UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------
For the fiscal year ended December 31, 1995
Commission file number 1-8330
LNH REIT, Inc.
(Name of small business issuer in its charter)
Maryland 75-1732388
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 One Jackson Place
188 East Capitol Street
Jackson, Mississippi 39201
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (601) 354-3555
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange on Which
Title of Each Class Registered
Common Stock ($.50 par value) New York Stock Exchange
Securities registered under to Section 12(g) of the Act:
None
Indicated 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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Revenues for the year ended December 31, 1995 were
$2,479,000
At March 15, 1996, the aggregate market value of the voting
stock held by nonaffiliates was $13,057,000.
The number of shares of Common Stock outstanding as of March
18, 1996 was 2,200,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1996 Annual Meeting of
Shareholders are incorporated by reference into Part III.
PART I
Item 1. Description of Business.
Original Organization
LNH REIT, Inc. ("LNH" or the "Company") is a corporation
established under the laws of the State of Maryland in December
1980 under the name L & N Housing Corp. At the April 22, 1992
Annual Meeting, the Shareholders approved the change of name from
L & N Housing Corp. to LNH REIT, Inc.
LNH has qualified to be taxed as a real estate investment trust
("REIT") under Sections 856-860 of the Internal Revenue Code of
1986, as amended (the "Code"), and intends to continue to qualify
to be so taxed. If in any taxable year the Company should not
qualify as a REIT, it would be taxed as a corporation and
distributions to shareholders would not be deductible by the
Company in computing its federal and state taxable income.
Administration
Until April 1992, the Company was managed pursuant to a
Management Agreement with L & N Housing Managers, Inc. ("Prior
Manager"), a wholly-owned subsidiary of Lomas Financial
Corporation ("LFC"). The Prior Manager served as the Company's
investment advisor, administering the day-to-day affairs of the
Company and representing the Company in its dealing with third
parties, subject to the supervision of the Company's Board of
Directors. LFC also owned 352,000 shares of the Company's common
stock.
In 1992, EastGroup Properties, a Maryland real estate
investment trust ("EastGroup"), and Walker Investments L.P.
("Walker"), purchased 352,000 shares of the Company's Common
Stock from LFC. The agreement pursuant to which the shares were
purchased (the "Agreement") further provided that the Prior
Manager would assign its rights and duties as manager under the
Management Agreement to LNH REIT Managers, a Mississippi general
partnership (the "Manager") which was an affiliate of EastGroup
and Walker. The Management Agreement was amended to substitute
the Manager for the Prior Manager under the Management Agreement.
EastGroup and Walker agreed to pay an aggregate of $406,000 to
the Company, in consideration of the assignment of the Prior
Manager's duties and responsibilities as manager under the
Management Agreement to LNH REIT Managers. The $406,000 has been
paid in installments subject to the maximum amount that the
Company may receive in a year without violating the 95% gross
Description of Business (continued)
income test set forth in Section 856(c) of the Internal Revenue
Code. The unpaid balance of the $406,000 accrued simple interest
at the rate of 6.6% and the obligation of EastGroup and Walker to
pay any unpaid balance of the $406,000 terminated on January 1,
1996. During the year ended December 31, 1995, the Company
accrued $41,000 as income pursuant to the assignment of the
Management Agreement and recorded $2,000 in interest on the
unpaid balance. The final payment on this obligation was
received in September 1995.
On March 24, 1995, EastGroup and its wholly owned subsidiary,
EGP Managers, Inc. ("EGP Managers"), entered into an agreement
(the "March 24, 1995 Agreement") with Walker and certain entities
affiliated with Walker and its affiliates pursuant to which
EastGroup agreed to purchase 383,775 shares of the Company's
Common Stock from Walker and EGP Managers agreed to purchase
Walker's interest in the Manager. On that same date, the Board
of Directors of the Company approved an additional amendment to
the Management Agreement pursuant to which EGP Managers would
assume the obligations and duties of Managers under the
Management Agreement effective upon the Closing of the
transactions set forth in the March 24, 1995 Agreement, which
Closing took place on April 3, 1995.
On September 6, 1995 (amended on December 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
$8.10 for each LNH share. The number of EastGroup shares that
LNH shareholders receive would be determined by dividing the
value $8.10 by the average trading price of EastGroup shares
during the 10 trading days prior to the effective date of the
merger. EastGroup presently owns 23.4% of LNH. The merger is
subject to several conditions, including 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.
The Management Agreement, as amended, was renewed at its
original expiration on December 31, 1995 but it will terminate on
the effective date of the Company's merger with EastGroup
Properties. The Manager had entered into an Administration
Agreement with Congress Street Properties, Inc. (" Congress
Street"), a Delaware corporation and then an affiliate of
EastGroup, pursuant to which Congress Street provided day-to-day
administrative services to the Company, including office space,
Description of Business. (continued)
equipment and personnel incident thereto. The Administration
Agreement was terminated by EGP Managers effective March 31,
1995. The Company bears the costs of independent agents, such as
attorneys, auditors and appraisers, retained on behalf of the
Company; of expenses connected with the acquisition, operation
and disposition of its real property interests; and of
shareholder communications, directors' fees and franchise taxes.
Pursuant to the Management Agreement, the Company has no
employees. All personnel required for the administration of the
Company's operations, including LNH's officers, were compensated
by EastGroup.
Operations
The Company was originally formed to invest in participating
first mortgage loans secured by multifamily rental projects
located in the United States. As the markets for multifamily
rental projects began to decline in 1985, the Company shifted its
investment target to commercial projects and investments in
marketable equity securities of other REITs.
Since its inception, the Company has funded mortgage loans on
15 projects of which ten were disposed, one remains outstanding
in the form of a mortgage loan and four loans were foreclosed and
the collateral is held as real estate owned at December 31, 1995.
The Company has operated, and intends to continue to operate,
in such manner as to qualify for taxation as a REIT under the
Code, but no assurance can be given that it will at all times so
qualify. To qualify as a REIT, the Company must satisfy various
requirements under the Code, including requirements concerning
the nature and composition of its income and assets and a
requirement that it distribute in each year at least 95% of its
REIT taxable income. So long as the Company qualifies as a REIT,
it will generally be taxable only on its undistributed taxable
income. Distributions out of current or accumulated earnings and
profits will be taxed to stockholders as ordinary income or
capital gain, as the case may be. Distributions in excess of the
Company's accumulated and current earnings and profits will
constitute a non-taxable return to the stockholders (except
insofar as such distributions exceed the cost basis on the Common
Stock) and will result in a corresponding reduction in the cost
basis of the Common Stock. If the Company fails to qualify as a
REIT in any taxable year, it will be taxed as a corporation.
Distributions to the stockholders will not be deductible by the
Description of Business. (continued)
Company in computing its taxable income but will be eligible for
the dividends received deduction for corporations; and unless
entitled to relief under specific statutory provisions, the
Company will be ineligible for REIT status for the next four
taxable years.
Item 2. Description of Property.
The operations of the Company are conducted from approximately
13,100 square feet of office space which was leased by Congress
Street Properties, Inc. prior to December 31, 1994 and is located
at 300 One Jackson Place, 188 East Capitol Street, Jackson,
Mississippi. On December 31, 1994 the Company entered into a new
Administration Agreement with EastGroup Properties. On March 31,
1995 this agreement was terminated. However, all operations
will be conducted in the same office space as noted above and all
leasing arrangements will be the responsibility of EastGroup.
The Company does not own or lease properties other than those
carried as part of its real estate investment portfolio discussed
below and in Note C to the financial statements.
The Company's primary investments in real estate related assets
are summarized below.
Mortgage Loans
Citrus Center. This 20.99% mortgage loan participation is
secured by a 136,228 square foot shopping center in Inverness,
Florida and has an outstanding principal balance of $1,868,000
and net carrying value of $1,593,000 at December 31, 1995.
