<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22455
SECURITY CAPITAL GROUP INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 36-3692698
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
125 LINCOLN AVENUE, SANTA FE, NEW 87501
MEXICO (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(505) 982-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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 for the past 90 days. Yes No X
--- ---
The number of shares outstanding of the Registrant's common stock as of August
8, 1997 was:
Class A Common Shares, $.01 par value--1,327,070 shares
Class B Common Shares, $.01 par value--0 shares
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER(S)
---------
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets--June 30, 1997 and December 31,
1996 ...................................................... 1
Consolidated Statements of Operations--Three and six months
ended June 30, 1997 and 1996............................... 2
Consolidated Statement of Shareholders' Equity--Six months
ended June 30, 1997........................................ 3
Consolidated Statements of Cash Flows--Six months ended June
30, 1997 and 1996.......................................... 4
Notes to Consolidated Financial Statements.................. 5-15
Report of Independent Public Accountants.................... 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 17-24
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 25
Item 6. Exhibits.................................................... 25
</TABLE>
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments, at equity:
Security Capital Industrial Trust............... $ 542,802 $ 548,194
Security Capital Pacific Trust.................. 381,832 374,317
Security Capital U.S. Realty.................... 626,376 516,426
---------- ----------
1,551,010 1,438,937
---------- ----------
Real estate, less accumulated depreciation, held
by:
Security Capital Atlantic Incorporated.......... 1,184,691 1,116,069
Homestead Village Incorporated.................. 391,254 249,304
---------- ----------
1,575,945 1,365,373
---------- ----------
Investments in publicly traded real estate
securities, at market value...................... 107,127 10,247
---------- ----------
Total real estate investments..................... 3,234,082 2,814,557
Cash and cash equivalents......................... 16,506 23,662
Other assets...................................... 159,807 91,065
---------- ----------
Total assets.................................. $3,410,395 $2,929,284
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Lines of credit................................. $ 386,250 $ 262,000
Mortgage notes payable.......................... 298,006 257,099
Convertible debt................................ 1,038,268 940,197
Accrued interest on convertible debt............ 50,197 42,450
Accounts payable and accrued expenses........... 85,599 83,427
Deferred income taxes........................... 47,095 30,872
---------- ----------
Total liabilities............................. 1,905,415 1,616,045
---------- ----------
Minority interests.............................. 475,909 394,537
SHAREHOLDERS' EQUITY:
Class A common shares, $.01 par value;
20,000,000 shares authorized, 1,327,150 and
1,209,009 shares issued and outstanding in 1997
and 1996, respectively......................... 13 12
Class B common shares, $.01 par value;
229,861,000 shares authorized; no shares issued
and outstanding................................ -- --
Series A Preferred shares, $.01 par value;
139,000 shares issued and outstanding in 1997
and 1996; stated liquidation preference of
$1,000 per share............................... 139,000 139,000
Additional paid-in capital...................... 1,093,392 985,392
Accumulated deficit............................. (203,334) (205,702)
---------- ----------
Total shareholders' equity.................... 1,029,071 918,702
---------- ----------
Total liabilities and shareholders' equity.... $3,410,395 $2,929,284
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
------------- ------------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
INCOME:
Equity in earnings of:
Security Capital
Industrial Trust..... $ 10,149 $ 5,739 $ 17,659 $ 11,444
Security Capital
Pacific Trust........ 10,702 8,459 25,326 15,815
Security Capital U.S.
Realty............... 18,197 10,577 35,098 12,479
Rental revenues......... 54,654 32,876 105,321 63,685
Services Division
revenues from related
parties................ 26,048 18,245 49,018 33,653
Other income............ 6,212 2,153 7,571 2,512
------------- ------------- ------------ ------------
125,962 78,049 239,993 139,588
------------- ------------- ------------ ------------
EXPENSES:
Rental expenses......... 21,413 12,599 41,370 25,234
Services Division
expenses............... 21,148 15,986 42,472 32,805
Depreciation and
amortization........... 9,899 5,610 18,726 11,131
Interest expense--
convertible debt....... 27,958 22,709 54,623 45,000
Interest expense--other
obligations............ 5,837 4,622 12,010 11,204
General, administrative
and other.............. 23,870 8,742 35,571 14,396
------------- ------------- ------------ ------------
110,125 70,268 204,772 139,770
------------- ------------- ------------ ------------
Earnings (loss) before
income taxes and
minority interests..... 15,837 7,781 35,221 (182)
Provision for income
taxes.................. 7,778 2,802 16,223 2,802
Minority interests in
net earnings of
subsidiaries........... 6,433 3,381 11,417 5,272
------------- ------------- ------------ ------------
Net earnings (loss)..... 1,626 1,598 7,581 (8,256)
Less Series A Preferred
Share dividends........ 2,607 2,606 5,213 2,606
------------- ------------- ------------ ------------
Net earnings (loss)
attributable to common
shares and common
equivalent shares...... $ (981) $ (1,008) $ 2,368 $ (10,862)
============= ============= ============ ============
Weighted average common
shares and common
equivalent shares
outstanding............ 1,297,066 1,019,230 1,355,349 1,007,009
============= ============= ============ ============
Net earnings (loss) per
common share and common
equivalent share....... $ (.76) $ (.99) $ 1.75 $ (10.79)
============= ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
SERIES A
PREFERRED
SHARES AT
COMMON AGGREGATE ADDITIONAL TOTAL
COMMON SHARES SHARES AT LIQUIDATION PAID-IN ACCUMULATED SHAREHOLDERS'
OUTSTANDING(A) PAR VALUE PREFERENCE CAPITAL DEFICIT EQUITY
-------------- --------- ----------- ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARES)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996 (Audited)......... 1,209,009 $12.090 $139,000 $ 985,392 $(205,702) $ 918,702
Issuance of common
shares................ 111,970 1.119 -- 103,148 -- 103,149
Interest Reinvestment
Plans................. 3,741 0.037 -- 4,624 -- 4,624
Exercise of stock
options............... 3,292 0.033 -- 1,008 -- 1,008
Repurchase of common
shares................ (862) (0.009) -- (1,006) -- (1,006)
Income tax benefit from
stock options
exercised............. -- -- -- 226 -- 226
Net earnings........... -- -- -- -- 7,581 7,581
Series A Preferred
Share dividends....... -- -- -- -- (5,213) (5,213)
--------- ------- -------- ---------- --------- ----------
Balances at June 30,
1997 (Unaudited)....... 1,327,150 $13.270 $139,000 $1,093,392 $(203,334) $1,029,071
========= ======= ======== ========== ========= ==========
</TABLE>
- --------
(a) At June 30, 1997, common shares outstanding represent Class A Common
Shares.
