- --------------------------------------------------------------------------------
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, 1999
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 1-13355
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 Mexico 87501
(Address of principal executive offices) (Zip Code)
(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 X No____
The number of shares outstanding of the Registrant's common stock as of
July 31, 1999 was:
Class A Common Shares, $.01 par value - 1,323,159 shares
Class B Common Shares, $.01 par value - 56,176,537 shares
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
INDEX
Page
Number(s)
PART I. Financial Information
Item 1.Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 1999 (unaudited) and
December 31, 1998............................................... 1
Consolidated Statements of Operations - Three and six months ended
June 30, 1999 and 1998 (unaudited).............................. 2-3
Consolidated Statement of Shareholders' Equity - Six months
ended June 30, 1999 (unaudited)............................... 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 1999 and 1998 (unaudited)............................ 5-6
Notes to Consolidated Financial Statements(unaudited)........... 7-21
Report of Independent Public Accountants........................ 22
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 23-37
Item 3.Quantitative and Qualitative Disclosure About Market Risk........ 37
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders............ 38
Item 6. Exhibits and Reports on Form 8-K............................... 38
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Investments, at equity:
Archstone Communities Trust $ 821,926 $ 827,977
ProLogis Trust 596,246 623,715
Security Capital European Realty 353,543 379,971
Security Capital Preferred Growth Incorporated 80,739 77,782
Security Capital U.S. Realty 812,006 791,562
Strategic Hotel Capital Incorporated 329,000 370,197
-------------- --------------
2,993,460 3,071,204
-------------- --------------
Real estate, less accumulated depreciation 1,129,508 1,164,869
Investments in publicly traded real estate securities, at market value 84,292 117,878
-------------- --------------
Total real estate investments 4,207,260 4,353,951
Cash and cash equivalents 33,941 13,209
Other assets 146,621 142,629
-------------- --------------
Total assets $ 4,387,822 $ 4,509,789
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Lines of credit $ 475,000 $ 520,480
Mortgage notes payable 221,334 343,362
Long-term debt 699,570 614,236
Convertible debentures 320,751 322,774
Capital lease obligations 142,636 --
Accounts payable and accrued expenses 117,956 118,152
Deferred income tax liability 22,431 35,457
-------------- --------------
Total liabilities 1,999,678 1,954,461
Minority interests 83,236 132,718
Shareholders' Equity:
Class A (NYSE: SCZ.A) Shares, $.01 par value; 20,000,000 shares
authorized; 1,337,152 and 1,487,109 shares issued and outstanding
in 1999 and 1998, respectively 13 15
Class B (NYSE: SCZ) Shares, $.01 par value; 229,537,385 shares
authorized; 55,473,295 and 47,628,481 shares issued and outstanding
in 1999 and 1998, respectively 555 476
Series B Preferred Shares, $.01 par value; 257,642 shares
issued and outstanding in 1999 and 1998; stated liquidation
preference of $1,000 per share 257,642 257,642
Additional paid-in capital 2,421,129 2,416,123
Accumulated deficit (374,431) (251,646)
-------------- --------------
Total shareholders' equity 2,304,908 2,422,610
-------------- --------------
Total liabilities and shareholders' equity $ 4,387,822 $ 4,509,789
============== ==============
</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
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- --------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
INCOME:
Equity in earnings (loss) of:
Archstone Communities Trust $ 19,723 $ 14,624 $ 34,309 $ 35,399
ProLogis Trust 4,320 9,633 5,325 21,332
Security Capital European Realty (9,586) (1,359) (26,246) (1,359)
Security Capital Preferred Growth Incorporated 9,545 172 5,515 630
Security Capital U.S. Realty 96,724 (35,985) 18,758 (53,935)
Strategic Hotel Capital Incorporated 5,999 3,059 11,247 5,571
Realized capital gains, net 1,895 241 3,363 2,475
Change in unrealized gain or loss on investments 7,457 (8,545) 4,569 (9,379)
Financial Services Division revenues from
related parties 20,675 30,522 39,429 48,309
Other income, net 4,263 3,167 5,207 5,746
Property revenue 54,954 34,067 104,421 61,238
---------------- ---------------- ---------------- -------------
215,969 49,596 205,897 116,027
---------------- ---------------- ---------------- -------------
EXPENSES:
Interest expense 35,082 17,292 66,100 30,091
Financial Services Division expenses 19,742 19,299 39,734 31,646
General, administrative and other 18,377 15,103 34,395 26,663
Depreciation and amortization 11,357 8,001 22,410 14,848
Property expenses 27,397 14,045 51,038 26,298
Homestead special charge 65,296 -- 65,296 --
Provision for loss on investment 55,245 -- 55,245 --
---------------- ---------------- ---------------- -------------
232,496 73,740 334,218 129,546
---------------- ---------------- ---------------- -------------
Loss from operations (16,527) (24,144) (128,321) (13,519)
Provision for income tax expense (benefit)
Current (910) 4,687 3,310 7,385
Deferred 27,578 (10,818) (13,026) (9,983)
---------------- ---------------- ---------------- -------------
Total income tax expense (benefit) 26,668 (6,131) (9,716) (2,598)
---------------- ---------------- ---------------- -------------
Minority interests in net earnings (loss)
of subsidiaries (19,049) 593 (20,839) 1,052
---------------- ---------------- ---------------- -------------
Loss before change in accounting principle (24,146) (18,606) (97,766) (11,973)
Change in accounting principle - Cumulative
effect on prior years of expensing costs of
start-up activities, net of minority interest -- -- 16,002 --
---------------- ---------------- ---------------- -------------
Net loss (24,146) (18,606) (113,768) (11,973)
Less Preferred Share dividends 4,508 23,464 9,017 26,070
---------------- ---------------- ---------------- -------------
Net loss attributable to common shares $ (28,654) $ (42,070) $ (122,785) $ (38,043)
================ ================ ================ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Weighted-average Class B common shares outstanding:
Basic 120,402 121,569 120,420 122,454
============== ============= ================ =============
Diluted 120,402 121,569 120,420 122,454
============== ============= ================ =============
Earnings (loss) per share:
Basic net earnings (loss) before change
in accounting principle $ (0.24) $ (0.35) $ (0.89) $ (0.31)
Change in accounting principle - expensing
costs of start-up activities -- -- (0.13) --
-------------- ------------- ---------------- -------------
Basic net earnings (loss) attributable to
common shares $ (0.24) $ (0.35) $ (1.02) $ (0.31)
============== ============= ================ =============
Diluted net earnings (loss) before change in
accounting principle $ (0.24) $ (0.35) $ (0.89) $ (0.31)
Change in accounting principle - expensing
costs of start-up activities -- -- (0.13) --
-------------- ------------- ---------------- -------------
Diluted net earnings (loss) attributable to
common shares $ (0.24) $ (0.35) $ (1.02) $ (0.31)
============== ============= ================ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 1999
(In thousands, except shares)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------
Class A Class B Series B
--------------------- ---------------------- Preferred Stock Additional Total
Shares Shares At Liquidation Paid-in Accumulated Shareholder's
Outstanding Par Value Outstanding Par Value Value Capital Deficit Equity
----------- --------- ----------- --------- --------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 1,487,109 $ 15 47,628,481 $ 476 $ 257,642 $2,416,123 $ (251,646) $ 2,422,610
Conversion of Class A Shares
to Class B Shares (154,623) (2) 7,731,167 78 -- (76) -- --
Conversion of 2016 Convertible
Debentures to Class B Shares -- -- 87,629 1 -- 2,022 -- 2,023
Issuance of Shares, net 4,666 -- 26,018 -- -- 3,060 -- 3,060
Net loss -- -- -- -- -- -- (113,768) (113,768)
Preferred Share dividends -- -- -- -- -- -- (9,017) (9,017)
--------- -------- ---------- --------- --------------- ---------- ----------- -----------
Balances at June 30, 1999 1,337,152 $ 13 55,473,295 $ 555 $ 257,642 $2,421,129 $ (374,431) $ 2,304,908
========= ======== ========== ========= =============== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1999 1998
-------------- -----------
<S> <C> <C>
Operating Activities:
Net loss $ (113,768) $ (11,973)
Adjustments to reconcile net loss to cash flows
provided by operating activities:
Provision for loss on investment 55,245 --
Homestead special charge 51,587 --
Deferred income tax benefit (13,026) (9,983)
Minority interests (20,839) 1,052
Cumulative effect on prior years of expensing costs
