SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For Quarterly Period Ended September 30, 1995
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Commission File Number 1 - 8330
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LNH REIT, Inc.
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(Exact name of small business issuer as specified in its charter)
Maryland 75-1732388
- ------------------------------- ---------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 One Jackson Place
188 East Capitol Street
P.O. Box 22728
Jackson, Mississippi 39225-2728
- ---------------------------------------- -----------------
(Address of principal executive offices) Zip Code
Issuer's telephone number, including area code (601) 354-3555
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Former name, former address and former fiscal year,
if changed since last report
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
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2,200,000 Shares of common stock $.50 par value, were outstanding
at November 7, 1995.
LNH REIT, INC.
FORM 10-QSB
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
- -----------------------------------------------------------------
Part I. Financial Information
Pages
Item 1. Consolidated financial statements
Consolidated balance sheets, September 30, 1995
and December 31, 1994 3
Consolidated statements of operations for the
three months and nine months ended
September 30, 1995 and 1994 4
Consolidated statements of cash flow for the
nine months ended September 30, 1995 and 1994 6
Consolidated statements of stockholders'
equity for the nine months ended
September 30, 1995 and 1994 7
Notes to consolidated financial statements 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 10
Part II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures
Authorized signatures 18
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
Assets
Mortgage loans $ 7,162 $ 5,149
Mortgage loans subject to foreclosure
proceedings 5,969 5,960
Real estate properties:
Earning
Warehouse 4,152 4,073
Shopping center 6,895 6,867
Accumulated depreciation (700) (427)
Non-earning land 776 3,067
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24,254 24,689
Less allowance for losses (275) (525)
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23,979 24,164
Marketable equity securities 675 525
Cash and cash equivalents 1,322 1,660
Accrued interest and other receivables 445 285
----------- ----------
$ 26,421 $ 26,634
=========== ==========
Liabilities
Minority interest payable $ 1,480 $ 1,510
Other liabilities 1,064 493
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2,544 2,003
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Stockholders' Equity
Common stock, $.50 par value,
15,000,000 shares authorized,
2,200,000 shares issued and
outstanding in 1995 and 1994 1,100 1,100
Paid in capital 25,169 27,215
Deficit (2,898) (4,040)
Unrealized gain on marketable
equity securities 506 356
----------- ---------
23,877 24,631
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$ 26,421 $ 26,634
=========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1995 1994 1995 1994
-------- ------- -------- ------
Revenues
Interest:
Mortgage loans $ 193 $ 176 $ 510 $ 650
Cash equivalents and other 12 23 41 83
Revenue from real estate properties 358 332 1,083 850
Other income - 53 43 109
------- ------ ------ ------
563 584 1,677 1,692
------- ------ ------ ------
Expenses
Management fees 73 81 221 258
Real estate expenses
Operating 140 138 400 443
Depreciation 93 75 273 193
Professional fees 117 19 186 61
General and administrative 54 39 167 126
Recovery of possible losses (250) - (250) -
Minority interest expense 26 17 73 31
------- ------ ------ ------
253 369 1,070 1,112
------- ------ ------ ------
Income from operations 310 215 607 580
------- ------ ------ ------
Gain on investments
Real estate and mortgage loans - - 535 135
------- ------ ------ ------
Net Income $ 310 $ 215 $ 1,142 $ 715
======= ====== ======= ======
Net Income per share
Income from operations $ .14 $ .10 $ .28 $ .27
Income from investments - - .24 .06
------- ------ ------- ------
Net Income $ .14 $ .10 $ .52 $ .33
======= ====== ======= ======
Average number of shares outstanding 2,200 2,200 2,200 2,200
======= ====== ======= ======
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(In thousands)
Nine Months Ended
September 30,
-------------------------
1995 1994
---------- ----------
Operating Activities
Net income $ 1,142 $ 715
Adjustments to reconcile
net income to net cash provided
by operating activities:
Amortization of deferred financing
fees and discount on mortgage loans (47) (44)
Depreciation 273 193
Recovery of possible losses (250) -
Gain on investments (535) (135)
Other (33) (24)
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Funds from operations 550 705
Net change in receivables, payables
and other assets 411 (241)
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Cash provided by operating activities 961 464
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Investing Activities
Collections on mortgage loans 229 3,996
Improvements to real estate (107) (35)
Proceeds from sale of real estate 625 44
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Cash provided by investing activities 747 4,005
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Financing Activities
Dividends paid (2,046) (4,114)
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Cash used in financing activities (2,046) (4,114)
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Net increase (decrease) in cash and
cash equivalents (338) 355
Cash and cash equivalents at
beginning of year 1,660 1,340
----------- ----------
Cash and cash equivalents at
end of year $ 1,322 $ 1,695
=========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands)
Nine Months Ended
September 30,
--------------------------
1995 1994
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Common stock, $.50 par value
Balance at beginning and
end of period $ 1,100 $ 1,100
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Paid-in capital
Balance at beginning of period 27,215 31,527
Cash dividends declared and paid (2,046) (4,114)
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Balance at end of period 25,169 27,413
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Deficit
Balance at beginning of period (4,040) (4,299)
Net income 1,142 715
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Balance at end of period (2,898) (3,584)
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Unrealized gain on marketable
equity securities
Balance at beginning of period 356 -
Change in unrealized gain on
securities 150 394
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Balance at end of period 506 394
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Total stockholders' equity $ 23,877 $ 25,323
=========== ==========
See notes to consolidated financial statements
Notes to Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
The financial statements should be read in conjunction with the
annual report and the notes thereto.
