================================================================================
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, 1999
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 25,639,078
Class B Common 10,060,633
================================================================================
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) August 31, November 30,
1999 1998
----------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 27,488 28,417
Restricted cash 95,846 56,264
Investment securities 514,468 434,157
Mortgage loans, net 79,351 97,855
Operating properties and equipment, net 809,556 712,419
Land held for investment 144,997 140,048
Investments in and advances to partnerships 305,254 194,490
Other assets 105,576 80,155
----------------- ----------------
Total assets $ 2,082,536 1,743,805
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 123,573 73,067
Mortgage notes and other debts payable 1,219,506 1,017,199
----------------- ----------------
Total liabilities 1,343,079 1,090,266
----------------- ----------------
Minority interests 39,530 34,560
----------------- ----------------
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 25,639 shares issued and
outstanding 2,564 2,485
Class B common stock, $.10 par value, 40,000 shares authorized, 10,061 shares issued
and outstanding 1,006 1,075
Additional paid-in capital 536,557 536,259
Retained earnings 144,678 71,452
Accumulated other comprehensive earnings 15,122 7,708
----------------- ----------------
Total stockholders' equity 699,927 618,979
----------------- ----------------
Total liabilities and stockholders' equity $ 2,082,536 1,743,805
================= ================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Rental income $ 21,839 20,023 67,578 49,887
Equity in earnings of partnerships 10,891 16,671 42,623 40,640
Interest income 27,510 20,071 75,896 54,830
Gains on sales of:
Real estate 13,934 9,378 54,165 21,439
Investment securities 6,056 - 6,056 1,386
Management and servicing fees 4,753 2,877 12,456 6,898
Other, net 138 143 426 822
------------ ------------ ------------ ------------
Total revenues 85,121 69,163 259,200 175,902
------------ ------------ ------------ ------------
Costs and expenses
Cost of rental operations 11,844 12,619 38,236 31,439
General and administrative 11,765 7,904 33,296 20,578
Depreciation 7,234 4,349 19,659 8,412
Minority interests 4,077 473 5,230 1,567
------------ ------------ ------------ ------------
Total costs and expenses 34,920 25,345 96,421 61,996
------------ ------------ ------------ ------------
Operating earnings 50,201 43,818 162,779 113,906
Interest expense 20,837 17,277 60,694 34,260
------------ ------------ ------------ ------------
Earnings before income taxes 29,364 26,541 102,085 79,646
------------ ------------ ------------ ------------
Income taxes 7,928 7,443 27,559 26,974
------------ ------------ ------------ ------------
Net earnings $ 21,436 19,098 74,526 52,672
============ ============ ============ ============
Weighted average shares outstanding:
Basic 35,696 36,144 35,670 36,138
============ ============ ============ ============
Diluted 36,455 36,549 36,303 36,472
============ ============ ============ ============
Net earnings per share:
Basic $ 0.60 0.53 2.09 1.46
============ ============ ============ ============
Diluted $ 0.59 0.52 2.05 1.44
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE EARNINGS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
Three Months Ended Nine Months Ended
August 31, August 31,
--------------------------- --------------------------
(IN THOUSANDS) 1999 1998 1999 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net earnings $ 21,436 19,098 74,526 52,672
Other comprehensive earnings, net of tax:
Unrealized gain (loss) on available-for-sale securities, net and other 4,758 (1,564) 11,139 (695)
------------- ------------- ------------ ------------
Comprehensive earnings $ 26,194 17,534 85,665 51,977
============= ============= ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
Nine Months Ended
August 31,
--------------------------
(IN THOUSANDS) 1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 74,526 52,672
Adjustments to reconcile net earnings to net cash (used in) provided by
operating activities:
Depreciation 19,659 8,412
Minority interests 5,230 1,567
Amortization of discount on mortgage loans and CMBS (15,212) (4,593)
Gains on sales of real estate (54,165) (21,439)
Equity in earnings of partnerships (42,623) (40,640)
Gain on sales of investment securities (6,056) (1,386)
Changes in assets and liabilities:
(Increase) decrease in restricted cash (39,743) 3,193
(Increase) in other assets and deferred taxes (19,678) (14,252)
Decrease (increase) in mortgage loans held for sale 12,902 (12,787)
Increase in accounts payable and accrued liabilities 58,918 30,216
------------ ------------
Net cash (used in) provided by operating activities (6,242) 963
------------ ------------
Cash flows from investing activities:
Operating properties and equipment
Additions (250,810) (242,533)
