================================================================================
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, 2000
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 24,199,342
Class B Common 10,003,833
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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) May 31, November 30,
2000 1999
----------------- ----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 14,135 8,587
Restricted cash 77,271 95,682
Investment securities 535,729 510,920
Mortgage loans, net 213,306 152,827
Operating properties and equipment, net 1,100,740 982,230
Land held for investment 113,187 126,047
Investments in and advances to partnerships 290,042 315,892
Other assets 120,690 90,816
----------------- ----------------
Total assets $ 2,465,100 2,283,001
================= ================
Liabilities and Stockholders' Equity
Liabilities
Accounts payable and other liabilities $ 146,003 131,342
Mortgage notes and other debts payable 1,556,428 1,403,401
----------------- ----------------
Total liabilities 1,702,431 1,534,743
----------------- ----------------
Minority interests 34,201 37,926
----------------- ----------------
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 24,199 shares
issued and outstanding 2,420 2,514
Class B common stock, $.10 par value, 40,000 shares authorized, 10,004
shares issued and outstanding 1,000 1,006
Additional paid-in capital 516,395 529,042
Retained earnings 212,622 163,974
Unamortized value of restricted stock grants (9,007) -
Accumulated other comprehensive earnings 5,038 13,796
----------------- ----------------
Total stockholders' equity 728,468 710,332
----------------- ----------------
Total liabilities and stockholders' equity $ 2,465,100 2,283,001
================= ================
</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) 2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Rental income $ 34,606 23,329 63,045 45,739
Equity in earnings and gains on sales of partnerships 48,815 16,985 74,428 31,732
Interest income 35,224 24,867 69,018 48,386
Gains on sales of real estate 293 27,593 3,759 40,231
Management and servicing fees 6,407 4,948 10,166 7,703
Other, net 59 165 250 288
------------ ------------ ------------ ------------
Total revenues 125,404 97,887 220,666 174,079
------------ ------------ ------------ ------------
Costs and expenses
Cost of rental operations 20,251 13,371 36,404 26,392
General and administrative 16,503 11,535 30,349 21,531
Depreciation 8,638 6,481 17,205 12,425
Minority interests 324 589 809 1,153
------------ ------------ ------------ ------------
Total costs and expenses 45,716 31,976 84,767 61,501
------------ ------------ ------------ ------------
Operating earnings 79,688 65,911 135,899 112,578
Interest expense 29,773 20,382 56,348 39,857
------------ ------------ ------------ ------------
Earnings before income taxes 49,915 45,529 79,551 72,721
------------ ------------ ------------ ------------
Income taxes 16,570 12,842 24,661 19,631
------------ ------------ ------------ ------------
Net earnings $ 33,345 32,687 54,890 53,090
============ ============ ============ ============
Weighted average shares outstanding:
Basic 33,326 35,677 33,589 35,656
============ ============ ============ ============
Diluted 34,906 36,418 34,811 36,227
============ ============ ============ ============
Net earnings per share:
Basic $ 1.00 0.92 1.63 1.49
============ ============ ============ ============
Diluted $ 0.96 0.90 1.58 1.47
============ ============ ============ ============
</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) 2000 1999 2000 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net earnings $ 33,345 32,687 54,890 53,090
Other comprehensive earnings (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities, net and 3,133 819 (2,991) 6,813
other
Less: reclassification adjustment for (gains) losses included in
net earnings (5,748) 94 (5,767) 218
------------- ------------- ------------ ------------
Other comprehensive earnings (loss) (2,615) 913 (8,758) 7,031
------------- ------------- ------------ ------------
Comprehensive earnings $ 30,730 33,600 46,132 60,121
============= ============= ============ ============
</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) 2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 54,890 53,090
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities:
Depreciation 17,205 12,425
Minority interests 809 1,153
Amortization of discount on mortgage loans, CMBS and other (13,209) (9,068)
