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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 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 24,212,047
Class B Common 10,000,580
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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) August 31, November 30,
2000 1999
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 27,474 8,587
Restricted cash 92,167 95,682
Investment securities 623,904 510,920
Mortgage loans, net 227,207 152,827
Operating properties and equipment, net 998,153 982,230
Land held for investment 106,794 126,047
Investments in and advances to partnerships 304,328 315,892
Other assets 109,886 90,816
----------- -----------
Total assets $ 2,489,913 2,283,001
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Accounts payable and other liabilities $ 158,097 131,342
Mortgage notes and other debts payable 1,549,358 1,403,401
----------- -----------
Total liabilities 1,707,455 1,534,743
----------- -----------
Minority interests 32,383 37,926
----------- -----------
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 24,212 shares issued and
outstanding 2,421 2,514
Class B common stock, $.10 par value, 40,000 shares authorized, 10,001 shares issued
and outstanding 1,000 1,006
Additional paid-in capital 516,498 529,042
Retained earnings 245,269 163,974
Accumulated other comprehensive earnings/(loss), net and other (15,113) 13,796
----------- -----------
Total stockholders' equity 750,075 710,332
----------- -----------
Total liabilities and stockholders' equity $ 2,489,913 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 Nine Months Ended
August 31, August 31,
----------------------- -----------------------
(In thousands, except per share amounts) 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Rental income $ 38,437 21,839 101,482 67,578
Equity in earnings and gains on sales of partnerships 16,555 10,891 90,983 42,623
Interest income 38,493 27,510 107,511 75,896
Gains on sales of:
Real estate 15,736 13,934 19,495 54,165
Investment securities 13,134 6,056 13,134 6,056
Management and servicing fees 7,940 4,753 18,106 12,456
Other, net 47 138 297 426
---------- ---------- ---------- ----------
Total revenues 130,342 85,121 351,008 259,200
---------- ---------- ---------- ----------
Costs and expenses
Cost of rental operations 21,391 11,844 57,795 38,236
General and administrative 16,995 11,765 47,344 33,296
Depreciation 9,901 7,234 27,106 19,659
Minority interests 2,030 4,077 2,839 5,230
---------- ---------- ---------- ----------
Total costs and expenses 50,317 34,920 135,084 96,421
---------- ---------- ---------- ----------
Operating earnings 80,025 50,201 215,924 162,779
Interest expense 32,108 20,837 88,456 60,694
---------- ---------- ---------- ----------
Earnings before income taxes 47,917 29,364 127,468 102,085
---------- ---------- ---------- ----------
Income taxes 14,853 7,928 39,514 27,559
---------- ---------- ---------- ----------
Net earnings $ 33,064 21,436 87,954 74,526
========== ========== ========== ==========
Weighted average shares outstanding:
Basic 33,336 35,696 33,505 35,670
========== ========== ========== ==========
Diluted 34,932 36,455 34,851 36,303
========== ========== ========== ==========
Net earnings per share:
Basic $ 0.99 0.60 2.63 2.09
========== ========== ========== ==========
Diluted $ 0.95 0.59 2.52 2.05
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE EARNINGS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
August 31, August 31,
---------------------------- ----------------------------
(In thousands) 2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings $ 33,064 21,436 87,954 74,526
Other comprehensive earnings (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities,
net and other 1,951 4,758 (1,040) 11,571
Less: reclassification adjustment for gains included in
net earnings (8,122) (4,375) (13,889) (4,157)
----------- ----------- ----------- -----------
Other comprehensive earnings (loss) (6,171) 383 (14,929) 7,414
----------- ----------- ----------- -----------
Comprehensive earnings $ 26,893 21,819 73,025 81,940
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
August 31,
---------------------------
(In thousands) 2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 87,954 74,526
Adjustments to reconcile net earnings to net cash (used in) provided by
operating activities:
Depreciation 27,106 19,659
Minority interests 2,839 5,230
Amortization of discount on mortgage loans, CMBS and other (21,648) (15,212)
Gains on sales of real estate (19,495) (54,165)
Equity in earnings and gains on sales of partnerships (90,983) (42,623)
