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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 February 28, 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 25,586,293
Class B Common 10,070,033
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<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) February 28, November 30,
1999 1998
--------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 16,948 28,417
Restricted cash 71,183 56,264
Investment securities 486,859 434,157
Mortgage loans, net 98,178 97,855
Operating properties and equipment, net 713,589 712,419
Land held for investment 174,255 140,048
Investments in and advances to partnerships 185,177 194,490
Other assets 93,046 80,155
----------------- ----------------
Total assets $ 1,839,235 1,743,805
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 98,796 73,067
Mortgage notes and other debts payable 1,061,244 1,017,199
----------------- ----------------
Total liabilities 1,160,040 1,090,266
----------------- ----------------
Minority interests 34,113 34,560
----------------- ----------------
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized,
25,586 shares issued and outstanding 2,558 2,485
Class B common stock, $.10 par value, 40,000 shares
authorized, 10,070 shares issued and outstanding 1,007 1,075
Additional paid-in capital 536,269 536,259
Retained earnings 91,422 71,452
Accumulated other comprehensive earnings 13,826 7,708
----------------- ----------------
Total stockholders' equity 645,082 618,979
----------------- ----------------
Total liabilities and stockholders' equity $ 1,839,235 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)
Three Months Ended
February 28,
-----------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
----------- -----------
<S> <C> <C>
Revenues
Rental income $ 22,410 14,594
Equity in earnings of partnerships 14,747 9,740
Interest income 23,519 16,940
Gains on sales of:
Real estate 12,638 6,526
Investment securities - 1,386
Management and servicing fees 2,755 2,094
Other, net 123 558
----------- -----------
Total revenues 76,192 51,838
----------- -----------
Costs and expenses
Cost of rental operations 13,021 9,111
General and administrative 9,996 6,053
Depreciation 5,944 1,837
Minority interests 564 533
----------- -----------
Total costs and expenses 29,525 17,534
----------- -----------
Operating earnings 46,667 34,304
Interest expense 19,475 7,058
----------- -----------
Earnings before income taxes 27,192 27,246
----------- -----------
Income taxes 6,789 10,626
----------- -----------
Net earnings $ 20,403 16,620
=========== ===========
Weighted average shares outstanding:
Basic 35,636 36,129
=========== ===========
Diluted 36,036 36,269
=========== ===========
Net earnings per share:
Basic $ 0.57 0.46
=========== ===========
Diluted $ 0.57 0.46
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE EARNINGS
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended
February 28,
-----------------------
(IN THOUSANDS) 1999 1998
----------- -----------
<S> <C> <C>
Net earnings $ 20,403 16,620
Other comprehensive earnings, net of tax:
Unrealized gain on available-for-sale securities, net and other 5,562 934
----------- -----------
Comprehensive earnings $ 25,965 17,554
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended
February 28,
--------------------------
(IN THOUSANDS) 1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 20,403 16,620
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Depreciation 5,944 1,837
Minority interests 564 533
Amortization of discount on mortgage loans and CMBS (3,673) (1,705)
Gains on sales of real estate (12,638) (6,526)
Equity in earnings of partnerships (14,747) (9,740)
Gain on sales of investment securities - (1,386)
Changes in assets and liabilities:
(Increase) decrease in restricted cash (15,009) 8,334
Increase in other assets and deferred taxes (7,389) (4,007)
Increase in mortgage loans held for sale (3,410) (2,505)
Increase in accounts payable and accrued liabilities 28,308 12,517
----------- ------------
Net cash (used in) provided by operating activities (1,647) 13,972
----------- ------------
Cash flows from investing activities:
Operating properties and equipment
Additions (88,112) (57,548)
Sales 6,267 6,923
Land held for investment
Additions (2,867) (2,290)
Sales 7,419 5,915
Investments in and advances to partnerships (6,461) (18,002)
Distributions from partnerships 25,464 4,745
Proceeds from mortgage loans held for investment 3,259 114
Purchase of investment securities (29,760) (8,381)
Proceeds from investment securities 5,543 1,909
Interest received on CMBS in excess of income recognized 4,019 3,012
