person as of the end of the last
completed fiscal quarter ending on or prior to the date of the transaction
giving rise to the need to calculate Consolidated Net Worth, determined on a
consolidated basis in accordance with GAAP, less (without duplication) amounts
attributable to (i) Disqualified Capital Stock of such Person and (ii) interests
in such Person's Consolidated Subsidiaries not owned, directly or indirectly by
such Person.
"Consolidated Non-cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization, and other non-cash charges of
such Person and its Subsidiaries reducing Consolidated Net Income of such Person
and its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such charges which require an accrual of or
a reserve for cash charges for any future period).
"Consolidated Subsidiary" means, with respect to any Person, a Subsidiary
of such Person, the financial statements of which are consolidated with the
financial statements of such Person in accordance with GAAP.
"Credit Agreement" means the Revolving Credit Agreement dated as of
December 5, 1997 among LNR, certain Subsidiaries of LNR, the lenders party
thereto in their capacities as lenders thereunder and Bank of America National
Trust and Savings Association, as agent, together with the related documents
thereto (including, without limitation, any guarantee agreements and security
documents), in each case as such agreement may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided, however, that such increase in
borrowings is permitted by the "Limitation on Incurrence of Additional
Indebtedness" covenant above other than as Permitted Indebtedness) or adding
Subsidiaries of LNR as additional borrowers or guarantors thereunder) all or any
portion of the Indebtedness under such agreement or any successor or replacement
agreement and whether by the same or any other agent, lender or group of
lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect LNR or
any Subsidiary of LNR against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) Indebtedness under or in respect
of the Credit Agreement and (ii) any other Indebtedness constituting Senior
Indebtedness which, at the time of determination, has an aggregate principal
amount of at least $25.0 million and is specifically designated in the
instrument evidencing such Senior Indebtedness as "Designated Senior
Indebtedness" by LNR.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is
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redeemable at the sole option of the holder thereof (other than as a result of a
Change of Control) on or prior to the final maturity date of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"Existing Indebtedness" means Indebtedness of LNR and its Subsidiaries
(other than Indebtedness under the Credit Agreement) in existence on the Issue
Date, until such amounts are repaid.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of LNR acting reasonably and in
good faith and shall be evidenced by a Board Resolution of the Board of
Directors of LNR.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect on the Issue Date.
"Holder" means any holder of New Notes.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business), (v) all Obligations for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction, (vi) guarantees and other contingent obligations in
respect of Indebtedness of any other Person that is referred to in clauses (i)
through (v) above and clause (viii) below, (vii) all Obligations of any other
Person of the kind referred to in clauses (i) through (vi) above and clause
(viii) below which are secured by any lien on any property or asset of such
Person, the amount of such Obligation being deemed to be the lesser of the fair
market value of such property or asset or the amount of the Obligation so
secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person and (ix) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price, but excluding accrued
dividends, if any. For purposes hereof, the amount of any guarantee or other
contingent obligation in respect of Indebtedness of (A) any other Person (other
than a Subsidiary of such Person) shall be deemed to be equal to the maximum
amount of such Indebtedness, unless the liability is otherwise limited by the
terms of such guarantee or other contingent obligation regarding such
Indebtedness, in which case, the amount of such guarantee or other obligation
shall be deemed to equal the maximum amount of such liability and (B) any
Subsidiary of such Person, at the option of such Person, shall be deemed to be
either the amount determined pursuant to clause (A) or the actual outstanding
amount of such Indebtedness. For purposes hereof, the "maximum fixed repurchase
price" of any Disqualified Capital Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Disqualified
Capital Stock as if such Disqualified Capital Stock were purchased on any date
on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors of the issuer
of such Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in LNR or any Subsidiary thereof and (ii) which, in
the judgment of the Board of Directors of LNR, is otherwise independent and
qualified to perform the task for which it is to be engaged.
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"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on a stated notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by LNR and
its Subsidiaries on commercially reasonable terms in accordance with normal
trade practices of LNR or such Subsidiary, as the case may be.
"Issue Date" means the date of original issuance of the New Notes.
"Land Partnership" means Lennar Land Partners, a Delaware general
partnership.
"Leisure Colony" means Leisure Colony Management Corp., a Florida
corporation, and its successors including any Subsidiary of LNR to which all or
substantially all the assets of Leisure Colony Management Corp. are sold, leased
or otherwise transferred.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Mortgage Subsidiary" means a Wholly Owned Subsidiary of LNR to be formed
after the Issue Date solely for the purpose of engaging in the mortgage banking
business and incidental activities directly related thereto.
"Non-Recourse Indebtedness" means any Indebtedness of LNR or any of its
Subsidiaries that is (i) (A) specifically advanced to finance the acquisition of
investment assets and (B) secured only by the assets to which such Indebtedness
relates without recourse to LNR or any of its Subsidiaries, (ii) advanced to a
Subsidiary of LNR or group of Subsidiaries of LNR formed for the sole purpose of
acquiring or holding investment assets (A) against which a loan is obtained that
is made without recourse to, and with no cross-collateralization against the
assets of, LNR or any other Subsidiary of LNR, and (B) upon complete or partial
liquidation of which the loan must be correspondingly completely or partially
repaid, as the case may be or (iii) specifically advanced to finance the
acquisition of real property and secured by only the real property to which such
Indebtedness relates without recourse to LNR or any of its Subsidiaries.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the New Notes in an aggregate principal amount
not in excess of $200,000,000;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate outstanding principal amount at any time not to exceed
$220,000,000;
(iii) Interest Swap Obligations of LNR covering Indebtedness of LNR or
any of its Subsidiaries; provided, however, that such Interest Swap
Obligations are entered into to protect LNR and its Subsidiaries from
fluctuations in interest rates on Indebtedness incurred in accordance with
the Indenture to the extent the notional principal amount of such Interest
Swap Obligation does not exceed the principal amount of the Indebtedness to
which such Interest Swap Obligation relates;
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(iv) Indebtedness under Currency Agreements; provided, however, that
in the case of Currency Agreements which relate to Indebtedness, such
Currency Agreements do not increase the Indebtedness of LNR and its
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(v) Indebtedness of a Subsidiary to LNR or to a Wholly Owned
Subsidiary of LNR for so long as such Indebtedness is held by LNR or a
Wholly Owned Subsidiary of LNR, in each case subject to no Liens held by
any Person other than LNR or a Wholly Owned Subsidiary of LNR; provided,
however, that if on any date any Person other than LNR or a Wholly Owned
Subsidiary of LNR acquires any such Indebtedness or obtains a Lien in
respect of such Indebtedness, such date shall be deemed the date of
incurrence of Indebtedness not constituting Permitted Indebtedness by the
issuer of such Indebtedness unless such Indebtedness is otherwise permitted
under the Indenture;
(vi) Indebtedness of LNR to a Wholly Owned Subsidiary of LNR for so
long as such Indebtedness is held by a Wholly Owned Subsidiary of LNR, in
each case subject to no Lien; provided, however, that (a) any Indebtedness
of LNR to any Wholly Owned Subsidiary of LNR is unsecured and subordinated,
pursuant to a written agreement, to LNR's obligations under the Indenture
and the New Notes at least to the same extent that the Notes are
subordinated to Senior Indebtedness and (b) if on any date any Person other
than a Wholly Owned Subsidiary of LNR acquires any such Indebtedness or
obtains a Lien in respect of such Indebtedness, such date shall be deemed
the date of incurrence of Indebtedness not constituting Permitted
Indebtedness by LNR unless such Indebtedness is otherwise permitted under
the Indenture;
(vii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within three business days of incurrence;
(viii) Indebtedness of LNR or any of its Subsidiaries represented by
letters of credit for the account of LNR or such Subsidiaries, as the case
may be, in order to provide security for workers' compensation claims,
payment obligations in connection with self-insurance or similar
requirements in the ordinary course of business;
(ix) Existing Indebtedness outstanding on the Issue Date;
(x) Non-Recourse Indebtedness of the Mortgage Subsidiary;
(xi) additional Indebtedness in an aggregate principal amount not to
exceed $50.0 million at any time outstanding; and
(xii) Refinancing Indebtedness.
"Permitted Transferee" means, with respect to any Person, (i) that Person's
spouse, (ii) a parent or lineal descendant (including an adopted child) of a
parent of that Person, or the spouse of a lineal descendant of a parent of that
Person, (iii) a trustee, guardian or custodian for, or an executor,
administrator or other legal representative of the estate of, that Person, or a
trustee, guardian or custodian for a Permitted Transferee of that Person, (iv)
the trustee of a trust (including a voting trust) for the benefit of that Person
and (v) a corporation, partnership or other entity of which that Person and
Permitted Transferees of that Person are the beneficial owners of a majority in
voting power of the equity.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
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"Recourse Indebtedness" means all Indebtedness of LNR and its Subsidiaries
other than Non-Recourse Indebtedness.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by LNR or any Subsidiary
of LNR of Indebtedness incurred in accordance with the "Limitation on Incurrence
of Additional Indebtedness" covenant (other than pursuant to clauses (ii),
(iii), (iv), (v), (vi), (vii), (viii), (x), (xi) or (xii) of the definition of
Permitted Indebtedness), in each case that does not (1) result in an increase in
the aggregate principal amount of Indebtedness of such Person as of the date of
such proposed Refinancing (plus the amount of any premium required to be paid
under the terms of the instrument governing such Indebtedness and plus the
amount of reasonable fees and expenses incurred by LNR or such Subsidiary, as
the case may be, in connection with such Refinancing), except to the extent that
any such increase in Indebtedness is otherwise permitted by the Indenture or (2)
create Indebtedness with (A) a Weighted Average Life to Maturity that is less
than the Weighted Average Life to Maturity of the Indebtedness being Refinanced
or (B) a final maturity earlier than the final maturity of the Indebtedness
being Refinanced; provided, however, that (x) if such Indebtedness being
Refinanced is Indebtedness of LNR, then such Refinancing Indebtedness shall be
Indebtedness solely of LNR and (y) if such Indebtedness being Refinanced is
subordinate or junior to the Notes, then such Refinancing Indebtedness shall be
subordinate to the Notes at least to the same extent and in the same manner as
the Indebtedness being Refinanced.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date among LNR and the Initial Purchasers.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Indebtedness; provided,
however, that if, and for so long as, any Designated Senior Indebtedness lacks
such a representative, then the Representative for such Designated Senior
Indebtedness shall at all times constitute the holders of a majority in
outstanding principal amount of such Designated Senior Indebtedness in respect
of any Designated Senior Indebtedness.