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss)............................... $ 7,581 $ (8,256)
Adjustments to reconcile net earnings (loss) to
cash flows provided by operating activities:
Provision for deferred income taxes............... 16,223 2,802
Minority interests................................ 11,417 5,272
Equity in earnings of unconsolidated investees.... (78,083) (39,738)
Distributions from unconsolidated investees....... 40,855 36,855
Depreciation and amortization..................... 18,726 11,131
Other............................................. 4,221 666
Increase in other assets.......................... (12,459) (6,291)
Increase in accrued interest on convertible debt.. 7,747 8,607
Increase in accounts payable and accrued
expenses......................................... 1,203 20,842
------------ ------------
Net cash flows provided by operating activities... 17,431 31,890
------------ ------------
INVESTING ACTIVITIES:
Real estate properties............................ (227,265) (151,017)
Disposition of real estate properties............. 11,873 14,651
Investment in shares of:
Security Capital U.S. Realty.................... (74,852) (179,746)
Strategic Hotel Capital Incorporated............ (22,642) --
Security Capital Preferred Growth Incorporated.. (5,000) --
Purchases of publicly traded real estate
securities, net.................................. (93,580) --
Purchase of Homestead Village Incorporated
warrants......................................... (18,654) --
Other............................................. (21,415) (5,799)
------------ ------------
Net cash flows used in investing activities....... (451,535) (321,911)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from lines of credit..................... $ 415,750 $ 315,500
Payments on lines of credit....................... (291,500) (365,000)
Proceeds from mortgage notes payable.............. 41,250 5,000
Principal payments on mortgage notes payable...... (753) (480)
Proceeds from issuance of convertible debt........ 98,097 52,520
Repurchase of convertible debt.................... (26) (7,412)
Proceeds from issuance of common shares, net of
expenses......................................... 102,181 51,390
Repurchase of common shares....................... (1,006) (8,504)
Proceeds from issuance of preferred shares........ -- 139,000
Distributions paid to minority interest holders... (14,285) (7,749)
Proceeds from issuance of common shares to
minority interest holders........................ 82,969 119,090
Preferred dividends paid.......................... (5,213) --
Other............................................. (516) (2,762)
------------ ------------
Net cash flows provided by financing activities... 426,948 290,593
------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... (7,156) 572
Cash and cash equivalents, beginning of period.... 23,662 13,708
------------ ------------
Cash and cash equivalents, end of period.......... $ 16,506 $ 14,280
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
(1) GENERAL
Security Capital Group Incorporated (Security Capital) engages in real
estate research, investment and management. Its strategy is to create the
optimal organization to lead and profit from global real estate
securitization. Security Capital has invested in various operating and other
entities (the Capital Division) (see note 3) and provides various management
and financial services through a Services Division (see note 2). The Capital
Division invests in real estate-related companies with the objective of
generating capital gains and growing dividends. The Services Division provides
strategic guidance, research, investment analysis, acquisition and development
services, asset management, property management, capital markets services and
legal and accounting services for the companies in which Security Capital and
its affiliates have invested. Security Capital is a Maryland corporation.
The accompanying consolidated financial statements include the results of
Security Capital, its majority-owned Capital Division subsidiaries (Security
Capital Atlantic Incorporated, Homestead Village Incorporated, and Security
Capital Employee REIT Fund Incorporated) and its wholly-owned Services
Division subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. Minority interest is comprised of the
minority shareholders of Security Capital Atlantic Incorporated, Homestead
Village Incorporated, and Security Capital Employee REIT Fund Incorporated.
Security Capital accounts for its 20% or greater (but not more than 50%) owned
investees by the equity method. For an investee accounted for under the equity
method, Security Capital's share of net earnings or losses of the investee is
reflected in income as earned and dividends are credited against the
investment as received.
The consolidated financial statements of Security Capital as of June 30,
1997 are unaudited and, pursuant to the rules of the Securities and Exchange
Commission (SEC), certain information and footnote disclosures normally
included in financial statements have been omitted. While management of
Security Capital believes that the disclosures presented are adequate, these
interim consolidated financial statements should be read in conjunction with
Security Capital's 1996 consolidated financial statements.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of Security Capital's
consolidated financial statements for the interim periods presented. Certain
reclassifications have been made in the 1996 consolidated financial statements
and notes to consolidated financial statements for the interim periods
presented in order to conform to the 1997 presentation. The results of
operations for the three- and six-month periods ended June 30, 1997 and 1996
are not necessarily indicative of the results to be expected for the entire
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) SERVICES DIVISION
REIT Managers and Property Managers
Certain Security Capital Services Division subsidiaries, under the terms of
separate agreements, manage the operations of the separate REITs (REIT
Managers) and provide property management services to those REITs
5
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(Property Managers). Each REIT Manager is paid a REIT management fee based on
a percentage of the REIT's pre-management fee cash flow, after deducting
actual and assumed regularly scheduled principal payments for long-term debt
and dividends paid on non-convertible preferred shares, as defined in the REIT
Management Agreements. The fee is generally 16% of cash flow, as so defined,
of the REIT. Property management fees are at market rates and are paid
separately to Security Capital's property management subsidiaries. The REIT
and Property Management Agreements are generally one year in term, renewable
annually by the REIT and cancelable upon sixty days notice.
In late January 1997, Security Capital made a proposal to Security Capital
Industrial Trust (SCI), Security Capital Pacific Trust (PTR) and Security
Capital Atlantic Incorporated (ATLANTIC) to exchange the REIT and Property
Managers for additional shares of the respective REITs. As a result of the
proposed transactions, each of the REITs would become internally managed. The
board of directors or trustees of each REIT appointed a special committee
comprised of independent directors or trustees to review the proposed
transaction.
On March 24, 1997, the board of trustees or directors of SCI, PTR, and
ATLANTIC each unanimously approved an agreement with Security Capital to
exchange its REIT common stock for Security Capital's REIT management and
property management companies (the mergers). The transactions, subject to
approval by the shareholders of Security Capital, SCI, PTR, and ATLANTIC, are
expected to be consummated during the third quarter of 1997. Shareholders of
Security Capital approved the transactions in the second quarter of 1997.
Under the terms of the agreement, SCI, PTR, and ATLANTIC will issue
$81,870,626 (3,692,023 shares), $75,838,457 (3,295,533 shares) and $54,608,549
(2,306,591 shares) of their common stock, respectively, in exchange for
Security Capital's REIT management and property management companies and
operating systems.
In order to allow existing common shareholders to maintain their relative
ownership interests, SCI, PTR and ATLANTIC commenced rights offerings on
August 8, 1997 to their respective shareholders and Security Capital agreed
not to exercise or sell its rights in such offerings. Also, as part of the
transactions, Security Capital will issue registered warrants to acquire $250
million of Class B shares to the common and convertible preferred shareholders
and unitholders of limited partnerships of SCI, PTR and ATLANTIC. The warrants
are expected to be publicly traded and have a term of twelve months.
On April 29, 1997 Security Capital filed a registration statement with the
SEC covering its initial public offering of Class B shares, which is expected
to be effective in the third quarter of 1997.
In connection with the proposed exchange of the REIT and Property Managers
for additional shares of the respective REITs and the issuance of warrants to
purchase Class B shares as described above, Security Capital filed three
registration statements with the SEC (one for each of the merger
transactions). Each of these registration statements was declared effective by
the SEC on August 5, 1997.
Operating Advisor
Another Services Division subsidiary domiciled in Luxembourg (Operating
Advisor) advises on all investment and operational activities of Security
Capital U.S. Realty, a Luxembourg corporation (USREALTY). The Operating
Advisor is paid a management fee of 1.25% of USREALTY's investments at fair
value (other than liquid short-term investments and investments in Security
Capital).
6
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(3) REAL ESTATE INVESTMENTS
Security Capital holds investments at June 30, 1997 through its wholly-owned
subsidiary, SC Realty Incorporated (SC Realty), as follows:
. Security Capital Industrial Trust (SCI), a publicly held REIT, acquires,
develops, operates and owns distribution facilities throughout the
United States and in Mexico and Europe. At June 30, 1997 and December
31, 1996, Security Capital owned 44.07% and 46.00%, respectively, of the
issued and outstanding common shares of beneficial interest of SCI.
Security Capital accounts for its investment in SCI by the equity
method.
. Security Capital Pacific Trust (PTR), a publicly held REIT, primarily
owns, develops, acquires and operates income-producing multifamily
properties in the western United States. At June 30, 1997 and December
31, 1996, Security Capital owned 34.51% and 36.28%, respectively, of the
issued and outstanding common shares of beneficial interest of PTR.
Security Capital accounts for its investment in PTR by the equity
method.
. Security Capital Atlantic Incorporated (ATLANTIC), a publicly held REIT,
owns, acquires, develops and operates income-producing multifamily
properties in the southeastern United States. At June 30, 1997 and
December 31, 1996, Security Capital owned 51.34% and 56.86%,
respectively, of the issued and outstanding common shares of ATLANTIC.
Security Capital consolidates ATLANTIC's accounts in the accompanying
consolidated financial statements.
. Security Capital U.S. Realty (USREALTY) is a Luxembourg real estate
corporation formed with the sponsorship of Security Capital with the
objective of becoming one of Europe's preeminent publicly held real
estate entities. It principally owns real estate through strategic
positions in both public and private real estate operating companies in
the United States. During the six months ended June 30, 1997, Security
Capital purchased additional common shares of USREALTY at a total cost
of $74,852,000. At June 30, 1997 and December 31, 1996 Security Capital
owned 31.82% and 39.44%, respectively, of the issued and outstanding
common shares of USREALTY. Security Capital accounts for its investment
in USREALTY by the equity method.