Gain on sales of investment securities (13,134) (6,056)
Changes in assets and liabilities:
Increase in restricted cash (3,419) (39,743)
Increase in other assets and deferred taxes (38,918) (19,678)
Decrease in mortgage loans held for sale 50,802 12,902
Increase in accounts payable and accrued liabilities 32,655 58,918
----------- -----------
Net cash (used in) provided by operating activities 13,759 (6,242)
----------- -----------
Cash flows from investing activities:
Operating properties and equipment
Additions (226,838) (250,810)
Sales 73,627 105,378
Land held for investment
Additions (21,832) (14,383)
Sales 15,203 11,460
Investments in and advances to partnerships (36,620) (111,583)
Distributions from partnerships 91,221 73,889
Proceeds from the sale of partnership interests 75,236 8,023
Purchase of mortgage loans held for investment (137,266) --
Proceeds from mortgage loans held for investment 11,305 7,224
Purchase of investment securities (81,188) (72,657)
Proceeds from principal collections on investment securities 64,016 29,360
Interest received on CMBS in excess of income recognized 11,151 13,241
Proceeds from the sale of other assets 14,753 8,000
Syndication of affordable housing communities 15,974 34,810
----------- -----------
Net cash used in investing activities (131,258) (158,048)
----------- -----------
Cash flows from financing activities:
Purchase and retirement of treasury stock (34,064) --
Proceeds from stock option exercises 286 145
Payment of dividends (1,238) (1,300)
Net borrowings (payments) under repurchase agreements and revolving credit lines 21,993 (85,508)
Mortgage notes and other debts payable:
Proceeds from borrowings 195,021 347,705
Principal payments (45,612) (97,681)
----------- -----------
Net cash provided by financing activities 136,386 163,361
----------- -----------
Net increase (decrease) in cash and cash equivalents 18,887 (929)
Cash and cash equivalents at beginning of period 8,587 28,417
----------- -----------
Cash and cash equivalents at end of period $ 27,474 27,488
=========== ===========
Continued
</TABLE>
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
August 31,
---------------------------
(In thousands) 2000 1999
----------- -----------
<S> <C> <C>
Supplemental disclosure of non-cash investing and financing activities:
Purchases of investment securities financed by seller $ 80,999 109,197
Investment in partnership -- 20,788
Grant of restricted stock 15,714 --
Supplemental disclosure of non-cash transfers:
Transfer of certain assets and liabilities to investments in partnerships $ 45,798 16,295
Transfer of other assets to operating properties -- 4,000
Transfer of land to operating properties from land held for investment 29,759 --
Syndication of affordable housing communities:
Proceeds from sale of partnership interests $ 15,974 34,810
Basis in partnership interests (15,974) (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 and is included in accumulated other comprehensive earnings/(loss), net
and other 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.
5. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards regarding derivative
instruments and hedging activities. SFAS No. 133 requires that all derivative
instruments be recorded as either an asset or liability on the balance sheet at
their fair value, and that changes in the fair value be recognized currently in
earnings unless specified criteria are met. This statement was effective for
fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" extended the effective date to all
fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activites - an Amendment of FASB Statement No. 133". This
statement amends the accounting and reporting standards of Statement No. 133 for
certain derivative instruments and certain hedging activities. Management is
still in the process of assessing the impact of implementing SFAS Nos. 133 and
138 on the Company's results of operations and financial position.
In December 1999, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition", which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101 is applicable to the Company
beginning no later than the fourth quarter of the year ended November 30, 2001.
Management is still in the process of assessing the impact of implementing SAB
No. 101 on the Company's results of operations and financial position.
<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) investing in high-yielding real estate loans and
purchasing portfolios of loans at a discount, all backed by real estate
properties, and (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.
