================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 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 25,624,803
Class B Common 10,069,033
================================================================================
<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 AMOUNT) MAY 31, NOVEMBER 30,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,022 28,417
Restricted cash 92,164 56,264
Investment securities 512,702 434,157
Mortgage loans, net 93,596 97,855
Operating properties and equipment, net 756,326 712,419
Land held for investment 159,777 140,048
Investments in and advances to partnerships 256,072 194,490
Other assets 105,365 80,155
---------- ----------
Total assets $1,987,024 1,743,805
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 109,139 73,067
Mortgage notes and other debts payable 1,160,614 1,017,199
---------- ----------
Total liabilities 1,269,753 1,090,266
---------- ----------
Minority interests 38,729 34,560
---------- ----------
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 25,625 shares issued and
outstanding 2,562 2,485
Class B common stock, $.10 par value, 40,000 shares authorized, 10,069 shares issued
and outstanding 1,007 1,075
Additional paid-in capital 536,558 536,259
Retained earnings 123,676 71,452
Accumulated other comprehensive earnings 14,739 7,708
---------- ----------
Total stockholders' equity 678,542 618,979
---------- ----------
Total liabilities and stockholders' equity $1,987,024 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 SIX MONTHS ENDED
MAY 31, MAY 31,
------------------------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues
Rental income $ 23,329 15,270 45,739 29,864
Equity in earnings of partnerships 16,985 14,229 31,732 23,969
Interest income 24,867 17,819 48,386 34,759
Gains on sales of:
Real estate 27,593 5,535 40,231 12,061
Investment securities - - - 1,386
Management and servicing fees 4,948 1,927 7,703 4,021
Other, net 165 121 288 679
------------ ------------ ------------ -----------
Total revenues 97,887 54,901 174,079 106,739
------------ ------------ ------------ -----------
Costs and expenses
Cost of rental operations 13,371 9,709 26,392 18,820
General and administrative 11,535 6,621 21,531 12,674
Depreciation 6,481 2,226 12,425 4,063
Minority interests 589 561 1,153 1,094
------------ ------------ ------------ -----------
Total costs and expenses 31,976 19,117 61,501 36,651
------------ ------------ ------------ -----------
Operating earnings 65,911 35,784 112,578 70,088
Interest expense 20,382 9,925 39,857 16,983
------------ ------------ ------------ -----------
Earnings before income taxes 45,529 25,859 72,721 53,105
------------ ------------ ------------ -----------
Income taxes 12,842 8,905 19,631 19,531
------------ ----------- ----------- -----------
Net earnings $ 32,687 16,954 53,090 33,574
============ ============ ============ ===========
Weighted average shares outstanding:
Basic 35,677 36,140 35,656 36,134
============ ============ ============ ===========
Diluted 36,418 36,596 36,227 36,432
============ ============ ============ ===========
Net earnings per share:
Basic $ 0.92 0.47 1.49 0.93
============ ============ ============ ===========
Diluted $ 0.90 0.46 1.47 0.92
============ ============ ============ ===========
</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 SIX MONTHS ENDED
MAY 31, MAY 31,
--------------------------- -------------------------
(IN THOUSANDS) 1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net earnings $ 32,687 16,954 53,090 33,574
Other comprehensive earnings, net of tax:
Unrealized gain on available-for-sale securities, net and other 819 (65) 6,381 869
------------ ------------ ----------- -----------
Comprehensive earnings $ 33,506 16,889 59,471 34,443
============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
MAY 31,
--------------------------
(IN THOUSANDS) 1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 53,090 33,574
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation 12,425 4,063
Minority interests 1,153 1,094
Amortization of discount on mortgage loans and CMBS (9,068) (2,877)
Gains on sales of real estate (40,231) (12,061)
Equity in earnings of partnerships (31,732) (23,969)
Gain on sales of investment securities - (1,386)
Changes in assets and liabilities:
Increase in restricted cash (36,061) (7,224)
Increase in other assets and deferred taxes (17,803) (18,176)
Decrease (increase) in mortgage loans held for sale 1,767 (827)