(2) Reclassifications
Certain reclassifications have been made in the fiscal
1994 financial statements to conform to the fiscal 1995
classifications.
(3) Supplemental Cash Flow Information
Nine Months Ended
September 30
-----------------------
1995 1994
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Loan foreclosures added to
real estate owned (1) $ - $ 6,806
Loans made to facilitate sales
of real estate owned 2,200 200
Change in gain on marketable
equity securities 150 394
(1) This includes the 22.22% minority participant's
ownership of $1,512,000.
(4) Marketable Equity Securities
The Company's investment in marketable equity securities
consists of the following:
September 30, 1995 December 31, 1994
------------------------- ------------------------
Quoted Quoted
Ownership Carrying Market Ownership Carrying Market
Interest Value Value Interest Value Value
--------- ------- ------ -------- --------- ------
Liberte'
Investors 2.41% $ 675 $ 675 2.41% $ 525 $ 525
("Liberte'") ======= ====== ======= =====
On January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" and
classified its investments as securities available-for-sale.
Accordingly, investment securities are carried at fair value with
the unrealized gain of $506,000 at September 30, 1995 and
$356,000 at December 31, 1994, presented as a separate component
of stockholders' equity.
(5) Agreement in Principle to Merge
On September 6, 1995, LNH REIT, Inc. and EastGroup
Properties, Inc. announced that the Special Committees of the
Boards of each company had agreed in principle to a merger
between LNH and EastGroup. The Company's shareholders would
receive shares of EastGroup with a value of $7.75 for each LNH
share. The number of EastGroup shares that LNH shareholders
receive would be determined by dividing the value $7.75 by the
average trading price of EastGroup shares during the 30 trading
days prior to the date the SEC declares EastGroup's registration
statement effective. The exchange ratio may not be greater than
.40 EastGroup share of less than .375 EastGroup share per LNH
share.
EastGroup presently owns 23.4% of LNH. The merger is
subject to several conditions, including execution and approval
of the merger agreement by the Boards of each company,
shareholder approval, receipt of a satisfactory fairness opinion
by LNH and registration of the EastGroup shares to be issued in
the merger with the Securities and Exchange Commission.
LNH REIT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
(Comments are for the balance sheet dated September 30, 1995
compared to December 31, 1994.)
Total assets of the Company at September 30, 1995 were
$26,421,000 compared to $26,634,000 at December 31, 1994. Total
liabilities increased from $2,003,000 at December 31, 1994 to
$2,544,000 at September 30, 1995.
The Company's mortgage loan balance increased $2,022,000
during the reporting period. This increase was primarily due to
a new loan of $2,200,000 made for the sale of the 90 acre
Baypointe property located in Houston, Texas. In addition, the
Company collected principal payments of $229,000 on loans and
recognized loan discounts and deferred financing fees of $47,000
during the reporting period.
The Company closed three sales of its Houston land during
the period ending September 30, 1995. During the first quarter
of 1995 the Company sold a 2.78 acre and a 12.60 acre tract of
Houston land. The Company received cash of $265,000 (net of
closing costs) for these sales. No gain or loss was recognized
on these sales. On April 20, 1995, the Company closed a 90 acre
sale of its Baypointe property for $550,000 in cash and
$2,200,000 in seller financing. The Company received $360,000 in
cash (net of closing costs). As part of the seller financing, a
$137,500 principal payment was due within 45 days of closing.