of start-up activities, net of minority interests 16,002 --
Equity in earnings of unconsolidated investees (42,367) (2,983)
Distributions from unconsolidated investees 75,131 71,471
Change in unrealized gain or loss on investments (4,789) 9,379
Depreciation and amortization 22,410 14,848
Other 3,039 1,926
Increase in other assets (4,110) (14,231)
Increase in accounts payable and accrued expenses 10,411 22,847
-------------- ----------
Net cash flows provided by operating activities 34,926 82,353
-------------- ----------
Investing Activities:
Real estate investments (90,264) (268,637)
Redemptions from (investments in):
Security Capital U.S. Realty (1,686) (31,639)
Security Capital European Realty -- (193,875)
Strategic Hotel Capital Incorporated -- (175,000)
Security Capital Preferred Growth Incorporated -- (25,000)
Publicly traded real estate securities, net 38,375 (35,346)
Other (3,461) (938)
-------------- ----------
Net cash flows used in investing activities (57,036) (730,435)
-------------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 5 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
Financing Activities:
Proceeds from lines of credit $ 323,130 $ 785,772
Payments on lines of credit (368,610) (657,500)
Proceeds from long-term debt offerings 85,335 499,600
Proceeds from unsecured note and mortgage notes payable -- 17,014
Payments on mortgage notes payable (122,028) --
Proceeds from issuance of common shares to minority
interest holders 13,449 33,485
Sale of real estate, net 127,261 --
Preferred dividends paid (9,017) (6,227)
Debt issuance costs (7,071) (18,164)
Other 393 3,041
----------- ----------
Net cash flows provided by financing activities 42,842 657,021
----------- ----------
Net increase in cash and cash equivalents 20,732 8,939
Cash and cash equivalents, beginning of period 13,209 11,454
----------- ----------
Cash and cash equivalents, end of period $ 33,941 $ 20,393
=========== ==========
Non-Cash Investing and Financing Activities:
Increase in property and equipment from capital lease $ 145,000 $ --
=========== ==========
Conversions of 2016 Convertible Debentures $ 2,023 $ --
=========== ==========
Receipt of Security Capital European Realty
shares in satisfaction of indebtedness $ -- $ 70,772
=========== ==========
Issuance of Series B Preferred Shares:
Series B Preferred Shares issued $ -- $ 257,642
Series A Preferred Shares retired -- (139,000)
Fair value of Class B Common Shares retired -- (98,799)
Series A Preferred dividend recorded -- (19,843)
----------- ----------
$ -- $ --
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 6 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
Security Capital Group Incorporated ("Security Capital") is a global real
estate research, investment and operating management company. Its strategy is to
create the optimal organization to build and hold significant ownership
positions in real estate operating companies that generate substantial internal
growth, enhance their real estate returns by generating significant levels of
service income and are able to become market leaders by creating value in their
brand. Security Capital operates its business through two divisions. The Capital
Division provides operational and capital deployment oversight to direct and
indirect investments in real estate investment trusts ("REITs") and real estate
operating companies. The Capital Division generates earnings principally from
its ownership of these private and public affiliates (see note 2). The Financial
Services Division generates fees from capital management, capital markets,
corporate services and research services primarily for the companies in which
Security Capital and its affiliates have invested.
The accompanying consolidated financial statements include the results of
Security Capital, its wholly owned Financial Services Division subsidiaries and
its majority-owned Capital Division investees which include BelmontCorp
("Belmont"), Homestead Village Incorporated ("Homestead"), Security Capital
European Real Estate Shares ("SC-European Real Estate Shares") and Security
Capital U.S. Real Estate Shares ("SC-US Real Estate Shares"). All significant
intercompany accounts and transactions have been eliminated in consolidation. At
June 30, 1999, minority interest relates mainly to Homestead and SC-US Real
Estate Shares.
In the opinion of management, the accompanying unaudited consolidated
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 1998 consolidated financial statements
and notes to consolidated financial statements in order to conform to the 1999
presentation. The results of operations for the six-month period ended June 30,
1999, 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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses recognized during
the reporting period. Actual results could differ from those estimates.
The consolidated financial statements of Security Capital as of June 30,
1999, 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 1998 audited consolidated financial statements contained in Security
Capital's 1998 Annual Report on Form 10-K.
7
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) CAPITAL DIVISION
Security Capital holds the following real estate investments at June 30,
1999, and December 31, 1998:
<TABLE>
<CAPTION>
% Ownership Security Capital's Net
as of Investments (Redemptions)
June 30, December 31, for the Six Months
Investment Type of Entity 1999 1998 Ended June 30, 1999
- ------------------------------------------- -------------------- -------------- -------------- -------------------------
(in thousands)
<S> <C> <C> <C> <C>
EQUITY-METHOD INVESTEES:
Archstone Communities Trust Apartment REIT 39.1% 38.1% $ --
- --------------------------- (publicly traded)
("Archstone")
ProLogis Trust("ProLogis") (a) Industrial REIT 30.9% 40.4% --
- -------------- (publicly traded)
Security Capital European Realty Global real estate 34.6% 34.6% --
- -------------------------------- investments
("SC-European Realty") (private entity)
Security Capital Preferred Growth Convertible security 9.7% 9.8% --
- ---------------------------------- investments in real
Incorporated ("SC-Preferred Growth") estate companies
------------- (private REIT)
Security Capital U.S. Realty U.S. real estate 37.8% 35.0% 1,686
- ----------------------------- investments
("SC-U.S.Realty") (publicly traded)
Strategic Hotel Capital Incorporated (b) Luxury and 30.4% 30.4% --
- ---------------------------------------- upscale hotels
("Strategic Hotel") (private entity)
CONSOLIDATED INVESTEES:
BelmontCorp Senior assisted living 100% 100% 19,071
- ----------- (private entity)
Homestead Village Incorporated Extended-stay lodging 87.0% 69.8% 213,810(c)
- ------------------------------ (publicly traded)
Security Capital European Real Estate European real 99.9% 99.9% 2,000
- -------------------------------------- estate securities fund
Shares (investment fund)
------
Security Capital U.S. Real Estate U.S. real estate 75.6% 89.9% (41,500)
- ---------------------------------- securities fund
Shares (investment fund)
------
</TABLE>
(a) On March 30, 1999, ProLogis merged with Meridian Industrial Trust, Inc.
Security Capital continues to be ProLogis' largest shareholder.
(b) On August 12, 1999, Security Capital agreed to sell its entire ownership
position in Strategic Hotel. See note 8 for further discussion.
(c) In May 1999 Security Capital invested $213,810 in Homestead through
participation in a common stock rights offering.
8
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Security Capital received dividends and interest from its investees
for the three and six months ended June 30, 1999 and 1998, as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Dividends Received (in thousands)
---------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------- -------------- --------------- --------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Dividends:
Archstone/Security Capital
Atlantic Incorporated (a) $ 20,180 $ 19,975 $ 40,360 $ 39,950
ProLogis 16,329 15,884 32,213 30,107
SC-European Real Estate Shares 109 -- 143 --
SC-Preferred Growth 1,298 867 2,558 1,414
SC-US Real Estate Shares 559 964 1,259 4,728
-------------- -------------- --------------- --------------
38,475 37,690 76,533 76,199
-------------- -------------- --------------- --------------
Interest:
Strategic Hotel (b) 3,271 2,810 6,541 4,655
-------------- -------------- --------------- --------------
$ 41,746 $ 40,500 $ 83,074 $ 80,854
============== ============== =============== ==============
Dividend Amount Per Investee Share
---------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
Archstone $ 0.3700 $ 0.3400 $ 0.7400 $ 0.6800
Security Capital Atlantic
Incorporated (a) -- 0.4000 -- 0.8000
ProLogis 0.3272 0.3183 0.6455 0.6033
SC-European Real Estate Shares 0.0987 -- 0.1335 --
SC-Preferred Growth 0.3300 0.2200 0.6500 0.3900
SC-US Real Estate Shares 0.1218 0.1000 0.2417 0.4902
</TABLE>
(a) Security Capital Atlantic Incorporated ("Atlantic") merged into
Archstone in July 1998.