"Senior Indebtedness" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of LNR, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, "Senior Indebtedness" shall also include the principal of,
premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of, (x) all monetary
obligations (including guarantees thereof) of every nature of LNR under the
Credit Agreement, including, without limitation, obligations to pay principal
and interest, reimbursement obligations under letters of credit, fees, expenses
and indemnities, (y) all Interest Swap Obligations (including guarantees
thereof) and (z) all obligations (including guarantees) under Currency
Agreements, in each case whether outstanding on the Issue Date or thereafter
incurred. Notwithstanding the foregoing, "Senior Indebtedness" shall not include
(i) any Indebtedness of LNR to a Subsidiary of LNR or any Affiliate of LNR or
any of such Affiliate's Subsidiaries, (ii) Indebtedness to, or guaranteed on
behalf of, any shareholder, director, officer or employee of LNR or of any
Subsidiary of LNR (including, without limitation, amounts owed for
compensation), (iii) Indebtedness to trade creditors and other amounts incurred
in connection with obtaining goods, materials or services, (iv) Indebtedness
represented by Disqualified Capital Stock, (v) any liability for federal, state,
local or other taxes owed or owing by LNR, (vi) that portion of any Indebtedness
incurred in violation of the Indenture provisions set forth under "Limitation on
Incurrence of Additional Indebtedness," (vii) Indebtedness which, when incurred
and without respect to any election under Section 1111(b) of Title
93
<PAGE> 95
11, United States Code is without recourse to LNR and (viii) any Indebtedness
which is, by its express terms, subordinated in right of payment to any other
Indebtedness of LNR.
"Senior Recourse Indebtedness" means all Senior Indebtedness other than
Senior Indebtedness that is Non-Recourse Indebtedness plus Subsidiary
Unsubordinated Indebtedness of each Subsidiary of LNR (but only to the extent
not in excess of the book value of the assets of the issuer thereof) other than
Subsidiary Unsubordinated Indebtedness of such Subsidiary that is a Non-Recourse
Indebtedness.
"Subordinated Indebtedness" means all Indebtedness of LNR and its
Subsidiaries which expressly provides that such Indebtedness shall be
subordinated in right of payment to any other Indebtedness.
"Subsidiary" means, with respect to any Person, (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person, (ii) any
other Person (other than a partnership) of which at least a majority of the
voting interest under ordinary circumstances is at the time, directly or
indirectly, owned by such Person or (iii) any partnership (a) the sole general
partner or the managing general partner of which is such Person or a Subsidiary
of such Person or (b) the only general partners of which are such Person or one
or more Subsidiaries of such Person (or any combination thereof).
"Subsidiary Unsubordinated Indebtedness" means all Indebtedness of a
Subsidiary of LNR other than Subordinated Indebtedness thereof.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Subsidiary" means, with respect to any Person, any Subsidiary
of such Person (i) of which all the outstanding voting securities normally
entitled to vote in the election of directors are owned by such Person or any
Wholly Owned Subsidiary of such Person (other than directors qualifying shares
or an immaterial amount of shares required to be owned by other Persons pursuant
to applicable law) or (ii) all the outstanding partnership interests are owned
by such Person or any Wholly Owned Subsidiary of such Person.
BOOK-ENTRY SYSTEM
The certificates representing the New Notes will be issued in fully
registered form. The New Notes initially will be represented by a single,
permanent global New Note, in definitive, fully registered form without interest
coupons (the "Global Note") and will be deposited with the Trustee as custodian
for DTC and registered in the name of Cede & Co., as DTC's nominee.
Upon the issuance of a Global Note, DTC or its nominee will credit the
accounts of Persons holding through it with the respective principal amounts of
the New Notes represented by such Global Note received by such Persons in the
Exchange Offer. Such accounts shall be designated by the Initial Purchasers.
Ownership of beneficial interests in a Global Note will be limited to Persons
that have accounts with DTC ("participants") or Persons that may hold interests
through participants. Any Person acquiring an interest in a Global Note through
an offshore transaction in reliance on Regulation S of the Securities Act may
hold such interest through Cedel or Euroclear. Ownership of beneficial interests
in a Global Note will be shown on, and the transfer of that ownership interest
will be effected only through, records maintained by DTC (with respect to
participants' interests) and such participants (with respect to the owners of
beneficial interests in such Global Note other than participants). The laws of
some jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Note.
Payment of principal of and interest on New Notes represented by a Global
Note will be made in immediately available funds to DTC or its nominee, as the
case may be, as the sole registered owner and the
94
<PAGE> 96
sole holder of the New Notes represented thereby for all purposes under the
Indenture. The Company has been advised by DTC that upon receipt of any payment
of principal of or interest on any Global Note, DTC will immediately credit, on
its book-entry registration and transfer system, the accounts of participants
with payments in amounts proportionate to their respective beneficial interests
in the principal or face amount of such Global Note as shown on the records of
DTC. Payments by participants to owners of beneficial interests in a Global Note
held through such participants will be governed by standing instructions and
customary practices as is now the case with securities held for customer
accounts registered in "street name" and will be the sole responsibility of such
participants.
A Global Note may not be transferred except as a whole by DTC or a nominee
of DTC to a nominee of DTC or to DTC. A Global Note is exchangeable for
certificated New Notes only if (a) DTC notifies the Company that it is unwilling
or unable to continue as a depositary for such Global Note or if at any time DTC
ceases to be a clearing agency registered under the Exchange Act, (b) the
Company in its discretion at any time determines not to have all the New Notes
represented by such Global Note, or (c) there shall have occurred and be
continuing a Default or an Event of Default with respect to the New Notes
represented by such Global Note. Any Global Note that is exchangeable for
certificated New Notes pursuant to the preceding sentence will be exchanged for
certificated New Notes in authorized denominations and registered in such names
as DTC or any successor depositary holding such Global Note may direct. Subject
to the foregoing, a Global Note is not exchangeable, except for a Global Note of
like denomination to be registered in the name of DTC or any successor
depositary or its nominee. In the event that a Global Note becomes exchangeable
for certificated New Notes, (a) certificated New Notes will be issued only in
fully registered form in denominations of $1,000 or integral multiples thereof,
(b) payment of principal of, and premium, if any, and interest on, the
certificated New Notes will be payable, and the transfer of the certificated New
Notes will be registerable, at the office or agency of the Company maintained
for such purposes and (c) no service charge will be made for any registration of
transfer or exchange of the certificated New Notes, although the Company may
require payment of a sum sufficient to cover any tax or governmental charge
imposed in connection therewith.
So long as DTC or any successor depositary for a Global Note, or any
nominee, is the registered owner of such Global Note, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the New Notes represented by such Global Note for all purposes under
the Indenture and the New Notes. Except as set forth above, owners of beneficial
interests in a Global Note will not be entitled to have the New Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of certificated New Notes in definitive
form and will not be considered to be the owners or holders of any New Notes
under such Global Note. Accordingly, each Person owning a beneficial interest in
a Global Note must rely on the procedures of DTC or any successor depositary,
and, if such Person is not a participant, on the procedures of the participant
through which such Person owns its interest, to exercise any rights of a holder
under the Indenture. The Company understands that under existing industry
practices, in the event that the Company requests any action of holders or that
an owner of a beneficial interest in a Global Note desires to give or take any
action which a holder is entitled to give or take under the Indenture, DTC or
any successor depositary would authorize the participants holding the relevant
beneficial interest to give or take such action and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations some of whom (or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks,
95
<PAGE> 97
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Trustee or
the Initial Purchasers will have any responsibility for the performance by DTC
or its participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
SALES OF NEW NOTES RECEIVED BY BROKER-DEALERS
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with sales of New Notes received in exchange for Old Notes which were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that, starting on the Expiration Date and ending on the
close of business on the first anniversary of the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until October 5, 1998, all
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of those methods of
resale, at prices which may or may not be based upon market prices prevailing at
the time of the sale. Any such sale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from the selling broker-dealer and/or the purchasers
of the New Notes. Any broker-dealer that sells New Notes that were received by
it for its own account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit from sale
of the New Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation. The Letter of Transmittal states
that a broker-dealer will not, by delivering a prospectus, be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Old Notes other than commissions or concessions of any brokers or
dealers, and the Company will indemnify the holders of the Old Notes (including
any broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The legality of the New Notes being offered hereby will be passed upon for
the Company by Rogers & Wells LLP, New York.
EXPERTS
The consolidated financial statements of the Company as of November 30,
1997 and 1996 and for each of the three years in the period ended November 30,
1997 included in this Prospectus and the related financial statement schedules
included elsewhere in the registration statement have been audited by Deloitte &
Touche LLP, independent auditors as stated in their report appearing herein and
elsewhere in the registration statement, and have been so included in reliance
upon such report of such firm given upon their authority as experts in
accounting and auditing.