Sales 105,378 38,660
Land held for investment
Additions (14,383) (97,916)
Sales 11,460 20,042
Investments in and advances to partnerships (111,583) (38,293)
Proceeds from the sale of partnership interest 8,023 -
Distributions from partnerships 73,889 54,856
Purchase of mortgage loans held for investment - (36)
Proceeds from mortgage loans held for investment 7,224 4,831
Purchase of investment securities (72,657) (70,693)
Proceeds from investment securities principal collections 29,360 7,336
Interest received on CMBS in excess of income recognized 13,241 8,817
Proceeds from the sale of other assets 8,000 -
Acquisition of AHG, net of cash acquired - (75,525)
Syndication of AHG properties 34,810 -
------------ ------------
Net cash used in investing activities (158,048) (390,454)
------------ ------------
Cash flows from financing activities:
Purchase and retirement of treasury stock - (5,600)
Proceeds from stock option exercises 145 -
Payment of dividends (1,300) (1,314)
Net borrowings (payments) under repurchase agreements and revolving credit lines (85,508) 161,014
Mortgage notes and other debts payable:
Proceeds from borrowings 347,705 277,743
Principal payments (97,681) (6,140)
Payments to Lennar Corporation - (12,526)
------------ ------------
Net cash provided by financing activities 163,361 413,177
------------ ------------
Net increase (decrease) in cash and cash equivalents (929) 23,686
Cash and cash equivalents at beginning of period 28,417 34,059
------------ ------------
Cash and cash equivalents at end of period $ 27,488 57,745
============ ============
</TABLE>
Continued
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
Nine Months Ended
August 31,
--------------------------
(IN THOUSANDS) 1999 1998
------------ ------------
<S> <C> <C>
Supplemental disclosure of non-cash investing and financing activities:
Purchases of investment securities financed by seller $ 109,197 34,956
Purchase of a mortgage loan financed - 105,000
Investment in partnership 20,788 -
Supplemental disclosure of non-cash transfers:
Transfer of operating properties to investment in partnerships $ 16,295 -
Transfer of other assets to operating properties 4,000 -
Purchase of interests in the Affordable Housing Group:
Restricted cash and other assets $ - 28,992
Operating properties - 178,486
Investments in and advances to partnerships - 13,899
Accounts payable, accrued expenses and other liabilities - (16,578)
Mortgage notes and other debts payable - (129,274)
------------ ------------
Cash paid $ - 75,525
============ ============
Syndication of AHG properties:
Proceeds from sale of partnership interests $ 34,810 -
Basis in partnership interests (26,583) -
------------ ------------
Net gain reflected in gains on sales of real estate $ 8,227 -
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying unaudited 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, 1998 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. COMPREHENSIVE EARNINGS
Effective December 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive earnings in a full set of general-purpose
financial statements. This statement also requires that an entity classify items
of other comprehensive earnings by their nature in a financial statement that is
displayed with the same prominence as other financial statements. Other
comprehensive earnings for the Company includes unrealized gains and losses on
marketable securities classified as available-for-sale and the change in
cumulative translation adjustment resulting from the changes in exchange rates
and the effect of those changes upon translation of the Company's foreign
investments reported in stockholders' equity. Comprehensive earnings are
presented in the Company's consolidated condensed financial statements net of
taxes.
3. 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.
On May 1, 1998, the Company completed the purchase of certain interests
representing 36 of the properties. In June and September 1998, the Company
completed the purchase of the remaining four and two properties, respectively.
The aggregate amount of consideration was $81 million, plus the assumption of
approximately $45 million of future equity commitments, and was financed
primarily using 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. There was no goodwill
associated with the transaction.
<PAGE>
ITEM 2. 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, (i) CHANGES IN INTEREST
RATES, (ii) CHANGES IN DEMAND FOR COMMERCIAL REAL ESTATE NATIONALLY, IN AREAS IN
WHICH THE COMPANY OWNS PROPERTIES, OR IN AREAS IN WHICH PROPERTIES SECURING
MORTGAGES DIRECTLY OR INDIRECTLY OWNED BY THE COMPANY ARE LOCATED, (iii)
INTERNATIONAL, NATIONAL OR REGIONAL BUSINESS CONDITIONS WHICH AFFECT THE ABILITY
OF MORTGAGE OBLIGORS TO PAY PRINCIPAL OR INTEREST WHEN IT IS DUE, AND (iv) THE
CYCLICAL NATURE OF THE COMMERCIAL REAL ESTATE BUSINESS. SEE THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED NOVEMBER 30, 1998, FOR A FURTHER
DISCUSSION OF RISKS AND UNCERTAINTIES APPLICABLE TO THE COMPANY'S BUSINESS.