(b) Includes deferred interest income from Strategic Hotel of $3,041,000
and $2,533,000 for the six months ended June 30,1999 and 1998,respectively.
See note 8 for discussion of the sale of Strategic Hotel.
9
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Presented below is summarized earnings information for Security
Capital's equity-method investees for the six months ended June 30, 1999 and
1998 (in thousands):
<TABLE>
<CAPTION>
Archstone/Atlantic(a) ProLogis Strategic Hotel(c)
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental revenue and other
income, net $ 324,704 $ 294,848 $ 226,973 $ 176,518 $ 350,133 $ 217,039
Expenses 242,959 210,876 181,891 105,471 329,222 210,566
------------- ------------- ------------- ------------- ------------- -------------
Net earnings before minority
interest 81,745 83,972 45,082 71,047 20,911 6,473
Minority interest share of
net earnings -- 450 2,603 2,054 5,449 3,937
------------- ------------- ------------- ------------- ------------- -------------
Net earnings from operations 81,745 83,522 42,479 68,993 15,462 2,536
Gain on disposition of
real estate 18,978 20,844 715 4,278 -- --
------------- ------------- ------------- ------------- ------------- -------------
Net earnings before Extraordinary item 100,723 104,366 43,194 73,271 15,462 2,536
Less: Loss on early extinguishment
of debt 1,113 -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Net earnings 99,610 104,366 43,194 73,271 15,462 2,536
Less Preferred Share dividends 11,306 11,625 27,938 21,874 -- --
------------- ------------- ------------- ------------- ------------- -------------
Net earnings attributable to common
shares before change in accounting
principle $ 88,304 $ 92,741 $ 15,256 $ 51,397 $ 15,462 $ 2,536
============= ============= ============= ============= ============= =============
Security Capital share of net earnings
before change in accounting
principle $ 34,309 $ 35,399 $ 5,325 $ 21,332 $ 4,706 $ 916
============= ============= ============= ============= ============= =============
Interest income from affiliate $ -- $ -- $ -- $ -- $ 6,541 $ 4,655
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
SC-European Realty(b) SC-Preferred Growth SC-U.S.Realty
------------------------- ------------------------- ----------------------
1999 1998 1999 1998 1999 1998
----------- ---------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $ (8,166) $ (3,941) $ 27,576 $ 15,369 $ 28,731 $ 41,107
Realized gains (losses) on investments 2,136 -- (12,332) -- 1,620 30,562
Change in unrealized gain or loss on investments (69,934) -- 41,155 (10,464) 26,963 (212,905)
Eliminations -- -- -- -- (4,062) (20,426)
----------- ---------- ----------- ---------- ----------- ---------
Adjusted net earnings (loss) $ (75,964) $ (3,941) $ 56,399 $ 4,905 $ 53,252 $(161,662)
=========== ========== =========== ========== =========== =========
Security Capital share of adjusted net $ (26,246) $ (1,359) $ 5,515 $ 630 $ 18,758 $ (53,935)
earnings(loss) =========== ========== =========== ========== =========== =========
</TABLE>
(a) Atlantic merged into Archstone in July 1998.
(b) SC-European Realty commenced operations in April 1998.
(c) Subsequent to the second quarter of 1999, Security Capital will no longer
record equity in earnings from Strategic Hotel as a result of the
write-down in carrying value to estimated net sales value as of June 28,
1999.
10
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A condensed consolidating balance sheet for Security Capital as of June
30, 1999, follows (in thousands):
<TABLE>
<CAPTION>
Investment
Security Capital(a) Homestead (b) Funds (b)(c) Consolidated(d)
------------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Investments, at equity $ 3,564,608 $ -- $ -- $ 2,993,460
Net real estate investments 46,427 1,126,973 -- 1,129,508
Investments in publicly traded real estate
securities, at market value -- -- 84,292 84,292
Cash and other assets 131,779 92,786 1,106 180,562
----------------- -------------- ------------ ---------------
Total assets $ 3,742,814 $ 1,219,759 $ 85,398 $ 4,387,822
================= ============== ============ ===============
Lines of credit $ 276,000 $ 199,000 $ -- $ 475,000
Long-term debt 1,020,321 363,970 -- 1,384,291
Other liabilities 117,449 64,223 1,806 140,387
----------------- -------------- ------------- --------------
Total liabilities 1,413,770 627,193 1,806 1,999,678
Minority interests 19,320 -- -- 83,236
Shareholders' equity 2,309,724 592,566 83,592 2,304,908
----------------- -------------- ------------- --------------
Total liabilities and
shareholders' equity $ 3,742,814 $ 1,219,759 $ 85,398 $ 4,387,822
================= ============== ============= ==============
</TABLE>
- -----------------
(a) Includes Homestead and the Investment Funds accounted for using the equity
method.
(b) Reflects the carrying amount prior to elimination entries.
(c) The Investment Funds, which invest in securities of real estate companies,
include SC-US Real Estate Shares and SC-European Real Estate Shares.
(d) Consolidated amounts include effect of elimination entries.
11
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A condensed consolidating statement of operations for Security Capital
for the six months ended June 30, 1999, follows (in thousands):
<TABLE>
<CAPTION>
Security Investment
Capital (a) Homestead (b) Funds (b)(c) Consolidated(d)
------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Equity in earnings of investees $ 5,192 $ -- $ -- $ 48,908
Financial Services Division revenues from
related parties 42,771 -- -- 39,429
Property revenue 1,149 103,272 -- 104,421
Other income 2,705 2,808 8,867 13,139
------------- ------------- ----------- ---------------
51,817 106,080 8,867 205,897
------------- ------------- ----------- ---------------
Interest expense 40,966 25,274 -- 66,100
Financial Services Division expenses 39,734 -- -- 39,734
General, administrative and other 18,602 18,238 591 34,395
Depreciation and amortization 3,337 20,315 -- 22,410
Property expenses 1,343 49,696 -- 51,038
Homestead special charge -- 65,296 -- 65,296
Provision for loss on investment 55,245 -- -- 55,245
------------- ------------- ------------ -------------
159,227 178,819 591 334,218
------------- ------------- ------------ -------------
Earnings (loss) before income taxes,
minority interests and change in
accounting principle (107,410) (72,739) 8,276 (128,321)
Income tax benefit (9,716) -- -- (9,716)
Minority interests -- -- -- (20,839)
------------- ------------ ------------ --------------
Net earnings (loss) before change in
accounting principle (97,694) (72,739) 8,276 (97,766)
Change in accounting principle -
Cumulative effect on prior years of
expensing costs of start-up activities,
net of minority interests 16,002 14,230 -- 16,002
------------- ------------ ------------ --------------
Net loss (113,696) (86,969) 8,276 (113,768)
Less Preferred Share dividends 9,017 -- -- 9,017
------------- ------------ ------------ --------------
Net earnings (loss) attributable to
common shares $ (122,713) $ (86,969) $ 8,276 $ (122,785)
============= ============ ============ ==============
</TABLE>
- ------------------
(a) Includes Homestead and the Investment Funds accounted for using the
equity method.
(b) Reflects the carrying amount prior to elimination entries.
(c) The Investment Funds, which invest in securities of real estate companies,
include SC-US Real Estate Shares and SC-European Real Estate Shares.
(d) Consolidated amounts include effect of elimination entries.