<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 nine-month periods
ended August 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 Nine Months Ended
August 31, August 31,
----------------------- -----------------------
(In thousands) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Real estate properties $ 62,939 44,242 149,895 145,731
Real estate loans 14,746 8,788 66,361 37,523
Real estate securities 52,657 32,091 134,752 75,946
--------- --------- --------- ---------
Total revenues 130,342 85,121 351,008 259,200
--------- --------- --------- ---------
Operating expenses
Real estate properties 38,229 26,378 101,169 72,827
Real estate loans 2,193 1,581 7,007 5,943
Real estate securities 2,665 2,625 8,202 5,786
Corporate and other 7,230 4,336 18,706 11,865
--------- --------- --------- ---------
Total operating expenses 50,317 34,920 135,084 96,421
--------- --------- --------- ---------
Operating earnings
Real estate properties 24,710 17,864 48,726 72,904
Real estate loans 12,553 7,207 59,354 31,580
Real estate securities 49,992 29,466 126,550 70,160
Corporate and other (7,230) (4,336) (18,706) (11,865)
--------- --------- --------- ---------
Total operating earnings 80,025 50,201 215,924 162,779
Interest expense 32,108 20,837 88,456 60,694
Income tax expense 14,853 7,928 39,514 27,559
--------- --------- --------- ---------
Net earnings $ 33,064 21,436 87,954 74,526
========= ========= ========= =========
</TABLE>
Three months and nine months ended August 31, 2000 compared to three months and
nine months ended August 31, 1999
The Company reported third quarter and year-to-date net earnings of $33.1
million and $88.0 million, respectively, compared to $21.4 million and $74.5
million for the same periods in 1999. The quarter-over-quarter improvement in
net earnings is attributable to (i) greater earnings from the Company's growing
CMBS investments, (ii) the gain on sale of the Company's remaining investment in
the common stock of Bank United Corporation ("BNKU"), (iii) an increase in
interest income from a growing investment in high-yielding loans and (iv)
increased net operating income (rental income less cost of rental operations)
from the Company's success in leasing up new and repositioned real estate
properties. These increases were offset somewhat by (i) an increase in interest
expense due primarily to increased borrowing levels to finance purchases of real
estate properties, loans, and securities and (ii) increased depreciation and
other operating expenses from the Company's growing business segments. The
year-over-year improvements in net earnings resulted primarily from (i) greater
earnings from the Company's growing CMBS investments, (ii) the gain on sale of
investments in the Company's Japanese real estate loan
<PAGE>
portfolios 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.
Real estate properties
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------ ------------------------
(In thousands) 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rental income $ 38,437 21,839 101,482 67,578
Gains on sales of real estate 15,736 13,934 19,495 54,165
Equity in earnings and gains on
sales of partnerships 7,886 8,210 27,061 23,454
Management fees 880 259 1,857 534
---------- ---------- ---------- ----------
Total revenues 62,939 44,242 149,895 145,731
---------- ---------- ---------- ----------
Cost of rental operations 21,391 11,844 57,795 38,236
Other operating expenses 5,727 4,005 15,923 11,760
Minority interests 1,210 3,295 345 3,172
Depreciation 9,901 7,234 27,106 19,659
---------- ---------- ---------- ----------
Total operating expenses 38,229 26,378 101,169 72,827
---------- ---------- ---------- ----------
Operating earnings $ 24,710 17,864 48,726 72,904
========== ========== ========== ==========
Balance sheet data:
Operating properties and
equipment, net $ 998,153 809,556 998,153 809,556
Land held for investment 106,794 144,997 106,794 144,997
Investments in and advances to
partnerships 182,403 141,871 182,403 141,871
---------- ---------- ---------- ----------
Total segment assets $1,287,350 1,096,424 1,287,350 1,096,424
========== ========== ========== ==========
</TABLE>
Real estate properties include apartment buildings, 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 nine months ended August 31, 2000 compared to three months and
nine months ended August 31, 1999
Overall, operating earnings from real estate properties were $24.7 million and
$48.7 million for the three-month and nine-month periods ended August 31, 2000,
respectively, compared to $17.9 million and $72.9 million for the same periods
in 1999. The increase in operating earnings for the three-month period ended
August 31, 2000 was due to a 71% increase in net operating income due to the
Company's success in leasing up new and repositioned real estate properties and
an increase in gains on sales of real estate. This increase was partially offset
by higher depreciation expense and other operating expenses. Net operating
income increased 49% for the nine-month period ended August 31, 2000. However,
this increase was more than offset by lower
<PAGE>
gains on sales of real estate of $34.7 million and an increase in depreciation
and other operating expenses. Gains on sales of real estate may fluctuate from
quarter to quarter based on the timing of the value-add and real estate closing
processes. The higher gains in 1999 include a $27.6 million gain on the sale of
four multi-family communities in the second quarter.