Gains on sales of real estate (3,759) (40,231)
Equity in earnings and gains on sales of partnerships (74,428) (31,732)
Changes in assets and liabilities:
Decrease (increase) in restricted cash 17,993 (36,061)
(Increase) in other assets and deferred taxes (25,316) (17,803)
Decrease in mortgage loans held for sale 46,390 1,767
Increase in accounts payable and accrued liabilities 18,259 43,582
------------- ------------
Net cash provided by (used in) operating activities 38,834 (22,878)
------------- ------------
Cash flows from investing activities:
Operating properties and equipment:
Additions (167,421) (161,298)
Sales 13,455 61,859
Land held for investment:
Additions (11,919) (7,746)
Sales 6,994 8,670
Investments in and advances to partnerships (30,494) (72,765)
Distributions from partnerships 53,928 58,571
Proceeds from sales of partnership interests 74,731 -
Purchase of mortgage loans held for investment (107,266) -
Proceeds from mortgage loans held for investment 458 3,639
Purchase of investment securities (42,937) (64,784)
Proceeds from principal collections on investment securities 47,040 15,610
Interest received on CMBS in excess of income recognized 7,344 9,203
Syndication of affordable housing communities 9,447 34,810
------------- ------------
Net cash used in investing activities (146,640) (114,231)
------------- ------------
Cash flows from financing activities:
Proceeds from stock option exercises 182 145
Purchase and retirement of treasury stock (34,064) -
Payment of dividends (821) (866)
Net (payments) borrowings under repurchase agreements and revolving credit lines 11,093 (115,032)
Mortgage notes and other debts payable:
Proceeds from borrowings 154,029 283,238
Principal payments (17,065) (47,771)
------------- ------------
Net cash provided by financing activities 113,354 119,714
------------- ------------
Net increase (decrease) in cash and cash equivalents 5,548 (17,395)
Cash and cash equivalents at beginning of period 8,587 28,417
------------- ------------
Cash and cash equivalents at end of period $ 14,135 11,022
============= ============
(Continued)
</TABLE>
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
May 31,
--------------------------
(In thousands) 2000 1999
------------- ------------
<S> <C> <C>
Supplemental disclosure of non-cash investing and financing activities:
Purchases of investment securities financed by seller $ 27,906 94,447
Investment in partnership - 20,788
Grant of restricted stock, net of deferred income taxes 9,649 -
Supplemental disclosure of non-cash transfers:
Transfer of land from operating properties to land held for investment $ 17,629 19,702
Transfer of certain assets and liabilities to investments in partnerships 10,617 -
Syndication of affordable housing communities:
Proceeds from sale of partnership interests $ 9,447 34,810
Basis in partnership interests (9,447) (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 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, 1999 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 Statement of
Financial Accounting Standards ("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 requires that an entity classify all components 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 primarily include unrealized gains and
losses on marketable securities classified as available-for-sale and the change
in cumulative translation adjustment resulting from changes in exchange rates
and the effect of those changes upon translation of the Company's foreign
investments reported in stockholders' equity. Other comprehensive earnings are
presented separately in the Company's consolidated statements of comprehensive
earnings, net of taxes.
3. Unamortized Value of Restricted Stock Grants
The Company's 2000 Stock Option and Restricted Stock Plan (the "Plan") provides
for the granting of stock options and awards of restricted stock of up to
2,240,947 shares of the Company's common stock to certain officers, employees
and directors.
On February 11, 2000, 870,000 shares of restricted stock were awarded under the
Plan. The value of such stock was established by the market price on the date of
grant. Unearned compensation arising from the restricted stock grants is
amortized to expense on a straight-line basis over a five-year vesting period.
Unamortized unearned compensation is shown as a reduction of stockholders'
equity in the accompanying consolidated condensed balance sheets.
<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.