Syndication of AHG properties 30,732 -
----------- ------------
Net cash used in investing activities (44,497) (63,603)
----------- ------------
Cash flows from financing activities:
Proceeds from stock option exercises 15 -
Payment of dividends (433) (438)
Net (payments) borrowings under repurchase agreements and revolving
credit lines (170,294) 37,194
Mortgage notes and other debts payable:
Proceeds from borrowings 221,756 6,592
Principal payments (16,369) (764)
Payments to Lennar Corporation - (12,526)
----------- ------------
Net cash provided by financing activities 34,675 30,058
----------- ------------
Net decrease in cash and cash equivalents (11,469) (19,573)
Cash and cash equivalents at beginning of period 28,417 34,059
=========== ============
Cash and cash equivalents at end of period $ 16,948 14,486
=========== ============
(Continued)
</TABLE>
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended
February 28,
--------------------------
(IN THOUSANDS) 1999 1998
------------ ------------
<S> <C> <C>
Supplemental disclosure of non-cash investing and financing activities:
Purchases of investment securities financed by repurchase agreements $ 30,828 8,050
Supplemental disclosure of non-cash transfers:
Transfer of land held for investment to operating properties $ 37,822 2,759
Syndication of AHG properties:
Proceeds from sale of partnerships interests $ 30,732 -
Basis in partnership interests (22,505) -
------------ ------------
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 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. 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.
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, during the period. The dilutive
impact of common stock equivalents is determined by applying the treasury stock
method.
3. 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 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 earnings be reported in a financial statement that is displayed
with the same prominence as other financial statements. Accumulated other
comprehensive earnings for the Company includes unrealized gains on
available-for-sale securities 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.
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
condensed financial statements to conform to the current year presentation.
5. 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, 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.
1. RESULTS OF OPERATIONS
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. For the following discussion, these businesses are
grouped as follows: (a) real estate operations, (b) CMBS and loans and (c)
partnerships and joint ventures.
<PAGE>
The following is a summary of the Company's actual results of operations for the
three months ended February 28, 1999 and 1998 after allocating among the core
business lines certain non-corporate general and administrative expenses:
<TABLE>
<CAPTION>
Three Months Ended
February 28,
---------------------------------
(IN THOUSANDS) 1999 1998
--------------- ---------------
<S> <C> <C>
Revenues
Real estate operations $ 35,048 21,120
CMBS and loans 24,612 19,338
Partnerships and joint ventures 16,409 10,822
Corporate and other 123 558
----------- ------------
Total revenues 76,192 51,838
----------- ------------
Operating expenses
Real estate operations 22,226 12,381
CMBS and loans 2,199 1,659
Partnerships and joint ventures 1,545 1,175
Corporate and other 3,555 2,319
----------- ------------
Total operating expenses 29,525 17,534
----------- ------------
Operating earnings
Real estate operations 12,822 8,739
CMBS and loans 22,413 17,679
Partnerships and joint ventures 14,864 9,647
Corporate and other (3,432) (1,761)
----------- ------------
Total operating earnings 46,667 34,304
Interest expense 19,475 7,058
Income tax expense 6,789 10,626
----------- ------------
Net earnings $ 20,403 16,620
=========== ============
</TABLE>
THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
1998
Net earnings for the three month period ended February 28, 1999 were $20.4
million, up 23% from net earnings of $16.6 million for the same period in 1998.
The increase in earnings resulted primarily from (i) greater interest income
from investment securities, (ii) greater gains on sales of real estate, (iii)
greater earnings from the Company's investments in partnerships and (iv) a lower
effective tax rate due to the Affordable Housing Group ("AHG") acquisition.
These increases were partially offset by an increase in interest expense due to
increased borrowing levels to finance purchases of real estate, CMBS and the AHG
acquisition.
