================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 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 23,252,078
Class B Common 10,057,733
================================================================================
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) February 29, November 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,524 8,587
Restricted cash 86,788 95,682
Investment securities 505,929 510,920
Mortgage loans, net 157,581 152,827
Operating properties and equipment, net 1,041,500 982,230
Land held for investment 107,120 126,047
Investments in and advances to partnerships 328,677 315,892
Other assets 105,232 90,816
----------- -----------
Total assets $ 2,351,351 2,283,001
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 123,205 131,342
Mortgage notes and other debts payable 1,494,131 1,403,401
----------- -----------
Total liabilities 1,617,336 1,534,743
----------- -----------
Minority interests 36,470 37,926
----------- -----------
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 23,252 shares issued and 2,325 2,514
outstanding
Class B common stock, $.10 par value, 40,000 shares authorized, 10,058 shares issued 1,006 1,006
and outstanding
Additional paid-in capital 516,356 529,042
Retained earnings 179,691 163,974
Unamortized value of restricted stock grants (9,486) --
Accumulated other comprehensive earnings 7,653 13,796
----------- -----------
Total stockholders' equity 697,545 710,332
----------- -----------
Total liabilities and stockholders' equity $ 2,351,351 2,283,001
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
----------------------------
February 29, February 28,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
------------ ------------
Revenues
Rental income $28,439 22,410
Equity in earnings of partnerships 25,613 14,747
Interest income 33,794 23,519
Gains on sales of real estate 3,466 12,638
Management and servicing fees 3,759 2,755
Other, net 191 123
------- -------
Total revenues 95,262 76,192
------- -------
Costs and expenses
Cost of rental operations 16,153 13,021
General and administrative 13,846 9,996
Depreciation 8,567 5,944
Minority interests 485 564
------- -------
Total costs and expenses 39,051 29,525
------- -------
Operating earnings 56,211 46,667
Interest expense 26,575 19,475
------- -------
Earnings before income taxes 29,636 27,192
------- -------
Income taxes 8,091 6,789
------- -------
Net earnings $21,545 20,403
======= =======
Weighted average shares outstanding:
Basic 33,852 35,636
======= =======
Diluted 34,716 36,036
======= =======
Net earnings per share:
Basic $ 0.64 0.57
======= =======
Diluted $ 0.62 0.57
======= =======
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE EARNINGS
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended
-------------------------------
February 29, February 28,
(IN THOUSANDS) 2000 1999
------------ ------------
<S> <C> <C>
Net earnings $ 21,545 20,403
Other comprehensive earnings (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities, net and other (6,124) 5,994
Less: reclassification adjustment for (gains) losses included in net earnings (19) 124
-------- --------
Other comprehensive earnings (loss) (6,143) 6,118
-------- --------
Comprehensive earnings $ 15,402 26,521
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended
--------------------------------
February 29, February 28,
(IN THOUSANDS) 2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 21,545 20,403
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation 8,567 5,944
Minority interests 485 564
Amortization of discount on mortgage loans, CMBS and other (8,119) (3,673)
Gains on sales of real estate (3,466) (12,638)
Equity in earnings of partnerships (25,613) (14,747)
Changes in assets and liabilities:
(Increase) decrease in restricted cash 8,894 (15,009)
Increase in other assets and deferred taxes (15,706) (7,389)
Increase in mortgage loans held for sale (958) (3,410)
Increase (decrease) in accounts payable and accrued liabilities (2,333) 28,308
-------- --------
Net cash used in operating activities (16,704) (1,647)
-------- --------
Cash flows from investing activities:
Operating properties and equipment
Additions (79,626) (88,112)
Sales 11,617 6,267
Land held for investment
Additions (4,952) (2,867)
Sales 6,140 7,419
Investments in and advances to partnerships (15,427) (6,461)
Distributions from partnerships 35,513 25,464
Purchase of mortgage loans held for investment (3,767) --
Proceeds from mortgage loans held for investment 245 3,259
