================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1998
Commission file number 1-13223
LNR PROPERTY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 65-0777234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
760 NORTHWEST 107TH AVENUE, MIAMI, FLORIDA 33172
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 485-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Common shares outstanding as of the end of the current fiscal quarter:
Common 25,045,930
Class B Common 10,755,063
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<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
August 31, November 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
----------------- ----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 57,745 34,059
Restricted cash 78,033 56,637
Investment securities 402,719 304,660
Mortgage loans, net 199,966 86,849
Operating properties and equipment, net 623,147 228,598
Land held for investment 162,008 83,297
Investments in and advances to partnerships 196,289 159,359
Deferred income taxes 6,236 23,974
Other assets 82,477 45,904
----------------- --------------
Total assets $ 1,808,620 1,023,337
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 9,106 4,244
Accrued expenses and other liabilities 75,608 36,708
Mortgage notes and other debts payable 1,080,491 391,171
----------------- --------------
Total liabilities 1,165,205 432,123
----------------- --------------
Minority interests 29,252 22,126
----------------- --------------
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 25,046 shares issued
and outstanding 2,504 2,515
Class B common stock, $.10 par value, 40,000 shares authorized, 10,755 shares
issued and outstanding 1,076 1,098
Additional paid-in capital 539,287 544,548
Retained earnings 51,434 370
Unrealized gain on available-for-sale securities, net 19,862 20,557
----------------- --------------
Total stockholders' equity 614,163 569,088
----------------- --------------
Total liabilities and stockholders' equity $ 1,808,620 1,023,337
================= ==============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED) (UNAUDITED)
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues
Rental income $ 20,023 13,600 49,887 43,578
Equity in earnings of partnerships 16,671 6,661 40,640 26,452
Interest income 20,071 10,269 54,830 30,899
Gains on sales of:
Real estate 9,378 7,473 21,439 13,874
Investment securities - 350 1,386 5,359
Management and servicing fees 2,877 4,193 6,898 10,170
Other, net 143 822 822 2,207
----------- ----------- ----------- -----------
Total revenues 69,163 43,368 175,902 132,539
----------- ----------- ----------- -----------
Costs and expenses
Cost of rental operations 12,619 9,878 31,439 28,159
General and administrative 7,904 5,364 20,578 16,897
Depreciation 4,349 1,407 8,412 4,322
Minority interests 473 30 1,567 156
----------- ----------- ----------- -----------
Total costs and expenses 25,345 16,679 61,996 49,534
----------- ----------- ----------- -----------
Operating earnings 43,818 26,689 113,906 83,005
Interest expense 17,277 7,521 34,260 20,722
----------- ----------- ----------- -----------
Earnings before income taxes 26,541 19,168 79,646 62,283
Income taxes 7,443 7,475 26,974 24,290
----------- ----------- ----------- -----------
Net earnings $ 19,098 11,693 52,672 37,993
========== =========== =========== ===========
Weighted average shares outstanding:
Basic 36,144 36,128 36,138 36,128
========== =========== =========== ===========
Diluted 36,549 36,298 36,472 36,298
========== =========== =========== ===========
Net earnings per share:
Basic $ 0.53 0.32 1.46 1.05
========== =========== =========== ===========
Diluted $ 0.52 0.32 1.44 1.05
========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
AUGUST 31,
--------------------------
1998 1997
(IN THOUSANDS) ------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 52,672 37,993
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation 8,412 4,322
Minority interests 1,567 156
Amortization of discount on mortgage loans and CMBS (4,593) -
Gains on sales of real estate (21,439) (13,874)
Equity in earnings of partnerships (40,640) (26,452)
Gains on sales of investment securities (1,386) (5,359)
Changes in assets and liabilities:
Decrease (increase) in restricted cash 3,193 (15,899)
Increase in other assets and deferred taxes (14,252) (16,170)
Increase in mortgage loans held for sale (12,787) (6,049)
Increase in accounts payable and accrued liabilities 30,216 8,910
------------ ----------
Net cash provided by (used in) operating activities 963 (32,422)
------------ ----------