OVERVIEW
LNR Property Corporation (the "Company") is engaged primarily in (i) acquiring,
developing, managing and repositioning commercial and multi-family residential
real estate properties and loans, (ii) acquiring (often in partnership with
financial institutions or real estate funds) and managing portfolios of real
estate assets, (iii) 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 (iv) making high yielding real estate related
loans and equity investments.
<PAGE>
1. RESULTS OF OPERATIONS
The following discussion and analysis presents the significant changes in
results of operations of the Company for the three and nine month periods
ended August 31, 1999 and 1998 by business segment. Effective with the second
quarter of 1999, management modified business segment reporting to more closely
reflect the nature of the Company's growing partnership and joint venture
operations. Accordingly, the pro rata share of the Company's equity in earnings
of each of its partnerships and joint ventures is now included in the results of
the real estate business segment (properties, securities or loans) to which it
relates. Prior year numbers have been restated for consistency. The following
discussion should be read in conjunction with the unaudited consolidated
condensed financial statements and notes thereto.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
-------------------------- --------------------------
(IN THOUSANDS) 1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Real estate properties $ 44,242 41,098 145,731 95,444
Real estate securities 32,091 16,772 75,946 45,170
Real estate loans 8,788 11,293 37,523 35,288
----------- ----------- ----------- -----------
Total revenues 85,121 69,163 259,200 175,902
----------- ----------- ----------- -----------
Operating expenses
Real estate properties 26,378 19,357 72,827 45,409
Real estate securities 2,625 1,025 5,786 2,524
Real estate loans 1,581 2,224 5,943 6,049
Corporate and other 4,336 2,739 11,865 8,014
----------- ----------- ----------- -----------
Total operating expenses 34,920 25,345 96,421 61,996
----------- ----------- ----------- -----------
Operating earnings
Real estate properties 17,864 21,741 72,904 50,035
Real estate securities 29,466 15,747 70,160 42,646
Real estate loans 7,207 9,069 31,580 29,239
Corporate and other (4,336) (2,739) (11,865) (8,014)
----------- ----------- ----------- -----------
Total operating earnings 50,201 43,818 162,779 113,906
Interest expense 20,837 17,277 60,694 34,260
Income tax expense 7,928 7,443 27,559 26,974
----------- ----------- ----------- -----------
Net earnings $ 21,436 19,098 74,526 52,672
=========== =========== =========== ===========
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1998
The Company reported third quarter and year-to-date net earnings of $21.4
million and $74.5 million, respectively, up 12% and 41% from $19.1 million and
$52.7 million for the same periods in 1998. The year-over-year improvements in
net earnings resulted primarily from (1) higher gains on sales of real estate
assets, (2) increases in net operating income from stabilized properties, (3)
greater interest income from investment securities and (4) a lower effective tax
rate due to the Affordable Housing Group ("AHG") acquisition. These increases
were partially offset by an increase in (1) depreciation and other operating
expenses from the Company's growing real estate properties and real estate
securities business segments and (2) an increase in interest expense due to
increased borrowing levels to finance the purchases of real estate properties,
CMBS and the AHG acquisition.
<PAGE>
REAL ESTATE PROPERTIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------------- -------------------------------
(IN THOUSANDS) 1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Rental income $ 21,839 20,023 67,578 49,887
Gains on sales of real estate 13,934 9,378 54,165 21,439
Equity in earnings of partnerships 8,210 11,515 23,454 23,669
Management fees 259 182 534 449
------------- ------------- ------------- -------------
Total revenues 44,242 41,098 145,731 95,444
------------- ------------- ------------- -------------
Cost of rental operations 11,844 12,619 38,236 31,439
Other operating expenses 4,005 2,462 11,760 5,614
Minority interests 3,295 (73) 3,172 (56)
Depreciation 7,234 4,349 19,659 8,412
------------- ------------- ------------- -------------
Total operating expenses 26,378 19,357 72,827 45,409
------------- ------------- ------------- -------------
Operating earnings $ 17,864 21,741 72,904 50,035
============= ============= ============= =============
Balance sheet data:
Operating properties and equipment,
net $ 809,556 623,147 809,556 623,147
Land held for investment 144,997 162,008 144,997 162,008
Investments in and advances to
partnerships 141,871 138,377 141,871 138,377
------------- ------------- ------------- -------------
Total segment assets $ 1,096,424 923,532 1,096,424 923,532
============= ============= ============= =============
</TABLE>
Total revenues from real estate properties include rental income from operating
properties, gains on sales of those properties, equity in earnings of
partnerships that own and operate real estate properties and fees earned from
managing those partnerships. Operating expenses include the direct costs of
operating the real estate properties, the related depreciation and the overhead
associated with managing the properties and partnerships.