. Homestead Village Incorporated (Homestead), a publicly held corporation,
is a developer, owner and operator of moderate priced, extended stay
lodging properties throughout the United States. During the first six
months of 1997, Security Capital exercised $38,000,000 of warrants and
purchased 2,171,495 Homestead warrants in the open market for
$18,654,000. Unexercised warrants of $10,216,000 (1,557,917 warrants)
are included in other assets in the accompanying June 30, 1997
consolidated balance sheet. At June 30, 1997 and December 31, 1996,
Security Capital owned 65.63% and 59.14%, respectively, of the issued
and outstanding common shares of Homestead. Security Capital
consolidates Homestead's accounts in the accompanying consolidated
financial statements.
. Security Capital Employee REIT Fund Incorporated (SC-ERF) is a real
estate investment fund that invests in securities of publicly traded
real estate companies in the United States. During the six months ended
June 30, 1997, Security Capital invested $90,073,000 in SC-ERF and
reinvested its June 30, 1997 dividend of $2,488,000. Shares of SC-ERF
are being offered only to Security Capital, directors, trustees,
employees of Security Capital and its affiliates and members of their
families and approved 401(k) plans of Security Capital and its
affiliates. Security Capital's ownership of SC-ERF's outstanding common
shares as of June 30, 1997 and December 31, 1996 was 98.68% and 100%,
respectively. Security Capital consolidates SC-ERF's accounts in the
accompanying consolidated financial statements.
7
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
. Strategic Hotel Capital Incorporated (SHC), a privately held corporation,
was formed in May 1997 and is focused on becoming the preeminent owner of
upscale hotel properties on a global basis. Security Capital has committed
to invest $200,000,000 of capital in SHC. At June 30, 1997, Security
Capital had invested $22,642,000, and two hotels had been purchased by SHC.
This investment is included in other assets in the accompanying June 30,
1997 consolidated balance sheet. Security Capital owned 49.65% of SHC's
common shares as of June 30, 1997.
. Security Capital Preferred Growth Incorporated (SC-PG), a private real
estate company formed in January 1997, will make intermediate-term
investments in undervalued, high-potential real estate operating companies
primarily through convertible securities. Security Capital has committed to
invest $50,000,000 of capital in SC-PG. As of June 30, 1997 Security
Capital has invested $5,000,000. This investment is included in other
assets in the accompanying June 30, 1997 consolidated balance sheet.
Security Capital owned 20.79% of SC-PG's common shares as of June 30, 1997.
An additional $10,000,000 was invested on July 30, 1997.
Security Capital received dividends from its investees for the six months
ended June 30, 1997 and 1996 as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
SCI.......................................................... $23,051 $19,873
PTR.......................................................... 17,804 16,982
ATLANTIC..................................................... 16,806 16,698
SC-ERF....................................................... 2,488 --
------- -------
$60,149 $53,553
======= =======
</TABLE>
8
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
The following summarizes real estate investments of Security Capital's
consolidated investees as of June 30, 1997 and December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Multifamily properties (ATLANTIC):
Operating properties................................ $ 968,409 $ 952,770
Developments under construction..................... 250,526 194,587
Developments in planning............................ 15,904 7,795
Land held for future development.................... 2,737 2,083
---------- ----------
Subtotal.............................................. 1,237,576 1,157,235
---------- ----------
Extended-stay lodging properties (Homestead):
Operating properties................................ 197,672 129,035
Developments under construction..................... 170,913 108,691
Developments in planning............................ 27,759 12,256
Land held for future development.................... 1,455 1,448
Land held for sale.................................. 4,561 5,590
---------- ----------
Subtotal.............................................. 402,360 257,020
---------- ----------
Total real estate, at cost............................ 1,639,936 1,414,255
Less accumulated depreciation......................... 63,991 48,882
---------- ----------
Total real estate..................................... $1,575,945 $1,365,373
========== ==========
</TABLE>
Presented below is the summary statement of earnings information for SCI for
the six months ended June 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Rental and other income.................................. $148,669 $106,081
Expenses:
Rental expenses, net of recoveries..................... 12,825 13,392
Depreciation and amortization.......................... 37,024 27,215
Interest............................................... 24,558 17,359
General and administrative, including REIT management
fee................................................... 14,982 11,426
-------- --------
89,389 69,392
-------- --------
Net earnings before minority interest.................... 59,280 36,689
Minority interest share in net earnings................ 1,835 1,640
-------- --------
Net earnings............................................. 57,445 35,049
Less Preferred Share dividends......................... 17,659 11,368
-------- --------
Net earnings attributable to common shares............... $ 39,786 $ 23,681
======== ========
Security Capital share of net earnings................... $ 17,659 $ 11,444
======== ========
</TABLE>
9
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
Presented below is the summary statement of earnings information for PTR for
the six months ended June 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Rental and other income.................................. $169,674 $155,429
Expenses:
Rental expenses........................................ 60,111 61,752
Depreciation........................................... 24,688 21,242
Interest............................................... 29,759 13,777
General and administrative, including REIT management
fee................................................... 11,775 12,146
-------- --------
126,333 108,917
-------- --------
Earnings from operations................................. 43,341 46,512
Gain on sale of investments............................ 37,207 8,083
-------- --------
Net earnings............................................. 80,548 54,595
Less Preferred Share dividends......................... 9,840 12,774
-------- --------
Net earnings attributable to common shares............... $ 70,708 $ 41,821
======== ========
Security Capital share of net earnings................... $ 25,326 $ 15,815
======== ========
</TABLE>
Presented below is the summary statement of earnings information for USREALTY
for the six months ended June 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Revenues:
Dividends................................................ $ 44,651 $ 2,351
Realized gains........................................... 13,620 408
Increase in unrealized gains............................. 66,200 30,852
Other income............................................. 1,364 1,510
-------- -------
125,835 35,121
-------- -------
Expenses:
Interest on line of credit............................... 6,577 60
General and administrative, including advisory fee....... 13,094 2,425
-------- -------
19,671 2,485
-------- -------
Net earnings............................................... $106,164 $32,636
======== =======
Security Capital share of net earnings..................... $ 35,098 $12,479
======== =======
</TABLE>
10
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(4) INDEBTEDNESS
Lines of Credit:
At June 30, 1997, Security Capital and its consolidated subsidiaries
(ATLANTIC and Homestead), had revolving bank lines of credit. Security Capital
has a $400,000,000 revolving line of credit with Wells Fargo Realty Advisors,
Incorporated (Wells Fargo) as agent for a group of lenders. The line of credit
was increased from $300,000,000 to $400,00,000 on July 22, 1997. The agreement
is effective through November 15, 1998 with an option to renew for successive
one year periods, with the approval of Wells Fargo and the participating
lenders. Borrowings bear interest, at Security Capital's option, at either
LIBOR plus 1.50% or a base rate (defined as the higher of Wells Fargo prime
rate or the Federal Funds Rate plus .50%) with interest payable monthly in
arrears. Commitment fees range from 0.125% to 0.25% per annum based on the
average unfunded line of credit balance. Security Capital's line is secured by
its holdings in SCI, PTR, ATLANTIC, USREALTY and Homestead, including warrants
to purchase shares of Homestead's common stock, as well as any unfunded
subscriptions for Security Capital's common stock and convertible subordinated
debentures. There were no unfunded subscriptions as of June 30, 1997.
The Security Capital line of credit is a primary obligation of SC Realty.
Security Capital guarantees the line. SC Realty is a legal entity which is
separate and distinct from Security Capital and its affiliates, and has
separate assets, liabilities, business functions and operations. The
outstanding balance on Security Capital's line of credit at June 30, 1997 was
$107,500,000.
On December 18, 1996, ATLANTIC obtained a $350,000,000 unsecured line of
credit from Morgan Guaranty Trust Company of New York (Morgan Guaranty), as
agent for a group of lenders. Borrowings bear interest at prime, or at
ATLANTIC's option, LIBOR plus a margin (1.375% through July 2, 1997 and 1.125%
thereafter). ATLANTIC currently pays a commitment fee on the average unfunded
line of credit balance ranging from 0.125% to 0.25% per annum, depending on
the amount of undrawn commitments. The line of credit matures December 1998
and may be extended for one year with the approval of Morgan Guaranty and the
other participating lenders. The outstanding balance on ATLANTIC's line of
credit at June 30, 1997 was $278,750,000.