12
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) FINANCIAL SERVICES DIVISION
Financial Services Division revenues for the three and six months ended
June 30, 1999 and 1998, were earned from the following sources (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Capital Markets fees $ 3,283 $ 16,544 $ 4,183 $ 21,182
Corporate Services fees 4,164 4,042 9,671 7,826
Global Capital Management Group fees 14,528 11,475 28,782 21,581
Real Estate Research fees 167 256 396 573
---------- ------------- ---------- -----------
Total Financial Services Division
revenues from related parties 22,142 32,317 43,032 51,162
Less amounts eliminated in
consolidation (1,467) (1,795) (3,603) (2,853)
---------- ------------- ---------- -----------
Consolidated Financial Services
Division revenue from related parties $ 20,675 $ 30,522 $ 39,429 $ 48,309
========== ============= ========== ===========
</TABLE>
(4) SEGMENT REPORTING
For internal management purposes, Security Capital uses Earnings Before
Depreciation, Amortization and Deferred Taxes ("EBDADT") to measure its
performance. Security Capital believes that EBDADT is the best measure of
operating performance for Security Capital and its affiliates. For EBDADT
purposes, all investees (including consolidated investees) are accounted for on
the equity method. In general, EBDADT is defined for Security Capital and its
consolidated and equity-method investees as follows:
Net earnings plus or minus:
Plus Real estate depreciation (depreciation will not
be added back for non-real estate assets whose
value is declining over time)
Plus Amortization of real estate related non-cash items
(e.g., goodwill)
Plus Other non-cash, non-recurring expenses
Minus Dividends received by SC-U.S.Realty and SC-
European Realty from their strategic investees
Plus/Minus Deferred tax expense (benefit)
Plus/Minus Losses (gains) on the disposition of depreciated
real estate
Plus/Minus Unrealized losses (gains) on non-strategic
investments
With respect to Security Capital investees in which Security Capital
has less than a 20% interest, and does not have the ability to significantly
influence management, Security Capital includes only dividends or interest
received in its EBDADT. SC-U.S.Realty and SC-European Realty use the same
approach for investees in which they own less than 20%.
13
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Presented below is a Statement of EBDADT by reportable segment for the
three and six months ended June 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Capital Division:
Equity in Investees' EBDADT $ 93,099 $ 81,672 $ 178,825 $ 160,037
Interest and other income 896 713 1,683 1,299
--------- ----------- ----------- ----------
93,995 82,385 180,508 161,336
--------- ----------- ----------- ----------
Operating expenses 11,937 8,650 20,150 16,089
Interest expense 21,117 13,149 40,948 22,969
Current income tax expense (benefit) (1,130) 3,533 2,739 5,798
Convertible preferred share dividends 4,508 3,622 9,017 6,228
--------- ------------ ----------- ----------
Capital Division EBDADT(1) 57,563 53,431 107,654 110,252
--------- ------------ ----------- ----------
Financial Services Division:
Revenues 22,142 32,317 43,032 51,162
--------- -------------- ----------- -----------
Operating expenses 18,342 20,042 38,180 32,911
Current income tax expense 220 1,155 571 1,587
--------- -------------- ----------- -----------
Financial Services Division EBDADT 3,580 11,120 4,281 16,664
--------- -------------- ----------- -----------
EBDADT before special items 61,143 64,551 111,935 126,916
Homestead special charge 45,581 -- 45,581 --
Strategic Hotel provision 55,288 -- 55,288 --
--------- -------------- ----------- ----------
EBDADT $ (39,726) $ 64,551 $ 11,066 $ 126,916
========= ============== =========== ==========
</TABLE>
(1) For purposes of calculating Capital Division EBDADT, Security Capital
applies all interest expense, preferred share dividends and similar charges
for invested capital to the Capital Division. Operating expenses include
the direct costs of personnel assigned to the Capital Division plus a
proportionate share of general and administrative costs based on revenues.
14
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Presented below is a reconciliation of net loss to EBDADT for the three and
six months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net loss attributable
to common shares $ (28,654) $ (42,070) $ (122,785) $ (38,043)
Investee reconciling items:
Real estate depreciation 47,379 38,151 91,268 70,223
Gain on sale of depreciated real estate (5,290) (3,533) (7,629) (9,518)
Unrealized (gains) losses (92,111) 58,865 20,800 88,692
EBDADT, net of dividends, from
Strategic Investees of SC-U.S.Realty
and SC-European Realty 12,616 3,451 25,285 7,460
Other (770) 5,488 1,808 3,068
----------- ----------- ---------- ----------
(38,176) 102,422 131,532 159,925
----------- ----------- ---------- ----------
Security Capital reconciling items:
Deferred tax (benefit) expense 27,578 (10,818) (13,026) (9,983)
Adoption of an accounting principle -- -- 16,002 --
Non-cash preferred share dividend -- 19,842 -- 19,842
Other (474) (4,825) (657) (4,825)
----------- ---------- ----------- ----------
27,104 4,199 2,319 5,034
----------- ---------- ----------- ----------
EBDADT $ (39,726) $ 64,551 $ 11,066 $ 126,916
=========== ========== =========== ==========
</TABLE>
Presented below is a reconciliation of segment assets at fair value, as used for
internal management purposes, to assets presented in accordance with generally
accepted accounting principles ("GAAP") as of June 30, 1999 and December 31,
1998 (in thousands):
June 30, December 31,
1999 1998
---------------- ------------
Capital Division assets at fair value (1) $ 4,107,226 $ 3,973,091
Excess of assets at fair value over cost
of unconsolidated GAAP assets (341,505) (300,707)
Consolidation of Homestead and
investment funds 668,369 847,584
Proceeds from assumed exercise
of options and warrants (2) (46,268) (10,179)
---------------- ------------
GAAP Assets $ 4,387,822 $ 4,509,789
================ ============
(1) For internal management purposes, Security Capital values its Capital
Division assets at fair value and does not assign a value to the Financial
Services Division.
(2) Includes only those options and warrants whose exercise price is equal to
or less than market value as of these dates.
15
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) INDEBTEDNESS
Lines of Credit:
At June 30, 1999, Security Capital had a $470,000,000 unsecured
revolving line of credit with Wells Fargo Bank, National Association (Wells
Fargo), as agent for a group of lenders. Borrowings accrued interest at LIBOR
plus a margin (1.30% as of June 30, 1999) based upon Security Capital's credit
rating or a Base Rate (defined as the higher of Wells Fargo prime rate or the
Federal Funds rate plus .50%).
On April 13, 1999, the line of credit was amended. The amended
agreement is effective through April 6, 2002, with an option to renew for
successive one-year periods with the approval of lenders. At Security Capital's
request, availability of the line was reduced to $470,000,000 from $650,000,000,
to match Security Capital's anticipated intermediate-term requirements.
Commitment fees on the amended line range from 0.125% to 0.20% per
annum based on the average unfunded line of credit balance. The line is
guaranteed by SC Realty Incorporated and SC Realty Shares Limited, each of which
is a wholly owned subsidiary of Security Capital.
As of March 18, 1999, Homestead executed an agreement with its bank
lenders to renew and amend their Working Capital Facilities. Homestead's lines
of credit as of June 30, 1999, are summarized as follows:
<TABLE>
<CAPTION>
Fee on average
Amount Maturity Interest rate range unfunded balances Collateral
- --------------- ------------------ -------------------------- -------------------- ----------------------------------------
<S> <C> <C> <C> <C>
$ 170,000,000 December 31, 2000 2.0% to 3.0% over LIBOR 0.375% Suburban real estate properties
(previously and 1.0% to 2.0% over
$150,000,000) prime or 1.5% to 2.5% over
the federal funds rate
$ 30,000,000 December 31, 2000 3.0% over LIBOR and 2.0% N/A Urban real estate properties
(previously over prime or 2.5% over
$50,000,000) the federal funds rate
</TABLE>
As of June 30, 1999, Homestead has an outstanding balance of
$199,000,000 under the Working Capital Facilities, the full amount available
based on collateral requirements. Subsequent to quarter end the Working Capital
Facilities balance was reduced by $5,900,000 with the net proceeds from the sale
of an urban site.
Each line of credit requires maintenance of certain financial
covenants. Security Capital, SC Realty, SC Realty Shares Limited and Homestead
were in compliance with all such covenants at June 30, 1999.
16
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Senior Unsecured Notes:
Under its medium-term note program, in the first quarter of 1999,
Security Capital issued $5,000,000 of 7.75% Senior Unsecured Notes due
January 11, 2005; $54,550,000 of 7.80% Senior Unsecured Notes, due January
12, 2005; and $25,750,000 of 7.80% Senior Unsecured Notes due January 19,
2005. The total outstanding principal balance of Senior Unsecured Notes was
$700,000,000 as of June 30, 1999.
All of the Notes are redeemable at any time at the option of Security
Capital, in whole or in part, at a redemption price equal to the sum of the
principal amount of the Notes being redeemed plus accrued interest thereon to
the redemption date plus an adjustment, if any, based on the yield to maturity
relative to market yields available at redemption.