Increase in accounts payable and accrued liabilities 43,582 11,525
----------- ----------
Net cash used in operating activities (22,878) (16,264)
----------- ----------
Cash flows from investing activities:
Operating properties and equipment
Additions (161,298) (84,424)
Sales 61,859 22,826
Land held for investment
Additions (7,746) (18,304)
Sales 8,670 9,829
Investments in and advances to partnerships (72,765) (31,042)
Distributions from partnerships 58,571 17,226
Proceeds from mortgage loans held for investment 3,639 222
Purchase of investment securities (64,784) (51,304)
Proceeds from investment securities principal collections 15,610 1,909
Interest received on CMBS in excess of income recognized 9,203 6,771
Acquisition of AHG, net of cash acquired - (70,086)
Syndication of AHG properties 34,810 -
----------- ----------
Net cash used in investing activities (114,231) (196,377)
----------- ----------
Cash flows from financing activities:
Proceeds from stock option exercises 145 -
Payment of dividends (866) (876)
Net payments under repurchase agreements and revolving credit lines (115,032) (8,831)
Mortgage notes and other debts payable:
Proceeds from borrowings 283,238 229,527
Principal payments (47,771) (3,909)
Payments to Lennar Corporation - (12,526)
----------- ----------
Net cash provided by financing activities 119,714 203,385
----------- ----------
Net decrease in cash and cash equivalents (17,395) (9,256)
Cash and cash equivalents at beginning of period 28,417 34,059
----------- ----------
Cash and cash equivalents at end of period $ 11,022 24,803
=========== ==========
</TABLE>
(Continued)
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
MAY 31,
--------------------------
(IN THOUSANDS) 1999 1998
------------ ------------
<S> <C> <C>
Supplemental disclosure of non-cash investing and financing activities:
Purchases of investment securities financed by seller $ 94,447 29,835
Investment in partnership 20,788 -
Supplemental disclosure of non-cash transfers:
Transfer of land held for investment to operating properties $ - 2,824
Transfer of land from operating properties to land held for investment 19,702 -
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 - 8,145
Accounts payable, accrued expenses and other liabilities - (16,263)
Mortgage notes and other debts payable - (129,274)
---------- ----------
Cash paid $ - 70,086
========== ==========
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 statement 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 month and six month periods
ended May 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. The following discussion should be read in conjunction with the
unaudited consolidated condensed financial statements and notes thereto.
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
---------------------- ---------------------
(IN THOUSANDS) 1999 1998 1999 1998
-------- -------- -------- --------
Revenues
Real estate properties $ 60,304 27,981 101,489 54,346
Real estate securities 24,364 14,053 43,855 28,398
Real estate loans 13,219 12,867 28,735 23,995
-------- -------- -------- --------
Total revenues 97,887 54,901 174,079 106,739
-------- -------- -------- --------
Operating expenses
Real estate properties 24,044 13,670 46,449 26,052
Real estate securities 1,907 639 3,161 1,499
Real estate loans 2,051 1,852 4,362 3,825
Corporate and other 3,974 2,956 7,529 5,275
-------- -------- -------- --------
Total operating expenses 31,976 19,117 61,501 36,651
-------- -------- -------- --------
Operating earnings
Real estate properties 36,260 14,311 55,040 28,294
Real estate securities 22,457 13,414 40,694 26,899
Real estate loans 11,168 11,015 24,373 20,170
Corporate and other (3,974) (2,956) (7,529) (5,275)
-------- -------- -------- --------
Total operating earnings 65,911 35,784 112,578 70,088
Interest expense 20,382 9,925 39,857 16,983
Income tax expense 12,842 8,905 19,631 19,531
-------- -------- -------- --------
Net earnings $ 32,687 16,954 53,090 33,574
======== ======== ======== ========
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1999 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED MAY 31, 1998
The Company reported second quarter and year-to-date net earnings of $32.7
million and $53.1 million, respectively, up 92% and 58% from $17.0 million and
$33.6 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
properties, (2) greater interest income from investment securities and (3) 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 the purchases of real
estate, CMBS and the AHG acquisition.