On June 30, 1997, ATLANTIC entered into a $25,000,000 short-term, unsecured
borrowing agreement with Texas Commerce Bank National Association. The loan
matures on June 30, 1998 and bears interest at an overnight rate. There were
no borrowings outstanding under this agreement at June 30, 1997.
On May 6, 1997 Homestead entered into a secured revolving line of credit
facility with Commerzbank AG, New York Branch (Commerzbank), which provides
for borrowings of up to $50,000,000, subject to collateral requirements.
Borrowings bear interest at the Eurodollar rate plus 2.5% per annum.
Additionally, there is a commitment fee of 0.325% per annum on the average
unfunded line of credit balance. The line of credit matures May 1998 and may
be extended with the approval of the lenders. There was no outstanding balance
on the line of credit as of June 30, 1997.
Each line requires maintenance of certain financial covenants. Security
Capital, SC Realty, ATLANTIC and Homestead were in compliance with all such
covenants at June 30, 1997.
11
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
Mortgage Notes Payable:
Mortgage notes payable, which are obligations of ATLANTIC and Homestead,
consisted of the following at June 30, 1997 and December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Mortgage Type
Conventional fixed rate (a)............................ $ 33,932 $ 34,168
Tax exempt fixed and variable rate (a)................. 121,105 121,622
-------- --------
155,037 155,790
-------- --------
Convertible fixed rate (b)............................. 158,557 112,639
Less discount.......................................... (15,588) (11,330)
-------- --------
142,969 101,309
-------- --------
$298,006 $257,099
======== ========
</TABLE>
- --------
(a) Real estate with an aggregate undepreciated cost at June 30, 1997 of
$51,259,000 and $204,518,000 serves as collateral for the conventional
mortgage notes payable and the tax exempt mortgages, respectively.
(b) In connection with the October 1996 Homestead spin-out transaction,
Homestead executed a funding commitment agreement with PTR which provides
borrowing capability in the amount of $199,000,000. Under this funding
agreement, Homestead may call for funding from PTR through March 31, 1998
for the development of the projects acquired from PTR in the transaction.
As a result of the fundings, PTR will receive convertible mortgage notes
in stated amounts of up to $221,000,000. The notes are collaterized by
Homestead properties.
PTR's convertible mortgage notes are convertible into Homestead common
stock after March 31, 1997 on the basis of one share of Homestead common
stock for every $11.50 of principal amount outstanding. None of the
mortgage notes were converted as of June 30, 1997.
Convertible Debt:
Security Capital's convertible subordinated debentures due June 30, 2014
(the 2014 Convertible Debentures) totaling $715,244,000 at June 30, 1997 and
$713,677,000 at December 31, 1996 accrue interest at 12% per annum but require
semi-annual cash interest payments at a minimum rate per annum of 3.5%.
Interest above the minimum may be paid currently or deferred at the option of
Security Capital. Any deferred interest accrues interest at 12% and is due
upon maturity. The Board of Directors of Security Capital approved a cash
interest payment rate of 10.535% and 9.939% per annum for 1997 and 1996,
respectively.
Security Capital's convertible subordinated debentures due March 29, 2016
(the 2016 Convertible Debentures) totaling $323,024,000 at June 30, 1997 and
$226,520,000 at December 31, 1996 accrue interest at 6.5% per annum and
require semi-annual interest payments on the last business day of June and
December.
The principal amount of the 2014 and 2016 Convertible Debentures are
convertible into Security Capital common stock at $1,046.00 and $1,153.90 per
share, respectively, at the option of the holder any time after the earlier to
occur of (i) the first anniversary of Security Capital's initial public
offering of its common stock, (ii) July 1, 1999 and March 29, 2001 for the
2014 and 2016 Convertible Debentures, respectively, (iii) the
12
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
consolidation or merger of Security Capital with another entity (other than a
merger in which Security Capital is the surviving entity) or any sale or
disposition of substantially all the assets of Security Capital or (iv) notice
of redemption of the debentures by Security Capital. On conversion of the 2014
Convertible Debentures, any accrued and unpaid deferred interest shall be
deemed to be paid in full upon delivery of the common shares to the debenture
holder. Security Capital may redeem the 2014 Convertible Debentures at any
time and the 2016 Convertible Debentures may be redeemed at any time after
March 29, 1999. To redeem the debentures, Security Capital must provide not
less than 60 days nor more than 90 days prior written notice to the holders.
The redemption price is par plus any accrued and unpaid interest to the
redemption date.
Interest:
Security Capital capitalizes interest as part of the cost of real estate
projects under development. During the six months ended June 30, 1997 and
1996, the total interest paid on all outstanding debt was $59,663,000 and
$49,377,000, respectively, including $13,310,000 and $4,585,000, respectively,
which was capitalized. Costs incurred in connection with the issuance or
renewal of debt are capitalized, included with other assets and amortized over
the term of the related loan in the case of issuance costs or twelve months in
the case of renewal costs. Amortization of deferred financing costs included
in interest expense for the six months ended June 30, 1997 and 1996 was
$1,464,000 and $1,328,000, respectively.
(5) SHAREHOLDERS' EQUITY
On April 17, 1997 Security Capital shareholders approved an amended and
restated charter which created Class A and Class B Shares. All outstanding
common stock as of April 18, 1997 was automatically changed to Class A Shares.
All references to Security Capital common stock are to Class A Shares unless
otherwise noted (See note 2 regarding registration statements filed with the
SEC).
Included in general, administrative and other expenses is a $6.6 million
charge associated with an exchange of Security Capital shares for shares of a
corporate entity owned by Security Capital's chairman, whose sole assets were
warrants and options to purchase Security Capital shares. The above-described
charge represents the value applicable to the holder's ability to defer
exercising the warrants and options until 2002 in accordance with their terms.
Per Share Data:
Per share data is computed based on weighted average shares outstanding
during the period. In the computation of net loss per common share,
outstanding options and warrants are not included as common stock equivalents
as to do so would have an anti-dilutive effect. In the computation of net
earnings per common share, outstanding options and warrants are included as
common stock equivalents using the treasury stock method. The conversion of
convertible debt and preferred stock into common shares is not assumed as the
effect would be anti-dilutive.
In February 1997, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS
No. 128). The new statement is effective December 31, 1997. At that time,
Security Capital will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options and warrants will be excluded. The result would be an
increase in earnings per share for the six months ended June 30, 1997 of $.13
per share, with no material effect on the six months ended June 30, 1996 or
the three months ended June 30, 1997 and 1996.
13
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(6) INCOME TAXES
Security Capital accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting For Income Taxes (SFAS No. 109).
Security Capital files a consolidated federal income tax return. Homestead
also accounts for income taxes under SFAS No. 109 and its tax effects are
included in Security Capital's consolidated financial statements. Homestead
files a separate Federal income tax return. ATLANTIC has elected to be taxed
as a real estate investment trust under the Internal Revenue Code of 1986, as
amended. Accordingly, no provision has been made in Security Capital's
consolidated financial statements for federal income taxes for ATLANTIC's
operations.
Security Capital had tax net operating loss carryforwards of approximately
$64,000,000 at June 30, 1997. Approximately $20,000,000 of these loss
carryforwards relate to the REIT and property management companies that are
being sold (see note 2). Security Capital will be unable to use these
carryforwards if the transactions are consummated. If not previously utilized,
the loss carryforwards will expire beginning 2005 through 2010. Utilization of
existing net operating loss carryforwards is limited by IRC Section 382
(limitation on net operating loss carryforwards following ownership change)
and the Separate Return Limitation Year (SRLY) rules.
Security Capital's deferred tax assets relate primarily to its net operating
loss carryforwards and such deferred tax assets are completely offset by a
valuation allowance. Deferred tax liabilities result from Security Capital's
investments in equity method operating companies.