This payment was made on June 8, 1995, and a gain of $535,000
($.24 per share) was recognized during the second quarter of
1995. Depreciation expense of $273,000 was recorded during the
nine months ended September 30, 1995 and improvements of $107,000
were made to the real estate properties.
The Company originally recorded a provision for possible
loss of $250,000 on December 31, 1994, on the Cowesett Corners
Shopping Center loan. In September 1995, a proposed sale of the
Shopping Center for $13,250,000 (includes participant 50%
interest) was announced. Based on this third party offer, it was
determined that the $250,000 would be successfully recovered, and
the amount was recorded as a recovery of a provision for possible
loss. At September 30, 1995, this loan had an outstanding
balance of $5,969,000 (net of deferred financing fees of
$31,000).
The increase in other liabilities is primarily due to the
collection of cash from the operations of the Cowesett Corners
Shopping Center, which is held in an interest bearing escrow
account.
Stockholders' equity decreased $754,000 for the nine
months ended September 30, 1995, reflecting net income of
$1,142,000, dividends declared and paid of $2,046,000 and the
unrealized gain on securities of $150,000.
RESULTS OF OPERATIONS
(Comments are for the three months and nine months ended
September 30, 1995, compared to the three months and nine months
ended September 30, 1994.)
The Company recorded income from operations of $310,000
($.14 per share) for the three months ended September 30, 1995
compared to $215,000 ($.10 per share) for the same period of
1994. For the nine months ended September 30, 1995, the Company
recorded income from operations of $607,000 ($.28 per share)
compared to $580,000 ($.27 per share) for the same period of
1994.
The Company recorded a gain on investments of $535,000
($.24 per share) related to the sale of the 90 acre Baypointe
land in Houston, Texas for the nine months ended September 30,
1995. The Company recorded a gain on investments of $135,000
($.06 per share) related to the payoff of a mortgage loan during
the nine months ended September 30, 1994.
Interest income on mortgage loans increased during the
third quarter of 1995 compared to the third quarter of 1994,
primarily due to the interest income recognized from the
Baypointe land loan. Interest income on mortgage loans decreased
$140,000 during the first nine months of 1995 compared to the
first nine months of 1994, reflecting primarily the payoff of the
Rivercrest Apartments, the foreclosure of the Liberty Corners
Shopping Center, and the cash flow payments of the Cowesett
Corners Shopping Center. Interest income on these three mortgage
loans during the first nine months of 1994 was $317,000 compared
to $9,000 for 1995. During the first nine months of 1995 cash
from operations of the Cowesett Corners Shopping Center of
$1,073,000 was collected. The amounts were placed in escrow
accounts and $624,000 in distributions for expenses were made.
Any distribution of any excess funds from this account is pending
the results of the foreclosure proceedings. The Company reported
$9,000 from amortization of financing fees and no interest income
related to this mortgage during the first nine months of 1995.
Interest income on mortgage loans increased by $168,000 in 1995
compared to 1994 primarily due to interest received from the
Meadowbend land loan, the Baypointe land loan and from the
interest rate increase on the Hickory Creek land loan.
The decrease in other income is primarily due to the total
assignment price of the management contact being paid off in the
second quarter of 1995.
Management fees decreased during the third quarter and
nine months ended September 30, 1995 compared to 1994, reflecting
primarily the decrease in the management fee base of average
invested assets from $24,894,000 at September 30, 1994 to
$23,276,000 at September 30, 1995.
The foreclosure of the Liberty Corners mortgage loan
accounts for the increase in revenue from real estate owned, the
increase in depreciation expense and the increase in minority
interest expense for the three months and nine months ended
September 30, 1995 compared to 1994. Only seven months of
revenue and expense from Liberty Corners was included in the
first nine months of 1994 while nine months of revenue and
expense was included in the first nine months of 1995. The
decrease in real estate operating expense for the nine months
ended September 30, 1995 compared to 1994 was due to lower costs
of property taxes, insurance expense and repair and maintenance.
The increase in Professional Fees is primarily the legal
costs incurred in foreclosure proceedings against the borrowers
of the Cowesett mortgage loan.
The increase in General and Administrative expense is
primarily due to increased costs of insurance and stockholder
relations expense.
Based on a third party offer of $13,250,000 (includes
participants 50% interest) for the purchase of the Cowesett
Corners Shopping Center, a recovery of possible losses of
$250,000 was made.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds continue to be
monthly principal and interest payments on its mortgage
investments and net operating income from real estate properties.