Total rental income increased to $38.4 million and $101.5 million for the three-
and nine-month periods ended August 31, 2000, respectively, from $21.8 million
and $67.6 million for the same periods in 1999. Cost of rental operations
increased to $21.4 million and $57.8 million for the three- and nine-month
periods ended August 31, 2000, respectively, from $11.8 million and $38.2
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 gains on sales of partnerships decreased slightly to $7.9
million for the three-month period ended August 31, 2000, from $8.2 million for
the same period in 1999. For the nine-month period ended August 31, 2000 equity
in earnings and gain on sale of partnerships increased to $27.1 million from
$23.5 million for the same period in 1999. The increase for the nine-month
period ended August 31, 2000 is primarily due to a gain on the sale of interests
in a single-asset partnership in the second quarter of 2000 and 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 $5.7 million and $15.9 million
for the three- and nine-month periods ended August 31, 2000, respectively, from
$4.0 million and $11.8 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 $9.9 million and $27.1 million for the
three-month and nine-month periods ended August 31, 2000, respectively, from
$7.2 million and $19.7 million for the same periods in 1999. These increases
were due to growth in the Company's operating property portfolio.
<PAGE>
The net book value of operating properties and equipment, excluding the
affordable housing communities, at August 31, 2000 and the annualized net
operating income for the nine-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 NOI as a %
Operating of Net
Net Book Occupancy Income Book
(In thousands, except percentages) Value Rate (NOI) (1) Value
---------------------------------------------
<S> <C> <C> <C> <C>
Stabilized operating properties
Commercial $281,336 93% $ 38,381 14%
Multi-family 25,422 95% 3,223 13%
Hotel and other 16,575 75% 2,504 15%
-------- ----------------------
323,333 44,108 14%
Under development or repositioning
Commercial 246,575 6,307
Multi-family 182,727 1,270
Hotel 61,604 1,467
-------- --------
490,906 9,044
-------- --------
Furniture, fixtures and equipment 24,960 --
-------- --------
Total operating properties and
equipment, net (excluding
affordable housing communities) $839,199 $ 53,152
======== ========
</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 August 31, 2000, approximately 40% 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 14% 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 August 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 $ 90,919
Investments in partnerships owning stabilized operating communities 40,268
Debt and other (59,405)
---------
Net investment in stabilized operating communities 71,782
Net investment in communities under development 49,639
---------
Net investment in affordable housing communities $ 121,421
=========
Stabilized operating communities:
NOI as a % of net book value 8%
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 August 31, 2000 the Company had been awarded and held rights to over $201
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 Nine Months Ended
August 31, August 31,
-------------------- --------------------
(In thousands) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income $ 8,770 4,534 25,601 14,045
Equity in earnings and gains
on sales of partnerships 2,004 2,569 36,046 18,048
Management fees 3,925 1,547 4,417 5,004
Other income 47 138 297 426
-------- -------- -------- --------
Total revenues 14,746 8,788 66,361 37,523
Operating expenses 1,625 1,036 5,237 4,329
Minority interests 568 545 1,770 1,614
-------- -------- -------- --------
Total operating expenses 2,193 1,581 7,007 5,943
-------- -------- -------- --------
Operating earnings $ 12,553 7,207 59,354 31,580
======== ======== ======== ========
Balance sheet data:
Mortgage loans, net $227,207 79,351 227,207 79,351
Other investments 49,536 46,827 49,536 46,827
Investments in and advances to
partnerships 14,293 76,916 14,293 76,916
-------- -------- -------- --------
Total segment assets $291,036 203,094 291,036 203,094
======== ======== ======== ========
</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 nine months ended August 31, 2000 compared to three months and
nine months ended August 31, 1999
Operating earnings from loans increased to $12.6 million and $59.4 million for
the three- and nine-month periods ended August 31, 2000, respectively, from $7.2
million and $31.6 million for the same periods in 1999. Earnings for the
three-month period ended August 31, 2000 were higher primarily due to increased
interest income and management fees. Earnings for the nine-month period ended
August 31, 2000 were higher primarily due to the gain on sale of the Company's
investment interests in its Japanese real estate loan portfolios and an increase
in interest income.