96
<PAGE> 98
INDEX TO FINANCIAL STATEMENTS
LNR PROPERTY CORPORATION AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
The following audited consolidated financial statements and unaudited
consolidated condensed financial statements of LNR Property Corporation and
subsidiaries are presented herein on the pages indicated below:
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS: PAGE
- --------------------- ----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of November 30, 1997 and
1996...................................................... F-3
Consolidated Statements of Earnings for the Years Ended
November 30, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Parent Company Investment and
Stockholders' Equity for the Years Ended November 30,
1997, 1996 and 1995....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
November 30, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements for the Years
Ended November 30, 1997, 1996 and 1995.................... F-8
Consolidated Condensed Balance Sheet as of May 31, 1998
(Unaudited)............................................... F-27
Consolidated Condensed Statements of Earnings for the Three
and Six Month Periods Ended May 31, 1998 and 1997
(Unaudited)............................................... F-28
Consolidated Condensed Statements of Cash Flows for the
Three and Six Month Periods Ended May 31, 1998 and 1997
(Unaudited)............................................... F-29
Notes to Consolidated Condensed Financial Statements for the
Six Months Ended May 31, 1998 and 1997.................... F-31
</TABLE>
F-1
<PAGE> 99
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of LNR Property Corporation:
We have audited the accompanying consolidated balance sheets of LNR
Property Corporation and subsidiaries (the "Company") as of November 30, 1997
and 1996 and the related consolidated statements of earnings, cash flows and
Parent Company investment and stockholders' equity for each of the three years
in the period ended November 30, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LNR Property
Corporation and subsidiaries at November 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended November 30, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, effective
December 1, 1994, the Company changed its method of accounting for its
investments in debt securities to conform with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Effective December 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
DELOITTE & TOUCHE LLP
Miami, Florida
February 3, 1998
(February 18, 1998, as to Note 16)
F-2
<PAGE> 100
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF NOVEMBER 30,
---------------------
1997 1996
---------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 34,059 2,295
Restricted cash............................................. 56,637 1,552
Investment securities....................................... 304,660 263,842
Mortgage loans, net......................................... 86,849 64,441
Operating properties and equipment, net..................... 228,598 203,266
Land held for investment.................................... 83,297 91,177
Investments in and advances to partnerships................. 159,359 110,180
Deferred income taxes....................................... 23,974 10,067
Other assets................................................ 45,904 6,148
---------- -------
Total assets...................................... $1,023,337 752,968
========== =======
LIABILITIES, PARENT COMPANY INVESTMENT AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable.......................................... $ 4,244 2,698
Accrued expenses and other liabilities.................... 36,708 27,931
Mortgage notes and other debts payable.................... 391,171 354,406
---------- -------
Total liabilities................................. 432,123 385,035
---------- -------
Minority interests.......................................... 22,126 885
---------- -------
Commitments and contingent liabilities (Note 13)
Parent Company investment................................... -- 367,048
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized,
25,144 shares issued and outstanding................... 2,515 --
Class B common stock, $.10 par value, 40,000 shares
authorized, 10,984 shares issued and outstanding....... 1,098 --
Additional paid-in capital................................ 544,548 --
Retained earnings......................................... 370 --
Unrealized gain on available-for-sale securities, net..... 20,557 --
---------- -------
Total Parent Company investment and stockholders'
equity.......................................... 569,088 367,048
---------- -------
Total liabilities, Parent Company investment and
stockholders' equity............................ $1,023,337 752,968
========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 101
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Rental income............................................. $56,334 59,215 51,664
Equity in earnings of partnerships........................ 30,149 51,862 31,203
Interest income........................................... 41,446 28,726 20,475
Gains on sales of:
Real estate............................................ 18,076 3,669 15,776
Investment securities.................................. 5,359 1,735 513
Management fees........................................... 13,385 18,229 10,274
Other, net................................................ 2,734 -- 2,910
------- ------- -------
Total revenues.................................... 167,483 163,436 132,815
------- ------- -------
Costs and expenses
Cost of rental operations................................. 35,767 38,126 30,890
General and administrative................................ 26,584 20,756 15,155
Depreciation.............................................. 6,060 5,916 5,671
Other, net................................................ -- 658 --
------- ------- -------
Total costs and expenses.......................... 68,411 65,456 51,716
------- ------- -------
Operating earnings.......................................... 99,072 97,980 81,099
Interest expense............................................ 26,584 20,513 14,692
------- ------- -------
Earnings before income taxes................................ 72,488 77,467 66,407
Income taxes................................................ 28,270 30,212 25,899
------- ------- -------
Net earnings................................................ $44,218 47,255 40,508
======= ======= =======
Net earnings per share...................................... $ 1.21
=======
Weighted average common and common equivalent shares
outstanding............................................... 36,434
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 102
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARENT COMPANY INVESTMENT
AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------------
1997 1996 1995
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
PARENT COMPANY INVESTMENT:
Beginning balance........................................... $ 367,048 370,903 396,403
Net earnings, December 1, 1996 through October 31, 1997..... 43,848 47,255 40,508
Advances (to) from Parent Company........................... 145,617 (53,240) (71,778)
Change in unrealized gain on available-for-sale securities,
net....................................................... 10,874 2,130 5,770
Spin-off of LNR from Parent Company......................... (567,387) -- --
--------- ------- -------
Balance at November 30.................................... -- 367,048 370,903
--------- ------- -------
COMMON STOCK:
Beginning balance........................................... -- -- --
Spin-off of LNR from Parent Company......................... 3,613 -- --
Conversion of common stock to Class B common stock.......... (1,098) -- --
--------- ------- -------
Balance at November 30.................................... 2,515 -- --
--------- ------- -------
CLASS B COMMON STOCK:
Beginning balance........................................... -- -- --
Conversion of common stock to Class B common stock.......... 1,098 -- --
--------- ------- -------
Balance at November 30.................................... 1,098 -- --
--------- ------- -------
ADDITIONAL PAID-IN CAPITAL:
Beginning balance........................................... -- -- --
Spin-off of LNR from Parent Company......................... 545,000 -- --
Cash dividends -- common stock.............................. (452) -- --
--------- ------- -------
Balance at November 30.................................... 544,548 -- --
--------- ------- -------
RETAINED EARNINGS:
Beginning balance........................................... -- -- --
Net earnings, November 1 through November 30, 1997.......... 370 -- --
--------- ------- -------
Balance at November 30.................................... 370 -- --
--------- ------- -------
UNREALIZED GAIN ON AVAILABLE-FOR-SALE SECURITIES, NET:
Beginning balance........................................... -- -- --
Spin-off of LNR from Parent Company......................... 18,774 -- --
Change in unrealized gain on available-for-sale securities,
net, November 1 through November 30, 1997................. 1,783 -- --
--------- ------- -------
Balance at November 30.................................... 20,557 -- --
--------- ------- -------
Total Parent Company investment and stockholders'
equity.......................................... $ 569,088 367,048 370,903
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 103
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 44,218 47,255 40,508
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation........................................... 6,060 5,916 5,671
Minority interest...................................... 238 -- --
Amortization of discount on mortgage loans and loan
costs................................................ (91) (6) (881)
Gains on sales of real estate.......................... (18,076) (3,669) (15,776)
Equity in earnings of partnerships..................... (30,149) (51,862) (31,203)
Gain on sales of investment securities................. (5,359) (1,735) (513)
Decrease in deferred income taxes...................... (21,999) (12,614) (14,742)
Changes in assets and liabilities:
Increase in restricted cash.......................... (10,182) (155) (1,397)
Decrease (increase) in other assets.................. (17,898) 8,129 (3,892)
Decrease (increase) in mortgage loans held for
sale.............................................. (14,910) (9,776) 10,285
Increase in accounts payable and accrued
liabilities....................................... 11,886 6,694 8,910
-------- ------- -------
Net cash (used in) operating activities........... (56,262) (11,823) (3,030)
-------- ------- -------
Cash flows from investing activities:
Operating properties and equipment
Additions.............................................. (79,830) (19,269) (9,511)
Sales.................................................. 71,664 11,667 21,804
Land held for investment
Additions.............................................. (21,435) (3,699) (5,911)
Sales.................................................. 10,733 4,258 16,365
Investments in and advances to partnerships............... (5,342) (12,138) (70,442)
Distributions from partnerships........................... 79,693 95,361 93,899
Purchases of other investments............................ (21,857) -- --
Purchase of mortgage loans held for investment............ (349) (15,927) (39,730)
Proceeds from mortgage loans held for investment.......... 1,116 9,616 5,374
Purchase of investment securities......................... (96,386) (96,295) (57,450)
Proceeds from sales of investment securities and other.... 110,714 19,773 11,019
Interest received on CMBS in excess of income
recognized............................................. 21,241 10,123 5,773
-------- ------- -------
Net cash provided by (used in) investing
activities...................................... 69,962 3,470 (28,810)
-------- ------- -------
Cash flows from financing activities:
Payment of dividends...................................... (452) -- --
Net borrowings under repurchase agreements and revolving
credit lines........................................... 240 76,424 109,482
Mortgage notes and other debts payable
Proceeds from borrowings............................... 35,377 1,255 --
Principal payments..................................... (17,101) (18,752) (1,323)
Payments (to) from Parent Company......................... -- (52,478) (73,708)
-------- ------- -------
Net cash provided by financing activities......... 18,064 6,449 34,451
-------- ------- -------
Net increase (decrease) in cash and cash equivalents...... 31,764 (1,904) 2,611
Cash and cash equivalents at beginning of year............ 2,295 4,199 1,588
-------- ------- -------
Cash and cash equivalents at end of year.................. $ 34,059 2,295 4,199
======== ======= =======
</TABLE>
F-6
<PAGE> 104
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized........ $ 25,341 20,428 14,489
Cash paid for taxes....................................... $ 3,660 -- --
Supplemental disclosures of non-cash investing and financing
activities:
Purchases of investment securities financed by sellers.... $ 50,280 25,619 24,162
Purchase of an operating property financed by a mortgage
note................................................... $ -- 17,400 --
Contribution of loans held for investment to acquire an
investment in partnership.............................. $ -- -- 27,651
Purchase of a mortgage loan financed by revolving credit
line................................................... $ 33,092 -- --
Spin-off of LNR from Parent Company:
Increase in Parent Company investment due to transfer of
certain assets, liabilities and minority interests
prior to Spin-off...................................... $145,617 -- --
Increase in Parent Company investment due to change in
unrealized gain on for-sale securities, net............ $ 10,874 -- --
Supplemental disclosure of non-cash transfers:
Transfer of mortgage loans to land held for investment.... $ -- 2,273 --
Transfer of operating properties to land held for
investment............................................. $ 1,826 -- --
Transfer of other assets to accounts payable and accrued
expenses............................................... $ 1,563 -- --
Transfer of Parent Company investment to common stock..... $ 3,613 -- --
Transfer of Parent Company investment to additional
paid-in capital........................................ $545,000 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 105
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997, 1996 AND 1995
1. SUMMARY OF ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
LNR Property Corporation ("LNR") and subsidiaries (collectively, the
"Company"), a Delaware corporation, was formed in June 1997. The Company
operates a real estate investment and management business which engages
principally in (i) developing and managing commercial real estate, (ii)
acquiring, managing and repositioning commercial real estate loans and
properties, (iii) acquiring (often in partnership with financial institutions
and real estate funds) and managing portfolios of real estate assets, (iv)
investing in non-investment grade commercial mortgage backed securities ("CMBS")
as to which the Company has the right to be the special servicer (i.e., to
oversee workouts of underperforming loans) and (v) originating high yielding
real estate related loans.