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1998
Operating earnings from real estate properties decreased to $17.9 million for
the three month period ended August 31, 1999 from $21.7 million for the same
period in the prior year. For the nine month period ended August 31, 1999,
operating earnings increased to $72.9 million from $50.0 million for the same
period in 1998. Operating earnings for the quarter-over-quarter period decreased
due to lower gains on sales of real estate from real estate property
partnerships and greater depreciation expense and other operating expenses from
the Company's growing real estate property portfolio. Year-to-date earnings were
higher primarily due to higher gains on sales of real estate and increased net
operating income from stabilized operating properties offset to some degree by
greater depreciation expense and other operating expenses.
Total rental income increased to $21.8 million and $67.6 million for the three
and nine month periods ended August 31, 1999, respectively, from $20.0 million
and $49.9 million for the same periods in 1998. The increase for the quarter was
primarily due to acquired, developed or repositioned properties coming on line.
The increase for the nine month period was primarily due to acquired, developed
or repositioned properties coming on line and the AHG acquisition.
<PAGE>
Net rental income increased by $2.6 million, or 35%, for the three months ended
August 31, 1999 over the same period in 1998. Net rental income increased by
$10.9 million, or 59%, for the nine months ended August 31, 1999 over the same
period in 1998. Of these increases, 43% and 41% for the three and nine month
periods, respectively, were due to net rental income increases from stabilized
market rate properties and the rest of the increases were due to the affordable
housing business.
The net book value of operating properties and equipment at August 31, 1999 and
the annualized net operating income for the nine month period ended on that date
with regard to various types of properties owned by the Company, were as
follows:
<TABLE>
<CAPTION>
Annualized Annualized
Net Operating NOI as a %
Net Book Occupancy Income of Net Book
(IN THOUSANDS, EXCEPT PERCENTAGES) Value Rate (NOI) (1) Value
---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Stabilized operating properties
Commercial $129,877 99% $20,535 16%
Multi-family 13,941 98% 1,563 11%
Hotel and other 33,730 70% 4,289 13%
---------------- --------------- --------------
177,548 26,387 15%
Under development or repositioning
Commercial 192,923 3,810
Multi-family 160,126 -
Hotel 42,760 191
---------------- ---------------
395,809 4,001
---------------- ---------------
Total market rate operating properties 573,357
AHG multi-family properties
Stabilized (2) 169,527 96% 10,556 6%
Development 59,227 -
---------------- ---------------
Total AHG multi-family properties 228,754 10,556
Furniture, fixtures and equipment 7,445 -
---------------- ---------------
Total operating properties and equipment $809,556 $40,944
================ ===============
<FN>
- --------------------
(1) Annualized NOI for purposes of this schedule is rental income less cost of
rental operations before commissions, repairs and maintenance and non-operating
expenses.
(2) Annualized NOI and annualized NOI as a percentage of net book value excludes
the annualized effect of tax credits and other related tax deductions; if
included, annualized NOI and annualized NOI as a percentage of net book value
would have been $24,978 and 15%, respectively, on a pre-tax basis.
</FN>
</TABLE>
As of August 31, 1999, approximately 31% of the Company's market rate operating
properties, based on net book value, had reached stabilized occupancy levels and
were yielding 15% on net book cost. The anticipated improvements in the earnings
of the unstabilized market rate operating properties are not expected to be
recognized until future periods.
Pre-tax operating margins for the AHG properties, which 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 the tax credits and other
related tax deductions.
<PAGE>
Although the Company sold real estate with carrying values of $31.9 million
during the three month period ended August 31, 1999, the total book value of
operating properties and equipment, net and land held for investment increased
by approximately $38.5 million. This increase was primarily due to approximately
$93.7 million of funding for properties under development, offset by real estate
sales, $16.3 million of operating properties transferred to investments in
partnerships and depreciation.