The other 79.01% of this mortgage loan, amounting to
$7,045,000, is held by a mortgage fund. This project was
funded in 1988 and was scheduled to mature May 31, 1998.
However, the borrowers on the Citrus Center mortgage loan
failed to make five scheduled payments during 1993 and 1994.
As a result of this default, the investment was written down
to its estimated fair value by recording an allowance for loss
of $275,000 at December 31, 1994 and writing off all accrued
interest on the loan. The interest rate on this mortgage loan
was 9% with payments of principal and interest due monthly. In
June 1995, a Modification Agreement between the borrowers and
the Company was agreed on. The Modification called 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 brought current, with the three remaining payments
Description of Property. (continued)
becoming due on November 30, 1998. As of December 31, 1995,
the borrowers have made all payments agreed to in the
Modification Agreement. During 1995, the Company has
recognized interest income of $174,000 as compared to $85,000
in 1994. The shopping center is 84% occupied at year end.
West Houston, Ltd. In the September 1993 sale of a 1,108 acre
parcel of the Houston land, the Company received cash of
$1,108,000 and a mortgage note receivable of $3,324,000. The
terms of the note include interest at the prime lending rate
(8.75% at year-end); payments of interest only for 18 months,
increasing thereafter to fixed principal and interest payments
based on a 20-year amortization; and, maturity on September
17, 1999. After being discounted to yield a market rate of
interest, the note has a net carrying value of $3,074,000 at
December 31, 1995.
MBSLD,Ltd. On March 18, 1994, the Company sold an 8.5 acre
parcel of the unimproved Houston land to MBSLD, Ltd., a Texas
limited partnership. The Company received $44,000 cash (net
of closing costs) and a first mortgage of $200,000. The terms
of the note include 36 monthly principal and interest payments
beginning on May 1, 1994 that are based on a 15-year
amortization accruing interest at 8 percent. The next 24
monthly payments will accrue interest at the lower of the
prime rate plus 1.5% or a fixed rate of 10%. On April 1,
1999, a final principal payment of $158,000 becomes due along
with any remaining accrued interest. No gain of loss was
recorded at the time of this sale, and the principal balance
of this loan at year-end was $146,000.
Baypointe. On April 20, 1995, the Company sold a 90 acre
parcel of land located in Houston, Texas to Elektra
Enterprises, Inc. The Company received $550,000 in cash and a
mortgage note receivable of $2,200,000. The terms of the note
call for semi-annual principal and interest payments for four
years. These payments are based on a 20 year amortization,
and the note is due after four years. Interest accrues on the
unpaid balance at the rate of 9.5% for the first 3 years and
at prime plus 1.5% (with a 12% ceiling) for the fourth year.
A gain of $535,000 was recognized on this sale and the
principal balance of this loan at year-end was $2,046,000.
Description of Property. (continued)
Real Estate Properties
Linpro Commerce Center. This 99,000 square foot commercial
building in Fort Lauderdale, Florida, was acquired on December
16, 1992 through a deed in lieu of foreclosure on a land
purchase-leaseback investment of $1,200,000 and a mortgage
loan investment with a net book value of $3,930,000. Linpro
is located in the Central Broward County submarket which
houses industrial distribution, mixed use, and office/service
users. Office/service buildings in this corridor typically
lease in the range of $6.50 - $9.00 net, with operating
expenses from $2.65 to $3.80 per square foot. Vacancy rates
along this corridor for office/service use is approximately
11%. Linpro is used as an office, showroom and warehouse and
was 95% occupied and 100% leased at December 31, 1995. The
asset was recorded at its estimated fair value of $3,800,000,
resulting in a loss of $1,350,000 during 1992. It has a net
book value of $3,730,000 at December 31, 1995.
The following table sets forth certain operating data with
respect to the property over the last five years (not owned by
LNH in 1991 and from January 1, 1992 to December 15, 1992):
Year Ended
December 31,
1991 1992 1993 1994 1995
Occupancy rate
(at end of period) 95% 95% 85% 95% 95%
Total rent per
leased square foot $5.90 $4.59 $4.77 $4.13 $4.94
The following table sets forth certain information
regarding the leases of the tenants that occupy more than 10%
of the rentable square footage at December 31, 1995:
Progressive Major Pride
Games Supply Outdoor Lennox
Minimum rent
per year $59,000 $100,000 $60,000 $76,000
Expiration date 1997 1997 1998 1998
Renewal option 2/2 yrs. 1/2 yrs. 2/2 yrs. 2/5 yrs.
ea. ea. ea. ea.
Lease expirations by year of expiration for all tenants as of
December 31, 1995 are as follows (dollars in thousands):
Description of Property. (continued)
1997 1998 1999 2000
Number of leases expiring 3 3 1 1
Total area (in sq.ft.) 43,000 32,500 9,500 9,000
Annual rental $199 $159 $52 $46
Percent of annual rental 43.6% 34.8% 11.4% 10.2%
Based upon its experience to date, LNH believes that
leases expiring in 1997 will be renewed (or replaced with new
tenants in a few cases) at minimum rentals at least equal to
existing rents for leases. However, LNH can give no
assurance in this respect.
The realty taxes for the year ended December 31, 1995
amounted to $78,000. The federal income tax basis of the
property at December 31, 1995 was $5,203,000. LNH believes
that the property is adequately covered by insurance.
Liberty Corners. This 121,432 square foot shopping center in
Liberty, Missouri, was acquired on February 25, 1994 through a
deed in lieu of foreclosure on a mortgage loan investment with
a book value of $6,689,000 and a carrying value of $5,294,000.
The Company owns 77.78% of the investment and records the
total assets, liabilities, revenues and expenses of the center
with minority interests provided for the 22.22% not owned.
The asset was recorded at its estimated fair value of
$6,806,000, which includes the 22.22% minority interest share
of $1,512,000. The property was built in 1987 and is one of
five major centers in Liberty, ranging in size from 17,300
square feet to our 121,382 square foot center. Rents in the
market range from an asking price of $6.00 to our asking rents
in the $10.00 per square foot range. The shopping center was
85% occupied at year end. It has a net book value of
$6,185,000 at December 31, 1995, which includes the minority
interest share of $1,476,000.
The following table sets forth certain operating data with
respect to the property during the period owned by LNH:
Year Ended
December 31,
1994 1995
Occupancy rate (at end of period) 83% 85%
Total rent per leased square foot $6.74 $6.81
Despite research of the Company's files and those held
by the property's management company, the information
disclosed in the above table was not available for 1991, 1992
and 1993.
Description of Property. (continued)
The following table sets forth certain information
regarding the lease of the only tenant that occupies more
than 10% of the rentable square footage at December 31, 1995:
Price
Chopper
Minimum rent
per year $290,000
Expiration date 2007
Renewal option 4/5 yrs. ea.
Lease expirations by year of expiration for all tenants as of
December 31, 1995 are as follows (dollars in thousands):
1997 1998 1999 2000 2002 2007
Number of
leases expiring 5 3 2 4 1 1
Total area
(in sq.ft.) 10,650 6,700 9,850 18,070 1,400 56,000
Annual rental $99 $68 $73 $157 $12 $290
Percent of
annual rental 14.2% 9.7% 10.4% 22.5% 1.7% 41.5%
Based upon its experience to date, LNH believes that
leases expiring in 1997 will be renewed (or replaced with new
tenants in a few cases) at minimum rentals at least equal to
existing rents for leases. However, LNH can give no
assurance in this respect.
The realty taxes for the year ended December 31, 1995
amounted to $147,000. The federal income tax basis of the
property at December 31, 1995 was $6,567,000. LNH believes
that the property is adequately covered by insurance.