The Company believes that these funds, along with cash balances,
are sufficient to meet its long and short-term operating needs as
well as to continue the payment of cash dividends as required for
its continued qualification as a real estate investment trust.
At September 30, 1995, the Company had $1,322,000 in cash
and cash equivalents available for general corporate use. During
the first quarter of 1995, the Company completed two sales of
Houston acreage. The Company received cash of $48,000 (net of
closing costs) for the sale of a 3 acre portion of one parcel,
and it received cash of $217,000 (net of closing costs) for the
sale of a 12 acre portion of a separate parcel. During the second
quarter of 1995, the Company completed one sale of Houston
acreage. The Company received $360,000 (net of closing costs)
for the sale of the 90 acre Baypointe tract.
The Company's portfolio of investments has been impacted
negatively by the generally depressed condition of the national
real estate markets that persisted in the early 1990s. A number
of factors contributed to these depressed conditions including a
surplus of retail real estate of every type in almost every major
market and real estate acquired through foreclosure by financial
institutions, the Federal Deposit Insurance Corporation and the
Resolution Trust Corporation being placed on the market for sale
or lease at distressed prices. Although the current real estate
conditions have generally improved, borrowers that depend on cash
flow from real estate projects to meet operating expenses and
interest payments may continue to be adversely affected. This,
in turn, will continue to have a negative impact on the operating
results of the Company if its borrowers fail to make scheduled
principal and interest payments.
Three of the Company's mortgage loan investments defaulted
under terms of the original notes during 1993. The Liberty
Corners mortgage went into default on July 1, 1993 and the
Company received a deed in lieu of foreclosure on the property on
February 25, 1994. The Company owns 77.78% of the investment and
records the total assets, liabilities, revenues and expenses of
the center with minority interest provided for the 22.22% not
owned. The loan had a $5,294,000 balance net of allowance for
losses and deferred income, and the Company recorded the asset at
$6,806,000, which included the participant's 22.22% minority
interest of $1,512,000. Subsequent to February 25, 1994, the
Company reported $1,367,000 in revenue (including the 22.22%
minority interest) from the operations of the property.
The Cowesett Corners mortgages, with a total outstanding
principal balance of $6,000,000, went into default on May 1,
1993. The borrower continued making payments from cash flow under
a short-term work out agreement. However, the Company
discontinued the accrual of interest income from the loan and now
records interest income on the cash basis since the owner of
Cowesett Corners filed for bankruptcy in February 1995. Also as
a result of the bankruptcy proceedings, LNH recorded a provision
for loss of $250,000 at December 31, 1994 to reduce the net
carrying value of the loans to the estimated fair value of the
investment. This loan is secured by a 135,713 square foot
shopping center that is in a good location in Warwick, Rhode
Island and in good physical condition. As of September 30, 1995,
LNH has collected $1,073,000 cash from operations of the Cowesett
Corners Shopping Center and disbursed $506,000 for past due
property taxes and $118,000 for operating expenses. This cash
was placed in an interest bearing escrow account. In addition,
the Company during October 1995 collected $217,000 in cash from
operations and disbursed $16,000 for operating expenses leaving a
balance in the escrow account of $650,000. In September 1995, a
proposed sale of the Cowesett Corners Shopping Center to a third
party for $13,250,000 (includes participants 50% interest) was
announced. If this sale does not close by November 30, 1995, LNH
may foreclose its lien on December 1, 1995, and Cowesett and the
Trustee waived any right to seek further stay of the foreclosure
sale. In addition, based on this proposed sale an entry to
record the recovery of the $250,000 provision for loss was made
in September 1995.
The Citrus Center mortgage, with an outstanding balance of
$1,873,000, went into default on December 1, 1993. The borrowers
had failed to make five scheduled payments and, as a result, the
Company recorded a provision for loss of $275,000 at December 31,
1994 to write down the investment to its estimated net realizable
value. In June 1995, a Modification Agreement between the
borrowers and the Company was agreed on. Basically, the
Modification calls for the interest rate to be reduced from 9% to
8%, with 1% to be deferred until the note matures on November 30,
1998. Also, of the five past due payments, the two payments most
current were to be brought current, with the three remaining
payments becoming due on November 30, 1998. As of September 30,
1995, the borrowers have made all payments agreed to in the
Modification Agreement. During the first nine months of 1995,
the Company has recognized interest income of $136,000 on this
loan. The Company's mortgage loan portfolio performance in 1995
will be dependent on the ability of the Citrus Center owners to
meet the terms of the Modification Agreement and the settlement
obtained in the Cowesett Corners bankruptcy proceedings. While
management of the Company does not believe it will incur
additional losses on these investments, there can be no assurance
that the defaults will be cured at terms as favorable to the
Company as the original note terms.