Capital Lease Obligation:
On February 23, 1999, Homestead completed a sale and leaseback of 18
of the 26 Homestead properties collaterizing the $122,000,000 mortgage note
which was due June 1999. Hospitality Properties Trust purchased the properties
for $145,000,000. Homestead will continue to operate the properties under a
long-term lease through December 2015 and pay a minimum rent of approximately
$16,000,000 per year. Homestead posted a security deposit equal to one year's
rent. The majority of the proceeds from the sale were used to repay a
$122,000,000 mortgage note and to post the approximate $16,000,000 security
deposit.
The approximate $350,000 gain on sale will be deferred and will be
recognized over the term of the lease. The lease is considered a capital lease
for financial reporting purposes and thus the present value of the minimum lease
payments, discounted at approximately 9.8%, has been recorded as an asset of
$145,000,000 to be amortized over the lease term, and an obligation, which will
be reduced over the term of the lease by allocating rent payments between
interest expense and reduction of the lease obligation. The balance of the lease
obligation at June 30, 1999, was $142,636,000.
The lease also provides for two extension periods of 15 years each at
the option of Homestead, requires payment of percentage rents beginning July
2000 based on increases in revenues over a base period, and requires a
percentage of revenues be paid to a furniture, fixtures and equipment reserve to
be used for capital expenditures.
Homestead Convertible Mortgage Notes Payable:
At June 30, 1999 Homestead had outstanding convertible mortgage notes
in the principal amount of $221,334,000, all of which were held by Archstone.
The notes are collateralized by 54 Homestead properties with a historical cost
of $360,800,000. The notes accrue interest at 9.0% on the principal amount and
require interest only payments every six months on May 28 and November 28 of
each year. The notes are due October 31, 2006, and are callable on or after May
28, 2001. The notes are convertible, at the option of the holder, into
21,191,262 shares of Homestead common stock (a conversion ratio equal to one
share of common stock for every approximate $10.44 of principal amount
outstanding). The conversion ratio was adjusted in accordance with the terms of
the notes upon the issuance of shares in the May 1999 rights offering.
Previously the conversion ratio was $11.50 (19,246,402 shares). Deferred
financing costs and the discount on the respective fundings have been fully
amortized. No further funding commitment is available under the mortgage notes.
17
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest:
Presented below are the interest costs incurred by Security Capital and
its consolidated subsidiaries for the three and six months ended June 30, 1999
and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Total interest incurred $ 37,266 $ 24,945 $ 72,724 $ 44,248
=========== ============ ========== ============
Homestead and Belmont capitalized
interest included in total interest incurred $ 2,184 $ 7,653 $ 6,624 $ 14,157
=========== ============ ========== ============
Interest paid in cash $ 53,653 $ 30,799 $ 66,802 $ 34,065
=========== ============ ========== ============
Amortization of deferred financing costs
included in interest incurred $ 1,834 $ 1,535 $ 3,399 $ 2,799
=========== ============ ========== ============
</TABLE>
18
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) SHAREHOLDERS' EQUITY
Per Share Data:
The following is a reconciliation of the numerators and denominators
used to calculate basic and diluted earnings per Class B Common Share under
Statement of Financial Accounting Standards 128 ("SFAS 128") for the periods
indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Loss before change in accounting
principle $ (24,146) $ (18,606) $ (97,766) $ (11,973)
Less: Preferred Share dividends 4,508 23,464 9,017 26,070
------------ ------------ ----------- -----------
Net loss attributable to common shares
and assumed conversions before
change in accounting principle $ (28,654) $ (42,070) $ (106,783) $ (38,043)
============ ============ =========== ===========
Basic weighted-average Class B
common shares outstanding 120,402 121,569 120,420 122,454
Increase in shares which would result
from:
Exercise of options -- -- -- --
Diluted weighted-average Class B
common shares outstanding 120,402 121,569 120,420 122,454
============ ============ =========== ===========
Per share net earnings (loss)
attributable to Class B common shares:
Basic $ (0.24) $ (0.35) $ (0.89) $ (0.31)
============ ============ =========== ===========
Diluted $ (0.24) $ (0.35) $ (0.89) $ (0.31)
============ ============ =========== ===========
</TABLE>
For all periods the Convertible Debentures and the Convertible
Preferred Shares are not assumed converted and the conversion of options and
warrants are not assumed exercised for the purpose of calculating diluted
earnings per Class B Common Share as the effects are anti-dilutive.
(7) HOMESTEAD SPECIAL CHARGE
In the second quarter of 1999, Homestead determined, based on its
inability to obtain financing for development of sites beyond those already in
construction, to further curtail its development program. As of the beginning of
the second quarter, Homestead had substantial investments in ownership of land
for development and in costs of pursuit of additional development sites. All
land previously held for development is now held for sale, all pursuits for
acquisition of additional sites for development were abandoned, and Homestead
reduced overhead costs and personnel to reflect a company with stabilized
operations of 136 properties. Homestead recorded a special charge of $65,296,000
in May 1999 consisting of approximately $43,500,000 for write-downs of the
carrying cost of land held for sale to its estimated fair value less estimated
costs to dispose, approximately $7,100,000 for write-offs of costs of pursuits
and loss of non-refundable earnest money deposits, approximately $5,500,000 for
closing of administrative offices and discontinued new initiatives, and
approximately $9,200,000 for the costs of severance of personnel. Revisions to
these estimates may be required based upon the ultimate sale of the properties.
19
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Carrying costs on the land sites, such as interest and property taxes,
have been expensed since April 1999, and will continue until the sites are
disposed of and will adversely affect earnings until disposal. The majority of
the land sites are subject to the security interests of the lenders under the
Working Capital Facilities and any sale of the encumbered sites requires the
consent of the lenders. Upon sale, the proceeds will be used to repay the
Working Capital Facilities.
(8) STRATEGIC HOTEL
On June 28, 1999, Security Capital's board of directors approved, in a
unanimous consent, the sale of its entire ownership position to Strategic Hotel.
An agreement to sell Strategic Hotel for $329,000,000 was signed on August 12,
1999. The sale is scheduled to close between September 8 and December 8, 1999.
A provision for loss on the sale of Strategic Hotel of $55,245,000 was
recorded as of June 28, 1999. In conjunction with the provision, a capital loss
tax benefit of $19,336,000 was recorded. However, a valuation allowance of
$18,126,000 was provided against the tax benefit because Security Capital
currently has no plans to sell any of the assets which would generate
sufficient taxable gains to offset this loss.
As a result of the write-down in carrying value of Strategic Hotel to
its estimated net sales value, equity in earnings from Strategic Hotel will not
be recorded after the second quarter of 1999.
(9) COMMITMENTS AND CONTINGENCIES
Security Capital and its affiliates have committed to invest up to
$518,258,000 in equity securities of SC-European Realty. As of June 30, 1999,
$375,737,000 had been funded by Security Capital and its affiliates, with an
additional $25,900,000 funded in July 1999.
At June 30, 1999, Homestead had approximately $17,000,000 of unfunded
commitments for developments under construction. Homestead anticipates
completing development of properties under construction utilizing cash on hand,
proceeds from future sales, if any, of unencumbered land, and cash flow from
operations.
As of June 30, 1999, $57,367,000 had been funded by Security Capital to
Belmont and an additional $25,633,000 of unfunded commitments remained. At June
30, 1999, Belmont had approximately $19,900,000 of unfunded commitments for
developments under construction.
20
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) RECENT ACCOUNTING PRONOUNCEMENT
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities,"
("SOP 98-5"), establishing accounting standards requiring the expensing of
organizational, pre-opening and start-up costs. Security Capital adopted SOP
98-5 effective January 1, 1999. Upon adoption, any material unamortized
organizational, pre-opening and start-up costs were written off as a cumulative
effect of adoption of an accounting standard. The cumulative impact of the
adoption of SOP 98-5 on Security Capital's results of operation and financial
position was $16,002,000 in the first quarter of 1999, primarily related to
Homestead and Belmont. No financial statement amounts were restated upon
adoption of the new standard.