Cowesett Corners. This 135,713 square foot shopping center
in Warwick, Rhode Island, was acquired on December 1, 1995
through foreclosure and the Company recorded its net loan
investment of $5,971,000 as an investment in a joint venture.
The company owns 50% of the investment and accounts for this
investment on the equity method of accounting. The
investment at December 31, 1995 amounted to $6,011,000.
Cowesett is situated in the Warwick Route 2 commercial
corridor which is the primary retail area for Providence and
Description of Property. (continued)
the State of Rhode Island. Within this submarket Cowesett
is the premier supermarket anchored strip type shopping
center. The Warwick retail market, due to its diversified
economic base, has generally been more resilient than the
overall Rhode Island economy. The shopping center is 97%
leased at December 31, 1995.
The following table sets forth certain operating data of the
previous owner with respect to the property over the last five
years:
Year Ended
December 31,
1991 1992 1993 1994 1995
Occupancy rate
(at end of period) 84% 86% 86% 86% 97%
Total rent per
leased square foot $8.84 $9.37 $9.57 $9.75 $9.89
The following table sets forth certain information
regarding the leases of the tenants that occupy more than 10%
of the rentable square footage at December 31, 1995:
Edwards
Super Sportswear Paint &
Stop N'Shop Store, Inc. Decorating
Minimum rent per year $500,000 $213,000 $135,000
Expiration date 2007 1998 2005
Renewal option 6/5 yrs. ea. 2/5 yrs. ea. 3/5 yrs. ea.
Lease expirations by year of expiration for all tenants as of
December 31, 1995 are as follows (dollars in thousands):
1996 1997 1998 2000
Number of leases expiring 3 1 8 3
Total area (in sq.ft.) 4,646 900 37,343 8,757
Annual rental $64 $14 $411 $121
Percent of annual rental 4.6% 1.0% 29.4% 8.6%
2001 2005 2007 2010
Number of leases expiring 2 1 1 1
Total area (in sq.ft.) 10,727 17,059 55,532 5,599
Annual rental $105 $135 $500 $50
Percent of annual rental 7.5% 9.6% 35.7% 3.6%
Description of Property. (continued)
Based upon its experience to date, LNH believes that
leases expiring in 1996 and 1997 will be renewed (or replaced
with new tenants in a few cases) at minimum rentals at least
equal to existing rents for leases. However, LNH can give no
assurance in this respect.
The realty taxes for the year ended December 31, 1995
amounted to $285,000. The federal income tax basis of the
property at December 31, 1995 was $5,964,000. LNH believes
that the property is adequately covered by insurance.
Unimproved Land. In December 1990, the Company received a
deed in lieu of foreclosure on a mortgage loan investment
collateralized by approximately 1,360 acres of unimproved land
in Houston, Texas. At December 31, 1995, the company had three
remaining parcels (approximately 141 acres) with a net book
basis of $776,000.
Marketable Equity Securities
Liberte' Investors. The Company owns 300,000 shares of this
company, which was formerly known as Lomas & Nettleton
Mortgage Investors and was managed by a subsidiary of LFC.
The investment has a carrying value and a market value of
$675,000 ($2.25 per share) at December 31, 1995. No dividends
have been received from this investment since 1990.
Item 3. Legal Proceedings.
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
Payable to the Company and a 50% participant with unpaid
principal balances of $11,975,000 and $25,000. The Company's
foreclosure was stayed by the filing of bankruptcy by Cowesett
Partners, L. P. on February 13, 1995 in Rhode Island. After
various motions with respect to whether LNH and its co-investor
should be able to foreclose on the Cowesett Corners Shopping
Center and sell it at public auction, an agreement was reached
and approved by the Court pursuant to which the Cowesett Corners
Shopping Center was to be sold to an unrelated third party and
LNH and its co-investor would release their lien on the Cowesett
Corners Shopping Center in return for a cash payment of
$13,250,000, of which $6,625,000 was to be paid to LNH. The
Description of Property. (continued)
potential purchaser of the Cowesett Corners Shopping Center
decided not to proceed with the transaction. Because the
proposed sale did not take place by the November 30, 1995
deadline, LNH and its co-investor foreclosed their lien on the
property and took title to the property on December 1, 1995.
Item 4. Submission of Matters to Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters.
The Company's common stock, $.50 par value, is traded on the
New York Stock Exchange under the symbol LHC. The following
table indicates the high and low share prices for each quarter
during the past two years and per share distributions declared
for the quarter.
1995 1994
Stock Price Cash Stock Price Cash
Dividends Dividends
Quarter Ended High Low Declared High Low Declared
March 31 $ 6 5/8 $ 5 3/4 $ .75 $8 7/8 $7 7/8 $ .14
June 30 6 3/4 6 .09 8 7/8 7 3/4 .14
September 30 7 3/8 6 1/4 .09 9 1/4 6 1/2 1.59
December 31 7 3/4 7 1/8 .15 7 6 1/8 .09
$ 1.08 $ 1.96
As of March 18, 1996, there were 502 holders of record of the
Company's common stock.
Item 6. Management's Discussion and Analysis
Financial Condition
Assets of the Company decreased by $959,000 during 1995, to a
balance of $25,675,000 at December 31, 1995. Total liabilities
increased from $2,003,000 at December 31, 1994 to $2,226,000 at
December 31, 1995.
The Company's mortgage loans balance (inclusive of mortgage
loans subject to foreclosure proceedings) decreased $3,974,000
during the fiscal year. This decrease was primarily due to the
foreclosure of the Cowesett Corners Shopping Center. The Company
acquired Cowesett through foreclosure on December 1, 1995, and
recorded its 50% of the investment at its book value of
$5,971,000 (net of $29,000 in unamortized financing fees). Due
to the Company only owning 50% of the property, the investment is
a joint venture. The Company recorded $40,000 as its 50% share of
the Shopping Center's operating income for the month of December
1995. Also, a loan of $2,200,000 was made by the Company for the
sale of the 90 acre Baypointe property located in Houston, Texas.
In addition, the Company collected principal payments of $269,000
Management's Discussion and Analysis (continued)
Financial Condition (continued)
on loans and recognized loan discounts and deferred financing
fees of $62,000 during the fiscal year.
The Company closed three sales of its Houston land during the
fiscal year ended December 31, 1995. During the first quarter of
1995 the Company sold a 2.78 acre and 12.26 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. 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. A gain of $535,000 was
recognized during the second quarter of 1995.
The Company spent $94,000 for improvements to the Linpro
Commerce Center and recorded $168,000 in depreciation during
1995. Improvements to Liberty Corners totalled $37,000 and
$201,000 in depreciation was recorded during 1995 (amounts
include 22.22% minority interest.)
The Company also wrote down its investment in the Liberty
Corners Shopping Center by $439,000. The resulting carrying
value, net of minority interest, of $4,650,000 reflects
management's best estimate of the property's net realizable
value.
During 1995, the Company recorded a recovery of a provision for
loss of $250,000 related to the mortgage loan on the Cowesett
Corners Shopping Center. At December 31, 1995, the allowance for
losses relates to the Citrus Center mortgage loan.
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.
Shareholders' equity decreased $1,182,000 during 1995,
reflecting net income of $1,044,000, dividends declared and paid
of $2,376,000 and an unrealized gain of $150,000 recorded on the
Company's available-for-sale securities. The Company's investment
in 300,000 shares of Liberte' Investors common stock is
Management's Discussion and Analysis. (continued)
Financial Condition (continued)
considered available for sale. The shares have a book value and
a market value of $2.25 per share at December 31, 1995.