Purchase of investment securities (11,683) (29,760)
Proceeds from principal collections on investment securities 36,040 5,543
Interest received on CMBS in excess of income recognized 3,443 4,019
Syndication of affordable housing communities -- 30,732
-------- --------
Net cash used in investing activities (22,457) (44,497)
-------- --------
Cash flows from financing activities:
Proceeds from stock option exercises 54 15
Purchase and retirement of treasury stock (34,064) --
Payment of dividends (407) (433)
Net (payments) borrowings under repurchase agreements and revolving credit lines 1,850 (170,294)
Mortgage notes and other debts payable:
Proceeds from borrowings 92,594 221,756
Principal payments (10,929) (16,369)
-------- --------
Net cash provided by financing activities 49,098 34,675
-------- --------
Net increase (decrease) in cash and cash equivalents 9,937 (11,469)
Cash and cash equivalents at beginning of period 8,587 28,417
-------- --------
Cash and cash equivalents at end of period $ 18,524 16,948
======== ========
(Continued)
</TABLE>
5
<PAGE>
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended
--------------------------------
February 29, February 28,
(IN THOUSANDS) 2000 1999
--------------- ---------------
<S> <C> <C>
Supplemental disclosure of non-cash investing and financing activities:
Purchases of investment securities financed by seller $ 19,998 30,828
Grant of restricted stock, net of deferred income taxes 9,649 --
Supplemental disclosure of non-cash transfers:
Transfer of land held for investment to operating properties $ 16,876 37,822
Transfer of certain assets and liabilities to investments in partnerships $ 10,617 --
Syndication of affordable housing communities:
Proceeds from sale of partnerships interests $ -- 30,732
Basis in partnership interests -- (22,505)
-------- --------
Net gain reflected in gains on sales of real estate $ -- 8,227
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<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 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 includes
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.
7
<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.
8
<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.
1. RESULTS OF OPERATIONS
OVERVIEW
LNR Property Corporation (the "Company") is engaged primarily in (i) acquiring,
developing, managing and repositioning commercial and multi-family residential
real estate properties, (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.
9
<PAGE>
The following discussion and analysis presents the significant changes in
results of operations of the Company for the three months ended February 29,
2000 and February 28, 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.
Three Months Ended
-------------------------------
February 29, February 28,
(IN THOUSANDS) 2000 1999
------------ ------------
Revenues
Real estate properties $ 41,318 41,185
Real estate securities 38,629 19,491
Real estate loans 15,315 15,516
-------- --------
Total revenues 95,262 76,192
-------- --------
Operating expenses
Real estate properties 29,373 22,405
Real estate securities 2,604 1,254
Real estate loans 2,099 2,311
Corporate and other 4,975 3,555
-------- --------
Total operating expenses 39,051 29,525
-------- --------
Operating earnings
Real estate properties 11,945 18,780
Real estate securities 36,025 18,237
Real estate loans 13,216 13,205
Corporate and other (4,975) (3,555)
-------- --------
Total operating earnings 56,211 46,667
Interest expense 26,575 19,475
Income tax expense 8,091 6,789
-------- --------
Net earnings $ 21,545 20,403
======== ========
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
1999
Net earnings for the three month period ended February 29, 2000 were $21.5
million compared to $20.4 million for the three month period ended February 28,
1999. The increase in earnings resulted primarily from (i) greater earnings from
the Company's investments in partnerships, (ii) greater interest income from
real estate securities and (iii) an increase in net rental income from a larger
portfolio of stabilized properties. These increases were partially offset by (i)
fewer gains on sales of real estate, (ii) an increase in interest expense due to
increased borrowing levels to finance purchases of real estate properties,
securities and loans and (iii) increased depreciation and other operating
expenses from the Company's growing real estate properties and real estate
securities business segments.