Spin-off Transaction
Prior to October 31, 1997, Lennar Corporation (the "Parent Company" or
"Lennar") transferred its real estate investment and management business to the
Company. On October 31, 1997, Lennar effected a spin-off of the Company to
Lennar's stockholders (the "Spin-off") by distributing to them one share of LNR
stock for each share of Lennar stock they held.
The assets and liabilities of Lennar and its subsidiaries were divided
between the Company and Lennar and its homebuilding subsidiaries so that Lennar
and its homebuilding subsidiaries would have a net worth of $200 million (with
specified adjustments) and the remaining net worth was transferred to the
Company.
In connection with the Spin-off, Lennar and the Company agreed that at
least until December 2002, Lennar and its homebuilding subsidiaries would not
engage in the businesses in which the Company currently is engaged and the
Company would not engage in the businesses in which Lennar and its homebuilding
subsidiaries currently are engaged (except in limited areas in which the
activities of the two groups overlap).
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. 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.
For periods prior to the Spin-off, the financial statements of the Company
are presented as if the Company had been a separate combined group. Expenses
which related both to the businesses operated by the Company and the businesses
retained by Lennar have been allocated on a basis which the Company believes is
reasonable. However, the expenses allocated to the Company are not necessarily
the same as those the Company would have incurred if it had operated
independently, and in general, the results of operations, financial position and
cash flows reflected in the consolidated financial statements of the Company are
not necessarily the same as those which would have been realized if the Company
had been operated independently of Lennar during the periods to which those
financial statements relate.
The Company began accumulating retained earnings immediately following the
Spin-off on October 31, 1997.
F-8
<PAGE> 106
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Earnings Per Share
The Company was formed in June 1997 and had no outstanding stock prior to
formation; therefore, net earnings per share have not been calculated for the
fiscal years ended November 30, 1996 and 1995 in the attached consolidated
financial statements. Earnings per share for 1997 are computed as though the
shares issued in the Spin-off had been outstanding throughout the year.
Net earnings per share is computed by dividing net earnings by the weighted
average number of the total common shares and Class B common shares and common
stock equivalents outstanding during the period. The dilutive effect of all
outstanding stock options is considered common stock equivalents and is
calculated using the treasury stock method.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Due to the
short maturity period of the cash equivalents, the carrying amount of these
instruments approximates their fair value.
Investment Securities
Investment securities are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This standard requires that debt and
equity securities that have determinable fair values are classified as
available-for-sale unless they are classified as held-to-maturity or trading.
Securities classified as held-to-maturity are carried at amortized cost because
they are purchased with the intent and ability to hold to maturity. At November
30, 1997 and 1996, no securities were held for trading purposes.
Securities classified as available-for-sale are recorded at fair value in
the consolidated balance sheet, with unrealized holding gains or losses, net of
tax effects, reported as a separate component of stockholders' equity. Realized
gains and losses, as well as unrealized losses that are other than temporary,
are recognized in earnings. The cost of securities sold is based on the specific
identification method.
Mortgage Loans, Net
Mortgage loans held for sale are recorded at the lower of cost or market,
estimated on a discounted cash flow basis using market interest rates. Purchase
discounts recorded on these loans are presented as a reduction of the carrying
amount of the loans and are not amortized. Mortgage loans held for investment
are carried net of unamortized discounts and are amortized utilizing a
methodology that results in a level yield.
The Company provides an allowance for credit losses related to loans based
upon the Company's historical loss experience and other factors.
Operating Properties and Equipment, Net and Land Held for Investment
Operating properties and equipment and land held for investment are
recorded at cost. Depreciation for operating properties and equipment is
calculated to amortize the cost of depreciable assets over their estimated
useful lives using the straight-line method. The range of estimated useful lives
for operating properties is 15 to 40 years and for equipment is 2 to 10 years.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires companies to
evaluate long-lived assets for impairment based on the undiscounted future cash
flows of the asset. If a long-lived asset is identified as impaired, the value
of the asset must be reduced to its fair value. The Company's operating
properties and land holdings would be considered long-lived assets under this
F-9
<PAGE> 107
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pronouncement. The Company adopted this statement in the first quarter of its
fiscal year ended November 30, 1997 and it did not have any material effect on
the Company's financial position, results of operations or cash flows.
Revenue Recognition
Interest income is comprised of interest received plus amortization of the
discount between the carrying value of each mortgage loan held for investment or
investment security and its unpaid principal balance using a methodology which
results in a level yield.
Revenues from sales of real estate (including the sales of land held for
investment and operating properties) are recognized when a significant down
payment is received, the earnings process is complete and the collection of any
remaining receivables is reasonably assured. Management fees are recognized in
income when they are earned and realization is reasonably assured.
The Company applies the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
in accounting for sales of investment securities and other financial assets.
This statement requires that transfers of financial and servicing assets be
recognized as sales when control has been surrendered.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under SFAS 109,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured by
using enacted tax rates expected to apply to taxable income in the years in
which those differences are expected to reverse.
Stock Option Plans
At November 30, 1997, the Company had one stock option plan, which is
described in Note 11. The Company grants stock options to certain employees for
a fixed number of shares with an exercise price not less than the fair value of
the shares at the date of grant. The Company accounts for the stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company applies the disclosure
only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
statement is effective for the Company beginning with the first quarter of 1998
and earlier adoption is not permitted. This statement requires that the current
calculations of earnings per share be replaced by basic and diluted earnings per
share calculations. Under the new guidance, basic and diluted earnings per share
would be $1.22 for 1997.
Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." SFAS No. 129, which applies to all
entities that have issued securities, requires in summary form, the pertinent
rights and privileges of the various securities outstanding. Examples of
information that must be
F-10
<PAGE> 108
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosed are dividend and liquidation preferences, participation rights, call
prices and dates, conversion or exercise prices or rates and pertinent dates,
sinking-fund requirements, unusual voting rights and significant terms of
contracts to issue additional shares. SFAS No. 129 is effective for financial
statements issued for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement is effective for fiscal
years beginning after December 15, 1997, and requires reclassification of
comparative purpose financial statements for all earlier periods presented.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the 1997 presentation.
2. RESTRICTED CASH
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------
1997 1996
------- -----
(IN THOUSANDS)
<S> <C> <C>
Short-term investment securities............................ $44,902 --
Funds held in trust for asset purchases..................... 10,007 --
Tenant security deposits.................................... 1,728 1,552
------- -----
$56,637 1,552
======= =====
</TABLE>
The short-term investment securities are collateral for a $44.5 million
letter of credit, which provides credit enhancement to $277.3 million of
tax-exempt bonds. The bonds are secured by five high-rise, class A, apartment
buildings in Manhattan, New York. The Company receives interest on the
short-term investment as well as 600 basis points per year for providing the
credit enhancement.
3. INVESTMENT SECURITIES
Investment securities consist of investments in various issues of rated and
unrated portions of CMBS. The Company's investment in rated CMBS is classified
as available-for-sale and its investment in unrated CMBS is classified as
held-to-maturity. In general, principal payments on each class of security are
made in the order of the stated maturities of each class so that no payment of
principal will be made on any class until all classes having an earlier maturity
date have been paid in full. The Company's investment securities have stated
maturity dates in years 2001 through 2028 and carry stated interest rates
ranging from 6.50% to 11.42%. These securities are, in effect, subordinate to
other securities of classes with earlier maturities. The annual principal
repayments on a particular class are dependent upon collections on the
underlying mortgages, affected by prepayments and extensions, and as a result,
the actual maturity of any class of securities may differ from its stated
maturity.
These investments represent securities which are collateralized by pools of
mortgage loans on commercial real estate assets located across the country.
Concentrations of credit risk with respect to these securities are limited due
to the diversity of the underlying loans across geographical areas and diversity
among property types. In addition, the Company only invests in these securities
when it performs significant due diligence analysis on the real estate
supporting the underlying loans and when it has the right to select itself as
special
F-11
<PAGE> 109
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
servicer for the entire securitization. As special servicer, the Company impacts
the performance of the securitization by using its loan workout and asset
management expertise to resolve non-performing loans.