<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
THOSE ANTICIPATED BY 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, 1999,
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, (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, 2000 and 1999 after allocating among the core business segments
certain non-corporate general and administrative expenses. The Company's
business segment reporting has been modified effective with the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information" on November 30, 1999. Prior
year numbers have been restated to conform to the modified business segment
reporting. The following discussion should be read in conjunction with the
unaudited consolidated condensed financial statements and notes thereto.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
------------------------- ----------------------------
(In thousands) 2000 1999 2000 1999
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Real estate properties $ 45,638 60,304 86,956 101,489
Real estate loans 36,300 13,219 51,615 28,735
Real estate securities 43,466 24,364 82,095 43,855
---------- ----------- ----------- ------------
Total revenues 125,404 97,887 220,666 174,079
---------- ----------- ----------- ------------
Operating expenses
Real estate properties 33,567 24,044 62,940 46,449
Real estate loans 2,715 2,051 4,814 4,362
Real estate securities 2,933 1,907 5,537 3,161
Corporate and other 6,501 3,974 11,476 7,529
---------- ----------- ----------- ------------
Total operating expenses 45,716 31,976 84,767 61,501
---------- ----------- ----------- ------------
Operating earnings
Real estate properties 12,071 36,260 24,016 55,040
Real estate loans 33,585 11,168 46,801 24,373
Real estate securities 40,533 22,457 76,558 40,694
Corporate and other (6,501) (3,974) (11,476) (7,529)
---------- ----------- ----------- ------------
Total operating earnings 79,688 65,911 135,899 112,578
Interest expense 29,773 20,382 56,348 39,857
Income tax expense 16,570 12,842 24,661 19,631
---------- ----------- ----------- ------------
Net earnings $ 33,345 32,687 54,890 53,090
========== =========== =========== ============
</TABLE>
Three months and six months ended May 31, 2000 compared to three months and six
months ended May 31, 1999
The Company reported second quarter and year-to-date net earnings of $33.3
million and $54.9 million, respectively, compared to $32.7 million and $53.1
million for the same periods in 1999. The year-over-year improvements in net
earnings resulted primarily from (i) the gain on sale of investment interests in
the Company's Japanese real estate loan portfolios, (ii) greater interest income
from real estate securities and (iii) an increase in net operating income
(rental income less cost of rental operations) from a larger portfolio of
stabilized properties. These increases were partially offset by (i) fewer gains
on sales of real estate properties, (ii) an increase in interest expense due
primarily to increased borrowing levels to finance purchases of real estate
properties, loans, and securities and (iii) increased depreciation and other
operating expenses from the Company's growing business segments.
<PAGE>
Real estate properties
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
------------------------------- -------------------------------
(In thousands) 2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Rental income $ 34,606 23,329 63,045 45,739
Gains on sales of real estate 293 27,593 3,759 40,231
Equity in earnings and gain on sale
of partnerships 10,101 9,278 19,175 15,244
Management fees 638 104 977 275
------------- ------------- ------------- -------------
Total revenues 45,638 60,304 86,956 101,489
------------- ------------- ------------- -------------
Cost of rental operations 20,251 13,371 36,404 26,392
Other operating expenses 5,247 4,344 10,196 7,755
Minority interests (569) (152) (865) (123)
Depreciation 8,638 6,481 17,205 12,425
------------- ------------- ------------- -------------
Total operating expenses 33,567 24,044 62,940 46,449
------------- ------------- ------------- -------------
Operating earnings $ 12,071 36,260 24,016 55,040
============= ============= ============= =============
Balance sheet data:
Operating properties and equipment,
net $ 1,100,740 756,326 1,100,740 756,326
Land held for investment 113,187 159,777 113,187 159,777
Investments in and advances to
partnerships 168,881 129,301 168,881 129,301
------------- ------------- ------------- -------------
Total segment assets $ 1,382,808 1,045,404 1,382,808 1,045,404
============= ============= ============= =============
</TABLE>
Real estate properties include apartments, office buildings, shopping centers,
hotels, industrial facilities and land that the Company acquires and develops,
redevelops or repositions. It also includes the Company's 50% interest in Lennar
Land Partners ("LLP"), a partnership engaged in the acquisition, development and
sale of land. 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, 2000 compared to three months and six
months ended May 31, 1999
Overall, operating earnings from real estate properties were $12.1 million and
$24.0 million for the three-month and six-month periods ended May 31, 2000,
respectively, compared to $36.3 million and $55.0 million for the same periods
in 1999. Net operating income increased 44% and 38%, respectively, for the
three- and six-month periods ended May 31, 2000 as a result of the strong
performance from the Company's growing stabilized real estate property
portfolio. This earnings increase was more than offset by lower gains on sales
of real estate of $27.3 million and $36.5 million, respectively, for the
three-month and six-month periods ended May 31, 2000 and an increase in
depreciation and other operating expenses. The higher gains in 1999 reflect a
$27.6 million gain on the sale of four multi-family communities in the second
quarter.
<PAGE>
Total rental income increased to $34.6 million and $63.0 million for the three-
and six-month periods ended May 31, 2000, respectively, from $23.3 million and
$45.7 million for the same periods in 1999. Cost of rental operations increased
to $20.3 million and $36.4 million for the three- and six-month periods ended
May 31, 2000, respectively, from $13.4 million and $26.4 million for the same
periods in 1999. These increases were primarily due to acquired, developed or
repositioned properties coming on line.