(7) COMMITMENTS AND CONTINGENCIES
Security Capital and its investees are parties to various claims and routine
litigation arising in the ordinary course of business. Based on discussion
with legal counsel, Security Capital does not believe that the results of all
claims and litigation, individually or in the aggregate, will have a material
adverse effect on its business, financial position or results of operations.
Security Capital's investees are subject to environmental and health and
safety laws and regulations related to the ownership, operation, development
and acquisition of real estate. Under such laws and regulations, Security
Capital may be liable for, among other things, the costs of removal or
remediation of certain hazardous substances, including asbestos-related
liability. Such laws and regulations often impose liability without regard to
fault.
As part of due diligence procedures, Security Capital's investees conduct
Phase I environmental assessments on each property prior to acquisition. The
cost of complying with environmental regulations was not material to Security
Capital's results of operations. Security Capital and its investees are not
aware of any environmental condition on any of their properties which is
likely to have a material adverse effect on its financial condition or results
of operations.
At June 30, 1997, Security Capital had approximately $264,700,000 of
unfunded development commitments for developments under construction. ATLANTIC
and Homestead's commitments were $96,700,000 and $168,000,000, respectively.
(8) RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the FASB released Statement of Financial Accounting Standards
No. 129, Disclosure of Information about Capital Structure. Security Capital
already complies with the requirements of the Statement which is effective for
periods ending after December 15, 1997.
14
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
The FASB also released Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS No. 130), governing the reporting and
display of comprehensive income and its components, and Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), requiring that all public businesses
report financial and descriptive information about their reportable operating
segments. Both Statements are applicable to reporting periods beginning after
December 15, 1997. The impact of adopting SFAS No. 130 is not expected to be
material to the consolidated financial statements or notes to consolidated
financial statements. Management is currently evaluating the effect of SFAS
No. 131 on consolidated financial statement disclosures.
15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Security Capital Group
Incorporated:
We have reviewed the accompanying consolidated balance sheet of Security
Capital Group Incorporated and subsidiaries (see note 1) as of June 30, 1997,
and the related consolidated statements of operations for the three- and six-
month periods ended June 30, 1997 and 1996, the statement of shareholders'
equity for the six-month period ended June 30, 1997 and the statements of cash
flows for the six-month periods ended June 30, 1997 and 1996. These financial
statements are the responsibility of Management. We were furnished with the
reports of other accountants on their reviews of the financial statements of
Security Capital Pacific Trust, Security Capital Atlantic Incorporated and
Homestead Village Incorporated, whose total assets represent 61.7% of the
total assets of Security Capital Group Incorporated and subsidiaries as of
June 30, 1997 and whose income represent 55.4% and 57.4% of the total income
in the consolidated statements of operations of Security Capital Group
Incorporated and subsidiaries for the six-month periods ended June 30, 1997
and 1996, respectively.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review and the reports of other accountants, we are not aware
of any material modifications that should be made to the financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Security Capital Group
Incorporated and subsidiaries as of December 31, 1996, and, in our report
dated February 28, 1997, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1996, is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
Arthur Andersen LLP
Chicago, Illinois
August 11, 1997
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Security
Capital's consolidated financial statements and the notes thereto in Item 1 of
this report.
The statements contained in this discussion that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are based on current expectations,
management's beliefs, and assumptions made by management. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. Security Capital undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Among the important factors that could cause Security
Capital's actual results to differ materially from those expressed in the
forward-looking statements are (i) changes in general economic conditions that
would affect the operating results of its Capital Division investees or the
revenues earned by its Services Division subsidiaries and (ii) changes in
financial markets and interest rates that could adversely affect Security
Capital's cost of capital and its ability to meet its financing needs and
obligations.
OVERVIEW
Security Capital engages in real estate research, investment and management.
Security Capital's strategy is to create the optimal organization to lead and
profit from global real estate securitization. Security Capital has invested
in various operating and other entities (the Capital Division) and provides
various management and financial services through a Services Division. The
Capital Division invests in real estate-related companies with the objective
of generating capital gains and growing dividends. The Services Division
provides strategic guidance, research, investment analysis, acquisition and
development services, asset management, property management, capital markets
services and legal and accounting services for the companies in which Security
Capital and its affiliates have invested.
Security Capital obtains income from two sources: (1) its share of earnings
in ATLANTIC, PTR, SCI, USREALTY, Homestead and SC-ERF; some of which Security
Capital accounts for by the equity method where it owns less than a 50%
controlling interest (PTR, SCI and USREALTY) and others of which are
consolidated in Security Capital's consolidated financial statements
(ATLANTIC, Homestead and SC-ERF); and (2) financial services revenues earned
by the Real Estate Research Group, the Investment Research Group and the
Financial Services Group and, prior to the proposed mergers (see note 2 to
consolidated financial statements), the REIT management and property
management companies. Revenues from the Services Division are only reflected
in Security Capital's consolidated financial statements if they were earned
from investees accounted for by the equity method. Services Division revenues
earned from consolidated investees are eliminated in Security Capital's
consolidated financial statements. Services Division revenues earned from PTR
and SCI have historically been based upon a percentage of the cash flow from
operations or a percentage of revenues, as defined in the applicable REIT
management and property management agreements, respectively.
USREALTY, in accordance with generally accepted accounting principles,
accounts for its investments at market value or estimated fair value
(depending on whether the investment is publicly traded) and reflects changes
in such values in its statement of income pursuant to fair value accounting
principles. Security Capital accounts for its investment in USREALTY using the
equity method and, as a consequence, Security Capital's results of operations
are affected by changes in the fair value of USREALTY's investments. USREALTY
values its investments in publicly traded companies at market determined by
using closing market prices as of the relevant balance sheet date. USREALTY
values its investments in private companies at fair value, generally
determined at cost, or an appropriate lower value if the investment is not
performing as expected. If substantial additional capital is raised by an
investee from independent third parties in a private placement, USREALTY
17
<PAGE>
values its investment at the price at which that capital was raised when a
substantial percentage of the new subscriptions have been funded. In addition,
through an advisory relationship with USREALTY, a Services Division subsidiary
also earns advisory fee revenues based on a percentage of the fair value of
USREALTY's investments (not including short-term investments and investments
in Security Capital).
SC-ERF, in accordance with generally accepted accounting principles,
accounts for its investments at market value and reflects changes in such
values in its statement of income pursuant to fair value accounting
principles. All of its investments are in publicly traded real estate
companies located in the United States.
If the proposed mergers involving ATLANTIC, PTR, and SCI are consummated,
Security Capital will exchange its interests in the applicable REIT management
companies and property management companies for common shares of ATLANTIC, PTR
and SCI, respectively. Although the effects of completion of the proposed
mergers on Security Capital's future consolidated results of operations are
complex, Security Capital expects reductions in Services Division revenues
relating to the sale of the REIT management and property management companies
for PTR and SCI to be substantially offset by increases in capital investments
revenues attributable to its ownership of additional common shares of PTR and
SCI.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
CAPITAL DIVISION INVESTMENTS
Dividends Received
Security Capital's dividends received increased $6.6 million, or 12%, from
$53.5 million for the six months ended June 30, 1996 to $60.1 million for the
six months ended June 30, 1997. The increase results primarily from (a) the
purchase of additional shares in SCI and ATLANTIC, (b) a dividend from SC-ERF
of approximately $2.5 million during the six months ended June 30, 1997 and
(c) an increase in per share dividend rates.
Equity in Earnings of Less Than 50% Owned Investees
Security Capital's equity in SCI's earnings increased 55% from $11.4 million
to $17.7 million for the six months ended June 30, 1996 and 1997,
respectively. This increase was primarily attributable to an increase in the
amount of distribution space owned and leased by SCI (85.3 million square feet
at June 30, 1997 compared to 70.1 million square feet at June 30, 1996) and
increased rental rates on renewal leases for previously occupied space. At
June 30, 1997 and 1996, Security Capital's ownership interest in the
outstanding common shares of beneficial interest of SCI was approximately 44%
and 48%, respectively.
Security Capital's equity in PTR's earnings increased 60% from $15.8 million
for the first six months of 1996 to $25.3 million for the first six months of
1997. This increase is primarily attributable to an increase ($29.1 million)
in gains on sales of properties offset by a slight net decrease in the number
of multifamily properties owned by PTR (40,786 units at June 30, 1997 compared
to 40,981 units at June 30, 1996). At June 30, 1997 and 1996, Security
Capital's ownership interest in the outstanding common shares of beneficial
interest of PTR was approximately 35% and 38%, respectively.