Equity in earnings of partnerships decreased to $8.2 million and $23.5 million
for the three and nine month periods ended August 31, 1999, respectively, from
$11.5 million and $23.7 million for the same periods in 1998. For the three
month period, the decrease was primarily a result of greater real estate
property partnership sales of assets in the third quarter of 1998 compared to
1999. For the nine month period, the decrease from greater real estate property
partnership asset dispositions was partially offset by greater earnings of
Lennar Land Partners ("LLP"). The Company's equity in LLP earnings was $8.1
million and $23.1 million for the three and nine month periods ended August 31,
1999, respectively, compared to $8.5 million and $20.4 million for the same
periods in 1998.
Other operating expenses, which represent an allocation of salary, professional
and other administrative expenses, increased to $7.3 million and $14.9 million
for the three and nine month periods ended August 31, 1999, respectively,
from $2.4 million and $5.6 million for the same periods in 1998. These increases
were due to additional personnel and administrative costs necessary to support
the growth in the Company's real estate property portfolio.
Depreciation expense increased to $7.2 million and $19.7 million for the three
and nine month periods ended August 31, 1999, respectively, from $4.3 million
and $8.4 million for the same periods in 1998. These increases were due to the
growth in the real estate property portfolio with approximately 29% and 42% of
the increased depreciation for the three and nine month periods, respectively,
resulting from the affordable housing business.
REAL ESTATE SECURITIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
----------------------------- -----------------------------
(IN THOUSANDS) 1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 22,976 14,691 61,851 39,442
Equity in earnings of partnerships 112 - 1,121 -
Gains on sales of investment securities 6,056 - 6,056 1,386
Management and servicing fees 2,947 2,081 6,918 4,342
------------ ------------ ------------ ------------
Total revenues 32,091 16,772 75,946 45,170
Operating expenses 2,388 1,025 5,342 2,524
Minority interest 237 - 444 -
------------ ------------ ------------ ------------
Operating earnings $ 29,466 15,747 70,160 42,646
============ ============ ============ ============
Balance sheet data:
Investment securities $ 514,468 402,719 514,468 402,719
Investments in and advances to
partnerships 86,467 - 86,467 -
Other investments 27,135 14,857 27,135 14,857
------------ ------------ ------------ ------------
Total segment assets $ 628,070 417,576 628,070 417,576
============ ============ ============ ============
</TABLE>
<PAGE>
Total revenues from real estate securities include interest income, equity in
earnings of partnerships that own real estate securities, gains on sales of
those securities, servicing fees from acting as special servicer for CMBS
transactions and fees earned from managing the partnerships. Operating expenses
include the overhead associated with managing the investments and partnerships
and costs of the special servicing responsibilities.
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1998
Overall, operating earnings from real estate securities operations increased to
$29.5 million and $70.2 million for the three and nine month periods ended
August 31, 1999, respectively, from $15.7 million and $42.6 million for the same
periods in 1998. Earnings were higher largely due to the growth of the Company's
CMBS portfolio, the greater recognition of earnings due to actual CMBS
performance exceeding original expectations and the gain on sale of a portion of
the Company's investment in the common stock of Bank United Corporation
("BNKU").
In recording CMBS interest income, the Company 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. 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, changes to original estimated yields have, and the Company
believes 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.
During the quarter ended August 31, 1999, the Company acquired $46.7 million
face amount of CMBS for $22.6 million, bringing the year-to-date purchases to
$407.8 million face amount with a total purchase price of $181.9 million. The
following is a summary of the CMBS portfolio held by the Company at August 31,
1999:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Interest % of Face Cash Yield Book Yield
Face Amount Rate Book Value Amount (1) (2)
-------------- ------------ --------------- ----------- ------------ ------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
BB rated or above $ 238,909 7.42% $ 180,478 75.5% 9.9% 13.4%
B rated 268,321 6.62% 159,019 59.3% 11.2% 12.2%
Unrated 721,452 7.35% 170,504 23.6% 29.3% 21.6%
Unrealized gains on
securities and other - - 4,467 - - -
-------------- ---------------
Total CMBS
portfolio $1,228,682 7.21% $ 514,468 41.9% 16.8% 15.8%
============== ===============
<FN>
- ----------------------
(1) Cash yield is determined by annualizing the actual cash received during the
month of August 1999, and dividing the result by the book value at August 31,
1999.