10
<PAGE>
REAL ESTATE PROPERTIES
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
February 29, February 28,
(IN THOUSANDS) 2000 1999
------------ ------------
<S> <C> <C>
Rental income $ 28,439 22,410
Gains on sales of real estate 3,466 12,638
Equity in earnings of partnerships 9,074 5,966
Management fees 339 171
----------- -----------
Total revenues 41,318 41,185
----------- -----------
Cost of rental operations 16,153 13,021
Other operating expenses 4,949 3,411
Minority interests (296) 29
Depreciation 8,567 5,944
----------- -----------
Total operating expenses 29,373 22,405
----------- -----------
Operating earnings $ 11,945 18,780
=========== ===========
Balance sheet data:
Operating properties and equipment, net $ 1,041,500 713,589
Land held for investment 107,120 174,255
Investments in and advances to partnerships 163,707 131,604
----------- -----------
Total segment assets $ 1,312,327 1,019,448
=========== ===========
</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 ENDED FEBRUARY 29, 2000 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
1999
Overall, operating earnings from real estate property activities were $11.9
million for the three month period ended February 29, 2000 compared to $18.8
million for the same period in 1999. Net rental income and equity in earnings of
real estate partnerships, primarily LLP, increased by 31% and 52%, respectively,
for the three month period. These earnings increases were offset by $9.2 million
of fewer gains on sales of real estate in the first quarter of 2000 compared to
the first quarter of 1999, as well as an increase in depreciation and other
operating expenses.
Total rental income increased to $28.4 million for the quarter ended February
29, 2000 from $22.4 million for the same period in 1999. Cost of rental
operations increased to $16.2 million for the quarter ended February 29, 2000
from $13.0 million for the same period in 1999. These increases were primarily
due to acquired, developed or repositioned properties coming on line.
Net rental income increased by $2.9 million or 31% over the prior year. Of this
increase, 96% was due to net rental income increases from stabilized market-rate
properties and the rest of the increase was due to the affordable housing
communities.
11
<PAGE>
Equity in earnings of partnerships increased to $9.1 million for the three
months ended February 29, 2000 from $6.0 million for the same period in 1999.
This increase was primarily due to greater earnings in LLP from increased sales
of the partnership's underlying real estate.
Other operating expenses, which represent an allocation of salary, professional
and other administrative expenses, increased to $4.9 million for the three month
period ended February 29, 2000 from $3.4 million for the same period in 1999,
primarily due to increases in personnel and administrative costs necessary to
support the growth in the Company's real estate property portfolio.
Depreciation expense increased to $8.6 million for the three months ended
February 29, 2000 from $5.9 million for the same period in 1999. This increase
was primarily due to growth in the Company's operating property portfolio, with
approximately 23% of the increase resulting from the affordable housing
communities.
Total book value of operating properties and equipment and land held for
investment increased by approximately $40.3 million during the three month
period ended February 29, 2000. This increase was primarily due to approximately
$53.4 million of funding for properties under development or repositioning and
approximately $31.1 million in acquisitions, partially offset by asset sales of
$14.1 million, $19.7 million of operating properties transferred to investments
in partnerships and depreciation.
The net book value of operating properties and equipment, excluding the
affordable housing communities, at February 29, 2000 and the annualized net
operating income for the three month period ended on that date with regard to
various types of market-rate properties owned by the Company, were as follows:
<TABLE>
<CAPTION>
Net
Operating NOI as a %
Net Book Occupancy Income of Net Book
(IN THOUSANDS, EXCEPT PERCENTAGES) Value Rate (NOI)(1) Value
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Stabilized operating properties
Commercial $268,978 93% $37,548 14%
Multi-family 2,670 99% 387 14%
Hotel and other 33,220 61% 3,415 10%
-------------- -------------- --------------
304,868 41,350 14%
Under development or repositioning
Commercial 217,289 5,102
Multi-family 199,393 4,049
Hotel 54,917 -
-------------- --------------
471,599 9,151
-------------- --------------
Furniture, fixtures and equipment 13,493 -
-------------- --------------
Total operating properties and equipment, net
(excluding affordable housing
communities) $789,960 $50,501
============== ==============
- ---------------------
<FN>
(1) Annualized NOI for purposes of this schedule is rental income less cost of rental operations before commissions,
repairs and maintenance and non-operating expenses.