Cash flows from investing activities:
Operating properties and equipment
Additions (242,533) (47,923)
Sales 38,660 47,495
Land held for investment
Additions (97,916) (4,318)
Sales 20,042 8,983
Investments in and advances to partnerships (38,293) (3,715)
Distributions from partnerships 54,856 71,644
Purchases of other investments - (6,857)
Purchases of mortgage loans held for investment (36) (349)
Proceeds from mortgage loans held for investment 4,831 213
Purchase of investment securities (70,693) (84,965)
Proceeds from sales of investment securities 7,336 110,714
Interest received on CMBS in excess of income recognized 8,817 14,186
Acquisition of AHG, net of cash acquired (75,525) -
------------ ----------
Net cash provided by (used in) investing activities (390,454) 105,108
------------ ----------
Cash flows from financing activities:
Purchase and retirement of treasury stock (5,600) -
Payment of dividends (1,314) -
Net borrowings under repurchase agreements and revolving credit lines 161,014 (9,572)
Mortgage notes and other debts payable
Proceeds from borrowings 277,743 16,721
Principal payments (6,140) (4,059)
Payments to Lennar Corporation (12,526) (73,752)
------------ ----------
Net cash provided by (used in) financing activities 413,177 (70,662)
------------ ----------
Net increase in cash and cash equivalents 23,686 2,024
Cash and cash equivalents at beginning of period 34,059 2,295
------------ ----------
Cash and cash equivalents at end of period $ 57,745 4,319
============ ==========
(Continued)
</TABLE>
3
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
ENDED
AUGUST 31,
-----------------------
(IN THOUSANDS) 1998 1997
------------ ----------
<S> <C> <C>
Supplemental disclosures of non-cash investing and financing activities:
Purchases of investment securities financed $ 34,956 47,171
Purchase of a mortgage loan financed $ 105,000 -
Spin-off of LNR from Lennar Corporation:
Increase in Lennar Corporation's investment due to transfers of assets and
liabilities to Lennar Corporation, prior to the spin-off $ - 4,612
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated condensed financial statements include the
accounts of LNR Property Corporation and its subsidiaries (the "Company"). The
assets, liabilities and results of operations of entities (both corporations and
partnerships) in which the Company has a controlling interest have been
consolidated. The ownership interests of noncontrolling owners in such entities
are reflected as minority interests. The Company's investments in partnerships
(and similar entities) in which less than a controlling interest is held are
accounted for by the equity method (when significant influence can be exerted by
the Company), or the cost method. All significant intercompany transactions and
balances have been eliminated. The financial statements have been prepared by
management without audit by independent public accountants and should be read in
conjunction with the November 30, 1997 audited financial statements in the
Company's Annual Report on Form 10-K for the year then ended. However, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for fair presentation of the accompanying consolidated
condensed financial statements have been made.
2. NET EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" beginning in the first quarter
of 1998. The statement requires that earnings per share be calculated and
presented on a basic and diluted basis. Net earnings per share for all periods
presented have been restated to conform with SFAS No. 128.
Basic net earnings per share is computed by dividing the Company's net earnings
by the weighted average number of shares outstanding during the period. Diluted
net earnings per share is computed by dividing the Company's net earnings by the
weighted average number of shares outstanding and the dilutive impact of common
stock equivalents, primarily stock options. The dilutive impact of common stock
equivalents is determined by applying the treasury stock method.
3. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
condensed financial statements to conform to the current year presentation.
4. ACQUISITION
On February 18, 1998, the Company entered into an agreement to purchase from
Pacific Harbor Capital, Inc., a wholly-owned subsidiary of PacifiCorp,
controlling interests in a group of entities as well as certain direct
partnership interests, known as the Affordable Housing Group ("AHG"), which own
multi-family and senior housing properties, many of which qualify for Low-Income
Housing Tax Credits under Section 42 of the Internal Revenue Code.