<PAGE>
REAL ESTATE PROPERTIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
------------------------- -------------------------
(IN THOUSANDS) 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rental income $ 23,329 15,270 45,739 29,864
Gains on sales of real estate 27,593 5,535 40,231 12,061
Equity in earnings of partnerships 9,278 7,022 15,244 12,154
Management fees 104 154 275 267
---------- ---------- ---------- ----------
Total revenues 60,304 27,981 101,489 54,346
---------- ---------- ---------- ----------
Cost of rental operations 13,371 9,709 26,392 18,820
Other operating expenses 4,192 1,735 7,632 3,169
Depreciation 6,481 2,226 12,425 4,063
---------- ---------- ---------- ----------
Total operating expenses 24,044 13,670 46,449 26,052
---------- ---------- ---------- ----------
Operating earnings $ 36,260 14,311 55,040 28,294
========== ========== ========== ==========
Balance sheet data:
Operating properties and equipment,
net $ 756,326 475,705 756,326 475,705
Land held for investment 159,777 92,747 159,777 92,747
Investments in and advances to
partnerships 129,301 141,672 129,301 141,672
---------- ---------- ---------- ----------
Total segment assets $1,045,404 710,124 1,045,404 710,124
========== ========== ========== ==========
</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 SIX MONTHS ENDED MAY 31, 1999 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED MAY 31, 1998
Overall, operating earnings from real estate properties increased to $36.3
million and $55.0 million for the three month and six month periods ended May
31, 1999, respectively, from $14.3 million and $28.3 million for the same
periods in 1998. Earnings were higher primarily due to higher gains on sales of
real estate, increased net operating income from stabilized operating properties
and a greater contribution from Lennar Land Partners ("LLP").
Total rental income increased to $23.3 million and $45.7 million for the three
and six month periods ended May 31, 1999, respectively, from $15.3 million and
$29.9 million for the same periods 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 $4.4 million, or 79%, for the three months ended
May 31, 1999 over the same period in 1998. Net rental income increased by $8.3
million, or 75%, for the six months ended May 31, 1999 over the same period in
1998. Of these increases, 55% and 40% for the three and six 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.
<PAGE>
The net book value of operating properties and equipment at May 31, 1999 and the
annualized net operating income for the six 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 $105,657 99% $ 16,522 16%
Multi-family 42,652 94% 4,803 11%
Hotel and other 34,039 63% 5,231 15%
-------- -------- ---
182,348 26,556 15%
Under development or repositioning
Commercial 193,387 4,178
Multi-family 128,163 -
Hotel 38,566 -
-------- --------
360,116 4,178
-------- --------
Total market rate operating properties 542,464 30,734
AHG multi-family properties
Stabilized (2) 141,075 97% 8,904 6%
Development 63,098 -
-------- --------
Total AHG multi-family properties 204,173 8,904
Furniture, fixtures and equipment 9,689 -
-------- --------
Total operating properties and equipment $756,326 $ 39,638
======== ========
</TABLE>
- ---------
(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; if included, annualized NOI and annualized
NOI as a percentage of net book value would have been $18,386 and 13%,
respectively.
As of May 31, 1999, approximately 34% of the Company's market rate operating
properties, based on net book value, had reached stabilized occupancy levels and
was 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.
During the quarter, the Company completed several real estate sales resulting in
gains of $27.6 million, compared with $5.5 million during the same quarter in
1998. The most significant sale involved a $61 million cash sale of four
stabilized multi-family communities in Florida, consisting of 1,520 apartments.
A portion of the proceeds from this sale was used to pay off approximately $38
million of secured debt.
Although the Company sold real estate with carrying values of $44.5 million
during the three month period ended May 31, 1999, the total book value of
operating properties and equipment, net and land held for investment increased
by approximately $28.3 million. This increase was primarily due to approximately
$75.2 million of funding for properties under development or repositioning and
$2.9 million in acquisitions, offset by depreciation and the real estate sales.