</FN>
</TABLE>
As of February 29, 2000, approximately 39% of the Company's market-rate
operating properties, excluding affordable housing communities, based on net
book value, had reached stabilized
12
<PAGE>
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.
The net investment in the affordable housing communities at February 29, 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 $ 161,054
Investments in partnerships 21,008
Debt and other (113,107)
---------------
Net investment in stabilized operating communities 68,955
Net investment in communities under development 47,509
---------------
Net investment in affordable housing communities $ 116,464
===============
Stabilized operating communities:
NOI as a % of net book value 7%
Adjusted NOI as a % of net book value (1) 14%
- -------------
(1) Adjusted NOI includes the annualized effect of tax credits and other related
tax deductions.
As of February 29, 2000 the Company had been awarded over $189 million in gross
tax credits, with approximately 55% relating to communities that have not yet
reached stabilized occupancy levels.
REAL ESTATE SECURITIES
Three Months Ended
-----------------------------
February 29, February 28,
(IN THOUSANDS) 2000 1999
------------ ------------
Interest income $ 25,865 18,398
Equity in earnings of partnerships 9,565 --
Management and servicing fees 3,199 1,093
-------- --------
Total revenues 38,629 19,491
-------- --------
Operating expenses 2,396 1,254
Minority interest 208 --
-------- --------
Total operating expenses 2,604 1,254
-------- --------
Operating earnings $ 36,025 18,237
======== ========
Balance sheet data:
Investment securities $505,929 486,859
Investments in and advances to partnerships 96,968 --
Other investments 23,745 21,113
-------- --------
Total segment assets $626,642 507,972
======== ========
13
<PAGE>
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 ENDED FEBRUARY 29, 2000 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,
1999
Overall operating earnings from real estate securities increased to $36.0
million for the three months ended February 29, 2000 from $18.2 million for the
three months ended February 28, 1999. Earnings were higher primarily due to 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 records interest received plus
the amortization of the difference between the carrying value and the face
amount of the securities to achieve a level yield. To date, this has resulted in
less recognition of interest income than interest received. The excess interest
received is applied to reduce the Company's investment. The Company's initial
and ongoing estimates of its returns on CMBS investments are based on a number
of assumptions that are subject to certain business and economic conditions, the
most significant of which is the timing and magnitude of credit losses on the
underlying mortgages.
Actual loss experience to date, particularly for older transactions (3 to 6
years in age) is significantly lower than originally underwritten by the
Company. Therefore, changes to original estimated yields have 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.
14
<PAGE>
Although the Company acquired $64.7 million face amount of CMBS for $31.7
million during the quarter ended February 29, 2000, the total book value of CMBS
decreased by approximately $5.0 million during the quarter primarily due to $36
million of principal collections received. The following is a summary of the
CMBS portfolio held by the Company at February 29, 2000:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average % of Average Average
Face Interest Face Cash Book
Amount Rate Book Value Amount Yield (1) Yield (2)
---------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
BB rated or above $ 246,760 7.05 % $ 184,209 74.7 % 9.5 % 14.4 %
B rated 270,484 6.48 % 155,053 57.3 % 11.3 % 12.4 %
Unrated 729,707 7.26 % 172,611 23.7 % 28.8 % 31.2 %
Unrealized losses on
securities - (5,944)
-------------- ---------------
Total CMBS
portfolio (3) $ 1,246,951 7.06 % $ 505,929 40.6 % 16.5 % 19.5 %
============== ===============
- --------------------
<FN>
(1) Cash yield is determined by annualizing the actual cash received during the month of February 2000, and
dividing the result by the book value at February 29, 2000.
(2) Book yield is determined by annualizing the interest income for the month of February 2000, and dividing
the result by the book value at February 29, 2000.
(3) This table excludes CMBS owned through non-consolidated partnerships.