Interest income increased to $8.8 million and $25.6 million for the three- and
nine-month periods ended August 31, 2000, respectively, from $4.5 million and
$14.0 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 third quarter of 2000, the Company funded one additional
investment for $30 million and one loan participation paid off in full, bringing
the total investment as of August 31, 2000 to $201.8 million. These investments
contributed approximately $5.9 million and $15.3 million to interest income in
the three- and nine-month periods ended August 31, 2000, respectively.
For the three-month period ended August 31, 2000, equity in earnings and gains
on sales of partnerships decreased slightly to $2.0 million from $2.6 million
for the same period in 1999. For the nine-month period ended August 31, 2000,
equity in earnings and gains on sales of partnerships increased to $36.0 million
from $18.0 million for the same period in 1999. This increase is primarily due
to the sale of the Company's investment interests in 16 Japanese real estate
loan portfolios for $66.4 million, which occurred in April 2000. The sale of
these investment interests resulted in a pre-tax gain of $20.3 million.
Equity in earnings from the Company's domestic loan portfolios was relatively
flat for the three-month period, and decreased $8.8 million for the nine-month
period ended August 31, 2000, compared to the same periods during 1999. The
Company does not expect earnings from these domestic loan portfolios to
contribute materially to earnings after the current fiscal year as the majority
of the assets remaining in these portfolios have been sold.
Management fees increased to $3.9 million for the three-month period ended
August 31, 2000 from $1.5 million for the same period in 1999 because of fees
received from one of the partnerships. Management fees decreased to $4.4 million
for the nine-month period ended August 31, 2000, from $5.0 million for the same
period in 1999. Overall, fees are decreasing due to fewer domestic loan
portfolio resolutions.
Operating expenses increased to $1.6 million and $5.2 million for the three- and
nine-month periods ended August 31, 2000, respectively, from $1.0 million and
$4.3 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 Nine Months Ended
August 31, August 31,
-------------------- --------------------
(In thousands) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income $ 29,723 22,976 81,910 61,851
Equity in earnings of partnerships 6,665 112 27,876 1,121
Gains on sales of investment
securities 13,134 6,056 13,134 6,056
Management and servicing fees 3,135 2,947 11,832 6,918
-------- -------- -------- --------
Total revenues 52,657 32,091 134,752 75,946
Operating expenses 2,413 2,388 7,478 5,342
Minority interests 252 237 724 444
-------- -------- -------- --------
Total operating expenses 2,665 2,625 8,202 5,786
-------- -------- -------- --------
Operating earnings $ 49,992 29,466 126,550 70,160
======== ======== ======== ========
Balance sheet data:
Investment securities $623,904 514,468 623,904 514,468
Investments in and advances to
partnerships 107,632 86,467 107,632 86,467
Other investments 8,820 27,135 8,820 27,135
-------- -------- -------- --------
Total segment assets $740,356 628,070 740,356 628,070
======== ======== ======== ========
</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 nine months ended August 31, 2000 compared to three months and
nine months ended August 31, 1999
Overall, operating earnings from real estate securities increased to $50.0
million and $126.6 million for the three- and nine-month periods ended August
31, 2000, respectively, from $29.5 million and $70.2 million for the same
periods in 1999. Earnings were higher primarily due to (1) increased interest
income associated with the growth of the Company's CMBS portfolio and greater
recognition of earnings due to actual CMBS performance continuing to exceed
original expectations, (2) increased equity in earnings from the Company's
participation in Madison Square Company LLC ("Madison") and (3) the gain on sale
of the Company's remaining investment in the common stock of BNKU.