<PAGE>
REAL ESTATE OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
February 28,
---------------------------------
(IN THOUSANDS) 1999 1998
----------------- ------------
<S> <C> <C>
Rental income $ 22,410 14,594
Gains on sales of real estate 12,638 6,526
----------- ----------
Total revenues 35,048 21,120
----------- ----------
Cost of rental operations 13,021 9,111
Other operating expenses 3,261 1,433
Depreciation 5,944 1,837
----------- ----------
Total operating expenses 22,226 12,381
----------- ----------
Operating earnings $ 12,822 8,739
=========== ==========
</TABLE>
Total revenues from real estate operations include rental income from operating
properties plus gains on sales of those properties. Operating expenses include
the direct costs of operating these properties, the related depreciation and the
overhead associated with managing the properties.
THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
1998
Overall, operating earnings from real estate properties increased to $12.8
million for the three month period ended February 28, 1999 from $8.7 million for
the same period in 1998. Earnings were higher primarily due to increased net
operating income from stabilized operating properties and higher gains on sales
of real estate offset to some degree by higher depreciation expense primarily
from AHG and the Company's growing real estate portfolio.
Total rental income increased to $22.4 million for the quarter ended February
28, 1999 from $14.6 million for the same period in 1998. Cost of rental
operations increased to $13.0 million for the quarter ended February 28, 1999
from $9.1 million for the same period in 1998. These increases were primarily
due to acquired, developed or repositioned properties coming on line and the AHG
acquisition.
Net rental income increased by $3.9 million, or 71% over the prior year, of
which 38% was due to net rental income increases from stabilized market rate
properties and the rest from the AHG acquisition.
Although the Company sold real estate with carrying values of $55 million during
the three month period ended February 28, 1999, the total book value of
operating properties and equipment and land held for investment increased by
approximately $35 million. This increase is primarily due to approximately $73
million of funding for properties under development or repositioning,
approximately $17 million in acquisitions, offset by the $55 million of sales.
Included in sales of real estate is the syndication of limited partnership
interests in certain AHG communities. The Company's strategy is to generate
enough tax credits and other non-cash expenses to reduce its tax liability and
to create excess credits which can be sold to third parties. The Company
realized over $8 million in gains from this transaction in the first quarter of
1999.
As of February 28, 1999, approximately 58% of the Company's operating property
portfolio, based on book value, had not yet reached stabilized occupancy; hence
the anticipated improvements in their operating earnings will not be recognized
until future periods.
<PAGE>
Other operating expenses, which represent an allocation of salary, professional
and other administrative expenses, increased to $3.3 million for the three month
period ended February 28, 1999 from $1.4 million for the same period in 1998,
primarily due to increases in personnel and administrative costs associated with
increasing the real estate portfolio, which grew 144% since February 28, 1998.
Depreciation expense increased to $5.9 million for the three months ended
February 28, 1999 from $1.8 million for the same period in 1998, an increase of
$4.1 million, approximately 54% of which relates to the AHG properties.
Pre-tax operating margins for properties, such as the AHG 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 the
tax credits and other related tax deductions.
CMBS AND LOANS
<TABLE>
<CAPTION>
Three Months Ended
February 28,
--------------------------
(IN THOUSANDS) 1999 1998
------------ ----------
<S> <C> <C>
Interest income - CMBS $ 18,398 11,947
Interest income - loans 3,281 2,841
Interest income - other 1,840 2,152
Gains on sales of investment securities - 1,386
Servicing fees 1,093 1,012
------------ ----------
Total revenues 24,612 19,338
Operating expenses 2,199 1,659
------------ ----------
Operating earnings $ 22,413 17,679
============ ==========
</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 ENDED FEBRUARY 28, 1999 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
1998
Overall, operating earnings from CMBS and loans increased to $22.4 million for
the three month period ended February 28, 1999, from $17.7 million for the same
period in 1998. 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 $486.9 million at February 28, 1999 from $434.2 million at November 30,
1998. During the three month period ended February 28, 1999, the Company
purchased $147.9 million face amount of securities for approximately $60.6
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. 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.
<PAGE>
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 increased slightly over the prior year
quarter to $3.3 million during the three month period ended February 28, 1999,
due to an increase in the average mortgage loan balance at February 28, 1999
versus February 28, 1998.