Results of Operations
Income before gain on investments was $509,000 for the year
ended December 31, 1995 compared to $124,000 in 1994. The
Company recorded a gain on investments of $535,000 related to the
sale of the 90 acre Baypointe land in Houston, Texas for the year
ended December 31, 1995. The Company recorded a gain on
investments of $135,000 related to the payoff of the Rivercrest
apartment mortgage loan during the year ended December 31, 1994.
Net income was $1,044,000 ($.47 per share) for the year ended
December 31, 1995 compared to $259,000 ($.12 per share) in 1994.
Interest income on mortgage loans increased $315,000 during
1995 compared to 1994, reflecting the interest earned on the
Baypointe land loan ($137,000), increased interest received on
the Cowesett Corners Shopping Center loan ($163,000), and
increased interest received on the Citrus Center mortgage loan
($89,000). These three loans had a positive impact on mortgage
loan interest income of $389,000 during the current year, but
were offset by a $145,000 decrease in interest received on the
Rivercrest (paid off in 1994) and Liberty Corners (foreclosed in
1994) mortgage loans and a $71,000 increase in interest income
received on the loans related to the Houston parcels of land.
The Cowesett Corners mortgages, with a total outstanding
principal balance of $6,000,000, went into default on May 1,
1993. For a time, 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 recorded 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 loan to the estimated fair value of the
investment. During 1995, the operating cash flow of Cowesett
Corners was required to be placed in a court approved escrow
account. As of December 31, 1995, LNH used the escrowed
$1,431,000 cash from operations of the Cowesett Corners Shopping
Center to pay past due property taxes and sewer assessments and
Management's Discussion and Analysis (continued)
$183,000 for operating expenses. In January 1996, the Company
received an additional $110,000 cash from operations of the
Cowesett Corners Shopping Center in December. The cash remaining
in the escrow account after the above transactions was $423,000.
The Company recorded $211,000 (its 50% interest) as interest
income in December 1995. Total interest income due for 1995
based on the terms of the note was $568,000 and the Company
recorded total interest income of $222,000 for 1995. In
September 1995, the Company learned of a proposed sale of the
Cowesett Corners Shopping Center to a third party for $13,250,000
(includes participants 50% interest). Because the sale did not
close by November 30, 1995, LNH foreclosed 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
$1,868,000, went into default on December 1, 1993. The borrowers
had failed to make five scheduled payments. 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 called 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
brought current, with the three remaining payments becoming due
on November 30, 1998. As of December 31, 1995, the borrowers have
made all payments agreed to in the Modification Agreement.
During 1995, the Company recognized interest income of $174,000
as compared to $85,000 in 1994.
Due to the payoff of the Rivercrest mortgage loan and the
foreclosure of the Liberty Corners mortgage loan in 1994, no
interest was recorded on these loans in 1995 compared to $145,000
in 1994.
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 year ended December 31, 1995 compared to 1994.
Only ten months of revenue and expense from Liberty Corners was
included during 1994 while twelve months was included in 1995.
The decrease in real estate operating expense for the year ended
December 31, 1995, compared to 1994 was due to lower costs of
property taxes, insurance expense and repair and maintenance.
Management's Discussion and Analysis. (continued)
The decrease in other income is primarily due to the total
assignment price of the management contract being paid off in the
second quarter of 1995 and the Company receiving a $91,000
payment in 1994 for the settlement of the Liberte' stock class
action suit. The Company recorded management fee income of
$41,000 in 1995 compared to $125,000 in 1994.
Management fees are calculated as a percentage of total assets
each month (based on a 1.25% per annum fee of the daily weighted
average balance of total assets), and total fees decreased during
1995 primarily as a result of a decrease in the management fee
base of average invested assets from $24,749,000 at December 31,
1994 to $23,301,000 at December 31, 1995.
The increase in professional fees is primarily the legal costs
incurred in foreclosure proceedings against the borrowers of the
Cowesett mortgage loan, and costs from the proposed merger
between EastGroup Properties and LNH REIT, Inc.
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 for the purchase of the Cowesett
Corners Shopping Center, a recovery of possible losses of
$250,000 was made during the third quarter of 1995. In addition,
management estimated the fair market value of the liberty Corners
Shopping Center to be $4,650,000 and a provision for loss of
$439,000 was recorded to reduce the property's carrying value to
the estimated fair market value.
Liquidity and Capital Resources
The Company's primary sources of funds continue to be
monthly principal and interest payments on its mortgage loans 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 December 31, 1995, the Company had $1,016,000 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
Management's Discussion and Analysis. (continued)
Liquidity and Capital Resources (continued)
of 1995, the Company completed another 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 loans 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.
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
recorded interest income on the cash basis since the owner of
Cowesett Corners filed for bankruptcy in February 1995. The
Company foreclosed the property on December 1, 1995 and recorded
its 50% participation of $5,971,000 (net of $29,000 in
unamortized financing fees) as a joint venture.
Management's Discussion and Analysis. (continued)
Liquidity and Capital Resources (continued)
The Citrus Center mortgage, with an outstanding balance of
$1,868,000, 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 called 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 December 31,
1995, the borrowers have made all payments agreed to in the
Modification Agreement. During 1995, the Company has recognized
interest income of $174,000 on this loan. The Company's mortgage
loan portfolio performance during 1995 has been 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 1995, the Company paid distributions to
its stockholders of $2,376,000 ($.1.08 per share), which included
a special dividend of $1,452,000 ($.66 per share).
On September 6, 1995 (amended on December 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
$8.10 for each LNH share. The number of EastGroup shares that
LNH shareholders receive would be determined by dividing the
value $8.10 by the average trading price of EastGroup shares
during the 10 trading days prior to the effective date of the
merger. EastGroup presently owns 23.4% of LNH. The merger is
subject to several conditions, including 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.
Item 7. Financial Statemetns.
INDEX OF FINANCIAL STATEMENTS
Report of Independent Auditors......................... 21
Consolidated Financial Statements:
Balance Sheets as of December 31, 1995 and 1994... 22
Statements of Operations for the years ended
December 31, 1995 and 1994...................... 23
Statements of Cash Flows for the years ended
December 31, 1995 and 1994...................... 24
Statement of Stockholders' Equity for the years
ended December 31, 1995 and 1994................ 25
Notes to Financial Statements..................... 26
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
LNH REIT, Inc.