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 August 31, 2000, the Company acquired $154.0 million
face amount of CMBS for $91.3 million, bringing the year-to-date purchases to
$304.6 million face amount with a total purchase price of $162.2 million. The
following is a summary of the CMBS portfolio held by the Company at August 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>
Fixed-rate
BB rated or above $ 261,671 7.12% $ 192,448 73.5% 9.7% 11.9%
B rated 368,757 6.66% 205,780 55.8% 11.9% 13.2%
Unrated 771,805 7.27% 181,813 23.6% 29.9% 32.7%
------------------------ --------------------------------------------------
Total 1,402,233 7.05% 580,041 41.4% 16.7% 18.9%
Floating-rate/
short-term
BB rated or above $ 12,788 7.91% $ 10,893 85.2% 9.3% 9.6%
Unrated 33,764 11.69% 31,564 93.5% 12.5% 8.5%
------------------------ --------------------------------------------------
Total 46,552 10.65% 42,457 91.2% 11.7% 8.8%
Unrealized gains
on securities -- 1,406
---------- ----------
Total CMBS
portfolio (3) $1,448,785 7.16% $ 623,904 43.1% 16.4% 18.3%
========== ==========
</TABLE>
----------------------
(1) Cash yield is determined by annualizing the actual cash received during the
month of August 2000, and dividing the result by the book value at August
31, 2000.
(2) Book yield is determined by annualizing the interest income for the month of
August 2000, and dividing the result by the book value at August 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. The venture owns
approximately $1.6 billion of real estate related securities. The Company's
investment in the venture at August 31, 2000 was $107.6 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 $9.7
million and $31.9 million of equity in earnings of partnerships to the real
estate securities line of business for the three- and nine-month periods ended
August 31, 2000, respectively.
The $13.1 million gain on sale of investment securities during the quarter ended
August 31, 2000 represents the sale of the Company's remaining 417,000 shares of
common stock in BNKU. During the third quarter of 1999, the Company recognized a
gain on sale of investment securities of $6.1 million for the sale of 200,000
shares of BNKU common stock. Early in 1999, the Company received these shares as
a distribution from one of its partnerships.
<PAGE>
Management and servicing fees increased to $3.1 million and $11.8 million for
the three- and nine-month periods ended August 31, 2000, respectively, from $2.9
million and $6.9 million for the same periods in 1999. This increase was
primarily attributable to the increase in the number of CMBS mortgage pools (63
at August 31, 2000 versus 55 at August 31, 1999) for which the Company acts as
special servicer.
Operating expenses increased slightly during the three-month period ended August
31, 2000 compared to the same period in 1999. Operating expenses increased to
$7.5 million for the nine-month period ended August 31, 2000 from $5.3 million
for the same period in 1999. These increases are primarily due to increased
personnel and out-of-pocket expenses directly related to the growth of the
Company's CMBS portfolio.
Corporate, Other, Interest and Income Tax Expenses
Three months and nine months ended August 31, 2000 compared to three months and
nine months ended August 31, 1999
Corporate and other operating expenses increased to $7.2 million and $18.7
million for the three- and nine-month periods ended August 31, 2000,
respectively, from $4.3 million and $11.9 million for the same periods in 1999,
primarily due to overall Company growth.