The Company's investment securities consisted of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Available-for-sale.......................................... $188,434 193,869
Held-to-maturity............................................ 116,226 69,973
-------- -------
$304,660 263,842
======== =======
</TABLE>
At November 30, 1997 and 1996, the amortized cost and fair value of
investment securities consisted of the following:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
--------- ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Available-for-sale......................... $154,734 33,918 (218) 188,434
Held-to-maturity........................... $116,226 37,291 -- 153,517
1996
Available-for-sale......................... $180,918 14,626 (1,675) 193,869
Held-to-maturity........................... $ 69,973 19,490 -- 89,463
</TABLE>
During 1997, proceeds from the sale of available-for-sale securities
amounted to $111.5 million and resulted in gross realized gains of $5.4 million,
primarily as a result of a Re-REMIC securitization transaction. The Re-REMIC
transaction was the securitization of the cash flows from certain pre-existing
CMBS bonds. In that transaction, the Company sold approximately $140.0 million
of rated non-investment grade CMBS bonds to a trust. During 1996, proceeds from
the sale of available-for-sale securities amounted to $18.1 million and resulted
in gross realized gains of $1.7 million.
4. MORTGAGE LOANS, NET
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans.............................................. $95,593 80,271
Allowance for losses........................................ (2,038) (4,979)
Unamortized discounts....................................... (6,706) (10,851)
------- -------
$86,849 64,441
======= =======
</TABLE>
At November 30, 1997 and 1996, the balance of mortgage loans classified as
held for sale were $64.4 million and $41.6 million, respectively, and classified
as held for investment were $22.4 million and $22.8 million, respectively.
F-12
<PAGE> 110
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING PROPERTIES AND EQUIPMENT, NET
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Rental apartments........................................... $ 98,068 70,357
Office buildings............................................ 67,455 65,725
Retail centers.............................................. 54,494 60,344
Hotels...................................................... 18,735 18,713
Industrial buildings........................................ 2,862 4,373
Other....................................................... 15,762 14,498
-------- -------
Total land and buildings.................................. 257,376 234,010
Furniture, fixtures and equipment........................... 7,318 5,028
-------- -------
264,694 239,038
Accumulated depreciation.................................... (36,096) (35,772)
-------- -------
$228,598 203,266
======== =======
</TABLE>
The Company leases as lessor its retail, office and other facilities under
non-cancelable operating leases with terms in excess of twelve months. The
future minimum rental revenues under these leases subsequent to November 30,
1997 are as follows (in thousands): 1998 -- $14,857; 1999 -- $13,599; 2000 --
$11,958; 2001 -- $9,798; 2002 -- $9,786 and thereafter -- $55,435.
6. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Summarized financial information on a combined 100% basis related to the
Company's significant partnerships accounted for by the equity method at
November 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Assets
Cash...................................................... $ 36,792 53,109
Portfolio investments..................................... 872,090 839,441
Other assets.............................................. 32,585 16,213
-------- -------
$941,467 908,763
======== =======
Liabilities and equity
Accounts payable and other liabilities.................... $ 61,105 57,557
Notes and mortgages payable............................... 385,115 425,716
Equity of:
The Company............................................ 164,065 119,133
Others................................................. 331,182 306,357
-------- -------
$941,467 908,763
======== =======
</TABLE>
The equity of the Company in the partnerships' financial statements shown
above exceeds the Company's recorded investment in and advances to the
partnerships by $4.7 million and $9.0 million at November 30, 1997 and 1996,
respectively, primarily due to purchase discounts. Portfolio investments consist
primarily of mortgage loans and business loans collateralized by real property,
as well as commercial properties and land held for development, investment or
sale.
F-13
<PAGE> 111
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
------------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................. $213,238 257,062 280,286
Costs and expenses................................... 125,693 87,629 115,269
-------- ------- -------
Earnings of partnerships............................. $ 87,545 169,433 165,017
======== ======= =======
The Company's share of earnings...................... $ 30,149 51,862 31,203
======== ======= =======
</TABLE>
In connection with the Spin-off, Lennar transferred parcels of land to the
Company and the Company transferred these parcels to Lennar Land Partners in
exchange for a 50% partnership interest in Lennar Land Partners. The net book
value of the assets contributed to Lennar Land Partners was $92.3 million.
Lennar Land Partners was formed so that Lennar and the Company could share the
risks and profits of ownership of real property previously acquired by Lennar,
primarily for use in its homebuilding activities. Lennar manages the day-to-day
activities of Lennar Land Partners under a management agreement.
At November 30, 1997 and 1996, the Company's equity interests in all other
significant partnerships ranged from 15% to 50%. These partnerships are involved
in the acquisition and management of portfolios of real estate loans and
properties. The Company shares in the profits and losses of these partnerships
and, when appointed the manager of the partnerships, receives fees for the
management and disposition of the assets. The outstanding debt of Lennar Land
Partners and one second-tier partnership, amounting to $119.0 million at
November 30, 1997, is guaranteed by the Company.
7. MORTGAGE NOTES AND OTHER DEBTS PAYABLE
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Secured without recourse to the Company
Mortgage notes on operating properties and land with a
fixed interest rate of 7.4%, due December 2003......... $ 20,640 23,994
Mortgage notes on operating properties and land with a
floating interest rate (8.5% at November 30, 1997), due
July 1999.............................................. 21,998 --
Other secured debt
Mortgage notes on operating properties and land with fixed
interest rates from 7.4% to 8.0%, due through 2004..... 25,659 47,648
Mortgage notes on operating properties and land with
floating interest rates (4.2% to 9.5% at November 30,
1997), due through December 2010....................... 21,972 --
Repurchase agreements with floating interest rates (6.7%
to 7.2% at November 30, 1997), secured by CMBS, due
through October 1998................................... 177,386 118,182
Revolving credit lines with floating interest rates (6.7%
to 6.9% at November 30, 1997), secured by CMBS and
mortgage loans, due through August 1998................ 110,909 97,582
Unsecured revolving credit notes payable with floating
interest rates............................................ -- 67,000
Unsecured note payable to Lennar with a fixed interest rate
of 10%, due December 1997................................. 12,607 --
-------- -------
$391,171 354,406
======== =======
</TABLE>
F-14
<PAGE> 112
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning the Company's more significant debt instruments is
as follows:
Repurchase Agreements
The Company, through certain subsidiaries, has entered into two reverse
repurchase agreements through which it finances selected CMBS. The agreements
have an aggregate commitment of $310 million under which $177 million was
outstanding at November 30, 1997. Interest is variable, corresponds to the
rating assigned to the CMBS and is based on LIBOR plus specified percentages.
The agreements mature during 1998 and are expected to be refinanced or extended
on substantially the same terms as the existing agreements. LNR has guaranteed
the obligations of its subsidiaries under these agreements and the agreements
are collateralized by the CMBS.
Revolving Credit Lines
The Company, through certain subsidiaries, has three revolving credit lines
with an aggregate commitment of $125 million under which $111 million was
outstanding at November 30, 1997. Interest is variable and is based on LIBOR or
commercial paper rates plus specified percentages. The lines are collateralized
by CMBS and mortgage loans. The lines mature during 1998 and are expected to be
refinanced or extended on substantially the same terms as the existing lines.
The agreements also contain certain financial tests and restrictive covenants,
none of which are currently expected to restrict the Company's activities. LNR
has guaranteed the obligations of its subsidiaries under these agreements.
Unsecured Revolving Credit Notes Payable
On December 5, 1997, the Company and certain of its subsidiaries, entered
into a $200 million revolving credit agreement (the "Revolving Credit
Agreement") which expires on December 31, 2000, with the option of a one year
extension. As of closing of the Revolving Credit Agreement, the Company had
commitments totaling $82 million. The remaining amount is currently being
syndicated. Interest is calculated at LIBOR plus a margin, which varies based on
the Company's leverage and debt ratings. Had there been outstanding amounts
under this facility at November 30, 1997, the interest rate would have been
7.0%. The agreements also contain certain financial tests and restrictive
covenants, none of which are currently expected to restrict the Company's
activities.
The aggregate principal maturities of mortgage notes and other debts
payable subsequent to November 30, 1997, are as follows (in thousands):
1998 -- $302,668; 1999 -- $24,432; 2000 -- $5,844; 2001 -- $1,359;
2002 -- $7,606 and thereafter -- $49,262. All of the notes secured by land
contain collateral release provisions.
8. MINORITY INTERESTS
Minority interests relate to the third party ownership interest in
partnerships in which the Company has a controlling interest. For financial
reporting purposes the partnerships' assets, liabilities and earnings are
consolidated with those of the Company, and the other partners' interests in the
partnerships are included in the Company's consolidated financial statements as
minority interest. The primary component of minority interests at November 30,
1997, representing $18.9 million, relates to the Company's interest in a
partnership which provides credit enhancement to $44.5 million of a $277.3
million issue of tax-exempt bonds collateralized by commercial real estate. See
Note 2.
9. INCOME TAXES
The Company was included in the consolidated federal income tax returns of
Lennar through the date of the Spin-off. Under the Agreement with Lennar, the
Company is required to reimburse Lennar for the income
F-15
<PAGE> 113
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
taxes resulting from the Company's 1997 activity. Lennar is responsible for the
preparation of all income tax returns prior to the Spin-off and it will be
determined at the time of filing of the relevant returns whether the Company has
under or over paid its portion of the liability. The final cash settlement with
Lennar for income taxes will result in an adjustment of the Company's recorded
deferred tax asset and liability balances. The Company's provision for federal
and state income taxes in the accompanying consolidated statement of earnings
for the period prior to the Spin-off have been calculated based on the Company's
income and temporary differences as if it filed a separate return. For the post
Spin-off period, the provision for income taxes has been based on the
stand-alone operations of the Company.