As of August 31, 1998 the Company completed the purchase of certain interests
which own 40 of the properties. The remaining two interests closed during the
fourth quarter. The aggregate
5
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
amount of consideration was $81 million, subject to certain post-closing
adjustments, plus the assumption of approximately $45 million of future equity
commitments. The purchase price paid for assets acquired as of August 31, 1998
was approximately $76 million. At August 31, 1998, the Company's balance sheet
included AHG balances as follows: operating properties of approximately $194
million, investments in partnerships of approximately $14 million and
approximately $133 million of property-specific mortgage financing that is
non-recourse to the Company.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CERTAIN STATEMENTS CONTAINED IN THE FOLLOWING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE
"FORWARD-LOOKING STATEMENTS" AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, (i) CHANGES IN
INTEREST RATES, (ii) CHANGES IN DEMAND FOR COMMERCIAL REAL ESTATE NATIONALLY, IN
AREAS IN WHICH THE COMPANY OWNS PROPERTIES, OR IN AREAS IN WHICH PROPERTIES
SECURING MORTGAGES DIRECTLY OR INDIRECTLY OWNED BY THE COMPANY ARE LOCATED,
(iii) INTERNATIONAL, NATIONAL OR REGIONAL BUSINESS CONDITIONS WHICH AFFECT THE
ABILITY OF MORTGAGE OBLIGORS TO PAY PRINCIPAL OR INTEREST WHEN IT IS DUE, (iv)
THE CYCLICAL NATURE OF THE COMMERCIAL REAL ESTATE BUSINESS AND (v) CHANGES IN
MARKETS FOR VARIOUS TYPES OF REAL ESTATE BASED SECURITIES. SEE THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED NOVEMBER 30, 1997, FOR A FURTHER
DISCUSSION OF RISKS AND UNCERTAINTIES APPLICABLE TO THE COMPANY'S BUSINESS.
1. RESULTS OF OPERATIONS
OVERVIEW
LNR Property Corporation (the "Company") is engaged primarily in (i) developing
and managing commercial and multi-family residential properties, (ii) acquiring,
managing and repositioning commercial and multi-family residential real estate
loans and properties, (iii) acquiring (often in partnership with financial
institutions or real estate funds) and managing portfolios of real estate
assets, (iv) investing in unrated and non-investment grade rated commercial
mortgage-backed securities ("CMBS") as to which the Company has the right to be
special servicer, and (v) making high yielding real estate related loans and
equity investments. For the following discussion, these businesses are grouped
as follows: (a) real estate operations, (b) CMBS and loans and (c) partnerships
and joint ventures.
7
<PAGE>
The following is a summary of the Company's actual results of operations for the
three and nine month periods ended August 31, 1998 and 1997 and pro forma
results for the three and nine month periods ended August 31, 1997, after
allocating among the core business lines certain non-corporate general and
administrative expenses. The pro forma adjustments to the three and nine month
periods ended August 31, 1997 include (i) the Company's 50% interest in Lennar
Land Partners, (ii) the addition of incremental administrative costs associated
with operating as a stand-alone public company, (iii) reductions in interest
expense due to the use of proceeds from funds advanced by Lennar Corporation
("Lennar") to repay debt, (iv) removal of costs associated with completing the
spin-off of the Company to Lennar stockholders and (v) the estimated income tax
effect of the pro forma adjustments at the Company's effective tax rate of
39.0%.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
---------------------------------------- ----------------------------------------
Actual Actual Pro Forma Actual Actual Pro Forma
----------- ---------- ---------- --------- ------------ ----------
(IN THOUSANDS) 1998 1997 1997 1998 1997 1997
----------- ---------- ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Real estate operations $ 29,401 21,073 21,073 71,326 57,452 57,452
CMBS and loans 22,152 11,595 11,595 60,558 39,439 39,439
Partnerships and
joint ventures 17,467 9,878 12,833 43,196 33,441 39,847
Corporate and other 143 822 822 822 2,207 2,207
----------- ---------- ---------- --------- ------------ ----------
Total revenues 69,163 43,368 46,323 175,902 132,539 138,945
----------- ---------- ---------- --------- ------------ ----------
Operating expenses
Real estate operations 19,225 12,085 12,085 45,278 35,011 35,011
CMBS and loans 2,034 780 780 4,645 2,791 2,791
Partnerships and
joint ventures 1,347 1,020 1,020 3,525 3,933 3,933
Corporate and other 2,739 2,794 3,521 8,548 7,799 7,727
----------- ---------- ---------- --------- ------------ ----------
Total operating expenses 25,345 16,679 17,406 61,996 49,534 49,462
----------- ---------- ---------- --------- ------------ ----------
Operating earnings
Real estate operations 10,176 8,988 8,988 26,048 22,441 22,441
CMBS and loans 20,118 10,815 10,815 55,913 36,648 36,648
Partnerships and
joint ventures 16,120 8,858 11,813 39,671 29,508 35,914
Corporate and other (2,596) (1,972) (2,699) (7,726) (5,592) (5,520)
----------- ---------- ---------- --------- ------------ ----------
Total operating earnings 43,818 26,689 28,917 113,906 83,005 89,483
Interest expense 17,277 7,521 6,996 34,260 20,722 19,147
Income tax expense 7,443 7,475 8,549 26,974 24,290 27,431
----------- ---------- ---------- --------- ------------ ----------
Net earnings $ 19,098 11,693 13,372 52,672 37,993 42,905
=========== ========== ========== ========= ============ ==========
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1997
Net earnings were $19.1 million and $52.7 million, respectively, for the three
and nine month periods ended August 31, 1998 compared to $11.7 million and $38.0
million, respectively, for the same periods in 1997. The increases resulted
primarily from greater interest income from investment securities, greater
earnings from the Company's investments in Lennar Land Partners ("LLP") and
greater gains on sales of real estate. Additionally, as a result of tax credits
from the Affordable Housing Group ("AHG") acquisition, the Company's effective
tax rate was reduced to 28% and 34% for the three and nine month periods ended
August 31, 1998 compared to 39% for both respective periods in 1997.