Equity in earnings and gain on sale of partnerships increased to $10.1 million
and $19.2 million for the three- and six-month periods ended May 31, 2000,
respectively, from $9.3 million and $15.2 million for the same periods in 1999.
The increase for the three-month period ended May 31, 2000 is due to a gain on
the sale of interests in a single-asset partnership in the second quarter of
2000. The increase in the six-month period was primarily due to greater earnings
in LLP from increased margins on the sale of the partnership's underlying real
estate.
Other operating expenses, which represent an allocation of salary, professional
and other administrative expenses, increased to $5.2 million and $10.2 million
for the three- and six-month periods ended May 31, 2000, respectively, from $4.3
million and $7.8 million for the same periods in 1999. These increases were due
to additional personnel and administrative costs necessary to support the growth
in the Company's real estate portfolio.
Depreciation expense increased to $8.6 million and $17.2 million for the
three-month and six-month periods ended May 31, 2000, respectively, from $6.5
million and $12.4 million for the same periods in 1999. These increases were
primarily due to the 46% growth in the Company's operating property portfolio.
Total book value of operating properties and equipment and land held for
investment increased by $65.3 million during the three-month period ended May
31, 2000. This increase was primarily due to approximately $68.2 million of
funding for properties under development or repositioning and approximately
$26.7 million in acquisitions, offset by approximately $17.8 million in the
syndication of affordable housing communities and $8.6 million in depreciation.
<PAGE>
The net book value of operating properties and equipment, excluding the
affordable housing communities, at May 31, 2000 and the annualized net operating
income for the six-month period ended on that date with regard to various types
of market-rate 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
---------------------------------------------------------------
Stabilized operating properties
<S> <C> <C> <C> <C>
Commercial $ 290,472 93% $ 39,813 14%
Multi-family 15,772 96% 1,528 10%
Hotel and other 33,088 71% 3,147 10%
--------------- ------------------------------
339,332 44,488 13%
Under development or repositioning
Commercial 218,121 4,611
Multi-family 219,357 5,697
Hotel 51,963 -
--------------- ----------------
489,441 10,308
--------------- ----------------
Furniture, fixtures and equipment 19,259 -
--------------- ----------------
Total operating properties and
equipment, net (excluding
affordable housing
communities) $ 848,032 $ 54,796
=============== ================
</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.
As of May 31, 2000, approximately 41% of the Company's market-rate operating
properties, excluding affordable housing communities, based on net book value,
had reached stabilized occupancy levels and were yielding 13% on net book cost.
The anticipated improvements in the earnings of the market-rate operating
properties that are under development or being repositioned are not expected to
be recognized until future periods.
Pre-tax operating margins for the Company's affordable housing communities,
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>
The net investment in the Company's affordable housing communities at May 31,
2000 and the annualized yield on the stabilized affordable housing communities,
were as follows:
(In thousands, except percentages)
Net book value of stabilized operating communities $ 141,721
Investments in partnerships 19,853
Debt and other (97,112)
-------------
Net investment in stabilized operating communities 64,462
Net investment in communities under development 49,097
-------------
Net investment in affordable housing communities $ 113,559
=============
Stabilized operating communities:
NOI as a % of net book value 7%
Adjusted NOI as a % of net book value (1) 15%
-------------
(1) Adjusted NOI includes the annualized effect of tax credits and other
related tax deductions.
As of May 31, 2000 the Company had been awarded and held rights to over $191
million in gross tax credits, with approximately 63% relating to communities
that have not yet reached stabilized occupancy levels.