The provisions for income taxes consisted of the following for the years
ended November 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal............................................. $43,802 37,866 35,593
State............................................... 6,467 4,960 5,048
------- ------- -------
50,269 42,826 40,641
------- ------- -------
Deferred
Federal............................................. (18,432) (12,337) (15,303)
State............................................... (3,567) (277) 561
------- ------- -------
(21,999) (12,614) (14,742)
------- ------- -------
Total expense......................................... $28,270 30,212 25,899
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax effects
of significant temporary differences of the Company's deferred tax assets and
liabilities at November 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Reserves and accruals..................................... $ 7,398 8,472
Investment securities income.............................. 19,091 13,043
Investment in partnerships................................ 24,704 11,251
Acquisition adjustments................................... 15,943 3,236
Other..................................................... 277 --
------- ------
Total deferred tax assets......................... 67,413 36,002
------- ------
</TABLE>
F-16
<PAGE> 114
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities
Capitalized expenses...................................... 2,662 2,603
Deferred gains............................................ 10,042 4,306
Acquisition adjustments................................... 16,736 12,786
Installment sales......................................... -- 845
Unrealized gain on available-for-sale securities.......... 13,143 5,051
Other..................................................... 856 344
------- ------
Total deferred tax liabilities.................... 43,439 25,935
------- ------
Net deferred tax asset...................................... $23,974 10,067
======= ======
</TABLE>
Based on management's assessment, it is more likely than not that the
deferred tax assets will be realized through future taxable income.
A reconciliation of the statutory rate to the effective tax rate for the
years ended November 30, 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
% OF PRE-TAX INCOME
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate.............................................. 35.0 35.0 35.0
State income taxes, net of federal income tax benefit....... 4.0 4.0 4.0
---- ---- ----
Effective rate............................................ 39.0 39.0 39.0
==== ==== ====
</TABLE>
10. FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of financial instruments held by the Company at November 30, 1997 and 1996,
using available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies might have a material effect on the estimated fair
value amounts. The table excludes cash and cash equivalents, restricted cash and
accounts payable, which had fair values approximating their carrying values.
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------------------
1997 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets
Mortgages loans.......................... $ 86,849 92,285 64,441 74,809
Investment securities
available-for-sale.................... 188,434 188,434 193,869 193,869
Investment securities held-to-maturity... 116,226 153,517 69,973 89,463
Liabilities
Mortgage notes and other debts payable... $391,171 391,171 354,406 354,406
</TABLE>
F-17
<PAGE> 115
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following methods and assumptions were used by the Company in
estimating fair values:
Mortgages loans: The fair values are based on discounting future cash flows
using the current interest rates at which similar loans would be made or are
estimated by the Company on the basis of financial or other information.
Investment securities available-for-sale and held-to-maturity: The fair
values are based on quoted market prices, if available. The fair values for
instruments which do not have quoted market prices are estimated by the Company
on the basis of the acquisition price paid or financial and other information.
Mortgages notes and other debts payable: The fair value of fixed rate
borrowings is based on discounting future cash flows using the Company's
incremental borrowing rate. Variable rate borrowings are tied to market indices
and thereby, approximate fair value.
11. CAPITAL STOCK
Preferred Stock
The Company has 500,000 shares of authorized preferred stock, $10 par
value. At November 30, 1997, no shares of preferred stock were issued or
outstanding. The preferred stock may be issued in series with any rights, powers
and preferences which may be authorized by the Company's Board of Directors.
Common Stock
The Company has two classes of common stock. The common stockholders have
one vote for each share owned in matters requiring stockholder approval and
during the fourth quarter of 1997 received quarterly dividends of $.0125 per
share. Class B common stockholders have ten votes for each share of stock owned
and during the fourth quarter of 1997 received quarterly dividends of $.01125
per share. As of November 30, 1997, Mr. Leonard Miller, a member of the Board of
Directors, owned or controlled 9.9 million shares of Class B common stock, which
represented approximately 74% of the voting control of the Company.
Stock Option Plan
In connection with the Spin-off, the Company adopted the 1997 Stock Option
Plan (the "1997 Plan"). The 1997 Plan provides for the granting of options to
certain officers, employees and directors of the Company to purchase shares at
prices not less than market value on the date of the grant. Options granted
under the 1997 Plan will expire not more than 10 years after the date of grant,
except that options granted to a key employee who is a 10% stockholder will
expire not more than five years after the date of grant. The exercise price of
each stock option granted under the 1997 Plan will be 100% of the fair market
value of the common stock on the date the stock option is granted, except in the
case of a key employee who is a 10% stockholder, in which case the option price
may not be less than 110% of the fair market value of the common stock on the
date the stock option is granted, and except as to stock options granted to
replace Lennar stock options held by Lennar employees who became employees of
the Company as a result of the Spin-off.
F-18
<PAGE> 116
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the status of the 1997 Plan (in thousands,
except for option prices):
<TABLE>
<CAPTION>
OUTSTANDING
WEIGHTED OUTSTANDING WEIGHTED EXERCISABLE
OPTION AVERAGE WEIGHTED AVERAGE WEIGHTED
PRICE PER # OF REMAINING AVERAGE FAIR EXERCISE AVERAGE FAIR
SHARE OPTIONS LIFE VALUE PRICE VALUE
------------ ------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options assumed at
Spin-off................... $3.98-$16.23 410 5.13 Years 18.70 7.64 19.05
Options granted.............. $ 24.82 1,069 9.72 Years 13.28 24.82 --
-----
Ending balance............... 1,479
-----
Exercisable.................. 61
-----
Options available for future
grant...................... 521
=====
</TABLE>
The Company has elected to account for its employee stock options under APB
25 and related Interpretations. No compensation expense is recorded under APB 25
because the exercise price of the Company's employee common stock options
equaled the market price for the underlying common stock on the grant date.
Under the terms of the Lennar 1991 Stock Option Plan (the "Lennar Option
Plan"), participants in the Lennar Option Plan who exercise their options after
the Spin-off (and who did not amend the terms of their options prior to the
Spin-off to provide otherwise) will receive upon exercise of Lennar stock
options both shares of Lennar common stock and LNR common stock. The Company has
agreed to deliver shares of its common stock to participants in the Lennar
Option Plan who exercise options and are entitled to LNR common stock. There
were Lennar stock options outstanding at the time of the Spin-off which could
entitle the holders to purchase up to 615,600 shares of LNR common stock. None
of these options had been exercised as of November 30, 1997. The Company will
not receive any portion of the exercise price of the Lennar stock options.
SFAS 123 requires "as adjusted" information regarding net income and net
income per share to be disclosed for new options granted after fiscal year 1996.
The Company determined this information using the fair value method of that
statement. The fair value of these options was determined at the date of grant
using the Black-Scholes option-pricing model. The significant weighted average
assumptions used were as follows for the year ended November 30, 1997: expected
dividend yield, .20%; calculated volatility rate, .45%; risk-free interest rate,
5.50%; and expected life of the option in years, 2-7 years.
The estimated fair value of the options is recognized in expense over the
options' vesting period for "as adjusted" disclosures. The net income per share
"as adjusted" for the effects of SFAS 123 is not indicative of the effects on
reported net income/loss for future years. For purposes of these calculations,
the Company has excluded shares subject to options which are held by
participants in the Lennar Option Plan who are not employees, and do not
otherwise receive compensation from, the Company. The Company's reported "as
adjusted" information for the year ended November 30, 1997 is as follows (in
thousands, except per share amounts):
<TABLE>
<S> <C>
Net earnings................................................ $44,218
Net earnings "As adjusted".................................. $43,042
Net earnings per share as reported -- primary............... $ 1.21
Net earnings per share "As adjusted" -- primary............. $ 1.18
</TABLE>
In management's opinion, existing stock option valuation models do not
provide a reliable single measure of the fair value of employee stock options
that have vesting provisions and are not transferable. In addition,
F-19
<PAGE> 117
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option-pricing models require the input of highly subjective assumptions,
including expected stock price volatility.
Employee Stock Ownership Plan/401(k) Plan
The Employee Stock Ownership Plan/401(k) Plan (the "Plan") provides shares
of stock to employees who have completed one year of continuous service with the
Company. All contributions for employees with five years or more of service are
fully vested. Under the 401(k) portion of the Plan, employees may make
contributions which are invested on their behalf, and the Company may also make
contributions for the benefit of employees. The Company records as compensation
expense an amount which approximates the vesting of the contributions to the
Employee Stock Ownership portion of the Plan, as well as the Company's
contribution to the 401(k) portion of the Plan. Amounts contributed by the
Company to the Plan during 1997, 1996 and 1995 were immaterial.
Restrictions on Payments of Dividends
Other than as required to maintain the financial ratios and net worth
requirements under the revolving credit and term loan agreements, there are no
restrictions on the payment of dividends on common stock by the Company. The
cash dividends paid with regard to a share of Class B common stock in a calendar
year may not be more than 90% of the cash dividends paid with regard to a share
of common stock in that calendar year. One of the Company's major subsidiaries
is also restricted on the payment of dividends to its parent company, LNR
Property Corporation, under the revolving credit and loan agreements.
12. RELATED PARTY TRANSACTIONS
During the period December 1, 1996 through October 31, 1997, and for the
years ended November 30, 1996 and 1995, Lennar provided various general and
administrative services to the Company including: data processing, treasury,
legal, human resources, payroll, accounting, risk management and others. Costs
for these services are designed to approximate the actual costs incurred by
Lennar to render these services. Management believes the methods used to
determine these costs are reasonable, however, such costs may not be
representative of those which would be incurred if the Company had operated as
an independent entity during the periods presented. Charges for these costs are
included in general and administrative expenses and amounted to $3.3 million,
$3.1 million and $2.6 million for the period December 1, 1996 through October
31, 1997 and for the years ended November 30, 1996 and 1995, respectively.
The Company provided a portion of Lennar's facilities on a rent-free basis
for the period December 1 through October 31, 1997 and for the years ended
November 30, 1996 and 1995. Subsequent to the Spin-off, the Company has
negotiated market-based lease agreements with Lennar and its subsidiaries that
result in additional rental income of over $1.4 million annually.
The Company has entered into agreements whereby Lennar provides data
processing and construction management services for a period of up to one year
from the Spin-off. Data processing services are charged at a monthly rate of
$16,000. Services under this agreement were provided after the Spin-off and
aggregated $16,000 for 1997. No charges were incurred under the construction
management services agreement in 1997 and charges for 1998 are not expected to
be material.