</FN>
</TABLE>
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 February 29, 2000 was
$97.0 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 $9.6 million of equity in earnings of partnerships
to the real estate securities line of business for the three months ended
February 29, 2000.
Management and servicing fees increased to $3.2 million for the three months
ended February 29, 2000 from $1.1 million for the three months ended February
28, 1999. This increase was primarily attributable to the increase in the number
of CMBS mortgage pools (57 at February 29, 2000 versus 43 at February 28, 1999)
for which the Company acts as special servicer.
Operating expenses increased to $2.4 million for the three months ended February
29, 2000 from $1.3 million for the three month period ended February 28, 1999,
primarily due to increases in personnel and out-of-pocket expenses directly
related to the growth of the CMBS portfolio.
15
<PAGE>
REAL ESTATE LOANS
Three Months Ended
-----------------------------
February 29, February 28,
(IN THOUSANDS) 2000 1999
------------ ------------
Interest income $ 7,929 5,121
Equity in earnings of partnerships 6,974 8,781
Management fees 221 1,491
Other income 191 123
-------- --------
Total revenues 15,315 15,516
-------- --------
Operating expenses 1,526 1,776
Minority interest 573 535
-------- --------
Total operating expenses 2,099 2,311
-------- --------
Operating earnings $ 13,216 13,205
======== ========
Balance sheet data:
Mortgage loans, net $157,581 98,178
Other investments 50,040 47,380
Investments in and advances to partnerships 68,002 53,573
-------- --------
Total segment assets $275,623 199,131
======== ========
Real estate loans include the Company's domestic and foreign discount loan
portfolio investments, owned primarily through partnerships, and related loan
workout operations, as well as its direct lending activities in unique high
yielding situations. Total revenues include interest income, equity in earnings
of partnerships and management fees earned from those partnerships. Operating
expenses include the overhead associated with servicing the loans and managing
the partnerships.
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THREE MONTHS ENDED FEBRUARY 29,
1999
Operating earnings from real estate loans were $13.2 million for both
three-month periods ended February 29, 2000 and February 28, 1999.
Interest income increased to $7.9 million for the three months ended February
29, 2000 from $5.1 million for the three months ended February 28, 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. As of February 29, 2000, the Company had four of
these investments funded with a net book value of $78.7 million. These
investments contributed approximately $2.7 million to interest income in the
first quarter of 2000.
For the three months ended February 29, 2000 equity in earnings of partnerships
decreased to $7.0 million from $8.8 million for the three months ended February
28, 1999. Earnings from the Company's domestic loan portfolios decreased $7.9
million, as expected, contributing only $2.2 million in the first quarter of
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. This
decrease in earnings was partially offset by an increase of $4.8 million in
earnings from the Company's investments in and workout of distressed Japanese
loan portfolios.
As of the end of the quarter, the Company had invested in a total of 16
portfolios of non-performing real estate loans in Japan through partnerships in
which the Company had a total net
16
<PAGE>
investment of $48.9 million. As a result of its loan workout operations, the
Company received cash distributions from its Japan investments of $4.0 million
during the first quarter of 2000 bringing the inception to date distributions to
approximately $36.7 million compared to total earnings recognized of $7.2
million.
Management fees decreased to $0.2 million for the three month period ended
February 29, 2000, from $1.5 million for the same period in 1999 due to
decreased disposition fees on the domestic loan portfolio resolutions.
Operating expenses decreased to $1.5 million during the first quarter of 2000
from $1.8 million for the same period in 1999, primarily due to the decrease in
expenses associated with managing the diminishing domestic discount loan
portfolios, offset somewhat by the increased general and administrative expenses
to support the Japan operations.
CORPORATE, OTHER, INTEREST, AND INCOME TAX EXPENSES
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THE THREE MONTHS ENDED FEBRUARY
28, 1999
Corporate and other operating expenses increased to $5.0 million for the
three-month period ended February 29, 2000, from $3.6 million for the same
period in 1999, reflecting overall company growth.