We have audited the accompanying consolidated balance sheets
of LNH REIT, Inc. and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of LNH REIT, Inc. and subsidiaries at December
31, 1995 and 1994, and the consolidated results of their
operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
\s\ Ernst & Young LLP
ERNST & YOUNG LLP
Jackson, Mississippi
March 15, 1996
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31
--------------------------
1995 1994
------------ ----------
Assets
Mortgage loans $ 7,135 $ 5,149
Mortgage loans subject to foreclosure
proceedings - 5,960
Real estate properties:
Earning
Warehouse 4,166 4,073
Shopping center 6,465 6,867
Accumulated depreciation (796) (427)
Joint venture in Cowesett 6,011 -
Non-earning land 776 3,067
----------- ----------
23,757 24,689
Less allowance for losses (275) (525)
----------- ----------
23,482 24,164
Marketable equity securities 675 525
Cash and cash equivalents 1,016 1,660
Accrued interest and other receivables 502 285
----------- ----------
$ 25,675 $ 26,634
=========== ==========
Liabilities
Minority interest $ 1,476 $ 1,510
Accrued expenses and other liabilities 750 493
----------- ----------
2,226 2,003
----------- ----------
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 24,839 27,215
Deficit (2,996) (4,040)
Unrealized gain on marketable
equity securities 506 356
----------- ---------
23,449 24,631
----------- ----------
$ 25,675 $ 26,634
=========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended
December 31
-------------------
1995 1994
-------- -------
Revenues
Revenue from real estate properties $1,451 $1,249
Interest income:
Mortgage loans 889 574
Cash equivalents and other 52 101
Equity in operation of
Cowesett joint venture 40 -
Other income 47 226
-------- ------
2,479 2,150
-------- ------
Expenses
Management fees 294 338
Real estate expenses
Operating 521 605
Depreciation 369 277
Professional fees 283 49
General and administrative 216 178
Provision for losses 189 525
Minority interest expense 98 54
-------- -------
1,970 2,026
-------- -------
Income before gain on investments 509 124
-------- -------
Gain on investments
Real estate and mortgage loans 535 135
-------- -------
Net Income $ 1,044 $ 259
======== =======
Net Income per share $ .47 $ .12
======== =======
Average number of shares outstanding 2,200 2,200
======== =======
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Year Ended
December 31
-------------------------
1995 1994
---------- ----------
Operating Activities
Net income $ 1,044 $ 259
Adjustments to reconcile
net income to net cash provided
by operating activities:
Amortization of deferred financing
fees and discount on mortgage loans (62) (60)
Depreciation 378 277
Joint Venture investment (50) -
Provision for losses 189 525
Gain on investments (535) (135)
Other (45) (35)
Net change in receivables, payables
and other assets 49 (14)
----------- ----------
Cash provided by operating activities 968 817
----------- ----------
Investing Activities
Collections on mortgage loans 269 3,999
Improvements to real estate (130) (228)
Proceeds from sale of real estate 625 44
----------- ----------
Cash provided by investing activities 764 3,815
----------- ----------
Financing Activities
Dividends paid (2,376) (4,312)
----------- ----------
Cash used in financing activities (2,376) (4,312)
----------- ----------
Net increase (decrease) in cash and
cash equivalents (644) 320
Cash and cash equivalents at
beginning of year 1,660 1,340
----------- ----------
Cash and cash equivalents at
end of year $ 1,016 $ 1,660
=========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Year Ended
December 31
--------------------------
1995 1994
----------- ----------
Common stock, $.50 par value
Balance at beginning and
end of period $ 1,100 $ 1,100
----------- ----------
Paid-in capital
Balance at beginning of period 27,215 31,527
Cash dividends declared and paid (2,376) (4,312)
----------- ----------
Balance at end of period 24,839 27,215
----------- ----------
Deficit
Balance at beginning of period (4,040) (4,299)
Net income 1,044 259
----------- ----------
Balance at end of period (2,996) (4,040)
----------- ----------
Unrealized gain on marketable
equity securities
Balance at beginning of period 356 -
Change in unrealized gain on
securities 150 356
----------- ----------
Balance at end of period 506 356
----------- ----------
Total stockholders' equity $ 23,449 $ 24,631
=========== ==========
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company operates as a real estate investment trust
("REIT") under Sections 856-860 of the Internal Revenue Code.
The Company's revenues consist principally of rental income from
operating real estate properties and interest income from
mortgage loans. At December 31, 1995, the Company's investments
consisted, principally, of four mortgage loans collateralized by
real estate, three operating real estate properties (two shopping
centers and one industrial distribution center), and undeveloped
land.
Proposed Merger
On September 6, 1995 (amended on December 6, 1995), LNH
REIT, Inc. and EastGroup Properties announced that the Special
Committees of the Boards of each company had agreed in principle
to a merger between LNH and EastGroup. See Note L to the
Financial Statements for further details of this event.
Principles of Consolidation
The consolidated financial statements include the accounts of
LNH REIT, Inc., its wholly owned subsidiaries and a 77.78% owned
joint venture (referred to collectively as "LNH" or "the
Company"). The property included in the joint venture is the
Liberty Corners Shopping Center located in Kansas City, Missouri.
The Liberty Corners joint venture's assets, liabilities, revenues
and expenses are recorded by the Company with minority interest
provided for the 22.22% not owned. All significant intercompany
transactions and accounts have been eliminated in consolidation.
For years ending after December 31, 1992, the Company adopted
the financial statement reporting provisions of Regulation S-B of
the Securities and Exchange Commission.
Recognition of Interest Income
Interest is taken into income when earned. The Company
discontinues the accrual of income when circumstances exist which
cause the collection of such income to be doubtful. The
determination to discontinue accruing income is made after review
by management of all relevant facts including delinquency in
payment of principal, interest and the credit of the borrower.
NOTE A - ACCOUNTING POLICIES (continued)
Revenue from Real Estate Properties
Minimum rents are recognized ratably over the lease term.
Rents that represent tenant reimbursements of certain expenses
are recognized as the applicable services are provided or the
expenses incurred and totalled $320,000 in 1995 and $300,000 in
1994.
Earnings Per Share
Earnings per share is based on the average number of shares of
common stock outstanding during each year.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Real Estate Properties
Foreclosed properties are recorded at the lower of cost or fair
value at the date of foreclosure. A provision for losses, if
any, is determined at the time of foreclosure in an amount equal
to the excess of the recorded investment over estimated fair
value. The carrying value of real estate properties are
evaluated in relation to current estimates of net realizable
value. If necessary, a provision for losses is recorded to write-
down carrying value to the estimated net realizable value.
Depreciation
Depreciation for financial reporting purposes is provided by
the straight-line method over the estimated useful lives of the
property. Buildings are depreciated over a 30 year estimated
useful life and tenant improvements over a 5 year estimated
useful life. Depreciation for tax reporting purposes is provided
by the straight-line method over the applicable Modified
Accelerated Cost Recovery System (MACRS) life.
NOTE A - ACCOUNTING POLICIES (continued)
Allowance for Possible Losses
Prior to January 1, 1995, the Company followed the method of
determining the allowance for possible losses prescribed by the
AICPA Statement of Position on Accounting Practices for Real
Estate Investment Trusts. Under this method, the Company
established an allowance for possible losses on mortgage loans
based upon management's evaluation of the recoverability of each
loan in its portfolio through a comparison of the carrying value
of an investment with its estimated net realizable value. In
determining estimated net realizable value, consideration is
given to such factors as the financial condition of the borrower
and the determination of collectibility; the estimated selling
price a property will bring if exposed for sale in the open
market allowing a reasonable time to find a purchaser; prevailing
economic conditions; expectations of future development; the
estimated cost to complete and improve such property to the
condition used in determining the estimated selling price; the
cost to dispose of the property; and the cost to hold the
property (including an interest factor based on the Company's
cost of funds) to the estimated time of sale.
Beginning January 1, 1995, the Company adopted Financial
Accounting Standards Board No. 114, "Accounting by Creditors for
Impairment of a Loan." Under the new standard, the 1995
allowance for credit losses related to loans that are identified
for evaluation in accordance with Statement 114 is based on
discounted cash flows using the loan's initial effective interest
rate or the fair value of the collateral for certain collateral
dependent loans. The effect of adopting FASB 114 on results of
operations for 1995 and the allowance for possible losses was not
material.
This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future
cash flows expected to be received on impaired loans that may be
susceptible to significant change.
NOTE A - ACCOUNTING POLICIES (continued)
Income Taxes
The Company qualified as a real estate investment trust under
Sections 856-860 of the Internal Revenue Code and intends to
continue to qualify as such. The Company has distributed all of
its taxable income to its shareholders, and, accordingly, no
provision for federal or state income taxes has been made and no
income taxes have been paid. Distributions paid per share in
1995 and 1994 for income tax purposes were as follows:
1995 1994
Ordinary Income $ .05 $ .63
Return of Capital 1.03 1.33
Total $ 1.08 $ 1.96
Taxable income differs from income reported for financial
reporting purposes primarily because of (1) the timing of the
deduction for the provision for possible losses, writedowns of
real estate investments and losses on securities, (2) different
depreciation methods and lives, and (3) different rates of
interest income accrual.