It is the Company's policy, consistent with its status as
a real estate investment trust, to distribute at least 100% of
taxable income. During the first nine months of 1995, the
Company paid distributions to its stockholders of $2,046,000
($.93 per share), which included a special dividend of $1,452,000
($.66 per share).
On September 6, 1995, LNH REIT, Inc. and EastGroup
Properties, Inc. announced that the Special Committees of the
Boards of each company had agreed in principle to a merger
between LNH and EastGroup. The Company's shareholders would
receive shares of EastGroup with a value of $7.75 for each LNH
share. The number of EastGroup shares that LNH shareholders
receive would be determined by dividing the value $7.75 by the
average trading price of EastGroup shares during the 30 trading
days prior to the date the SEC declares EastGroup's registration
statement effective. The exchange ratio may not be greater than
.40 EastGroup share of less than .375 EastGroup share per LNH
share.
EastGroup presently owns 23.4% of LNH. The merger is
subject to several conditions, including execution and approval
of the merger agreement by the Boards of each company,
shareholder approval, receipt of a satisfactory fairness opinion
by LNH and registration of the EastGroup shares to be issued in
the merger with the Securities and Exchange Commission.
LNH REIT, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the December 31, 1994 10-KSB and the
June 30, 1995 10-QSB, the Company initiated foreclosure
proceedings against the owner of Cowesett Corners
Shopping Center, Cowesett Partners, L.P. in February
1995, as the result of the owner's June 1993 default
under the terms of a certain Mortgage Deed (with
Security Agreement and Assignment of Rents and Leases)
dated March 31, 1988, and a certain Modification of Lien
Agreement. The Mortgage and Modification of Lien
Agreements secured two Promissory Notes with unpaid
principal balances of $11,975,000 and $25,000 payable to
the Company and a 50% participant. The Company's
foreclosure was stayed by the filing of bankruptcy by
Cowesett Partners, L.P. on February 13, 1995, in Rhode
Island. The Company filed for relief from the automatic
stay in the Cowesett Partners, L.P. bankruptcy case and
initiated a lawsuit in the United States District Court
for the Northern District of Texas against the
guarantors of the Notes. In July of 1995, the
bankruptcy court lifted the automatic stay which would
allow the Company to proceed with its foreclosure. On
July 7, 1995, Cowesett filed a Notice of Appeal of the
Order granting relief from automatic stay. That appeal
was docketed in the U.S. District Court on August 15,
1995. However on August 9, 1995, the bankruptcy court
converted the debtor's Chapter 11 case to a Chapter 7
liquidation and a trustee was appointed. On August 18,
1995, Cowesett filed a Motion for Stay for the Order
granting relief from the automatic stay, seeking a stay
of the August 30, 1995 foreclosure sale, and requested
an emergency hearing. On August 30, 1995, a 30-day stay
of the foreclosure sale was granted. Oral arguments on
Cowesett's appeal was scheduled for September 28, 1995.
On that date, Cowesett, the Chapter 7 Trustee, and LNH
presented the court with a Consent Order Dismissing
Appeal. This Consent Order provided, inter alia, that
the Chapter 7 Trustee could proceed with a proposed sale
of the Property to a third party and that LNH would
release its lien against the Property upon receipt of
the sum of $13,250,000 (includes participants 50%
interest). If the sale does not close by November 30,
1995, LNH may foreclose its lien on December 1, 1995,
and Cowesett and the Trustee waived any right to seek
further stay of the foreclosure sale. In early July
1995, the Company received a judgment against one of the
guarantors of the Notes in its lawsuit filed in the
United States District Court for the Northern District
of Texas. The Company then docketed its judgment in
Rhode Island Superior Court. The Company is pursuing
collection of its judgment. The guarantor against whom
judgment was entered has moved to vacate the judgment.
Also, the Company is continuing its action against the
remaining guarantor.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule attached
hereto.
(b) Reports on Form 8-K
None
SIGNATURE
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.
Dated: November 7, 1995 LNH REIT, Inc.
By: /s/ Russell L. Wall
---------------------
Russell L. Wall
Controller
/s/ N. Keith McKey
---------------------
N. Keith McKey, CPA
Senior Vice President
Chief Financial Officer
and Secretary
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