(2) Book yield is determined by annualizing the interest income for the month of
August 1999, and dividing the result by the book value at August 31, 1999.
</FN>
</TABLE>
<PAGE>
Equity in earnings of partnerships represents the Company's participation in a
venture, Madison Square Company LLC ("Madison"), which was formed in April 1999.
The Company's investment in Madison continues to increase as the venture grows
its CMBS portfolio. During the quarter, the venture closed on an additional $409
million of assets bringing the total acquisitions to date to approximately $1.5
billion. The Company's investment in the venture as of the end of the quarter
was approximately $86 million out of a total commitment of $125 million. In
addition to its investment in the venture the Company also maintains a
significant ongoing role in the venture, for which it earns fees, both as the
special servicer for the purchased CMBS transactions and as the provider of
management services for the venture. Madison has contributed approximately $2.6
million and $3.6 million of equity in earnings of partnerships to the real
estate securities line of business for the three and nine month periods ended
August 31, 1999, respectively.
The $6.1 million of gains on sales of investment securities represents the sale
of 200,000 shares of common stock in BNKU. Early in 1999, the Company received
approximately 617,000 shares of BNKU stock in the form of a distribution from
one of its partnerships. At August 31, 1999, the Company had a remaining
investment of approximately 417,000 shares of BNKU stock which had a market
value on that date of approximately $14.3 million.
Management and servicing fees increased to $2.9 million and $6.9 million for the
three and nine month periods ended August 31, 1999, respectively, from $2.1
million and $4.3 million for the same periods in 1998. This increase was
directly attributable to the growth in the CMBS portfolio period-over-period.
The Company is now the special servicer for 55 CMBS transactions with an
original face amount of approximately $42 billion.
Operating expenses increased to $2.6 million and $5.8 million during the three
and nine month periods ended August 31, 1999, respectively, from $1.0 million
and $2.5 million for the same periods in 1998, primarily due to increased
personnel and out-of-pocket expenses directly related to the growth of the CMBS
business.
<PAGE>
REAL ESTATE LOANS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
--------------------------- ---------------------------
(IN THOUSANDS) 1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income $ 4,534 5,380 14,045 15,388
Equity in earnings of partnerships 2,569 5,156 18,048 16,971
Management fees 1,547 614 5,004 2,107
Other income 138 143 426 822
----------- ----------- ----------- -----------
Total revenues 8,788 11,293 37,523 35,288
Operating expenses 1,036 1,678 4,329 4,426
Minority interest 545 546 1,614 1,623
----------- ----------- ----------- -----------
Operating earnings $ 7,207 9,069 31,580 29,239
=========== =========== =========== ===========
Balance sheet data:
Mortgage loans, net $ 79,351 199,966 79,351 199,966
Investments in and advances to
partnerships 76,916 57,912 76,916 57,912
Other investments 46,827 44,467 46,827 44,467
----------- ----------- ----------- -----------
Total segment assets $ 203,094 302,345 203,094 302,345
=========== =========== =========== ===========
</TABLE>
The real estate loan business includes the Company's discount loan portfolio
investments and related loan workout operations, which are owned primarily
through partnerships, as well as its direct lending activities in unique
high-yielding situations. Total revenues include interest income, equity in
earnings of partnerships and management fees earned from those partnerships.
Operating expenses include the overhead associated with servicing the loans and
managing the partnerships.
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1998
Loan operating earnings decreased to $7.2 million for the three month period
ended August 31, 1999 compared with $9.1 million for the same period in 1998.
For the nine month period, loan operating earnings increased 8% to $31.6 million
compared with $29.2 million for the same period in 1998.
Interest income declined to $4.5 million and $14.0 million for the three and
nine month periods ended August 31, 1999, respectively, from $5.4 million and
$15.4 million for the same periods in 1998. For the three month periods ended
August 31, 1999 and 1998, equity in earnings of partnerships also experienced a
decrease to $2.6 million from $5.2 million. However, for the nine month period
ended August 31, 1999, equity in earnings of partnerships increased 6% to $18.0
million from $17.0 million for the same period in 1998. This increase in the
year-to-date period was primarily a result of increased loan portfolio
resolutions during the first quarter of 1999. Overall, the Company's earnings
from the domestic discount loan portfolios are declining as the assets in the
partnerships are resolved and sold or paid down. The Company expects the
earnings from the domestic discount loan portfolios to continue to run off
during the next few quaters while earnings from the Company's Japanese discount
loan portfolio investments are not expected to materially impact earnings until
at least the year 2000.