21
<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, 1999, and the
related consolidated statements of operations for the three- and six-month
periods ended June 30, 1999 and 1998, the consolidated statement of
shareholders' equity for the six-month period ended June 30, 1999, and the
consolidated statements of cash flows for the six-month periods ended June 30,
1999 and 1998. These financial statements are the responsibility of the
Management of the Company. We were furnished with the reports of other
accountants on their reviews of the financial statements of Archstone
Communities Trust and Security Capital Atlantic Incorporated, whose total assets
represent 18.6% of the total assets of Security Capital Group Incorporated and
subsidiaries as of June 30, 1999, and whose income represent 13.3% and 14.4% 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, 1999 and 1998, 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, 1998, and, in our report dated March 10,
1999, we expressed an unqualified opinion on that statement based on our audit
and reports of other auditors. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1998, 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 13, 1999
22
<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. See Security Capital's 1998 Annual Report on Form 10-K for a
discussion of various risk factors associated with forward looking statements
made in this document.
Overview
Security Capital is a global real estate research, investment and
operating management company. Security Capital operates its business and obtains
income through two divisions. The Capital Division provides operational and
capital deployment oversight to direct and indirect investments in real estate
investment trusts and real estate operating companies. The Capital Division
generates earnings principally from its ownership of these private and public
affiliates. The Financial Services Division generates fees and earnings from
capital management, capital markets, corporate services and research services
primarily for the companies in which Security Capital and its affiliates have
invested. Revenues from Capital Markets, Corporate Services, Global Capital
Management Group and Real Estate Research are all included in the Financial
Services Division and are only reflected in Security Capital's consolidated
financial statements if they were earned from investees not consolidated in the
financial statements. Financial Services Division revenues earned from
consolidated investees (Belmont, Homestead, SC-European Real Estate Shares and
SC-US Real Estate Shares) are eliminated in Security Capital's consolidated
financial statements.
Results of Operations
Three and Six Months Ended June 30, 1999 Compared to Three and Six Months Ended
June 30, 1998
Capital Division Investments
Dividends Received
Security Capital's dividends received increased from $37.7 million to
$38.5 million, for the three months ended June 30, 1999, compared to the same
period in 1998 and increased from $76.2 million to $76.5 million, for the six
months ended June 30, 1999, compared to the same period in 1998. The increases
for the three and six month periods resulted primarily from an increase in the
dividend rates from Archstone, ProLogis and SC-Preferred Growth, slightly offset
by the decrease in dividends received from SC-US Real Estate Shares due to
redemptions totaling $51.0 million since the fourth quarter of 1998. For the six
months ended June 30, 1999, there was also a decrease in the dividend rate of
SC-US Real Estate Shares (see "dividends per investee share" chart in note 2 to
the consolidated financial statements).
Equity in Earnings of Investees
Security Capital includes in its earnings its share of the earnings of
its unconsolidated investees. The equity in earnings of SC-European Realty,
SC-U.S.Realty and SC-Preferred Growth, and the earnings of SC-US Real Estate
Shares and SC-European Real Estate Shares, in accordance with generally accepted
accounting principles, include the change in unrealized gains or losses on their
investments in their earnings. This component of earnings or loss fluctuates
with changes in the prevailing market prices for the shares of the real estate
companies in which they invest. The fluctuation in market prices does not have
an impact on cash flow, but the general decline in real estate equity security
prices through the first quarter of 1999 had a significant adverse impact on
Security Capital's equity in earnings of these investees. During the second
quarter of 1999, real estate security prices generally increased which had a
positive effect on Security Capital's equity in earnings of these investees.
23
<PAGE>
Presented below is Security Capital's equity in earnings (loss) of
affiliates for the three months and six months ended June 30, 1999 and 1998, and
Security Capital's common share ownership interest in affiliates as of June 30,
1999 and 1998 (dollar amounts in millions):
<TABLE>
<CAPTION>
Equity in Earnings (Loss)
------------------------------------------------------------------------- % Ownership
Three Months Ended Six Months Ended as of
June 30, June 30, June 30,
------------------------------ ----------------------------- ----------------
1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Archstone $ 19.7 $ 14.6 $ 34.3 $ 35.4 39.1% 38.1%
ProLogis 4.3 9.6 5.3 21.3 30.9 40.6
SC-European Realty (9.6) (1.4) (26.2) (1.4) 34.6 34.6
SC-Preferred Growth 9.5 0.2 5.5 0.6 9.7 12.8
SC-U.S.Realty 96.7 (36.0) 18.8 (53.9) 37.8 34.3
Strategic Hotel:
Earnings 2.7 0.2 4.7 0.9 30.4 31.2
Interest income 3.3 2.9 6.5 4.7
---------- --------- ---------- ------------
$ 126.6 $ (9.9) $ 48.9 $ 7.6
========== ========= ========== ============
</TABLE>
Atlantic was merged into Archstone in July of 1998. For purposes of the
table above Security Capital has combined the results of Archstone and Atlantic
for the three and six months ended June 30, 1998. The increase in Security
Capital's equity in Archstone's earnings for the three months ended June 30,
1999, compared to the same period in 1998, is primarily due to gains on
dispositions of depreciated real estate of $13.7 million in the second quarter
of 1999 and a $6.0 million charge in the second quarter of 1998 related to
Atlantic terminating an interest rate lock on a debt offering due to the merger
with Archstone. The decrease in Security Capital's equity in Archstone's
earnings for the six months ended June 30, 1999, compared to the same period
in 1998, is primarily due (i) an increase in depreciation and interest expense
relative to the increase in rental revenues due to the increase in the
number and cost basis of operating communities; and, (ii) a decrease of $1.9
million on gains on disposition of investments from 1998.
The decrease in Security Capital's equity in ProLogis' earnings for the
three and six months ended June 30, 1999, compared to the same periods in 1998,
is primarily due to (i) a net decrease in income generated by ProLogis'
unconsolidated subsidiaries in 1999 from 1998, primarily due to the recognition
of net foreign currency exchange losses in 1999; and, (ii) increases in general
and administrative expenses and other expenses, primarily pursuit costs written-
off in 1999.
Security Capital's decreased ownership in ProLogis is due to ProLogis'
merger with Meridian Industrial Trust, Inc. which was effective March 30, 1999,
whereby ProLogis acquired Meridian through the issuance of new shares.
Security Capital continues to be ProLogis' largest shareholder.
SC-European Realty commenced operations in April 1998. Security
Capital's weighted average investment increased from $97.2 million to $375.7
million for the three months ended June 30, 1998, compared to the same period
in 1999 and increased from $64.8 million to $375.7 million for the six months
ended June 30, 1998, compared to the same period in 1999. SC-European
Realty's current investments are primarily in prestabilized operating and
development companies. The current year losses relate primarily to unrealized
foreign exchange losses.
The increase in Security Capital's equity in SC-Preferred Growth's
earnings for the three and six months ended June 30, 1999, compared to the same
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<PAGE>
period in 1998, is primarily due to a change in unrealized gain or loss on
investments ($83.1 million increase for the second quarter and $41.2 increase
for the first six months of 1999 and $9.5 million decrease for the second
quarter and $10.5 million decrease for the first six months of 1998) due to the
increase in the fair value of stocks owned by SC-Preferred Growth during the
second quarter of 1999. This increase was partially offset by a realized loss of
$12.3 million recorded in the first quarter of 1999.
The increase in Security Capital's equity in SC-U.S.Realty's earnings
for the three and six months ended June 30, 1999, compared to the same periods
in 1998, is primarily due to the change in unrealized gain or loss on
investments ($263.6 million increase and $120.1 million decrease for the three
months ended June 30, 1999 and 1998, respectively, and $27.0 million increase
and $212.9 million decrease for the six months ended June 30, 1999 and 1998,
respectively), due to the rise in the market value of REIT stocks in the second
quarter of 1999, including those owned by SC-U.S.Realty. SC-U.S.Realty's
realized gains on its non-strategic real estate portfolio investments decreased
by $12.3 million and $28.9 million for the three and six months ended June 30,
1999, respectively, compared to the same periods in 1998. SC-U.S.Realty's net
investment income (defined as dividends and other investment income net of
administrative expenses, advisor fees, taxes and interest) decreased by $4.6
million and $12.4 million for the three and six months ended 1999, respectively,
compared to the same periods in 1998.