8
<PAGE>
REAL ESTATE OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------------ --------------------------------
(IN THOUSANDS) 1998 1997 1998 1997
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Rental income $ 20,023 13,600 49,887 43,578
Gains on sales of real estate 9,378 7,473 21,439 13,874
------------- ------------- ------------- ---------------
Total revenues 29,401 21,073 71,326 57,452
------------- ------------- ------------- ---------------
Cost of rental operations 12,619 9,878 31,439 28,159
Other operating expenses 2,257 800 5,427 2,530
Depreciation 4,349 1,407 8,412 4,322
------------- ------------- ------------- ---------------
Total operating expenses 19,225 12,085 45,278 35,011
------------- ------------- ------------- ---------------
Operating earnings $ 10,176 8,988 26,048 22,441
============= ============= ============= ===============
</TABLE>
Total revenues from real estate operations include the rental income from
operating properties plus gains on sales of those properties. Total operating
expenses include the direct costs of operating those properties and the overhead
associated with managing them.
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1997
Overall, operating earnings from real estate properties increased to $10.2
million and $26.0 million for the three and nine month periods ended August 31,
1998, respectively, from $9.0 million and $22.4 million, for the same periods in
1997. Earnings were higher primarily due to gains on sales of stabilized
operating properties and increases in net rental income.
The three and nine month periods ended August 31, 1998 include $2.0 million and
$2.7 million, respectively, of net rental income from operations on the 36 AHG
property investments that closed on May 1, 1998 and the four additional
investments that closed during the month of June. 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 $16.3 million and
$37.0 million during the three month and nine month periods ended August 31,
1998, the total book value of operating properties and equipment and land held
for investment increased by $217 million and $473 million, respectively, during
these same three month and nine month periods primarily as a result of the AHG
acquisition and other asset purchases. The AHG acquisition increased operating
properties by approximately $15 million and $194 million, respectively, during
the three and nine month periods ended August 31, 1998. A majority of the other
asset purchases were of operating properties which are being developed or where
the Company believes it can improve net operating earnings and/or ultimate sales
value, although there can be no assurance that the Company will be successful.
As of August 31, 1998, approximately 45% of the Company's operating property
portfolio, based on book value, had not yet reached stabilized occupancy and the
anticipated improvements in their operating earnings will not be recognized
until future periods.
9
<PAGE>
Net rental income increased during the three month and nine month periods of
1998 as compared to the same periods in 1997 as the net rental income increases
more than offset the net rental income from the properties sold. The net rental
income for the quarter doubled from last year's third quarter. Depreciation
expense increased to $4.3 million and $8.4 million for the three and nine month
periods ended August 31, 1998 from $1.4 million and $4.3 million for the same
periods in 1997. The increase was a direct result of the AHG acquisition and
other property acquisitions.
Other operating expenses, which represent an allocation of salary, professional
and other administrative expenses, increased to $2.3 million and $5.4 million,
respectively, for the three and nine month periods ended August 31, 1998 from
$0.8 million and $2.5 million, for the same periods in 1997, primarily due to
increases in personnel and general overhead costs necessary to analyze, acquire
and manage new properties and the acquisition of AHG.
NOTE: ACTUAL AND PRO FORMA RESULTS ARE IDENTICAL FOR 1997.