Security Capital's share of USREALTY's earnings increased substantially from
$12.5 million for the six months ended June 30, 1996 to $35.1 million for the
six months ended June 30, 1997. USREALTY effectively commenced its investment
activities in October 1995, and at June 30, 1996, USREALTY had investments at
cost of approximately $519 million with a fair market value of approximately
$550 million. At June 30, 1997, USREALTY had investments at cost of $1.82
billion with a fair market value of $2.15 billion. Unrealized appreciation on
USREALTY's investments increased by $66.2 million and $30.9 million for the
six months ended June 30, 1997 and 1996, respectively. In addition, USREALTY
recorded net investment income of $40.0 million and $1.8 million for the six
months ended June 30, 1997 and 1996, respectively. At June 30, 1997 and
18
<PAGE>
1996, Security Capital's ownership interest in the outstanding common stock of
USREALTY was approximately 32% and 39%, respectively.
Security Capital's initial investment (approximately $9.9 million) in SC-ERF
occurred in late December 1996. During the six months ended June 30, 1997,
Security Capital invested an additional $92.6 million in SC-ERF (including a
dividend reinvestment of approximately $2.5 million). At June 30, 1997, SC-ERF
had investments at cost and fair market value of approximately $103.6 million
and $107.1 million, respectively. Security Capital owned 98.7% and 100% of the
outstanding shares of SC-ERF at June 30, 1997 and December 31, 1996,
respectively.
RENTAL OPERATIONS--FROM GREATER THAN 50% OWNED CONSOLIDATED INVESTEES
Rental Revenues
Rental revenues increased $41.6 million, or 65%, from $63.7 million for the
six months ended June 30, 1996 to $105.3 million for the same period in 1997.
This increase was attributable to an increase in the number of multifamily
units owned and operated by ATLANTIC (19,265 operating units at June 30, 1997
compared to 17,109 operating units at June 30, 1996), coupled with stable
occupancies (approximately 95%) for both periods and increased rental rates.
This resulted in a $17.1 million increase in rental revenues between the six-
month periods. Also accounting for part of the increase in rental revenues is
the consolidation of Homestead after the spin-out transactions completed on
October 17, 1996 by Security Capital, ATLANTIC and PTR of their extended-stay
lodging assets. Homestead generated $24.5 million in revenues for the six
month period ended June 30, 1997.
Other Income, Net
The $5.1 million increase in Other Income primarily results from (a) the
inclusion of SC-ERF's net investment income (approximately $2.5 million) and
increase in unrealized appreciation on investments (approximately $3.5
million) for the six months ended June 30, 1997 offset by (b) a $.9 million
decrease in fees applicable to certain consulting services.
Rental Expenses
Rental expenses increased by $16.1 million, or 64%, to $41.4 million for the
six months ended June 30, 1997 from $25.3 million for the same period in 1996.
The increase is attributable to the increase in the number of ATLANTIC's
operating multifamily communities and the consolidation of Homestead as
discussed above under "Rental Revenues". ATLANTIC's rental expenses increased
$5.7 million (excluding REIT and property management fees) in the first six
months of 1997 compared to the corresponding period of 1996. Homestead's
rental expenses were $10.4 million for the six months ended June 30, 1997.
SERVICES DIVISION
Revenues
Services Division revenues increased by 45% from $33.7 million for the six
months ended June 30, 1996 to $49.0 million for the same period in 1997. The
increase of $15.3 million in Services Division revenues in 1997 as compared to
1996 was primarily attributable to growth in operations at USREALTY and SCI.
In particular, advisory revenues earned from USREALTY increased $8.8 million
and financial services revenues earned from SCI increased $6.3 million.
Additionally, fees earned by Security Capital Markets Group Incorporated and
Security Capital Investment Research Group increased by $2.3 million and $0.2
million, respectively, during the six months ended June 30, 1997 compared to
the same period in 1996, offset by a $2.3 million decrease in fees earned by
the PTR REIT and property management companies as a result of the spin-out of
Homestead assets by PTR in October, 1996.
19
<PAGE>
Expenses
Services Division expenses increased by $9.7 million, or 30%, for the six
months ended June 30, 1997, to $42.5 million from $32.8 million for the same
period in 1996. This increase resulted from the expansion of the Services
Division, including the hiring of additional professionals primarily for the
REIT and property management companies and the Investment Research Group.
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization for Security Capital was $18.7 million
and $11.1 million for the six months ended June 30, 1997 and 1996,
respectively. Of those amounts, $16.2 million and $9.6 million represented
depreciation and amortization from rental operations for those same periods in
1997 and 1996, respectively. Depreciation for ATLANTIC increased $3.0 million
to $12.6 million for the first half of 1997 from $9.6 million for the first
half of 1996, an increase of 31%, due to the increase in the number of
operating multifamily communities between those periods. Depreciation for
Homestead was $3.6 million for the six months ended June 30, 1997. The
remaining depreciation and amortization of $2.5 million and $1.5 million in
1997 and 1996, respectively, is attributable to the Services Division and the
administrative support functions, representing an increase of $1.0 million
over such depreciation and amortization for the first half of 1996. The
increase of $1.0 million between 1997 and 1996 is primarily a result of
depreciation and amortization on additional computer hardware and software and
office leasehold improvements.
INTEREST EXPENSE
Interest expense on the Convertible Debentures increased $9.6 million or 21%
to $54.6 million for the first half of 1997 compared to $45.0 million for the
same period in 1996. The increase is primarily attributable to receipt of the
subscriptions of the 2016 Convertible Debentures from a private placement
offering completed in March, 1996, which totaled $323 million.
Interest expense on other obligations increased by $0.8 million from the
first half of 1996 to the same period in 1997, largely due to ATLANTIC's
increased weighted average mortgage debt outstanding during the first six
months of 1997.
GENERAL, ADMINISTRATIVE AND OTHER
General, administrative and other expenses increased by $21.2 million, or
147%, for the six months ended June 30, 1997, to $35.6 million from $14.4
million for the same period in 1996. This increase resulted primarily from (a)
additional personnel and related costs and professional fees applicable to
researching new business opportunities, enhancing information systems designed
for global operations, and to a lesser extent, additional personnel for human
resources and other administrative support functions ($7.9 million), (b) a
noncash, non-recurring charge to earnings of $6.6 million in the second
quarter of 1997 in connection with the stock exchange transaction discussed in
note 5 to the consolidated financial statements, (c) consolidation of
Homestead's accounts in 1997 ($6.3 million), and (d) an increase in ATLANTIC's
administrative expenses ($0.4 million).
PROVISION FOR INCOME TAXES
The provision for income taxes increased by $13.4 million for the six months
ended June 30, 1997 as compared to the same period in 1996 primarily
attributable to deferred income taxes on the equity in earnings of Security
Capital's unconsolidated investees.
Prior to the second quarter of 1996, Security Capital did not record a
provision for income taxes as it had deferred tax assets that were completely
offset by a valuation allowance. Beginning in the second quarter of 1996, a
deferred tax liability was recorded primarily because of Security Capital's
equity in the earnings of USREALTY. The effective rate for the three- and six-
month periods ended June 30, 1997 is also affected by the $6.6 million
nondeductible charge to earnings described in note 5 to the consolidated
financial statements.
20
<PAGE>
MINORITY INTERESTS
Minority interests increased from $5.3 million for the six months ended June
30, 1996 to $11.4 million for the six months ended June 30, 1997 primarily due
to increased earnings of ATLANTIC and Homestead, coupled with an increase in
minority ownership interests in ATLANTIC in conjunction with its public
offerings in October 1996 and May 1997 and the spin-out of Homestead which
also occurred in October 1996.