<PAGE>
Equity in earnings of partnerships increased to $9.3 million and $15.2 million
for the three and six month periods ended May 31, 1999, respectively, from $7.0
million and $12.2 million for the same periods in 1998. These increases were
primarily due to the equity in earnings of LLP which grew to $8.4 million and
$15.0 million for the three month and six month periods ended May 31, 1999,
respectively, from $6.5 million and $11.9 million for the same periods in 1998.
Other operating expenses, which represent an allocation of salary, professional
and other administrative expenses, increased to $4.2 million and $7.6 million
for the three month and six month periods ended May 31, 1999, respectively, from
$1.7 million and $3.2 million for the same periods in 1998. These increases were
due to additional personnel and administrative costs necessary to support the
growing real estate portfolio.
Depreciation expense increased to $6.5 million and $12.4 million for the three
month and six month periods ended May 31, 1999, respectively, from $2.2 million
and $4.1 million for the same periods in 1998. These increases were due to the
growth in the real estate portfolio with approximately 40% and 47% for the three
and six month periods, respectively, resulting from the affordable housing
business.
REAL ESTATE SECURITIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
--------------------- ---------------------
(IN THOUSANDS) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income $ 20,477 12,804 38,875 24,751
Equity in earnings of partnerships 1,009 -- 1,009 --
Gains on sales of investment securities -- -- -- 1,386
Management and servicing fees 2,878 1,249 3,971 2,261
-------- -------- -------- --------
Total revenues 24,364 14,053 43,855 28,398
Operating expenses 1,907 639 3,161 1,499
-------- -------- -------- --------
Operating earnings $ 22,457 13,414 40,694 26,899
======== ======== ======== ========
Balance sheet data:
Investment securities $512,702 385,267 512,702 385,267
Investments in and advances to
partnerships 50,459 -- 50,459 --
-------- -------- -------- --------
Total segment assets $563,161 385,267 563,161 385,267
======== ======== ======== ========
</TABLE>
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 the special servicing responsibilities.
<PAGE>
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1999 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED MAY 31, 1998
Overall, operating earnings from real estate securities operations increased to
$22.5 million and $40.7 million for the three and six month periods ended May
31, 1999, respectively, from $13.4 million and $26.9 million for the same
periods in 1998. Earnings were higher largely due to the growth of the Company's
CMBS portfolio and the greater recognition of earnings due to actual CMBS
performance exceeding original expectations.
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.
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 May 31, 1999, the Company acquired $213.2 million face
amount of CMBS for $98.6 million, bringing the year-to-date purchases to $361.1
million face amount with a total purchase price of $159.2 million. The following
is a summary of the CMBS portfolio held by the Company at May 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 $ 223,742 7.79% $ 172,862 77.3% 10.2% 13.8%
B rated 258,786 6.66% 154,327 59.6% 11.2% 13.0%
Unrated 718,594 7.43% 172,218 24.0% 28.8% 21.1%
Unrealized gains on
securities and other -- -- 13,295 -- -- --
---------- ----------
Total CMBS
portfolio $1,201,122 7.29% $ 512,702 42.7% 16.9% 16.0%
========== ==========
</TABLE>
- ----------------------
(1) Cash yield is determined by annualizing the actual cash received during the
month of May 1999, and dividing the result by the book value at May 31, 1999.
(2) Book yield is determined by annualizing the interest income for the month of
May 1999, and dividing the result by the book value at May 31, 1999.
<PAGE>
Equity in earnings of partnerships represents the Company's participation in a
venture, Madison Square Company, LLC ("Madison"), which closed on its first $1.1
billion of assets during the second quarter of 1999. The partners include an
affiliate of Credit Suisse First Boston ("CSFB") and a company controlled by
real estate investor Peter Bren. The Company initially committed $100 million of
equity capital for Madison, and after the end of the second quarter, increased
its commitment to $125 million. The venture has raised its initial goal of $440
million of equity capital and CSFB has provided a credit facility to fund $1.76
billion of financing to the venture, which is non-recourse to the partners. In
addition to its investment in the partnership 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. This venture contributed approximately $1.0
million of equity in earnings of partnerships to the real estate securities line
of business for the three and six month periods ended May 31, 1999. The Company
does not expect this partnership to be a significant contributor to earnings
until the year 2000.