As of the end of the quarter, the Company had invested in 13 portfolios of
non-performing real estate loans in Japan through partnerships with a total net
investment of approximately $55.4 million. In addition, during September 1999,
the Company committed to purchase two additional portfolios, increasing its
Japanese investment by approximately $6 million. As a result of its loan workout
activities, the Company has received cash equity distributions
<PAGE>
from its Japan investments of approximately $21.5 million, the majority of which
were utilized to invest in additional Japan portfolios.
Management fees increased to $1.5 million and $5.0 million for the three
and nine month periods ended August 31, 1999, respectively, from $0.6 million
and $2.1 million for the same periods in 1998, due to increased disposition fees
on the loan portfolio resolutions.
Operating expenses decreased to $1.6 million and $5.9 million for the three and
nine month periods ended August 31, 1999, respectively, from $2.2 million and
$6.0 million for the same periods in 1998, primarily due to the decrease in
expenses associated with managing the diminishing domestic discount loan
portfolios, offset somewhat by the increased general and administrative expenses
to support the Japan operations.
CORPORATE, OTHER, INTEREST, AND INCOME TAX EXPENSES
THREE MONTHS AND NINE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS AND
NINE MONTHS ENDED AUGUST 31, 1998
Corporate and other net operating expenses increased to $4.3 million and $11.9
million for the three and nine month periods ended August 31, 1999,
respectively, from $2.7 million and $8.0 million for the same periods in 1998,
primarily due to overall Company growth.
Interest expense increased to $20.8 million and $60.7 million for the three
and nine month periods ended August 31, 1999, respectively, from $17.3
million and $34.3 million for the same periods in 1998. These increases were
directly attributable to the Company's mortgage notes and other debts payable
increasing to $1.2 billion at August 31, 1999 from $1.1 billion at August 31,
1998 and an increase in interest rates on new debt.
Despite an 11% and 28% increase in earnings before income taxes in the three and
nine month periods ended August 31, 1999, respectively, compared with the same
periods of the prior year, income tax expense increased only slightly to $7.9
million and $27.6 million for the three and nine month periods ended August 31,
1999, respectively, from $7.4 million and $27.0 million for the same periods in
1998. This was primarily the result of tax credits and other related tax
deductions from the affordable housing business. These tax credits and related
tax deductions allowed the Company's effective tax rate to be reduced to 27% for
both the three and nine month periods ended August 31, 1999, respectively,
compared to 28% and 34% for the same periods in 1998.
2. LIQUIDITY AND FINANCIAL RESOURCES
In the nine months ended August 31, 1999, $6.2 million of cash was used in the
Company's operating activities compared to $1.0 million provided by these
activities for the same period in 1998. The increase in cash flow used in
operating activities during the first nine month period of 1999 was primarily
due to an increase in restricted cash of $42.9 million and a decrease in cash
flow from net earnings of $13.2 million, after adjusting for the effects of
non-cash items, whose contribution to cash flow is reflected in cash from
investing activities below. These increases in cash flow uses in operating
activities were offset by a decrease in mortgage loans held for sale of $25.7
million and an increase in accounts payable and accrued liabilities of $28.7
million.
<PAGE>
The Company used $158.0 million of cash in investing activities during the nine
months ended August 31, 1999, $232.5 million less than the $390.5 million of
cash used for the same period in 1998. For the first nine month period in 1999,
although the Company increased its investment in partnerships by $73.3 million,
this increase was offset primarily by (1) $58.1 million more in proceeds from
sales of real estate, (2) a $75.3 million decrease in real estate purchased, (3)
$34.8 million in cash from the syndication of the AHG properties, (4) $19.0
million more in cash distributions from partnerships, (5) $22.0 million more in
proceeds from CMBS principal collections, and (6) $75.5 million of cash used in
the prior year for the acquisition of AHG.
Financing activities provided $163.4 million of cash during the nine months
ended August 31, 1999 compared with $413.2 million for the same period in 1998.
The overall decrease in cash flow provided by financing activities was primarily
due to pay-downs under repurchase agreements and revolving credit lines of
$246.5 million, offset by $21.6 million of net borrowing activity under the
Company's mortgage notes and other debts payable.