Real estate loans
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
--------------------------- ---------------------------
(In thousands) 2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income $ 8,902 4,390 16,831 9,511
Equity in earnings and gains on sales
of partnerships 27,068 6,698 34,042 15,479
Management fees 271 1,966 492 3,457
Other income 59 165 250 288
----------- ----------- ----------- -----------
Total revenues 36,300 13,219 51,615 28,735
Operating expenses 2,086 1,517 3,612 3,293
Minority interests 629 534 1,202 1,069
----------- ----------- ----------- -----------
Total operating expenses 2,715 2,051 4,814 4,362
----------- ----------- -----------
-----------
Operating earnings $ 33,585 11,168 46,801 24,373
=========== =========== =========== ===========
Balance sheet data:
Mortgage loans, net $ 213,306 93,596 213,306 93,596
Other investments 50,093 47,349 50,093 47,349
Investments in and advances to
partnerships 15,167 76,312 15,167 76,312
----------- ----------- ----------- -----------
Total segment assets $ 278,566 217,257 278,566 217,257
=========== =========== =========== ===========
</TABLE>
Real estate loans include the Company's direct lending activities in unique high
yielding situations, as well as its domestic and foreign discount loan portfolio
investments, owned primarily through partnerships, and related loan workout
operations. 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, 2000 compared to three months and six
months ended May 31, 1999
Operating earnings from loans increased to $33.6 million and $46.8 million for
the three- and six-month periods ended May 31, 2000, respectively, from $11.2
million and $24.4 million for the same periods in 1999. Earnings were higher
primarily due to the gains on sale of the Company's investment interests in its
Japanese real estate loan portfolios, as discussed below.
Interest income increased to $8.9 million and $16.8 million for the three- and
six-month periods ended May 31, 2000, respectively, from $4.4 million and $9.5
million for the same periods in 1999. During the fourth quarter of 1999, the
Company began investing in structured junior loan participations in high-quality
short- to medium-term variable rate first mortgage real estate loans. During the
second quarter of 2000, the Company funded four of these investments bringing
the total investment as of May 31, 2000 to $182.2 million. These investments
contributed approximately $5.7 million and $8.4 million to interest income in
the three- and six-month periods ended May 31, 2000, respectively.
For the three- and six-month periods ended May 31, 2000, equity in earnings and
gains on sales of partnerships increased to $27.1 million and $34.0 million,
respectively, from $6.7 million and $15.5 million for the same periods in 1999.
In April 2000, the Company sold its investment interests in 16 Japanese real
estate loan portfolios for $66.4 million. The sale of these investment interests
resulted in a pre-tax gain of $20.3 million. Over the past two and a half years,
the Company had on average approximately $30 million invested in these Japanese
loan portfolios, and with this sale, has now received over $32 million of cash
profit on these investments.
Equity in earnings from the Company's domestic loan portfolios decreased $2.3
million and $8.9 million, respectively, contributing only $4.4 million and $6.4
million in the three- and six-month periods ended May 31, 2000. The Company
anticipates that the earnings from the domestic discount loan portfolios will
continue to be less significant in future periods as the majority of the assets
remaining in the partnerships have been resolved.
Management fees decreased to $0.3 million and $0.5 million for the three- and
six-month periods ended May 31, 2000, respectively, from $2.0 million and $3.5
million for the same periods in 1999 due to decreased disposition fees on the
domestic loan portfolio resolutions.
Operating expenses increased to $2.1 million and $3.6 million for the three- and
six-month periods ended May 31, 2000, respectively, from $1.5 million and $3.3
million for the same periods in 1999, primarily due to increased general and
administrative expenses to support the growth in the Company's mortgage loan
portfolio.
<PAGE>
Real estate securities
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
----------------------------- -----------------------------
(In thousands) 2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 26,322 20,477 52,187 38,875
Equity in earnings of partnerships 11,646 1,009 21,211 1,009
Management and servicing fees 5,498 2,878 8,697 3,971
------------ ------------ ------------ ------------
Total revenues 43,466 24,364 82,095 43,855
Operating expenses 2,669 1,700 5,065 2,954
Minority interests 264 207 472 207
------------ ------------ ------------ ------------
Total operating expenses 2,933 1,907 5,537 3,161
------------ ------------ ------------ ------------
Operating earnings $ 40,533 22,457 76,558 40,694
============ ============ ============ ============
Balance sheet data:
Investment securities $ 535,729 512,702 535,729 512,702
Investments in and advances to
partnerships 105,994 50,459 105,994 50,459
Other investments 26,787 - 26,787 -
------------ ------------ ------------ ------------
Total segment assets $ 668,510 563,161 668,510 563,161
============ ============ ============ ============
</TABLE>
Real estate securities include unrated and non-investment grade rated
subordinated CMBS which are collateralized by pools of mortgage loans on
commercial and multi-family residential real estate properties. It also includes
the Company's investment in a partnership that invests in CMBS, as well as
several small investments in entities in related businesses. Total revenues from
real estate securities include interest income, equity in the earnings of the
partnership that owns 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 partnership. Operating expenses include the
overhead associated with managing the investments and partnership and costs of
the special servicing responsibilities.