CMBS AND LOANS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
---------------------------- ----------------------------
(IN THOUSANDS) 1998 1997 1998 1997
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Interest income - CMBS $ 14,691 6,574 39,475 21,873
Interest income - loans 3,684 3,695 12,020 9,026
Interest income - other 1,696 - 3,335 -
Gains on sales of investment
securities - 350 1,386 5,359
Servicing fees 2,081 976 4,342 3,181
------------ ------------ ----------- ------------
Total revenues 22,152 11,595 60,558 39,439
Operating expenses 2,034 780 4,645 2,791
------------ ------------ ----------- ------------
Operating earnings $ 20,118 10,815 55,913 36,648
============ ============ =========== ============
</TABLE>
Revenues from CMBS and loans include interest income, gains on sales of these
assets and fees from acting as special servicer for CMBS transactions. Related
operating expenses include the direct costs of investing in and originating CMBS
and loans, and servicing the CMBS portfolio.
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1997
Overall, operating earnings from CMBS and loans increased to $20.1 million and
$55.9 million for the three month and nine month periods ended August 31, 1998,
respectively, from $10.8 million and $36.6 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 CMBS
performance exceeding original expectations. The Company's CMBS portfolio grew
to $403 million at August 31, 1998 from $305 million at November 30, 1997.
During the nine month period ended August 31, 1998, the Company purchased $177
million face amount of securities for approximately $106 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 nine month periods
ended
10
<PAGE>
August 31, 1998, this excess of cash received over income recorded was $2.0
million and $8.8 million, respectively. It was $5.1 million and $14.2 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 5
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.
Interest income from mortgage loans remained constant over the prior year
quarter at $3.7 million during the three month period ended August 31, 1998.
During the third quarter of 1998, interest income on new investments was offset
by reduced interest earned on loans that paid off. Interest income increased to
$12.0 million for the nine months ended August 31, 1998 from $9.0 million for
the same period in the prior year. The year to date increase was primarily
attributable to new investments in mortgage loans. Investments in loans
increased to $200 million at August 31, 1998 from $87 million at November 30,
1997 primarily due to a $105 million participation in a $255 million first
mortgage loan collateralized by a hotel portfolio that was acquired late in the
quarter ended August 31, 1998. This loan was sold at par subsequent to quarter
end.
Other interest income increased during the three and nine month periods ended
August 31, 1998, primarily due to investments made during the fourth quarter of
1997. The first quarter of 1998 also included interest earned from temporary
investments made with cash received from Lennar in connection with the spin-off.
Operating expenses increased to $2.0 million and $4.6 million during the three
and nine month periods ended August 31, 1998, respectively, from $0.8 million
and $2.8 million for the same periods in 1997, primarily due to increases in
personnel and out-of-pocket expenses related to the growth of the CMBS business.
NOTE: ACTUAL AND PRO FORMA RESULTS ARE IDENTICAL FOR 1997.
11
<PAGE>
PARTNERSHIPS AND JOINT VENTURES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
-------------------------------------- -------------------------------------
Actual Pro Forma Actual Pro Forma
------------------------ ---------- ----------------------- ----------
(IN THOUSANDS) 1998 1997 1997 1998 1997 1997
---------- ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Equity in earnings from
partnerships
Portfolios $ 5,004 6,137 6,137 15,903 25,169 25,169
Lennar Land Partners 8,529 - 2,955 20,413 - 6,406
Other 3,138 524 524 4,324 1,283 1,283
Management fees 796 3,217 3,217 2,556 6,989 6,989
---------- ---------- ---------- --------- --------- ----------
Total revenues 17,467 9,878 12,833 43,196 33,441 39,847
Operating expenses 1,347 1,020 1,020 3,525 3,933 3,933
---------- ---------- ---------- --------- --------- ----------
Operating earnings $ 16,120 8,858 11,813 39,671 29,508 35,914
========== ========== ========== ========= ========= ==========
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1997
Operating earnings from partnerships and joint ventures increased to $16.1
million and $39.7 million for the three and nine month periods ended August 31,
1998, respectively, from $8.9 million and $29.5 million, for the same periods in
1997. Although the Company's investments in earnings of its older partnerships
have decreased, those related earnings have to some extent been replaced with
the Company's 50% share of LLP's results, which amounted to $8.5 million and
$20.4 million for the three month and nine month periods ended August 31, 1998,
respectively. The Company expects LLP to continue to provide 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. Other
partnership earnings were higher during the third quarter ended August 31, 1998
compared with the same period in 1997 due to the sale of assets in the
underlying partnerships.