Marketable Equity Securities
On January 1, 1994, the Company adopted 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, as of December 31,
1995 and 1994, investment securities are carried at fair value
with the unrealized gain of $506,000 and $356,000, respectively,
presented as a separate component of stockholders' equity.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly
liquid investments with original maturities of three months or
less.
Reclassifications
Certain amounts in the prior year financial statements have
been reclassified to conform to the current year's presentation.
NOTE B - MORTGAGE LOANS
The unpaid balances of mortgage loans, summarized by type of
loan, are as follows:
December 31
1995 1994
Type of Loan (In thousands)
Shopping Centers................. $ 1,868 $ 7,822
Land ............................ 5,267 3,287
$ 7,135 $11,109
The unpaid balances of mortgage loans, which bear interest at an
average rate of 8.91%, are scheduled to mature in succeeding
years as follows:
Year Amount
(In thousands)
1996 $ 144
1997 154
1998 2,034
1999 4,803
--------
$ 7,135
========
Because of the circumstances discussed in Note C regarding the
Cowesett Corners Shopping Center, the interest income on this
loan was accounted for on the cash basis. The amount of interest
foregone on this loan due to this accounting method was $346,000
and $562,000 in the years ending December 31, 1995 and 1994,
respectively.
The amount of loan discounts and related accumulated
amortization reflected as a reduction to the carrying value of
mortgage loans were as follows:
December 31,
1995 1994
Loan discounts $ 292,000 $ 292,000
Accumulated amortization (108,000) ( 59,000)
--------- ----------
$ 184,000 $ 233,000
The federal income tax basis of mortgage loans at December 31,
1995 is approximately $7,319,000. The federal income tax return
for the year ended December 31, 1995 has not been filed, and,
accordingly, the income tax basis of mortgage loans as of
December 31, 1995 is based on preliminary data.
NOTE C - REAL ESTATE INVESTMENTS
At December 31, 1995, the Company's investment in land
includes three parcels of undeveloped land, approximately 141
acres in total, located in Houston, Texas. The land has a
carrying value of $776,000 at December 31, 1995.
Also included in real estate investments at December
31,1995 are the Linpro Commerce Center in Fort Lauderdale,
Florida, the Liberty Corners shopping center in Kansas City,
Missouri, and the Cowesett Corners shopping center in Warwick,
Rhode Island. The Linpro Commerce Center is a 99,000 square foot
industrial building, and it is used by tenants as an office,
showroom and warehouse. Upon foreclosure in 1992, the property
was recorded at its estimated fair value of $3,800,000, resulting
in a loss of $1,350,000. At December 31, 1995, the property was
95% occupied.
The Liberty Corners Shopping Center is a 121,432 square
foot commercial facility that was 85% leased at December 31,1995.
The shopping center was collateral to a 77.78% mortgage loan
participation the Company owned with an outstanding principal
balance of $6,689,000 and a carrying value, net of allowance for
losses and deferred income, of $5,294,000. The Company received
a deed in lieu of foreclosure to Liberty Corners on February 25,
1994, and title to the property is held as tenants in common with
the 22.22% participant in the mortgage loan. The Company
recorded the total assets, liabilities, revenues and expenses of
the center with minority interest provided for the 22.22% not
owned. The Company recorded the original investment at
$6,806,000, which included the participant's 22.22% minority
interest of $1,512,000. In December 1995, the carrying value of
the Liberty Corners Shopping Center was adjusted to net
realizable value. The write-down of $439,000, net of minority
interest, is reflected in the Company's December 31, 1995
financial statements. The resulting carrying value of Liberty
Corners is management's best estimate of the property's net
realizable value.
The Cowesett Corners Shopping Center is a 135,713 square
foot shopping center in Warwick, Rhode Island. The Company
acquired title on December 1, 1995 through foreclosure and
recorded its net loan investment of $5,971,000 as an investment
in a joint venture. The company owns 50% of the investment and
accounts for this investment on the equity method of accounting.
The investment at December 31, 1995 amounted to $6,011,000. The
shopping center was 97% leased at December 31, 1995.
NOTE C - REAL ESTATE INVESTMENTS - (continued)
The following is a schedule by year of future approximate
minimum rental receipts under non-cancelable leases for the
Linpro Commerce Center, Liberty Corners Shopping Center and
Cowesett Corners Shopping Center as of December 31, 1995:
Year Amount
(In thousands)
1996 $ 2,555
1997 2,393
1998 2,165
1999 1,571
2000 1,391
Subsequently 6,998
----------
$17,073
The federal income tax basis of real estate, net of
depreciation as of December 31, 1995, is approximately
$19,661,000. The federal income tax return for the year ended
December 31, 1995 has not been filed, and, accordingly, the
income tax basis of real estate as of December 31, 1995 is based
on preliminary data.
NOTE D - ALLOWANCE FOR LOSSES
Activity in the allowance account was as follows:
Year Ended December 31
1995 1994
Beginning balance................. .... $ 525 $ 1,356
Provision for losses................... 525
Charge-offs on foreclosures and sales.. (1,356)
Recoveries of provisions for losses.... (250)
Ending balance......................... $ 275 $ 525
At December 31, 1995, the recorded investment in mortgage
loans that was considered to be impaired under FASB 114 was one
mortgage loan (Citrus Center) with a carrying value of
$1,868,000. This loan, for which the Company owns a 20.99%
participation, was modified in 1995. The interest rate was
reduced from 9% to 8%, with the 1% difference to be deferred
until the note matures on November 30, 1998. Certain payments
past due at June 1995 along with the unpaid principal balance is
due on November 30, 1998. At December 31, 1995, the balance of
the allowance for losses related to this mortgage loan. This
allowance ($275,000) had been recorded at December 31, 1994. For
the years ended December 31, 1995 and 1994, the Company
NOTE D - ALLOWANCE FOR LOSSES (continued)
recognized interest income on this impaired loan of $174,000 and
$85,000, respectively, compared to interest income according to
its original terms of $172,000 in each year.
During the year ended December 31, 1995 and 1994, the
Company's investment in a mortgage loan collateralized by
Cowesett Corners Shopping Center was impaired and nonperforming.
At December 31, 1994, the Company had recorded an allowance for
losses related to this mortgage loan of $250,000. Because of the
expected pay-off of this mortgage loan in 1995, the Company
reduced its allowance for losses by this amount. The mortgage
loan was foreclosed effective December 1, 1995. See Note C. For
the years ended December 31, 1995 and 1994, the Company
recognized interest income on this loan of $222,000 and $58,000,
respectively, compared to interest income according to its
original terms of $568,000 and $620,000, respectively.
NOTE E - RELATED PARTY TRANSACTIONS
Until April 1992, the Company was managed pursuant to a
Management Agreement with L & N Housing Managers, Inc. ("Prior
Manager"), a wholly-owned subsidiary of Lomas Financial
Corporation ("LFC"). The Prior Manager served as the Company's
investment advisor, administering the day-to-day affairs of the
Company and representing the Company in its dealing with third
parties, subject to the supervision of the Company's Board of
Directors. LFC also owned 352,000 shares of the Company's common
stock.
In 1992, EastGroup Properties, a Maryland real estate
investment trust ("EastGroup"), and Walker Investments L.P.
("Walker"), purchased 352,000 shares of the Company's Common
Stock from LFC. The agreement pursuant to which the shares were
purchased (the "Agreement") further provided that the Prior
Manager would assign its rights and duties as manager under the
Management Agreement to LNH REIT Managers, a Mississippi general
partnership (the "Manager") which is an affiliate of EastGroup
and Walker. The Management Agreement was amended to substitute
the Manager for the Prior Manager under the Management Agreement.