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, the
disposition of these matters will not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.
F-20
<PAGE> 118
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is subject to the usual obligations associated with entering
into contracts for the purchase, development and sale of real estate as well as
the management of partnerships and special servicing of CMBS in the routine
conduct of its business.
The Company is committed, under various letters of credit or other
agreements, to provide certain guarantees. Outstanding letters of credit and
guarantees under these arrangements totaled approximately $56.2 million at
November 30, 1997.
The Company leases certain premises and equipment under various
noncancellable operating leases with terms expiring through 2003, exclusive of
renewal option periods. The annual aggregate minimum rental commitments under
these leases are summarized as follows (in thousands): 1998 -- $182;
1999 -- $163; 2000 -- $149; 2001 -- $158; 2002 -- $166 and thereafter $170.
14. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Revenues.......................................... $44,760 44,411 43,368 34,944
Operating income.................................. $27,166 29,150 26,689 16,067
Earnings before income taxes...................... $20,357 22,758 19,168 10,205
Net earnings...................................... $12,418 13,882 11,693 6,225
1996
Revenues.......................................... $38,814 41,773 41,336 41,513
Operating income.................................. $22,801 27,081 23,739 24,359
Earnings before income taxes...................... $18,169 21,721 18,405 19,172
Net earnings...................................... $11,083 13,250 11,227 11,695
</TABLE>
F-21
<PAGE> 119
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
As a result of the Spin-off and formation of Lennar Land Partners, the
Company believes that pro forma information provides the best information to
compare the results of operations and trends in earnings and costs. Results for
1997 have been adjusted to give pro forma effect to these transactions as if
such transactions had been completed as of the beginning of the period. The pro
forma information does not purport to be indicative of the results of operations
which would actually have been reported if the transactions had occurred on the
dates or for the periods indicated:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
1997 ADJUSTMENTS 1997
----------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Rental income..................................... $ 56,334 56,334
Equity in earnings of partnerships................ 30,149 13,292(a) 43,441
Interest income................................... 41,446 41,446
Gains on sales of:
Real estate..................................... 18,076 18,076
Investment securities........................... 5,359 5,359
Management fees................................... 13,385 13,385
Other, net........................................ 2,734 2,734
-------- ------ -------
Total revenues.......................... 167,483 13,292 180,775
Costs and expenses
Cost of rental operations......................... 35,767 35,767
General and administrative........................ 26,584 (4,408)(b) 22,176
Depreciation...................................... 6,060 6,060
-------- ------ -------
Total costs and expenses................ 68,411 (4,408) 64,003
-------- ------ -------
Operating earnings................................ 99,072 17,700 116,772
Interest expense.................................. 26,584 (2,100)(c) 24,484
-------- ------ -------
Earnings before income taxes...................... 72,488 19,800 92,288
Income taxes...................................... 28,270 7,721(d) 35,991
-------- ------ -------
Net earnings...................................... $ 44,218 12,079 56,297
======== ====== =======
Net earnings per share............................ $ 1.21 1.55
======== =======
</TABLE>
Adjustments to the historical results to arrive at the pro forma results are as
follows:
(a) Represents entries to reflect the Company's 50% interest in the earnings of
Lennar Land Partners.
(b) Represents entries to reflect the elimination of costs related to the
Spin-off and addition of incremental administrative costs associated with
creating a stand-alone public company.
(c) Represents entries to reflect reductions in interest expense due to the use
of proceeds from funds advanced by Lennar to repay debt.
(d) The adjustment to taxes represents the estimated income tax effect of the
pro forma adjustments to the Company's effective tax rate of 39.0%.
16. SUBSEQUENT EVENTS
In February 1998, the Company agreed to purchase interests in 41 entities
that own approximately 6,000 residential rental apartments. The purchase price,
which is subject to closing adjustments, is approximately $86 million plus the
assumption of approximately $44 million of future equity commitments, subject to
certain adjustments. The Company will manage the existing assets and is expected
to both develop and acquire new low-income tax credit properties. The
transaction remains subject to the receipt of third party consents.
F-22
<PAGE> 120
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Of LNR Property Corporation:
We have audited the consolidated financial statements of LNR Property
Corporation (the "Company") as of November 30, 1997 and 1996, and for each of
the three years in the period ended November 30, 1997, and have issued our
report thereon dated February 3, 1998 (February 18, 1998, as to Note 16); such
report is included elsewhere in this Form 10-K. Our audits also included the
financial statement schedules of LNR Property Corporation, listed in Item 14.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
Miami, Florida
February 3, 1998
F-23
<PAGE> 121
LNR PROPERTY CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
------------------------------------------
CHARGED
CHARGED (CREDITED)
TO COSTS TO OTHER AND BEGINNING ENDING
DESCRIPTION BALANCE EXPENSES ACCOUNTS (DEDUCTIONS) BALANCE
- ----------- ----------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Year ended November 30, 1997
Allowances deducted from
assets to which they
apply:
Allowances for doubtful
accounts and notes
receivable.............. $ 938,000 467,000 (702,000) -- 703,000
=========== ========= ========= ========== ==========
Deferred income and
unamortized discounts... $10,851,000 -- 235,000 (4,380,000)(A) 6,706,000
=========== ========= ========= ========== ==========
Loan loss reserve.......... $ 2,071,000 -- -- (33,000) 2,038,000
=========== ========= ========= ========== ==========
Valuation allowance........ $ 2,908,000 -- -- (2,908,000)(A) --
=========== ========= ========= ========== ==========
Year ended November 30, 1996
Allowances deducted from
assets to which they
apply:
Allowances for doubtful
accounts and notes
receivable.............. $ 871,000 511,000 -- (444,000) 938,000
=========== ========= ========= ========== ==========
Deferred income and
unamortized discounts... $13,112,000 -- (746,000)(B) (1,515,000)(A) 10,851,000
=========== ========= ========= ========== ==========
Loan loss reserve.......... $ -- 1,869,000 1,396,000 (1,194,000) 2,071,000
=========== ========= ========= ========== ==========
Valuation allowance........ $ 340,000 2,711,000 580,000 (723,000) 2,908,000
=========== ========= ========= ========== ==========
Year ended November 30, 1995
Allowances deducted from
assets to which they
apply:
Allowances for doubtful
accounts and notes
receivable.............. $ 273,000 1,190,000 4,000 (596,000) 871,000
=========== ========= ========= ========== ==========
Deferred income and
unamortized discounts... $10,600,000 -- 4,186,000(B) (1,674,000)(A) 13,112,000
=========== ========= ========= ========== ==========
Valuation allowance........ $ 172,000 -- 168,000 -- 340,000
=========== ========= ========= ========== ==========
</TABLE>
- ---------------
Notes:
(A) Includes transfers to Lennar Corporation of approximately $4.2 million and
amortization of discount and other.
(B) Includes discounts on mortgages purchased.
F-24
<PAGE> 122
LNR PROPERTY CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (D)(E)
YEAR ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
COST
CAPITALIZED GROSS AMOUNT
INITIAL COST SUBSEQUENT TO AT WHICH
TO COMPANY ACQUISITION CARRIED AT
------------------------- ---------------------- CLOSE OF PERIOD
BUILDING AND IMPROVE- CARRYING ---------------------------------------
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS MENTS COSTS LAND(A) BUILDINGS(A) TOTAL(C)
- ----------- ------------ ---------- ------------ ---------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rental apartment
property -- FL...... $20,640,000 1,872,000 9,063,000 4,624,000 359,000 2,046,000 13,872,000 15,918,000
Rental office
property -- FL...... 12,709,000 1,779,000 -- 13,577,000 1,959,000 4,319,000 12,996,000 17,315,000
Hotel -- FL.......... -- 1,000,00 3,478,000 8,867,000 367,000 1,367,000 12,345,000 13,712,000
Rental apartment
property -- CO...... 21,998,000 -- 5,375,000 24,055,000 441,000 -- 29,871,000 29,871,000
Rental office
property -- GA...... -- 1,263,000 11,700,000 -- -- 1,263,000 11,700,000 12,963,000
Rental office
property -- GA...... -- 5,238,000 20,020,000 1,570,000 -- 5,239,000 21,589,000 26,828,000
Rental retail
property -- AZ...... -- 11,945,000 -- 1,023,000 -- 11,945,000 1,023,000 12,968,000
Other miscellaneous
properties which are
individually less
than 5% of total.... 34,922,000 44,362,000 51,821,000 29,420,000 2,198,000 49,632,000 78,169,000 127,801,000
----------- ---------- ----------- ---------- --------- ---------- ----------- -----------
$90,269,000 67,459,000 101,457,000 83,136,000 5,324,000 75,811,000 181,565,000 257,376,000
=========== ========== =========== ========== ========= ========== =========== ===========
<CAPTION>
DATE OF
COMPLETION
ACCUMULATED OF DATE
DEPRECIATION(B) CONSTRUCTION ACQUIRED
--------------- ------------- --------
DESCRIPTION
- -----------
<S> <C> <C> <C>
Rental apartment
property -- FL...... 9,946,000 1979 1977
Rental office
property -- FL...... 3,250,000 Various 1980
Hotel -- FL.......... 3,046,000 Various 1987
Rental apartment
property -- CO...... 446,000 Under 1996
Construction
Rental office
property -- GA...... -- Under 1997
Construction
Rental office
property -- GA...... 984,000 Under 1996
Construction
Rental retail
property -- AZ...... -- Under 1997
Construction
Other miscellaneous
properties which are
individually less
than 5% of total.... 14,232,000 Various Various
----------
31,904,000
==========
</TABLE>
- ---------------
Notes:
(A) Includes related improvements and capitalized carrying costs.
(B) Depreciation is calculated using the straight-line method over the estimated
useful lives which vary from 15 to 40 years.
(C) The aggregate cost of the listed property for federal income tax purposes
was $220,000,000 at November 30, 1997.