Partnership distributions received by the Company during the three month and
nine month periods ended August 31, 1998 were $37.7 million and $54.9 million,
respectively, in comparison with $42.5 million and $71.6 million for the same
periods in 1997. For the three month and nine month periods ended August 31,
1998, respectively, distributions were $21.0 million and $14.3 million greater
than the Company's actual equity in earnings of the partnerships of $16.7
million and $40.6 million, respectively, primarily due to asset sales by the
older partnerships and a $13 million distribution from LLP.
The Company's overall investments in and advances to partnerships increased to
$196 million at August 31, 1998 from $159 million at November 30, 1997. This was
primarily due to the portfolio investments in Japan and the AHG acquisition.
During the quarter, the Company completed its fifth portfolio purchase with
partners of non-performing commercial mortgage real estate loans in Japan,
bringing its total investment at August 31, 1998 to approximately $20 million.
12
<PAGE>
Management fees decreased to $0.8 million and $2.6 million for the three and
nine month periods ended August 31, 1998, respectively, from $3.2 million and
$7.0 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 NINE MONTH PERIODS ENDED AUGUST 31, 1997 WERE $11.8 MILLION AND $35.9
MILLION, RESPECTIVELY, COMPARED TO $8.9 MILLION AND $29.5 MILLION ON AN ACTUAL
BASIS. THESE DIFFERENCES WERE DUE TO THE INCLUSION OF LLP'S PRO FORMA INCOME FOR
THE THREE AND NINE MONTH PERIODS ENDED AUGUST 31, 1997.
CORPORATE, OTHER, INTEREST, AND INCOME TAX EXPENSES
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THE THREE MONTHS
AND NINE MONTHS ENDED AUGUST 31, 1997
Corporate and other operating expenses increased to $2.6 million and $7.7
million for the three and nine month periods ended August 31, 1998,
respectively, from $2.0 million and $5.6 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 NINE MONTH
PERIODS ENDED AUGUST 31, 1997 WERE $2.7 MILLION AND $5.5 MILLION, RESPECTIVELY,
COMPARED TO $2.0 MILLION AND $5.6 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 $17.3 million and $34.3 million for the three and
nine month periods ended August 31, 1998, respectively, from $7.5 million and
$20.7 million, for the same periods in 1997. This increase was directly
attributable to the Company's mortgage notes and other debts payable increasing
to $1,080 million at August 31, 1998 from $368 million at August 31, 1997, as
described in further detail below under "Liquidity and Financial Resources."
PRO FORMA INTEREST EXPENSE FOR THE THREE AND NINE MONTH PERIODS ENDED AUGUST 31,
1997 WAS $7.0 MILLION AND $19.1 MILLION, RESPECTIVELY, COMPARED TO $7.5 MILLION
AND $20.7 MILLION 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.
Income tax expense decreased to $7.4 million for the three months ended August
31, 1998 from $7.5 million for the same period in 1997; and increased to $27.0
million for the nine months ended August 31, 1998 from $24.3 million for the
same period in 1997. However, as a result of the AHG tax credits, the Company's
effective tax rate was reduced to 28% and 34% for the three and nine month
periods ended August 31, 1998 compared to 39% for both respective periods in
1997.
PRO FORMA INCOME TAX EXPENSE FOR THE THREE AND NINE MONTH PERIODS ENDED AUGUST
31, 1997 WAS $8.5 MILLION AND $27.4 MILLION, RESPECTIVELY, COMPARED TO $7.5
MILLION AND $24.3 MILLION ON AN ACTUAL BASIS. THE DIFFERENCE WAS DUE TO THE
ESTIMATED INCOME TAX EFFECT OF THE PRO FORMA ADJUSTMENTS AT THE COMPANY'S
EFFECTIVE TAX RATE OF 39.0%.
2. LIQUIDITY AND FINANCIAL RESOURCES
The Company received $1.0 million of cash from operating activities during the
nine months ended August 31, 1998 compared with $32.4 million of cash used for
the same period in 1997.
13
<PAGE>
Increased cash flow from operating activities during 1998 is primarily due to a
decrease in restricted cash and an increase in accounts payable and accrued
liabilities.
Cash flows used in investing activities totaled $390.5 million during the nine
months ended August 31, 1998 compared with $105.1 million of cash flows provided
by investing activities for the same period in 1997. The increase in cash flow
used in investing activities during the nine months ended August 31, 1998 is
primarily attributable to higher purchases of operating properties and land held
for investment, the AHG acquisition and significantly less proceeds from sales
of investment securities.