EastGroup and Walker agreed to pay an aggregate of $406,000 to
the Company, in
consideration of the assignment of the Prior Manager's duties and
responsibilities as manager under the Management Agreement to LNH
REIT Managers. The $406,000 has been paid in installments
subject to the maximum amount that the Company may receive in a
year without violating the 95% gross income test set forth in
Section 856(c) of the Internal Revenue Code. The unpaid balance
NOTE E - RELATED PARTY TRANSACTIONS (continued)
of the $406,000 accrued simple interest at the rate of 6.6% and
the obligation of EastGroup and Walker to pay any unpaid balance
of the $406,000 terminated on January 1, 1996. During the year
ended December 31, 1995 and 1994, the Company accrued $41,000 and
$125,000, respectively, as income pursuant to the assignment of
the Management Agreement and recorded $2,000 and $10,000,
respectively, in interest on the unpaid balance. The final
payment on this obligation was received in September 1995.
On March 24, 1995, EastGroup and its wholly owned
subsidiary, EGP Managers, Inc. ("EGP Managers"), entered into an
agreement (the "March 24, 1995 Agreement") with Walker and
certain entities affiliated with Walker and its affiliates
pursuant to which EastGroup agreed to purchase 383,775 shares of
the Company's Common Stock from Walker and EGP Managers agreed to
purchase Walker's interest in the Manager. On that same date,
the Board of Directors of the Company approved an additional
amendment to the Management Agreement pursuant to which EGP
Managers would assume the obligations and duties of Managers
under the Management Agreement effective upon the Closing of the
transactions set forth in the March 24, 1995 Agreement, which
Closing took place on April 3, 1995. The Management Agreement, as
amended, was renewed at its original expiration on December 31,
1995 but it will terminate on the effective date of the Company's
merger with EastGroup Properties.
The Manager had entered into an Administration Agreement
with Congress Street Properties, Inc. (" Congress Street"), a
Delaware corporation and then an affiliate of EastGroup, pursuant
to which Congress Street provided day-to-day administrative
services to the Company, including office space, equipment and
personnel incident thereto. The Administration Agreement was
terminated by EGP Managers effective March 31, 1995.
Pursuant to the Management Agreement, the Company has no
employees. All personnel required for the administration of the
Company's operations, including LNH's officers, were compensated
by EastGroup. The Company bears the costs of independent agents,
such as attorneys, auditors and appraisers, retained on behalf of
the Company; of expenses connected with the acquisition,
operation and disposition of its real property interests; and of
shareholder communications, directors' fees and franchise taxes.
NOTE F - MARKETABLE EQUITY SECURITIES
The Company's investment in marketable equity securities
consists of the following:
December 31, 1995 December 31, 1994
------------------------- ------------------------
Quoted Quoted
Ownership Market Ownership Market
Interest Cost Value Interest Cost Value
--------- ------- ------ -------- --------- ------
Liberte'
Investors 2.41% $ 169 $ 675 2.41% $ 169 $ 525
("Liberte'") ======= ====== ======= =====
On January 1, 1994, the Company adopted 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, as of
December 31, 1995 and 1994, investment securities are carried at
fair value with the unrealized gain of $506,000 and $356,000,
respectively, presented as a separate component of stockholders'
equity.
The income tax basis of the investment in marketable equity
securities at December 31, 1995 was $6,028,000.
NOTE G - SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides information regarding
supplemental cash and noncash investing and financing activities:
Year Ended December 31
1995 1994
(In thousands)
Loan foreclosures, net of allowance for
losses, added to real
estate properties................... $ 5,971 $ 6,806 (1)
Loans made to facilitate sales of real
estate owned........................ 2,200 200
Unrealized gain on marketable equity
securities.......................... 150 356
(1) This includes the 22.22% minority participant's ownership of
$1,512,000.
NOTE H - REVERSE REPURCHASE AGREEMENT
The Company does not in the ordinary course of business
take possession of the securities which collateralize its reverse
repurchase agreements (assets purchased under agreements to
resell). The Company has controls which consist of the right to
demand additional collateral or return of these invested funds at
anytime the collateral value is less than the invested funds plus
any accrued earnings thereon. The Company conducts these
transactions on a short term basis with Deposit Guaranty National
Bank with which it has a normal business relationship. At
December 31, 1995, the Company had $645,000 invested in reverse
repurchase agreements which can be withdrawn at any time without
penalty.
NOTE I - INCENTIVE COMPENSATION PLAN
In December 1993, the Board of Directors approved the LNH
REIT, Inc. Incentive Compensation Plan, ("Incentive Plan") which
was effective as of October 1, 1993. Under the Incentive Plan,
80,000 incentive compensation units were granted to officers of
the Company. An incentive compensation unit is a right to
receive an amount equal to the dividend paid on a specified
number of shares and is payable to the grantee in cash as the
corresponding payments are made to shareholders. At December 31,
1994, 80,000 incentive compensation units were outstanding under
the incentive plan and there were no additional units available
for grant. Compensation expense related to the Incentive Plan
for the years ended December 31, 1995 and 1994 was $34,000 and
$37,000, respectively.
NOTE J - NEWLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, which requires impairment losses
to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying value amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed
of. The Company will adopt Statement 121 in the first quarter of
1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table represents the carrying amounts and
estimated fair values of the Company's financial instruments at
December 31, 1995. FASB Statement No. 107, Disclosures about
Fair Value of Financial Instruments, defines the fair value of a
financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties.
1995
Carrying Fair
Amount Value
(In thousands)
Financial Assets
Cash and cash equivalents $1,016 1,016
Investment in marketable
securities 675 675
Mortgage loans 6,860 6,899
The carrying amounts shown in the table are included in the
balance sheet under the indicated captions, net of related
allowance for losses.
The following methods and assumptions were used to estimate
fair value of each class of financial instruments.
Cash and cash equivalents: The carrying amounts approximate
fair value because of the short maturity of those instruments.
Mortgage loans: The fair value of performing mortgage loans is
estimated using discounted cash flows at current interest rates
for loans with similar terms and maturities. The fair value for
nonperforming loans is based on the underlying estimated
collateral value.
Investment in marketable securities: The fair value of the
equity investment is based on quoted market prices at the
reporting date for the investment. Because this investment is
classified as a security available-for-sale, it is carried at
fair value with the unrealized gain of $506,000 presented as a
separate component of stockholders' equity.
NOTE L - PROPOSED MERGER
On September 6, 1995 (amended on December 6, 1995), LNH
REIT, Inc. and EastGroup Properties 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
$8.10 for each LNH share. The number of EastGroup shares that
LNH shareholders receive would be determined by dividing the
value $8.10 by the average trading price of EastGroup shares
during the 10 trading days prior to the effective date of the
merger. EastGroup presently owns 23.4% of LNH. The merger is
subject to several conditions, including 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. As a result of the
transaction, EastGroup will succeed to the operations and net
assets of the Company and the Company will cease to be a
reporting company under the Securities Exchange Act of 1934, as
amended.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16 (a) of the Exchange Act.
The Registrant's definitive proxy statement which will be filed
with the Securities and Exchange Commission (the "Commission")
pursuant to Regulation 14A within 120 days of the end of
Registrant's fiscal year is incorporated herein by reference.
Item 10. Executive Compensation.
Registrant's definitive proxy statement which will be filed
with the Commission pursuant to Regulation 14A within 120 days of
the end of Registrant's fiscal year is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The Registrant's definitive proxy statement which will be filed
with the Commission pursuant to Regulation 14A within 120 days of
the end of Registrant's fiscal year is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions.
The Registrant's definitive proxy statement which will be filed
with the Commission pursuant to Regulation 14A within 120 days of
the end of Registrant's fiscal year is incorporated herein by
reference.
Item 13. Exhibits and Reports on Form 8-K.
(a)Exhibits required by item 601 of Regulation S-B:
(3)(a)By-Laws of the Company (incorporated by reference to
the Company's Registration Statement on Form S-11 (No. 2-
70446) dated December 31, 1980).