Interest expense increased to $32.1 million and $88.5 million for the three- and
nine-month periods ended August 31, 2000, respectively, from $20.8 million and
$60.7 million for the same periods in 1999. These increases were primarily
attributable to the Company's increased borrowing levels and, to a lesser
extent, higher interest rates. The Company's mortgage notes and other debts
payable increased to $1,549.4 million at August 31, 2000 from $1,219.5 million
at August 31, 1999 as the Company increased its investments in all three of its
core business segments.
Income tax expense increased to $14.9 million and $39.5 million for the three-
and nine-month periods ended August 31, 2000, respectively, from $7.9 million
and $27.6 million for the same periods in 1999 primarily due to an increase in
pre-tax earnings. The Company's effective tax rate was 31% for both the three-
and nine-month periods ended August 31, 2000, compared to 27% for the same
periods in 1999.
2. LIQUIDITY AND FINANCIAL RESOURCES
In the nine months ended August 31, 2000, $13.8 million of cash was provided by
the Company's operating activities compared to $6.2 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 higher decrease in
mortgage loans held for sale of $37.9 million and a lower increase in restricted
cash of $36.3 million. This increase was offset by a lower increase in accounts
payable and accrued liabilities of $26.3 million, a higher increase in other
assets and deferred taxes of $19.2 million, and a decrease in cash flow from net
earnings of $8.7 million, after adjusting for the effects of non-cash items,
whose contributions to cash flow is reflected in cash from investing activities
below.
The Company used $131.3 million of cash in investing activities during the nine
months ended August 31, 2000 compared to $158.0 million of cash used for the
same period in 1999. The decrease in net cash used was primarily due to $67.2
million more in proceeds from sales of partnership interests, a $75.0 million
decrease in investment in and advances to partnerships and $38.7 million more in
proceeds from principal collections on investment securities and mortgage loans,
offset by the
<PAGE>
acquisition of $137.3 million of mortgage loans held for investment and $18.8
million less in proceeds from the syndication of affordable housing communities.
Financing activities provided $136.4 million of cash during the nine months
ended August 31, 2000 compared with $163.4 million for the same period in 1999.
The overall decrease in cash flow provided by financing activities was primarily
due to $100.6 million of lower 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 in 2000, partially offset by $107.5 million of higher
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 the bonds which collateralize them
significantly decline. At August 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 $19.0 million was
outstanding. This facility matures in June 2001. The third facility is a $150
million non-recourse facility which matures in March 2003 and had an outstanding
balance of $97.6 million at August 31, 2000. Additionally, the Company has
received seller financing in the form of term repos for five specific CMBS
transactions. These agreements had an outstanding balance of $95.1 million at
August 31, 2000 and expire through August 2004.
During the third quarter of 2000, the Company amended its $200 million unsecured
revolving credit facility, increasing the total facility to $325 million and
extending its term to 2004, assuming a one-year extension option. In addition,
during the quarter, the Company closed on a three-year, $30 million revolving
credit facility with a group of banks secured by real estate properties and
loans.
Including additional commitments received subsequent to the end of the third
quarter, LNR will have approximately $517 million available from existing or
committed lines, financings and cash and approximately $133 million available
under committed project-level financings to fund future development.
At August 31, 2000, the Company had scheduled maturities on existing debt of
$174.5 million through August 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. Among
other things, the Company believes, based upon internal valuations, that the
current aggregate market value of the Company's assets substantially exceeds
their aggregate book value.
Approximately 67% of the Company's existing indebtedness bears interest at
variable rates, including 11% which is match-funded with variable-rate assets.
Most of the Company's investments generate interest or rental income at
essentially fixed rates. Therefore, a material
<PAGE>
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 August 31, 2000, approximately $985 million, or 64% of the
approximately $1.5 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 third quarter of 2000.
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 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:
A report on Form 8-K, dated October 5, 2000, was filed by the
registrant with respect to selected data furnished in accordance
with Regulation FD under Item 9.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
Signature and Title Date
------------------- ----
/s/ SHELLY RUBIN October 16, 2000
-------------------------------
Shelly Rubin
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
27.1 Financial Data Schedule