The Company received cash from financing activities of $413.2 million during the
nine months ended August 31, 1998 compared with $70.7 million of cash used for
the same period in 1997. The increase was primarily due to increased borrowings
under repurchase agreements, revolving credit lines and mortgage notes and other
debts payable, which were utilized to fund the purchase of new operating
properties, the construction or improvement costs to existing properties, the
purchase of land held for investment and the AHG acquisition.
During the third quarter, the Company entered into a $150 million warehouse
credit facility which is collateralized by mortgage loans. This line of credit
bears interest at LIBOR plus a margin. At August 31, 1998, approximately $149
million was outstanding under this line.
Beginning in the late summer of 1998, the market prices of real estate related
securities began to decrease. The Company believes these decreases are for the
most part due to the reduction in the number of purchasers and the amount of
capital available in the market place to buy those securities as well as the
recent increase in the supply of those securities. These price decreases did not
directly affect the Company's results from operations, because the Company holds
its real estate related securities primarily as long-term investments. The
Company does not believe the decline in market prices represents a permanent
impairment of the value of the securities, particularly because there does not
appear to have been an impairment of the value of the real estate assets
underlying those securities.
The Company has financed some of its purchases of real estate related securities
under repurchase agreements. At August 31, 1998, the Company had two such
repurchase lines amounting to $310 million of which $255 million was
outstanding. Both of the agreements expire before December 31, 1998. The Company
believes it will be able to renew or replace both lines, although possibly on
somewhat less favorable terms. If the Company were not able to renew or replace
one or both of the lines, it might have to utilize availability under other
existing credit facilities and cash flow generated from operations or asset
sales.
The Company's board of directors has approved a stock repurchase plan
authorizing the Company to buy back up to 2,000,000 shares of its own stock. As
of the end of the third quarter, the Company had purchased and retired 350,000
shares under this program at an average price of approximately $16 per share.
YEAR 2000
The Company has segregated its systems into two basic types in terms of
identifying and assessing Year 2000 issues. These systems are the financial
systems and the non-financial systems. The financial systems comprise the
general ledger and related subsystems. Non-financial systems are primarily
related to the Company's business activities as a lessor of commercial real
estate and the Company is currently assessing the cost to change these systems.
The inability to correct any Year 2000 deficiencies in any non-financial systems
would not seriously impair the ability of the Company to conduct its business.
14
<PAGE>
As part of the tax free spin-off from Lennar Corporation, the Company was
required to segregate its financial systems from Lennar. The Company has
identified the software and hardware to do this and has already put one system
in place and is in the process of installing all other financial systems, all of
which are Year 2000 compliant. The Company currently anticipates that the
implementation of the new financial systems will be completed before mid-1999
and the total project costs will be between $3 million and $4 million.
The Company is also in the process of assessing the Year 2000 readiness of its
key vendors, subcontractors and business partners to determine whether key
processes and business activities will be interrupted. The Company expects to
complete this project early in 1999. A failure of the Company's vendors,
subcontractors and business partners to address adequately their Year 2000
readiness could affect the Company's business. As part of its contingency
planning efforts, the Company is preparing to identify alternate sources or
strategies where necessary if significant exposures are identified.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not subject to any legal proceedings other than suits relating to
properties it owns which the Company views as an ordinary part of its business,
and at least most of which are covered by insurance. Management believes these
suits will not, in the aggregate, have a material adverse effect upon the
Company.
ITEMS 2-5. NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
Signature and Title Date
------------------- ----
/s/ SHELLY RUBIN
- ------------------------------------ October 15, 1998
Shelly Rubin
Chief Financial Officer (Principal
Financial Officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> NOV-30-1997
<PERIOD-END> AUG-31-1998
<CASH> 135,778
<SECURITIES> 402,719
<RECEIVABLES> 199,966
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 663,698
<DEPRECIATION> 40,551
<TOTAL-ASSETS> 1,808,620
<CURRENT-LIABILITIES> 0
<BONDS> 1,080,491
0
0
<COMMON> 3,580
<OTHER-SE> 610,583
<TOTAL-LIABILITY-AND-EQUITY> 1,808,620
<SALES> 0
<TOTAL-REVENUES> 69,163
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,277
<INCOME-PRETAX> 26,541
<INCOME-TAX> 7,443
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,098
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.52
</TABLE>