The increase in Security Capital's equity in Strategic Hotel's earnings
for the three and six months ended June 30, 1999, compared to the same periods
in 1998, is primarily due to additional property acquisitions by Strategic Hotel
in 1998 and the first six months of 1999 and an increase in net operating
income.
The decline in the real estate equity markets during 1998 and into the
first quarter of 1999 may impact the near-term ability of operating affiliates
of Security Capital to access the equity and debt markets, which could adversely
impact their ability to maintain their historical growth rates. However, this
should be partially mitigated by the affiliates' ability to maximize the
performance of their portfolio of operating properties.
Property Revenue and Expenses and Homestead Special Charge
Homestead's room revenue increased from $34.1 million to $54.3 million,
a 59% increase for the three months ended June 30, 1999, compared to the same
period in 1998 and increased from $61.2 million to $103.3 million, a 69%
increase for the six months ended June 30, 1999, compared to the same period in
1998. Homestead's rental expenses increased from $14.0 million to $26.6 million,
a 90% increase for the three months ended June 30, 1999, compared to the same
period in 1998 and increased from $26.3 million to $49.7 million, an 89%
increase for the six months ended June 30, 1999, compared to the same period in
1998. Homestead's 36 operating property openings from the end of the second
quarter of 1998 through the end of the second quarter of 1999 were the primary
reason for both the increases in room revenue and rental expenses. The increase
in room revenue was also due to a modest increase in the average weekly rate.
The average weekly rate increase was partially offset by lower overall occupancy
for the three and six months ended June 30, 1999, as compared to the same
periods in 1998. The occupancy decrease is attributable to the effect of
competition and increased rates.
Homestead's results for the first six months of 1999 were below
management's prior expectations. Lower than expected occupancy rates in certain
markets has led to lower than expected revenues for certain properties. Lower
than expected increases in occupancy rates for newly-opened properties in the
northeast and mid-west also are expected to impact revenues. These lower than
expected results will adversely affect Security Capital's results in 1999.
In the second quarter of 1999, Homestead determined, based on its
inability to obtain financing for development beyond those properties already in
construction, to further curtail its development program. All land previously
held for development is held for sale, all pursuits for acquisition of
additional sites for development were abandoned, and Homestead has reduced
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<PAGE>
overhead costs and personnel to reflect a company with stabilized operations of
136 properties. A special charge of $65.3 million was recorded in the second
quarter of 1999 for write-downs of land held for sale, write-offs of costs of
pursuits, and the costs of severance of personnel. See footnote 7 to the
consolidated financial statements for details of the special charge.
Financial Services Division Revenues
The components of Financial Services Division revenues were as follows
for the three and six months ended June 30, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Capital Markets $ 3.3 $ 16.5 $ 4.2 $ 21.2
Corporate Services 4.1 4.0 9.6 7.8
Global Capital Management Group 14.5 11.5 28.8 21.6
Real Estate Research 0.2 0.3 0.4 0.6
------------ ------------ ------------ ------------
Total Financial Services Division revenues 22.1 32.3 43.0 51.2
Less amounts eliminated in consolidation (1.4) (1.8) (3.6) (2.9)
------------ ------------ ------------ ------------
Consolidated Financial Services
Division revenues $ 20.7 $ 30.5 $ 39.4 $ 48.3
============ ============ ============ ============
</TABLE>
The decrease in Financial Services Division revenues for the three and
six months ended June 30, 1999, compared to the same periods in 1998 was
primarily attributable to the decrease in Capital Markets revenue. Capital
Markets revenues are transactional in nature and influenced by the general Real
Estate Investment Trust ("REIT") equity market conditions discussed above. This
decrease was partially offset by the growth in assets managed by the Global
Capital Management Group (shown in the following table), which generated
increased advisory and management fees.
The following table reflects the market value of assets under
management by the Global Capital Management Group as of June 30, 1999 and 1998
(in millions):
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
SC-European Realty $ 1,126.9 $ 584.1
SC-Preferred Growth 878.4 636.1
SC-U.S.Realty 2,888.0 3,156.5
Investment Funds 83.6 155.8
Other 96.9 --
------------ -------------
$ 5,073.8 $ 4,532.5
============ =============
</TABLE>
Growth in Financial Services Division revenues is expected to come
primarily from management and advisory revenues earned by the Global Capital
Management Group and fees earned by Capital Markets, Corporate Services and Real
Estate Research. The decline in real estate security stock prices in 1998 and
early 1999 has made it more difficult to attract assets to the company's
investment funds and investees, and to execute Capital Markets transactions,
which has, in turn, impacted revenue growth for the Global Capital Management
Group and Capital Markets. Additionally, the decline in real estate securities
prices in 1998 and the first quarter of 1999 reduced the value of assets under
management in some of Security Capital's closed-end managed entities, thereby
decreasing fee income to Security Capital for managing such entities. Any
reduced growth could be partially offset, over the long-term, by increases in
other Financial Services revenues as Security Capital continues to expand in
this area, although no assurance of this growth can be given. During the second
quarter of 1999, assets under management increased materially due to rising real
estate security prices.
26
<PAGE>
Realized capital gains
Realized capital gains increased from $0.2 million to $1.9 million for
the three months ended June 30, 1999, compared to the same period in 1998 and
increased from $2.5 million to $3.4 million for the six months ended June 30,
1999, compared to the same period in 1998. These increases were primarily due to
increases in the market value of SC-US Real Estate Shares' investments that were
sold.
Change in unrealized gain or loss on investments
The change in unrealized gain or loss on investments was an increase of
$7.5 million and $4.6 million for the three and six months ended June 30, 1999,
compared to a decrease of $8.5 million and $9.4 million for the same periods in
1998. The change in unrealized gains or losses varies depending on changes in
real estate equity markets.
At June 30, 1999, SC-US Real Estate Shares had investments at cost and
fair market value of approximately $60.9 million and $65.1 million,
respectively. At June 30, 1999, SC-European Real Estate Shares had investments
at cost and fair market value of approximately $19.9 million and $19.3 million,
respectively.
Other Income, net
Other income increased from $3.1 million to $4.3 million, a 39%
increase for the three months ended June 30, 1999, compared to the same period
in 1998, and decreased from $5.7 million to $5.2 million, a 9% decrease for the
six months ended June 30, 1999, compared to the same period in 1998. The
increase for the three months is due to an increase in other Homestead property
revenue for the three months. The decrease for the year is primarily due to
decreased dividend income for the investment funds due to Security Capital
reducing its investment in SC-US Real Estate Shares by $51.0 million since the
fourth quarter of 1998.
Financial Services Division Expenses
Financial Services Division expenses increased from $19.3 million to
$19.7 million, a 2% increase for the three months ended June 30, 1999, compared
to the same period in 1998, and increased from $31.6 million to $39.7 million, a
26% increase for the six months ended June 30, 1999, compared to the same period
in 1998. The increase for the six months primarily resulted from increased
personnel in the Global Capital Management Group and the Capital Markets Group
during the second half of 1998, primarily due to the establishment of
European-based capabilities for capital markets and certain capital management
activities. During the second quarter of 1999 there were some staff reductions
and other cost controls that decreased expenses for the quarter compared to
1998.
General, Administrative and Other
General, administrative and other expenses increased from $15.1 million
to $18.4 million, a 22% increase for the three months ended June 30, 1999,
compared to the same period in 1998 and increased from $26.7 million to $34.4
million, a 29% increase for the six months ended June 30, 1999, compared to the
same period in 1998. These increases resulted primarily from additional
personnel and costs related to Security Capital's Capital Division.