Three months and six months ended May 31, 2000 compared to three months and six
months ended May 31, 1999
Overall, operating earnings from real estate securities increased to $40.5
million and $76.6 million for the three- and six-month periods ended May 31,
2000, respectively, from $22.5 million and $40.7 million for the same periods in
1999. Earnings were higher primarily due to increased interest income and
management and servicing fees associated with the growth of the Company's CMBS
portfolio, greater recognition of earnings due to actual CMBS performance
continuing to exceed original expectations and equity in earnings from the
Company's participation in Madison Square Company LLC ("Madison").
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 6
years in age) is significantly lower than originally underwritten by the
Company. Therefore, yields have exceeded original estimates, which has resulted,
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 loan workout
and real estate expertise and (iii) a strong 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, 2000, the Company acquired $85.9 million face
amount of CMBS for $39.2 million, bringing the year-to-date purchases to $150.6
million face amount with a total purchase price of $70.8 million. The following
is a summary of the CMBS portfolio held by the Company at May 31, 2000:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Face Interest Book % of Face Cash Book
Amount Rate Value Amount Yield (1) Yield (2)
------------------------------------------------------------------------------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
BB rated or above $ 252,052 7.14% $ 188,044 74.6% 9.6% 13.2%
B rated 310,979 6.56% 177,185 57.0% 11.5% 12.9%
Unrated 750,925 7.27% 176,551 23.5% 28.9% 33.2%
Unrealized losses on
securities - (6,051)
------------ ------------
Total CMBS
portfolio (3) $ 1,313,956 7.08% $ 535,729 40.8% 16.5% 19.6%
============ ============
</TABLE>
----------------------
(1) Cash yield is determined by annualizing the actual cash received during the
month of May 2000, and dividing the result by the book value at May 31, 2000.
(2) Book yield is determined by annualizing the interest income for the month of
May 2000, and dividing the result by the book value at May 31, 2000.
(3) This table excludes CMBS owned through non-consolidated partnerships.
Equity in earnings of partnerships primarily represents the Company's
participation in Madison, which was formed in April 1999. Since formation, the
venture has acquired approximately $1.7 billion of real estate related
securities. The Company's investment in the venture at May 31, 2000 was $106.0
million, representing a 25.8% ownership interest. 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 contributed $12.7 million and $22.2 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, 2000, respectively.
Management and servicing fees increased to $5.5 million and $8.7 million for the
three- and six-month periods ended May 31, 2000, respectively, from $2.9 million
and $4.0 million for the same periods in 1999. This increase was primarily
attributable to the increase in the number of CMBS mortgage pools (60 at May 31,
2000 versus 53 at May 31, 1999) for which the Company acts as special servicer.
Operating expenses increased to $2.7 million and $5.1 million during the three-
and six-month periods ended May 31, 2000, respectively, from $1.7 million and
$3.0 million for the same periods in 1999, primarily due to increased personnel
and out-of-pocket expenses directly related to the growth of the CMBS portfolio.
<PAGE>
Corporate, Other, Interest and Income Tax Expenses
Three months and six months ended May 31, 2000 compared to three months and six
months ended May 31, 1999
Corporate and other operating expenses increased to $6.5 million and $11.5
million for the three- and six-month periods ended May 31, 2000, respectively,
from $4.0 million and $7.5 million for the same periods in 1999, primarily due
to overall Company growth.
Interest expense increased to $29.8 million and $56.3 million for the three- and
six-month periods ended May 31, 2000, respectively, from $20.4 million and $39.9
million for the same periods in 1999. These increases were primarily
attributable to the Company's increased borrowing levels and an increase in
interest rates. The Company's mortgage notes and other debts payable increased
to $1,556.4 million at May 31, 2000 from $1,160.6 million at May 31, 1999 as the
Company increased its investments in all three of its core business segments.
Income tax expense increased to $16.6 million and $24.7 million for the three-
and six-month periods ended May 31, 2000, respectively, from $12.8 million and
$19.6 million for the same periods in 1999 primarily due to an increase in
pre-tax earnings. The Company's effective tax rate was 33% and 31% for the
three- and six-month periods ended May 31, 2000, respectively, compared to 28%
and 27% for the same periods in 1999.