The Company has financed some of its purchases of CMBS under reverse repurchase
lines ("repos"). During the second quarter of 1999, the Company repaid one of
its repo lines in full. At August 31, 1999, the Company had one repo line
remaining, which finances selected CMBS, of which $106.5 million is outstanding.
Subsequent to August 31, 1999, this facility was extended through December 14,
2001 and has two one-year extensions, through December 14, 2003, subject to
certain terms. This repo agreement contains provisions which may require the
Company to repay amounts or post additional collateral prior to the scheduled
maturity date if the market value of the bonds which collateralize it
significantly declines.
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
interest rates could increase the Company's interest expense without a
corresponding increase in income.
During the first quarter of 1999, the Company issued $100 million of long-term
fixed-rate unsecured senior subordinated notes, bringing the Company's total
unsecured senior subordinated notes to $300 million, or 25% of the Company's
total outstanding debt balance. The $100 million notes bear interest at a fixed
rate of 10.5% and have a 10-year term. The Company used the proceeds from the
issuance to pay down short-term floating rate debt and for general corporate
purposes.
As of August 31, 1999, the Company had scheduled maturities on existing debt of
approximately $353.8 million through August 31, 2000. Subsequent to August 31,
1999, approximately $151.6 million of these maturities were extended or
refinanced beyond August 31, 2000. The Company believes its availability under
existing credit facilities, operating cash flow, unencumbered assets, and its
ability to obtain new borrowings and/or raise new capital, should provide the
funds necessary to meet its working capital requirements, debt service and
maturities, and short- and long-term needs based upon currently anticipated
levels of growth.
<PAGE>
YEAR 2000
The Year 2000 ("Y2K") issue results from computer programs having been written
with date fields using two digits, instead of four. Consequently, on January 1,
2000 many programs may recognize the "00" as 1900, which could cause system
failures and miscalculations.
As part of the spin-off of the Company from Lennar Corporation, the Company was
required to segregate its financial systems within an agreed-upon time period.
The primary financial systems have been replaced. These systems are warranted to
be Y2K compliant. The cost of replacing the primary financial systems was $4.1
million, of which $3.8 million was capitalized.
Additionally, the Company uses non-financial systems that are integral to the
operation of the buildings the Company owns and includes systems for elevators,
heating/air conditioning and security, among others. Certain of the operating
properties are older, have multiple systems requiring update or may require an
overhaul of their systems. An inability to adequately address Y2K problems in
advance is not expected to seriously impact the Company's business if such
problems are corrected shortly after January 1, 2000. However, any longer term
inability to correct the problems could result in the non-payment of rent or
damage claims by lessees. The cost of upgrading the current systems is not
expected to be material.
The Company completed an assessment of the Y2K readiness of key vendors,
subcontractors and business partners to determine whether key processes and
business activities will be interrupted. A failure of the Company's vendors,
subcontractors or business partners to adequately address their Y2K readiness
could negatively affect the Company's business and profitability. To date, the
Company has not identified, from surveys or other sources, material issues with
Y2K compliance in any critical area with any key vendor or third party provider
or any internal system, facility or service. Continued effort will be expended
throughout 1999 to further analyze and confirm this assessment in order to
prepare contingency plans in the event that the information provided or
collected is inaccurate.
The nature and scope of the Company's efforts to address the Y2K issue will be
subject to changes and modifications as circumstances warrant. The estimates of
costs and identification of potential issues involve both projections based on
known facts and subjective determinations of future conditions and may change as
the Year 2000 approaches.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not subject to any legal proceedings other than suits relating to
properties it owns which the Company views as an ordinary part of its business
and at least most of which are covered by insurance. LNR 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
<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, 1999
Shelly Rubin
Chief Financial Officer (Principal
Financial Officer)
<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-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 123,334
<SECURITIES> 514,468
<RECEIVABLES> 79,351
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 852,186
<DEPRECIATION> 42,630
<TOTAL-ASSETS> 2,082,536
<CURRENT-LIABILITIES> 0
<BONDS> 1,219,506
0
0
<COMMON> 3,570
<OTHER-SE> 696,357
<TOTAL-LIABILITY-AND-EQUITY> 2,082,536
<SALES> 0
<TOTAL-REVENUES> 85,121
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 34,920
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,837
<INCOME-PRETAX> 29,364
<INCOME-TAX> 7,928
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,436
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.59
</TABLE>