Other interest income decreased during the three month period ended February 28,
1999 as the first quarter of 1998 included interest earned from temporary
investments made with cash received from Lennar in connection with the spin-off.
Operating expenses increased to $2.2 million during the three month period ended
February 28, 1999 from $1.7 million for the same period in 1998, primarily due
to increases in personnel and out-of-pocket expenses related to the growth of
the CMBS business.
PARTNERSHIPS AND JOINT VENTURES
<TABLE>
<CAPTION>
Three Months Ended
February 28,
------------------------------
(IN THOUSANDS) 1999 1998
------------- -------------
<S> <C> <C>
Equity in earnings of partnerships
Portfolios $ 7,888 4,561
Lennar Land Partners 6,593 5,431
Other 266 (252)
Management fees 1,662 1,082
------------- -------------
Total revenues 16,409 10,822
Operating expenses 1,545 1,175
------------- -------------
Operating earnings $ 14,864 9,647
============= =============
</TABLE>
THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
1998
Operating earnings from partnerships and joint ventures increased to $14.9
million for the three month period ended February 28, 1999 from $9.6 million for
the same period in 1998. The increase was primarily due to sales transactions
from the older partnerships and increased earnings from Lennar Land Partners
("LLP"). LLP continues to be a major contributor to partnerships and joint
venture results, providing approximately $6.6 million to operating earnings
during the first quarter of 1999. 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 and regional economic conditions
and housing starts. The Company's investments in the older partnerships were
made between 1992 and 1996 when the partnerships acquired large portfolios of
distressed U.S. real estate assets. Earnings from these partnerships were higher
during the first quarter ended February 28, 1999 compared with the same period
in 1998 due to greater earnings from sales of assets in the underlying
partnerships.
Partnership distributions received by the Company during the three month period
ended February 28, 1999 were $25.5 million in comparison with $4.7 million for
the same period in 1998. For the
<PAGE>
three month period ended February 28, 1999 distributions were $10.8 million
greater than the Company's actual equity in earnings of the partnerships of
$14.7 million, primarily due to $9.3 million in distributions from the Company's
Japan partnerships.
The Company's overall investments in and advances to partnerships decreased to
$185.2 million at February 28, 1999 from $194.5 million at November 30, 1998.
This was primarily due to $10.8 million of distributions in excess of equity in
earnings.
Management fees increased to $1.7 million for the three month period ended
February 28, 1999, from $1.1 million for the same period in 1998 due to
increased disposition fees on increased asset sales.
Operating expenses increased to $1.5 million during the first quarter of 1999
from $1.2 million for the same period in 1998, primarily due to general and
administrative expenses to support the Japan operations.
CORPORATE, OTHER, INTEREST, AND INCOME TAX EXPENSES
THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THE THREE MONTHS ENDED FEBRUARY
28, 1998
Corporate and other operating expenses increased to $3.4 million for the three
month period ended February 28, 1999, from $1.8 million for the same period in
1998, primarily due to overall company growth.
Interest expense increased to $19.5 million for the three month period ended
February 28, 1999 from $7.1 million for the same period in 1998. This increase
was directly attributable to the Company's mortgage notes and other debts
payable increasing to $1,061.2 million at February 28, 1999 from $429.7 million
at February 28, 1998, as described in further detail below under "Liquidity and
Financial Resources."
Income tax expense decreased to $6.8 million for the three months ended February
28, 1999 from $10.6 million for the same period in 1998 primarily as a result of
the AHG tax credits. These credits allowed the Company's effective tax rate to
be reduced to 25% for the three month period ended February 28, 1999 compared to
39% for the same period in 1998.
<PAGE>
2. LIQUIDITY AND FINANCIAL RESOURCES
The Company used $1.6 million of cash for operating activities during the three
months ended February 28, 1999 compared with $14.0 million of cash provided by
those activities for the same period in 1998. Decreased cash flow from operating
activities during 1999 is primarily due to an increase in restricted cash of
$23.3 million and an increase in other assets and deferred taxes of $3.4 million
offset by an increase in accounts payable and accrued liabilities of $15.8
million.