Interest expense increased to $26.6 million for the three-month period ended
February 29, 2000 from $19.5 million for the same period in 1999. This increase
was primarily attributable to the Company's increased borrowing levels. The
Company's mortgage notes and other debts payable increased to $1,494.1 million
at February 29, 2000 from $1,061.2 million at February 28, 1999 as the Company
increased its investments in all three of its core business segments.
Income tax expense increased to $8.1 million for the three months ended February
29, 2000 from $6.8 million for the same period in 1999 primarily due to an
increase in pre-tax earnings.
2. LIQUIDITY AND FINANCIAL RESOURCES
In the three months ended February 29, 2000, $16.7 million of cash was used in
the Company's operating activities, compared with $1.6 million in the three
months ended February 28, 1999. This increase in cash flow used in operating
activities is primarily due to a decrease in accounts payable and accrued
liabilities of $30.6 million and an increase in other assets and deferred taxes
of $8.3 million offset by a decrease in restricted cash of $23.9 million.
The Company used $22.5 million of cash in investing activities during the three
months ended February 29, 2000, compared with $44.5 million for the three months
ended February 28, 1999. The decrease was primarily due to $30.5 million more in
proceeds from principal collections on investment securities and $18.1 million
of fewer purchases of investment securities without seller financing, offset by
$30.7 million less in proceeds from the syndication of affordable housing
communities.
Financing activities provided $49.1 million of cash during the three months
ended February 29, 2000, compared with $34.7 million for the three months ended
February 28, 1999. The increase was primarily due to $172.1 million of net
borrowing activity under the Company's repurchase agreements and revolving
credit lines, partially offset by $129.2 million of fewer borrowings under
mortgage notes and other debts payable and the purchase and retirement of $34.1
million of treasury stock.
17
<PAGE>
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 February 29, 2000, the Company had two repo agreements
through which it financed selected CMBS. The first facility had $106.5 million
outstanding and is required to be paid in full in December 2003. The second
facility had a commitment of $50.0 million of which $36.7 million was
outstanding. This facility matures in June 2000 but at that time gets converted
to a revolving line of credit available to finance mortgage loans, with a
maturity date of September 2003. 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 $88.4 million at February 29, 2000 and
expire through February 2002.
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.
Approximately 63% 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.
At February 29, 2000, the Company had scheduled maturities on existing debt of
$325.1 million through February 28, 2001, assuming the Company takes advantage
of extensions which are exercisable at the Company's option. The Company's
ability to make scheduled debt payments of principal or interest on or to
refinance this indebtedness depends on its future performance, which to a
certain extent, is subject to general economic, financial, competitive and other
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.
At February 29, 2000, LNR had over $302 million available from existing or
committed lines, financings and cash and approximately $146 million available
under committed project-level financings to fund future development.
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 the 1998 authorization
to repurchase 2,000,000 shares. During the quarter ended February 29, 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.
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."
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not subject to any legal proceedings other than suits in the
ordinary course of its business, most of which are covered by insurance. LNR
believes these suits will not, in 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
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
SIGNATURE AND TITLE DATE
------------------- ----
/S/ SHELLY RUBIN April 14, 2000
- ----------------------------------
Shelly Rubin
Chief Financial Officer (Principal
Financial Officer)
20
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-2000
<PERIOD-START> DEC-1-1999
<PERIOD-END> FEB-29-2000
<CASH> 105,312
<SECURITIES> 505,929
<RECEIVABLES> 157,581
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,099,062
<DEPRECIATION> 57,562
<TOTAL-ASSETS> 2,351,351
<CURRENT-LIABILITIES> 0
<BONDS> 1,494,131
0
0
<COMMON> 3,331
<OTHER-SE> 694,214
<TOTAL-LIABILITY-AND-EQUITY> 2,351,351
<SALES> 0
<TOTAL-REVENUES> 95,262
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 39,051
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,575
<INCOME-PRETAX> 29,636
<INCOME-TAX> 8,091
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,545
<EPS-BASIC> 0.64
<EPS-DILUTED> 0.62
</TABLE>