(D) The listed real estate includes operating properties completed or under
construction.
(E) Reference is made to Notes 1, 5, and 7 of the consolidated financial
statements.
(F) The changes in the total cost of investment properties and accumulated
depreciation for the years ended November 30, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cost:
Balance at beginning of year................. $234,010 204,833 206,022
Additions, at cost........................... 76,921 34,410 6,808
Cost of real estate sold..................... (55,381) (9,051) (8,304)
Transfers.................................... 1,826 3,818 307
-------- ------- -------
Balance at end of year.................... $257,376 234,010 204,833
======== ======= =======
Accumulated depreciation:
Balance at beginning of year................. $ 31,971 28,686 25,763
Depreciation and amortization charged against
earnings.................................. 5,195 5,170 4,992
Depreciation of real estate sold............. (5,262) (1,885) (2,069)
-------- ------- -------
Balance at end of year.................... $ 31,904 31,971 28,686
======== ======= =======
</TABLE>
F-25
<PAGE> 123
LNR PROPERTY CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
LOANS
CARRYING SUBJECT TO
FINAL FACE AMOUNT OF DELINQUENT
INTEREST MATURITY PERIODIC PAYMENT PRIOR AMOUNT OF MORTGAGES PRINCIPAL OR
RATE DATE TERMS LIENS MORTGAGES (A)(B) INTEREST
DESCRIPTION ----------- --------- ---------------- -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage notes secured real
estate and other:
Office building -- CA.............. 7.89% 2003 Varying payment $16,788,000 12,227,000
Convention center -- NV............ Libor + 300 2000 Interest Only 45,000,000 45,000,000
Hotel -- NJ........................ 9.50% 1999 Varying payment 4,500,000 4,194,000
Retail center -- TX................ 10.00% 1998 Interest Only 3,704,000 3,355,000
Other.............................. 6%-10.5% 1998-2005 Various 5,613,000 4,295,000
----------- ----------
75,605,000 69,071,000
----------- ----------
Second mortgage notes secured by
real estate:
Residential land -- FL............. Prime + 2% 2001 Varying payment $314,436 4,400,000 4,400,000
Residential land -- CA............. 15% 1999 Varying payment 3,180,000 3,133,000
Residential land -- NV............. 15% 1999 Varying payment 7,760,000 7,690,000
Industrial land -- CA.............. 25% 1999 Varying payment 4,648,000 4,593,000
----------- ----------
19,988,000 19,816,000
Loan loss reserve.................. (2,038,000)
----------
$95,593,000 86,849,000
=========== ==========
</TABLE>
- ---------------
Notes:
(A) For Federal income tax purposes, the aggregate basis of the listed mortgages
was $86,849,000 at November 30, 1997.
(B) Carrying amounts are net of unamortized discounts and valuation allowance.
(C) The changes in the carrying amounts of mortgages for the years ended
November 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year...................... $ 64,441,000 53,551,000 55,893,000
Additions (deductions):
New mortgage loans, net......................... 67,319,000 77,369,000 42,572,000
Collections of principal........................ (20,085,000) (53,347,000) (44,495,000)
Transfers to Lennar Corporation................. (24,918,000) (7,063,000) (1,779,000)
Amortization of discount........................ 92,000 488,000 344,000
Deferred income recognized...................... 0 0 1,066,000
Other........................................... 0 (6,557,000) (50,000)
------------ ------------ ------------
Balance at end of year............................ $ 86,849,000 64,441,000 53,551,000
============ ============ ============
</TABLE>
F-26
<PAGE> 124
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MAY 31, NOVEMBER 30,
1998 1997
----------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<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.
F-27
<PAGE> 125
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
------------------- -----------------
1998 1997 1998 1997
-------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <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.
F-28
<PAGE> 126
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
MAY 31,
--------------------
1998 1997
--------- -------
(IN THOUSANDS)
<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
========= =======
</TABLE>
F-29
<PAGE> 127
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
MAY 31,
--------------------
1998 1997
--------- -------
(IN THOUSANDS)
<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.
<PAGE> 128
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MAY 31, 1998 AND 1997
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.
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.
F-31
<PAGE> 129
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY LNR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES
IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Forward-Looking Statements............ 15
Risk Factors.......................... 16
The Exchange Offer.................... 23
Capitalization........................ 29
Pro Forma Consolidated Condensed
Financial Information............... 30
Selected Consolidated Financial
Data................................ 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 52
Management............................ 64
Principal Stockholders................ 67
Certain Relationships and
Transactions........................ 69
Description of Certain Indebtedness... 73
Description of the New Notes.......... 74
Sales of New Notes Received By Broker-
Dealers............................. 96
Legal Matters......................... 96
Experts............................... 96
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$200,000,000
5.
OFFER TO EXCHANGE 9 3/8% SERIES B
SENIOR SUBORDINATED NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT FOR ANY AND ALL
OUTSTANDING 9 3/8% SERIES A SENIOR
SUBORDINATED NOTES DUE 2008
------------------------
PROSPECTUS
------------------------
DATED AUGUST 18, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 130
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(i) for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the DGCL (providing for liability of directors for the unlawful payment
of dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which a director derived an improper personal benefit.
Section 145 of the DGCL empowers the Company to indemnify, subject to the
standards set forth therein, any person in connection with any action, suit or
proceeding brought before or threatened by reason of the fact that the person
was a director, officer, employee or agent of such company, or is or was serving
as such with respect to another entity at the request of such company. The DGCL
also provides that the Company may purchase insurance on behalf of any such
director, officer, employee or agent.
The Company's Certificate of Incorporation provides for the indemnification
by the Company of each director and officer of the Company to the fullest extent
permitted by applicable law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
1.1 Purchase Agreement, dated March 19, 1998, by and among LNR
Property Corporation (the "Company"), BT Alex. Brown
Incorporated and Donaldson Lufkin & Jenrette Securities
Corporation (the "Initial Purchasers").*
3.1 Certificate of Incorporation.*
3.2 By-laws.*
4.1 Indenture, dated as of March 24, 1998, by and among the
Company and U.S. Bank Trust National Association (the
"Trustee"), including Form of 9 3/8% Series A Senior
Subordinated Notes due 2008 and Form of 9 3/8% Series B
Senior Subordinated Notes due 2008.*
4.2 Registration Agreement, dated as of March 24, 1998, by and
among the Company and the Initial Purchasers.*
5.1 Opinion of Rogers & Wells LLP.*
10.1 Separation and Distribution Agreement between the Company
and Lennar Corporation, dated June 10, 1997.*
10.2 LNR Property Corporation Employee Stock Ownership/401(k)
Plan.*
10.3 Shared Facilities Agreement between LNR Property Corporation
and Lennar Corporation.*
10.4 Partnership Agreement by and between Lennar Land Partners
Sub, Inc. and LNR Land Partners Sub, Inc.*
10.5 Revolving Credit Agreement dated as of December 5, 1997,
among LNR Property Corporation and certain subsidiaries and
Bank of America National Trust and Savings Association, as
lender and agent.*
10.6 Master Repurchase Agreement dated as of December 8, 1997,
between LNR Sands Holdings, Inc. and Goldman Sachs Mortgage
Company.*
10.7 Reverse Repurchase Agreement dated as of October 21, 1997,
between DLJ Mortgage Capital, Inc. and LNR Property
Corporation, Lennar Capital Services, Inc., Nevada
Securities Holdings, Inc., Lennar Securities Holdings, Inc.,
Lennar MBS, Inc. and LFS Asset Corp.*
</TABLE>
II-1
<PAGE> 131
<TABLE>
<S> <C>
10.8 Amended and Restated Credit Agreement dated as of October
31, 1997, between Lennar Capital Services Inc. and Lennar
MBS, Inc. as borrowers and Nationsbank of Texas, N.A. as
lender.*
10.9 Credit Agreement among Lennar Land Partners as borrower, and
the First National Bank of Chicago, et al.*
10.10 Revolving Credit Agreement dated as of November 6, 1997, by
and between Lennar Capital Services, Inc. and The Bank of
New York.*
10.11 Reverse Repurchase Agreement dated as of June 7, 1996,
between CS First Boston (Hong Kong) Limited and Lennar
Financial Services, Inc., Lennar MBS, Inc., Lennar
Securities Holdings, Inc. and LFS Asset Corp.*
11.1 Statement re computation of Per Share Earnings.*
21.1 List of subsidiaries.*
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Rogers & Wells LLP (to be contained in the
opinion filed as Exhibit 5.1).*
24.1 Power of attorney (incorporated by reference in the
signature pages).*
25.1 Form T-1 Statement of Eligibility and Qualification of U.S.
Bank Trust National Association, as trustee.*
27.1 Financial Data Schedule*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Exchange Agent Agreement.*
</TABLE>
- ---------------
* Previously filed.
ITEM 22. UNDERTAKING.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrants hereby undertake:
(i) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
II-2
<PAGE> 132
(ii) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(iii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iv) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
II-3
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
New York, on August 19, 1998.
LNR PROPERTY CORPORATION
By: /s/ STEVEN J. SAIONTZ
--------------------------------------
Steven J. Saiontz
Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey P. Krasnoff and Shelly Rubin his true and
lawful attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this registration
statement and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully for all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirement of the Securities Act of 1933, this
registration statement has been signed by the following person in the capacity
and on the date indicated.
By: /s/ SHELLY RUBIN
--------------------------------------
Shelly Rubin
Attorney-In-Fact
August 19, 1998
<PAGE> 134
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
23.1 Consent of Deloitte & Touche LLP
</TABLE>
<PAGE> 1
EXHIBIT 23-1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-50017 of LNR Property Corporation on Form S-4 of our report dated February
3, 1998 (February 18, 1998, as to Note 16), appearing in the Prospectus, which
is part of this Registration Statement and our report dated February 3, 1998
relating to the financial statement schedules appearing elsewhere in this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Miami, Florida
August 18, 1998