The Company used $44.5 million of cash in investing activities during the three
months ended February 28, 1999 compared with $63.6 million for the same period
in 1998. Although the Company increased its investments in operating properties
by $30.6 million and increased its investments in CMBS by $21.4 million, these
increases were offset by $20.7 million more in cash distributions from
partnerships, $11.5 million fewer dollars invested in partnerships and $30.7
million in proceeds from the syndication of the AHG properties.
Financing activities provided $34.7 million of cash during the three months
ended February 28, 1999 compared with $30.1 million for the same period in 1998.
The increase was primarily due to increased borrowings under mortgage notes and
other debts payable, which were utilized to fund the purchase of assets
described above.
During the first quarter of 1999, the Company issued $100 million of long-term
fixed-rate unsecured senior subordinated notes. The 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.
The Company has financed some of its purchases of CMBS under reverse repurchase
lines ("repos"). At February 28, 1999, the Company had two such repo facilities,
which finance selected CMBS, of which $184 million was outstanding. One
facility, with an outstanding balance of $39 million as of February 28, 1999, is
expected to be repaid in full on its maturity date of April 20, 1999. The second
facility, which has an outstanding balance of $145 million at February 28, 1999,
was reduced to $106 million on March 31, 1999 and is required to be reduced to
$72 million in September 1999 and paid in full in December 1999, unless
otherwise extended.
The Company has been replacing some of the availability under these existing
repo lines and expects to continue this process throughout 1999. If the Company
is not able to fully replace these repos, it expects to repay them using
availability under other existing credit facilities, cash flow generated from
operations or asset sales. These repo financings comprise only 9% of the
Company's total book capitalization and, since they are scheduled to be reduced
even further during the year, the Company does not expect them to have a
significant impact on future liquidity. However, as they are reduced or
replaced, borrowing costs may be higher and other terms may not be as favorable.
The repo agreements contain provisions which may require the Company to repay
amounts prior to the scheduled maturity dates if the market value of the bonds
which collateralize them declines significantly.
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 potentially increase the Company's interest expense.
At February 28, 1999, the Company had scheduled maturities on existing debt of
$213.3 million in 1999, of which $111.1 million represents the two repo lines
described above, $39 million of which was repaid on March 31, 1999. The
Company's ability to make scheduled debt payments of principal or interest on,
or to refinance, this indebtedness depends on its future performance, which, to
a certain extent, is subject to general economic, financial, competitive and
other
<PAGE>
factors beyond the Company's control. 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.
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, the Company was required to
segregate its financial systems within an agreed-upon time period. The primary
financial systems are in the process of being replaced and the new systems are
expected to be functional by the third quarter of 1999. These systems are
warranted to be Y2K compliant. The cost of replacing the primary financial
systems are estimated to be approximately $4 million, with almost all of that
cost capitalizable. As of February 28, 1999, the Company had incurred $2.4
million of these costs with $2.1 million capitalized. The costs to complete are
expected to be incurred and capitalized during the remainder of 1999.
Additionally, the Company uses non-financial systems that are integral to the
operation of the buildings the Company owns and include 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. The Company currently estimates that less than one
quarter of the existing operating properties will require at least a moderate
amount of remedial action. 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 is also in process of assessing 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.
Based on efforts to date, the Company believes that the systems which are
critical to its business will remain up and running after January 1, 2000.
During 1999, the Company will continue to work with key vendors, subcontractors
and business partners to ensure that Y2K readiness is achieved.
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 April 14, 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> FEB-28-1999
<CASH> 88,131
<SECURITIES> 486,859
<RECEIVABLES> 98,178
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 762,399
<DEPRECIATION> 48,810
<TOTAL-ASSETS> 1,839,235
<CURRENT-LIABILITIES> 0
<BONDS> 1,061,244
0
0
<COMMON> 3,565
<OTHER-SE> 641,517
<TOTAL-LIABILITY-AND-EQUITY> 1,839,235
<SALES> 0
<TOTAL-REVENUES> 76,192
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,475
<INCOME-PRETAX> 27,192
<INCOME-TAX> 6,789
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,403
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
</TABLE>