(b)Articles of Incorporation of the Company
(incorporated by reference to Company's Annual Report on
Form 10-K for the period ended December 31, 1981).
(c)Amendment to Articles of Incorporation of the
Company (incorporated by reference to Amendment No. 4 of
the Company's Registration Statement on Form S-11 (No. 2-
70446) dated May 14, 1981).
(10)Material Contracts
(a)Conformed copy of Management Agreement among the
Company, the Prior Manager and LFC* (the "Management
Agreement"), (incorporated by reference to the Company's
Registration Statement of Form S-11 (No.2-70446) dated
December 31, 1980).
(b)First Amendment to Management
Agreement,*(incorporated by reference to the Company's
Annual Report on Form 10-K for the period ended December
31,1988).
(c)Second Amendment to Management Agreement,*
(incorporated by reference to the Company's Annual Report
on Form 10-K for the period ended December 31, 1991).
(d)Third Amendment to Management
Agreement,*(incorporated by reference to the Company's
Annual Report on Form 10-K for the period ended December
31, 1994).
(e)Administration Agreement between LNH REIT
Managers and Congress Street Properties, Inc. dated April
22, 1992 (incorporated by reference to the Company's
Annual Report on Form 10-K for the period ended December
31, 1994).
(f)First Amendment to Administration Agreement dated
January 1, 1995 among Parkway Congress Corporation,
EastGroup Properties and LNH REIT Managers (incorporated
by reference to the Company's Annual Report on Form 10-K
for the period ended December 31, 1994).
(g)Fourth amendment to Management Agreement (filed
herewith).
(21)Subsidiaries:
LNH Florida, Inc.
LNH K.C., Inc.
LNH R.I., Inc.
(25)Powers of Attorney, filed herewith.
(27)Financial Data Schedules, filed herewith.
(b)Reports on Form 8-K
The Company filed Form 8-K dated December 15, 1995 for
disclosure of the Company's foreclosure of the mortgage
loan collateralized by the Cowesett Corners Shopping
Center.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Pursuant to the requirement of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Company and in the capacities and on the dates
indicated.
* /s/ Leland R. Speed
H. C. Bailey, Jr., Trustee Leland R. Speed,
March 18, 1996 Chairman of the Board
(Principal Executive Officer)
March 18, 1996
* /s/ Ken Redford
Ted Enloe, Director Ken Redford, Controller
March 18,1996 March 18, 1996
* /s/ Keith McKey
George R. Farish, Director N. Keith McKey
March 18, 1996 Executive Vice President,
Chief Financial Officer,
and Secretary
March 18, 1996
/s/ Keith McKey
* By N. Keith McKey, Attorney in Fact
Exhibit 10(g)
FOURTH AMENDMENT TO MANAGEMENT AGREEMENT
April 3, 1995
WHEREAS, as of May 13, 1981, a Management Agreement was
entered into by LNH REIT, Inc. (formerly L&N Housing Corp)
("LNH"), L&N Housing Managers, Inc. and LOMAS FINANCIAL
CORPORATION (formerly Lomas & Nettleton Financial
Corporation) ("Lomas") which was amended on October 17,
1988, February 12, 1992 and July 1, 1994 (the "Management
Agreement"); and
WHEREAS, Pursuant to the amendment of February 12,
1992, L&N Housing Managers, Inc. assigned all of its rights
and duties under the Management Agreement to LNH REIT
Managers; and
WHEREAS, the parties to the Management Agreement desire
to amend further the Management Agreement to provide for the
assignment by LNH REIT Managers to EGP Managers, Inc. ("EGP
Managers") of all of LNH REIT Managers duties;
NOW, THEREFORE, LNH REIT, Inc., EGP Managers, Inc. and
LNH REIT Managers agree as follows (all references to
Sections are references to Sections of the Management
Agreement and terms not otherwise defined herein shall have
the respective meanings set forth in the Management
Agreement):
1. LNH REIT Managers hereby assigns to EGP Managers
all of its rights and obligations under the
Management Agreement.
2. EGP Managers hereby agrees to perform LNH REIT
Managers' obligations under the Management
Agreement and to be bound to the terms
thereof in all respects as if EGP Managers
were a party to the Management Agreement in
lieu of LNH REIT Managers. From and after
the date of execution of this Amendment No. 4
to the Management Agreement ("Amendment
No.4"), any reference in the Management
Agreement to Manager shall mean EGP Managers.
3. The assignment of the rights and obligations of
LNH REIT Managers to EGP Managers pursuant to
this Amendment No. 4 shall not be deemed a
termination of the Management Agreement for
any purpose.
4. Any notice, report or other communication required
or permitted to be given to EGP Managers
hereunder shall be in writing unless some
other method of giving such notice, report or
communication is accepted by the party to
whom it is given, and shall be given by being
delivered or mailed (first class mail,
postage prepaid) to:
EGP Managers, Inc.
300 One Jackson Place 188 East Capitol Street
Jackson, MS 39201 Attention: N. Keith McKey
IN WITNESS WHEREOF, The parties hereto have caused this
Amendment No. 4 to be executed by their officers thereunto
duly authorized as of the day and year first above written.
LNH REIT, Inc.
By: \s\ N. Keith McKey
------------------
Name: N. Keith McKey
Title: CFO
By: \s\ David H. Hoster
Name: David H. Hoster
Title: Exec. V.P.
LNH REIT MANAGERS
By: EGP MANAGERS, Inc.
By: \s\ N. Keith McKey
Name: N. Keith McKey
Title: CFO
By: WALKER MANAGERS, L.P.,
General Partner
By: BILLCO Inc., General Partner of
Walker Managers, L.P.
By: \s\ James H. Daughdrill, III
Name: James H. Daughdrill, III
Title: President
EGP MANAGERS, Inc.
By: \s\ N. Keith McKey
Name: N. Keith McKey
Title: CFO
LNH REIT, INC.
POWER OF ATTORNEY
The undersigned Director of LNH REIT, Inc., a Maryland
Trust, hereby constitutes and appoints N. Keith McKey as the true
and lawful Attorney-in-fact and Agent of the undersigned to sign
on behalf of the undersigned: (a) the Annual Report of the
Company on Form 10-KSB (or such other form as may be required)
for the year ended December 31, 1995 to be filed with the
Securities and Exchange Commission ("SEC"); and (b) any and all
amendments to such Report as may be required to be filed with the
SEC.
/s/ H.C. Bailey
H.C. Bailey, Jr.
Director
Date: 3-15-96
LNH REIT, INC.
POWER OF ATTORNEY
The undersigned Director of LNH REIT, Inc., a Maryland
Trust, hereby constitutes and appoints N. Keith McKey as the true
and lawful Attorney-in-fact and Agent of the undersigned to sign
on behalf of the undersigned: (a) the Annual Report of the
Company on Form 10-KSB (or such other form as may be required)
for the year ended December 31, 1995 to be filed with the
Securities and Exchange Commission ("SEC"); and (b) any and all
amendments to such Report as may be required to be filed with the
SEC.
/s/ George R. Farish
George R. Farish
Director
Date: 3-18-96
LNH REIT, INC.
POWER OF ATTORNEY
The undersigned Director of LNH REIT, Inc., a Maryland
Trust, hereby constitutes and appoints N. Keith McKey as the true
and lawful Attorney-in-fact and Agent of the undersigned to sign
on behalf of the undersigned: (a) the Annual Report of the
Company on Form 10-KSB (or such other form as may be required)
for the year ended December 31, 1995 to be filed with the
Securities and Exchange Commission ("SEC"); and (b) any and all
amendments to such Report as may be required to be filed with the
SEC.
/s/ Ted Enloe
Ted Enloe
Director
Date: 3-15-96
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