Management and servicing fees increased to $2.9 million and $4.0 million for the
three and six month periods ended May 31, 1999, respectively, from $1.2 million
and $2.3 million for the same periods in 1998. This increase was directly
attributable to the growth in the CMBS portfolio period-over-period. With the
addition of the assets purchased by the venture, the Company is now the special
servicer for 53 CMBS transactions with an original face amount of approximately
$40 billion.
Operating expenses increased to $1.9 million and $3.2 million during the three
and six month periods ended May 31, 1999, respectively, from $0.6 million and
$1.5 million for the same periods in 1998, primarily due to increased personnel
and out-of-pocket expenses directly related to the growth of the real estate
securities line of business.
REAL ESTATE LOANS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
-------------------- ---------------------
(IN THOUSANDS) 1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income $ 4,390 5,015 9,511 10,008
Equity in earnings of partnerships 6,698 7,207 15,479 11,815
Management fees 1,966 524 3,457 1,493
Other income 165 121 288 679
-------- -------- -------- --------
Total revenues 13,219 12,867 28,735 23,995
Operating expenses 2,051 1,852 4,362 3,825
-------- -------- -------- --------
Operating earnings $ 11,168 11,015 24,373 20,170
======== ======== ======== ========
Balance sheet data:
Mortgage loans, net $ 93,596 87,955 93,596 87,955
Other investments 47,349 44,783 47,349 44,783
Investments in and advances to
partnerships 76,312 61,257 76,312 61,257
-------- -------- -------- --------
Total segment assets $217,257 193,995 217,257 193,995
======== ======== ======== ========
</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.
<PAGE>
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1999 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED MAY 31, 1998
Loan operating earnings remained relatively flat at $11.2 million for the three
month period ended May 31, 1999 compared with $11.0 million for the same period
in 1998. For the six month period, operating earnings increased 21% to $24.4
million compared with $20.2 million for the same period in 1998.
Interest income declined slightly to $4.4 million and $9.5 million for the three
and six month periods ended May 31, 1999, respectively, from $5.0 million and
$10.0 million for the same periods in 1998. For the three month periods ended
May 31, 1999 and 1998, equity in earnings of partnerships also experienced a
decrease to $6.7 million from $7.2 million, respectively. However, for the six
month period ended May 31, 1999, equity in earnings of partnerships increased
31% to $15.5 million from $11.8 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
anticipates that earnings from the domestic discount loan portfolios will
continue to run off during the next year 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 ten portfolios of
non-performing real estate loans in Japan through partnerships with a total net
investment of approximately $55 million. As a result of its loan workout
operations, the Company has already received cash equity distributions from its
Japan investments of approximately $16 million, the majority of which were
utilized to invest in additional Japan portfolios.
Management fees increased to $2.0 million and $3.5 million for the three month
and six month periods ended May 31, 1999, respectively, from $0.5 million and
$1.5 million for the same periods in 1998 due to increased disposition fees on
the loan portfolio resolutions.
Operating expenses increased to $2.1 million and $4.4 million for the three
month and six months ended May 31, 1999, respectively, from $1.9 million and
$3.8 million for the same periods in 1998, primarily due to increased general
and administrative expenses to support the Japan operations.
CORPORATE, OTHER, INTEREST, AND INCOME TAX EXPENSES
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1999 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED MAY 31, 1998
Corporate and other net operating expenses increased to $4.0 million and $7.5
million for the three and six month periods ended May 31, 1999, respectively,
from $3.0 million and $5.3 million for the same periods in 1998, primarily due
to overall Company growth.
Interest expense increased to $20.4 million and $39.9 million for the three
month and six month periods ended May 31, 1999, respectively, from $9.9 million
and $17.0 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 May 31, 1999 from $0.8 million at May 31, 1998 and an
increase in interest rates on new debt.