2. LIQUIDITY AND FINANCIAL RESOURCES
In the six months ended May 31, 2000, $38.8 million of cash was provided by the
Company's operating activities compared to $22.9 million of cash used for
operating activities for the same period in 1999. The increase in cash flow
provided by operating activities was primarily due to a decrease in restricted
cash of $54.1 million and a decrease in mortgage loans held for sale of $44.6
million, offset by a decrease in accounts payable and accrued liabilities of
$25.3 million.
The Company used $146.6 million of cash in investing activities during the six
months ended May 31, 2000 compared to $114.2 million of cash used for the same
period in 1999. The increase was primarily due to the acquisition of $107.3
million of mortgage loans held for investment, $50.1 million less in proceeds
from the sale of real estate and $25.4 million less in proceeds from the
syndication of affordable housing communities, offset by $74.7 million in
proceeds from sales of partnership interests, a $42.3 million decrease in
investment in and advances to partnerships, $31.4 million more in proceeds from
principal collections on investment securities and $21.8 million of fewer
purchases of investment securities without seller financing.
Financing activities provided $113.4 million of cash during the six months ended
May 31, 2000 compared with $119.7 million for the same period in 1999. The
overall decrease in cash flow provided by financing activities was primarily due
to $98.5 million of net borrowing activity under the Company's mortgage notes
and other debts payable and the purchase and retirement of $34.1 million of
treasury stock, partially offset by $126.1 million of net borrowing activity
under the Company's repurchase agreements and revolving credit lines.
The Company continues to diversify its capital structure and to manage its debt
position with a combination of short-, medium- and long-term financings with a
goal of properly matching the maturities of its debt with the expected lives of
its assets.
The Company has financed some of its purchases of CMBS under reverse repurchase
lines ("repos"). These repo agreements contain provisions which may require the
Company to repay amounts or post additional collateral prior to the scheduled
maturity dates if the market value of
<PAGE>
the bonds which collateralize them significantly decline. At May 31, 2000, the
Company had three repo agreements through which it financed selected CMBS. The
first facility had $93.9 million outstanding and is required to be paid in full
by December 2003. The second facility had a commitment of $50.0 million of which
$29.6 million was outstanding. This facility matures in June 2001. In March
2000, the Company entered into a $100 million non-recourse repo facility with a
leading financial institution to finance selected CMBS. This facility matures in
March 2003 and had an outstanding balance of $97.6 million at May 31, 2000.
Additionally, the Company has received seller financing in the form of term
repos for three specific CMBS transactions. These agreements had an outstanding
balance of $50.2 million at May 31, 2000 and expire through February 2002.
On July 14, 2000, the Company amended its $200 million unsecured revolving
credit facility, increasing the total facility to $325 million and extending its
term to 2004. In addition, subsequent to the end of the quarter the Company
received a $30 million commitment from a group of banks for a separate secured
facility with a three-year term. The Company expects this facility to close in
the third quarter.
Including these new facilities, LNR will have approximately $500 million
available from existing or committed lines, financings and cash and
approximately $142 million available under committed project-level financings to
fund future development.
At May 31, 2000, the Company had scheduled maturities on existing debt of $134.1
million through May 31, 2001, assuming the Company takes advantage of extensions
which are exercisable at the Company's option. The Company's ability to make
scheduled 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 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.
Approximately 62% 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.
The Company's debt portfolio is comprised of recourse and non-recourse debt
facilities. At May 31, 2000, approximately $895 million, or 58% of the
approximately $1.6 billion of outstanding debt, was recourse to the Company.
In December 1999, the Company's Board of Directors authorized the repurchase of
up to 3,500,000 shares of its common stock in addition to a 1998 authorization
to repurchase 2,000,000 shares. During the first quarter of 2000, the Company
purchased and retired 1,893,200 shares, bringing the inception-to-date total
under the Company's buy-back programs to 2,944,100 shares. No shares were
purchased by the Company during the second quarter of 2000.
<PAGE>
Year 2000
The Company has successfully transitioned into the Year 2000 ("Y2K"). It did not
encounter significant problems from the fact that many computer programs had
been written with date fields using two digits, instead of four and then might
have treated the year "00" as being earlier than the year "99."
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,
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 17, 2000
-----------------------------------
Shelly Rubin
Chief Financial Officer (Principal
Financial Officer)
<PAGE>
Exhibit Index
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule.