PREFERRED SHARE DIVIDENDS
On April 1, 1996, Security Capital issued 139,000 Series A Preferred Shares
to a single investor. The Series A Preferred Shares carry a 7.5% preferential
cash dividend rate, payable when and if authorized by the Board of Directors
quarterly in arrears. Security Capital paid $5.2 million and $2.6 million in
dividends on the Series A Preferred Shares for the six months ended June 30,
1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Security Capital's investment activities consist primarily of the investment
in the common shares of its Capital Division investees and capital
expenditures relating to expansion of its Services Division business. The
investment activities of Security Capital's operating companies consist
primarily of the acquisition and development of real estate. In addition, SC-
ERF invests in the securities of publicly traded real estate companies.
Security Capital has historically financed its investment activities primarily
through the sale of stock and debentures in private placements and borrowings
under its line of credit.
Based on Security Capital's current level of operations and anticipated
growth as a result of pending new business initiatives, Security Capital
expects that cash flows from operations (including dividends and fees received
from its operating companies), proceeds from the proposed initial public
offering (the Offering) of its Class B Shares and funds currently available
under its $400 million revolving line of credit will be sufficient to enable
Security Capital to satisfy its anticipated cash requirements for operating
and investing activities for existing businesses for the next twelve months.
Security Capital intends to finance its long-term business activities
(including investments in new business initiatives) through the proceeds from
the Offering of its Class B Shares, borrowings under an expanded line of
credit and the exercise of the Warrants to be issued as described below. In
addition, Security Capital anticipates that its operating companies will
separately finance their activities through cash flow from operations, sales
of equity and debt securities and the incurrence of mortgage debt or line of
credit borrowings.
After the proposed mergers, Security Capital intends to distribute Warrants
to purchase $250 million of Class B Shares to the shareholders of SCI, PTR and
ATLANTIC pursuant to the mergers. These Warrants will be issued subject to the
closing of the proposed mergers, will have an exercise price based on the
market price of the Class B Shares on the Warrant Issuance Date, and the
warrants will have a term of one year.
Security Capital's consolidated investees have undertaken the following
recent financing activities:
. In May 1997, ATLANTIC completed an $83 million (net proceeds) equity
offering to finance development and acquisition plans for 1997. In
addition, as described in registration statements initially filed with
the Securities and Exchange Commission on July 3, 1997, ATLANTIC has
proposed to offer approximately $50 million of preferred stock and $150
million of unsecured senior debt securities to the public. Proceeds from
these securities offerings and borrowings under its $350 million line of
credit are expected to provide the capital for ATLANTIC's financing
needs.
. Homestead plans a development program for its extended-stay lodging
properties which will be financed primarily through its funding
commitment agreements with PTR and ATLANTIC, which agreements will
provide up to $199 million and $111 million, respectively, in financing,
as well as through outstanding warrants to purchase approximately $44
million (approximately $15.5 million
21
<PAGE>
owned by Security Capital) of Homestead common stock outstanding as of
June 30, 1997 (if such warrants are exercised). Subsequent to June 30,
1997 Security Capital has purchased additional warrants and during the
period June 30 to August 11, 1997 Security Capital exercised $18.1
million of warrants. In May 1997, Homestead obtained a $50 million
revolving line of credit and is considering securities offerings to
provide additional sources of capital to meet its financing needs.
SIX MONTHS ENDED JUNE 30, 1997 INVESTING AND FINANCING ACTIVITIES
Security Capital recorded investments of $452 million for the six months
ended June 30, 1997 consisting primarily of (i) $96 million invested by
ATLANTIC for the development and acquisition of multifamily communities; (ii)
$131 million invested by Homestead for the development of extended-stay lodging
properties; (iii) $75 million invested by Security Capital for common shares of
USREALTY; (iv) $94 million invested by SC-ERF in publicly traded real estate
securities; and (v) $23 million and $5 million invested by Security Capital in
the common shares of Strategic Hotel Capital Incorporated (SHC) and Security
Capital Preferred Growth Incorporated (SC-PG), respectively. Other investing
activities (net) amounted to $28 million.
Security Capital obtained financing of $427 million during the six months
ended June 30, 1997 primarily from (i) proceeds from the sale of common stock
of $101 million net of expenses and repurchases and convertible debentures of
$98 million; (ii) net proceeds from line of credit borrowing of $124 million;
(iii) ATLANTIC's net proceeds from sale of common shares to its minority
interest owners of $83 million; (iv) Homestead's issuance of convertible
mortgage notes to PTR for $42 million, and (v) other financing transactions
resulting in an aggregate use of cash of $21 million.
LINES OF CREDIT
Security Capital
SC Realty, a wholly owned subsidiary of Security Capital, has a $400 million
secured revolving line of credit with Wells Fargo. The line of credit matures
in November 1998 and may be extended for one year periods with the approval of
Wells Fargo and the other participating lenders. Borrowings on the line of
credit bear interest, at SC Realty's option, at either (i) LIBOR plus a margin
of 1.50%, or (ii) the higher of the federal funds rate plus a margin of .50% or
Wells Fargo's prime rate, with interest payable monthly in arrears. SC Realty
pays a commitment fee ranging from .125% to .25% per annum based on the average
unfunded line of credit balance. The line of credit is guaranteed by Security
Capital and is secured by shares of PTR, SCI, ATLANTIC, USREALTY and Homestead,
as well as warrants to purchase shares in Homestead.
The line of credit contains a restricted payments covenant which prohibits
dividends and distributions on SC Realty's capital stock in excess of 100% of
SC Realty's cash flow available for distribution (as defined). Security
Capital's guaranty of the line of credit also contains various financial and
other covenants applicable to Security Capital, including a minimum
shareholders' equity test, a total liabilities to net worth ratio and an
interest coverage ratio, as well as restrictions on Security Capital's ability
to incur indebtedness and effect consolidations, mergers (other than a
consolidation or merger in which Security Capital is the surviving entity) and
sales of assets. The guaranty also contains a restricted payments covenant
which prohibits dividends and distributions on Security Capital's capital stock
in excess of 95% of Security Capital's cash flow available for distribution (as
defined). As of June 30, 1997, the outstanding balance on this line of credit
was $107,500,000 and Security Capital and SC Realty were in compliance with all
financial covenants.
ATLANTIC
ATLANTIC has obtained a $350 million unsecured line of credit from Morgan
Guaranty Trust Company of New York (Morgan Guaranty). The line of credit
matures in December 1998 and may be extended for one year with the approval of
Morgan Guaranty and the other participating lenders. Borrowings on the line of
credit bear interest at ATLANTIC's option at prime or LIBOR plus a margin,
1.375% through July 2, 1997 and 1.125%
22
<PAGE>
thereafter. ATLANTIC pays a commitment fee ranging from .125% to .25% per
annum based on the average unfunded line of credit balance. ATLANTIC's line of
credit is not guaranteed by Security Capital.
ATLANTIC's line of credit contains restrictive covenants which prohibit
dividends and distributions on ATLANTIC's capital stock in excess of 95% of
ATLANTIC's Funds from Operations (as defined). The line of credit also
contains various financial and other covenants, including a net worth test, a
total liabilities to net worth ratio, an interest coverage ratio and a fixed
charge coverage ratio, as well as restrictions on ATLANTIC's ability to incur
indebtedness and effect consolidations, mergers and sales of assets. As of
June 30, 1997 the outstanding balance on this line of credit was $278,750,000
and ATLANTIC was in compliance with all financial covenants.
Homestead
On May 6, 1997, Homestead entered into a secured revolving line of credit
facility with Commerzbank AG, New York Branch (Commerzbank), which provides
for borrowings up to $50,000,000, subject to collateral requirements.
Borrowings bear interest at the Eurodollar rate plus 2.5% per annum.
Additionally, there is a commitment fee of 0.325% per annum on the average
unfunded line of credit balance. The line of credit matures May 1998 and may
be extended with the approval of the lenders. At June 30, 1997 there was no
outstanding balance on this line of credit and Homestead was in compliance
with all financial covenants.
Mortgage Notes Payable
Mortgage notes payable totalled $298.0 million at June 30, 1997 and
consisted of the following: (i) conventional fixed rate mortgage obligations
of ATLANTIC in the amount of $33.9 million; (ii) tax exempt mortgage
obligations of ATLANTIC of $121.1 million; and (iii) convertible mortgage
obligations of Homestead of $143.0 million. Mortgage note obligations of
ATLANTIC and Homestead are not guaranteed by Security Capital.