<PAGE>
Income tax expense increased to $12.8 million for the three months ended May 31,
1999 from $8.9 million for the same period in 1998 primarily as a result of the
significant increase in earnings offset by the AHG tax credits. Despite a 37%
increase in earnings before income taxes in the six months ended May 31, 1999
compared with the same period of the prior year, income taxes remained
relatively flat at $19.6 million compared with $19.5 million, respectively,
primarily as a result of the AHG tax credits. These credits allowed the
Company's effective tax rate to be reduced to 28% and 27% for the three month
and six month periods ended May 31, 1999, respectively, compared to 34% and 37%
for the same periods in 1998.
2. LIQUIDITY AND FINANCIAL RESOURCES
In the six months ended May 31, 1999, $22.9 million of cash was used in the
Company's operating activities compared to $16.3 million for the same period in
1998. The increase in cash flow used in operating activities during the first
six month period of 1999 was primarily due to an increase in restricted cash of
$28.8 million and a decrease in cash flow from net earnings of $12.8 million,
after adjusting for the effects of non-cash items, whose contribution to cash
flow is reflected in cash from investing activities below. The increase in cash
flow used in operating activities was offset by an increase in accounts payable
and accrued liabilities of $32.1 million.
The Company used $114.2 million of cash in investing activities during the six
months ended May 31, 1999, $82.2 million less than the $196.4 million of cash
used for the same period in 1998. For the first six month period in 1999,
although the Company increased its investment in operating properties by $76.9
million and its investment in partnerships by $41.7 million, these increases
were offset primarily by (1) $37.9 million more in proceeds from sales of real
estate, (2) $34.8 million in cash from the syndication of the AHG properties,
(3) $41.3 million more in cash distributions from partnerships, (4) $13.7
million more in proceeds from CMBS principal collections, and (5) $70.1 million
of cash used in the prior year for the acquisition of AHG.
Financing activities provided $119.7 million of cash during the six months ended
May 31, 1999 compared with $203.4 million for the same period in 1998. The
overall decrease in cash flow from financing activities was primarily due to
increased pay-downs under repurchase agreements and revolving credit lines of
$106.2 million, which is discussed in further detail below, offset by $9.8
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 May 31, 1999, the Company had one repo line
remaining, which finances selected CMBS, of which $106.5 million was
outstanding. This line is required to be reduced to $72.6 million in September
1999 and paid in full in December 1999, unless otherwise extended. This repo
agreement contains provisions which may require the Company to repay amounts
prior to the scheduled maturity date if the market value of the bonds which
collateralize it declines significantly.
To date, the Company has successfully been replacing its repo lines with CMBS
specific debt and expects to continue this process throughout 1999. As the
remaining repo line is reduced or replaced, borrowing costs may be higher and
other terms may not be as favorable.
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
without a corresponding increase in income.
<PAGE>
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.
As of May 31, 1999, the Company had scheduled maturities on existing debt of
approximately $84.8 million in 1999. 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 Corporation, 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 will 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 $4.1 million, with almost all of that
cost capitalizable. As of May 31, 1999, the Company had incurred $3.7 million of
these costs with $3.4 million 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. 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 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
<PAGE>
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
- ----------------------------------- July 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>
Ths 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> MAY-31-1999
<CASH> 103,186
<SECURITIES> 512,702
<RECEIVABLES> 93,596
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 795,217
<DEPRECIATION> 38,891
<TOTAL-ASSETS> 1,987,024
<CURRENT-LIABILITIES> 0
<BONDS> 1,160,614
0
0
<COMMON> 3,569
<OTHER-SE> 674,973
<TOTAL-LIABILITY-AND-EQUITY> 1,987,024
<SALES> 0
<TOTAL-REVENUES> 97,887
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 31,976
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,382
<INCOME-PRETAX> 45,529
<INCOME-TAX> 12,842
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,687
<EPS-BASIC> 0.92
<EPS-DILUTED> 0.90
</TABLE>