The Homestead convertible mortgage notes are convertible, at the option of
PTR, into common shares of Homestead common stock beginning April 1, 1997. The
conversion price is equal to one share of common stock for every $11.50 of
principal amount outstanding.
CONVERTIBLE DEBENTURES
2014 Convertible Debentures
At June 30, 1997, Security Capital had approximately $715.2 million
principal amount of 2014 Convertible Debentures outstanding. The 2014
Convertible Debentures accrue interest at an annual rate of 12% and require
semi-annual cash interest payments at a minimum rate of 3.5%. Interest above
the minimum may be paid currently or deferred at the option of Security
Capital. Any deferred interest accrues interest at 12% and is due upon
maturity. The principal amount of the 2014 Convertible Debentures are
convertible into Class A Shares at $1,046.00 per share at the option of the
holder at any time after the earlier to occur of (i) the first anniversary of
Security Capital's initial public offering, (ii) July 1, 1999, (iii) the
consolidation or merger of Security Capital with another entity (other than a
merger in which Security Capital is the surviving entity) or any sale or
disposition of substantially all the assets of Security Capital or (iv) notice
of redemption of the 2014 Convertible Debentures by Security Capital. Security
Capital may redeem the 2014 Convertible Debentures at any time, in whole or in
part, at par plus accrued and unpaid interest to the date of redemption. On
conversion, any accrued and unpaid deferred interest shall be deemed to be
paid in full upon delivery of the Class A Shares.
2016 Convertible Debentures
At June 30, 1997, Security Capital had approximately $323.0 million
principal amount of 2016 Convertible Debentures outstanding. The 2016
Convertible Debentures accrue interest at an annual rate of 6.5% and require
semi-annual cash interest payments. The principal amount of the 2016
Convertible Debentures are convertible into Class A Shares at $1,153.90 per
share at the option of the holder at any time after the earlier to occur of
(i)
23
<PAGE>
the first anniversary of Security Capital's initial public offering, (ii)
March 29, 2001, (iii) the consolidation or merger of Security Capital with
another entity (other than a merger in which Security Capital is the surviving
entity) or any sale or disposition of substantially all the assets of Security
Capital or (iv) a recommendation by the Board of any tender offer or exchange
offer for 50% or more of Security Capital's outstanding common stock (provided
that the 2016 Convertible Debentures have then become convertible pursuant to
their terms) or (v) notice of redemption of the 2016 Convertible Debentures by
Security Capital. Security Capital may redeem the 2016 Convertible Debentures
at any time after March 29, 1999, in whole or in part, at par plus accrued and
unpaid interest to the date of redemption.
24
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At their annual meeting on May 15, 1997, the shareholders of Security Capital
elected Messrs. Samuel W. Bodman, Hermann Buerger and John P. Frazee, Jr. as
Class I Directors to serve three-year terms expiring in the year 2000, with
1,239,907 shares (91.58% of the total shares eligible to vote) voting for
Messrs. Bodman, Buerger and Frazee, 238 shares abstaining and no shares
withheld. Directors continuing in office include Cyrus F. Freidheim, Jr., H.
Laurance Fuller, Ray L. Hunt, John T. Kelley III, William D. Sanders and Peter
S. Willmott.
At a special meeting on April 17, 1997, the shareholders of Security Capital
voted on the following matters:
A. Merger and Issuance Agreements--proposed transactions in which
Security Capital will transfer its REIT and Property Management
subsidiaries to Security Capital Atlantic Incorporated, Security Capital
Industrial Trust and Security Capital Pacific Trust in exchange for common
shares of each of these entities.
B. Proposal to amend and restate Security Capital's Articles of
Incorporation to provide for a new class of common stock, i.e., 229,861,000
shares of Class B common stock with a Class B Share having, (a) voting
rights equal to one-two hundredth ( 1/200th), and (b) dividend and
distribution rights equal to one fiftieth ( 1/50th) of a Class A common
share.
C. Adoption of the Security Capital Group Incorporated 1996 Outside
Directors Plan--such Plan provides for the grant of options to acquire up
to a total of 7,000 shares of common stock of Security Capital to members
of the Security Capital Board who are not employees of Security Capital or
any parent or subsidiary of Security Capital.
The results of the voting are as follows:
<TABLE>
<CAPTION>
FOR WITHHELD ABSTAIN
--------- -------- -------
<S> <C> <C> <C>
A. Merger and Issuance
Agreements............. 1,181,564 3,000 351
(89.79%) (.23%) (.03%)
B. Amend and Restate
Articles of
Incorporation.......... 1,237,512 -0- 351
(90.62%) (0%) (.03%)
C. Outside Directors'
Plan................... 1,177,167 3,622 4,126
(89.12%) (.28%) (.31%)
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
11 Fully Diluted Earnings Per Common Share and Common Equivalent Share
Letter from Arthur Andersen LLP dated August 11, 1997 regarding unaudited
15 financial information
27 Financial Data Schedule
</TABLE>
25
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
Security Capital Group Incorporated
/s/ Paul E. Szurek
_____________________________________
Paul E. Szurek,
Chief Financial Officer
(Principal Financial Officer)
/s/ Jayson C. Cyr
_____________________________________
Jayson C. Cyr,
Vice President and Controller
(Principal Accounting Officer)
Date: August 14, 1997
26
<PAGE>
EXHIBIT 11
SECURITY CAPITAL GROUP INCORPORATED
AND SUBSIDIARIES
FULLY DILUTED EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1997 1996
---------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Reconciliation of net earnings (loss) per
primary earnings (loss) per common share
and common equivalent share computation to
amount used for fully diluted computation:
Net earnings (loss) per Consolidated
Statements of Operations................. $ 2,368 $ (10,862)
Add: Series A Preferred Share dividends... 5,213 2,606
Add: Interest expense--convertible debt,
net of tax effect........................ 35,505 29,250
---------------- ----------------
Net earnings (loss), as adjusted.......... $ 43,086 $ 20,994
================ ================
Reconciliation of weighted average number of
common shares outstanding per primary
earnings (loss) per common share and common
equivalent share computation to amount used
for fully diluted computation:
Weighted average number of common shares
outstanding per primary earnings per
common share and common equivalent share
computation.............................. 1,355,349 1,007,009
Add: Weighted average effect of conversion
of Series A Preferred Shares into common
shares................................... 105,896 52,366
Add: Weighted average effect of conversion
of convertible debentures into common
shares................................... 920,986 698,111
---------------- ----------------
Weighted average number of common
shares, as adjusted.................... 2,382,231 1,757,486
================ ================
Primary earnings (loss) per common share
and common equivalent shares............. $ 1.75 $ (10.79)
================ ================
Fully diluted earnings (loss) per common
share and common equivalent shares(1).... $ 18.09 $ 11.95
================ ================
</TABLE>
- --------
(1) Fully diluted earnings per common share and common equivalent share is not
presented on the Consolidated Statements of Operations as the effect of
the conversion of the preferred shares and the convertible debt into
common shares is not assumed as the effect would be anti-dilutive.
<PAGE>
EXHIBIT 15
August 11, 1997
To the Board of Directors and Shareholders of Security Capital Group
Incorporated:
We are aware that Security Capital Group Incorporated has included in its
Registration Statement No. 333-26037, its consolidated financial statements
for the three- and six-month periods ended June 30, 1997, which includes our
report dated August 11, 1997 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the Securities Act
of 1933 (the "Act"), that report is not considered a part of such registration
statements prepared or certified by our firm or a report prepared or certified
by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
Arthur Andersen LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 16,506
<SECURITIES> 107,127
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,639,936
<DEPRECIATION> 63,991
<TOTAL-ASSETS> 3,410,395
<CURRENT-LIABILITIES> 0
<BONDS> 1,336,274
0
139,000
<COMMON> 13
<OTHER-SE> 890,058
<TOTAL-LIABILITY-AND-EQUITY> 3,410,395
<SALES> 0
<TOTAL-REVENUES> 239,993
<CGS> 0
<TOTAL-COSTS> 138,139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,663
<INCOME-PRETAX> 35,221
<INCOME-TAX> 7,581
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,581
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 0
</TABLE>