27
<PAGE>
Interest Expense
Interest expense for the three months ended June 30, 1999 and 1998, is
summarized as follows (in millions):
<TABLE>
<CAPTION>
Security Capital Homestead Total
------------------ ------------------ -------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Convertible debentures $ 5.2 $ 5.2 $ -- $ -- $ 5.2 $ 5.2
Lines of credit 3.0 7.4 7.4 3.1 10.4 10.5
Senior unsecured notes 13.3 0.8 -- -- 13.3 0.8
Mortgage notes payable -- -- 4.8 8.4 4.8 8.4
Capital lease -- -- 3.5 -- 3.5 --
Capitalized interest (0.3) (0.2) (1.8) (7.4) (2.1) (7.6)
-------- -------- -------- -------- -------- ---------
Total $ 21.2 $ 13.2 $ 13.9 $ 4.1 $ 35.1 $ 17.3
======== ======== ======== ======== ======== =========
</TABLE>
Interest expense for the six months ended June 30, 1999 and 1998, is
summarized as follows (in millions):
<TABLE>
<CAPTION>
Security Capital Homestead Total
------------------ ------------------ -------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Convertible debentures $ 10.5 $ 10.5 $ -- $ -- $ 10.5 $ 10.5
Lines of credit 4.8 12.1 14.9 4.8 19.7 16.9
Senior unsecured notes 26.3 0.8 -- -- 26.3 0.8
Mortgage notes payable -- -- 11.3 16.0 11.3 16.0
Capital lease -- -- 4.9 -- 4.9 --
Capitalized interest (0.6) (0.4) (6.0) (13.7) (6.6) (14.1)
-------- -------- -------- -------- -------- ---------
Total $ 41.0 $ 23.0 $ 25.1 $ 7.1 $ 66.1 $ 30.1
======== ======== ======== ======== ======== =========
</TABLE>
The increase in Security Capital's net interest expense is primarily
due to the issuance of additional debt to fund investments. The increase in
Homestead's net interest expense is primarily due to increased line of credit
borrowings used to fund developments.
Depreciation and Amortization
Depreciation and amortization increased from $8.0 million to $11.4
million, a 42% increase for the three months ended June 30, 1999, compared to
the same period in 1998 and increased from $14.8 million to $22.4 million, a 51%
increase for the six months ended June 30, 1999, compared to the same period in
1998. These increases primarily resulted from additional Homestead properties
and, to a lesser degree, additional computer hardware, software and office
leasehold improvements in the Financial Services Division.
Provision for Income Taxes
The effective tax rates for the six months ended June 30, 1999, and the
three and six months ended June 30, 1998, are less than 35%. The reduced rates
are primarily created by unbenefited net deferred tax assets in consolidated
subsidiaries and income generated on permanently invested capital in a foreign
jurisdiction that has a substantially lower tax rate. As discussed below, for
the three months ended June 30, 1999, in addition to the items mentioned above,
Security Capital provided a tax benefit for an anticipated loss on a sale of an
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<PAGE>
investment. The Company established a valuation reserve against the expected
capital loss carryforward due to the uncertainty of its generating future
capital gains against which this loss could be carried forward.
If Security Capital sells any investments, it will be taxed on any
realized gains at the federal corporate tax rate of 35%. Realized gains will be
measured based upon the excess of the fair market value of any consideration
Security Capital receives in such disposition over Security Capital's tax basis
at the time of disposition. Any realized losses, for tax purposes, may be
carried back up to three years, or forward five years, to offset taxable gains,
if any.
Realized losses can not typically be offset against ordinary taxable income.
Security Capital will generate a capital loss of approximately $55.2
million when the sale of Strategic Hotel is consummated. This will generate a
tax benefit of $19.3 million if Security Capital realizes comparable taxable
gains over the next five years. Security Capital has provided a reserve against
$18.1 million of this benefit because it has no current plans to sell any of the
assets which would generate sufficient taxable gains to offset this loss.
Security Capital's plans could change in the future due to changes in market
conditions or strategy.
Security Capital's tax basis in any investee is generally equal to its
original cost basis for such asset, reduced by the portion of the cumulative
dividends received from such investee which have been characterized for tax
purposes as return of capital.
Security Capital's tax basis in its strategic investees at June 30,
1999, was as follows (in thousands):
Archstone $ 757,625
ProLogis 643,582
SC-European Realty 375,737
SC-U.S. Realty 733,645
Strategic Hotel 375,000
On May 28, 1999, Security Capital increased its ownership in Homestead
to 87%. So long as Security Capital owns more than 80% of Homestead, Security
Capital will consolidate Homestead in Security Capital's federal tax return. Any
net operating losses, for federal tax purposes, generated by Homestead during
the consolidation period will reduce the income tax liability of Security
Capital, and any taxable income generated by Homestead will increase Security
Capital's taxable income. Due to its recent restructuring and development
completions, Homestead is expected to generate net operating losses for the
balance of 1999 and at least some portion of 2000.
Upon disposition of Security Capital's interest in Homestead, any
taxable gain or loss will be based upon the form of such transaction and certain
other facts and circumstances at the time, and cannot be predicted with
certainty.
Provision for loss on investment
On June 28, 1999, Security Capital's board of directors approved, in a
unanimous consent, the sale of its entire ownership position to Strategic Hotel.
An agreement to sell Strategic Hotel for $329.0 million was signed on August 12,
1999. The sale is scheduled to close between September 8 and December 8, 1999.
A provision for loss on the sale of Strategic Hotel of $55.2 million was
recorded as of June 28, 1999.
29
<PAGE>
Preferred Share Dividends
Preferred Share dividends decreased from $23.5 million to $4.5 million
for the three months ended June 30, 1999, compared to the same period in 1998
and decreased from $26.1 million to $9.0 million for the six months ended June
30, 1999, compared to the same period in 1998. The decrease is due to a $19.8
million non-cash dividend incurred in conjunction with the exchange of Series A
Preferred Shares and certain Class B Common Shares for Series B Preferred Shares
in May 1998.
Change in accounting principle
The net loss for the six months ended June 30, 1999, includes the
cumulative effect of a change in accounting principle of $16.0 million,
primarily related to Homestead and Belmont's adoption of the Statement of
Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). Upon
adoption on January 1, 1999, any material unamortized organizational,
pre-opening and start-up costs were written off.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Security Capital's investment activities consist primarily of
investments in the common shares of its Capital Division investees and research
and capital expenditures relating to expansion of its Financial Services
Division business. The investment activities of Security Capital's investee
operating companies consist primarily of the acquisition and development of real
estate, or strategic ownership positions in companies that conduct such
activities. Other affiliates make portfolio investments in the securities of
publicly traded real estate companies and/or intermediate-term investments,
primarily in the convertible securities of publicly-traded real estate operating
companies. Security Capital has historically financed its investment activities
through cash from operations, the sale of stock and convertible securities,
borrowings under lines of credit and issuance of unsecured long-term debt.
Operating Activities
Cash provided by operating activities decreased by $47.4 million during
the six months ended June 30, 1999, compared to the same period in 1998. This
decrease is primarily due to higher interest expense due to increased debt used
to fund investments in non-dividend paying investees and to a lesser extent by
reduced capital markets fees.
Investing and Financing Activities
Security Capital's investing activities provided approximately $20.6
million of cash and Homestead's used approximately $77.6 million for the six
months ended June 30, 1999, compared to $470.2 million used by Security Capital
and $260.2 million used by Homestead, for the six months ended June 30, 1998.
Security Capital's investing activities during the six months ended June 30,
1999, primarily consisted of (i) $13.4 million investment by Belmont in real
estate, (ii) $1.7 million invested in securities of various affiliates, and
(iii) $38.4 million net redemption of publicly traded real estate securities.
Security Capital's investing activities during the six months ended June 30,
1998, consisted primarily of (i) $425.5 million investment by Security Capital
in securities of various affiliates; and (ii) $35.3 million investment by
Security Capital in securities of other publicly traded real estate securities.
30
<PAGE>
Security Capital also invested $213.8 million in Homestead during 1999, but this
amount is not reflected above as it is eliminated in consolidation. Homestead
used these funds to reduce its lines of credit.
Financing activities provided net cash of $42.8 million for the six
months ended June 30, 1999, compared to $657.0 million for the six months ended
June 30, 1998. Financing activities for the six months ended June 30, 1999,
primarily consisted of: (i) net reduction of the lines of credit borrowings of
$45.5 million; (ii) proceeds from Security Capital's issuance of senior
unsecured notes of $85.3 million; (iii) Homestead's payment on mortgage notes
payable of $122.0 million; and (iv) Homestead's net proceeds on the sale and
leaseback of properties of $127.3 million. Financing activities for the six
months ended June 30, 1998, primarily consisted of: (i) $128.3 million of net
proceeds from the borrowings under lines of credit; (ii) net proceeds from
Security Capital's issuance of senior unsecured notes of $499.6 million and
(iii) proceeds from the sale of common stock to minority interest holders
(Homestead) of $33.5 million.
Security Capital and its subsidiaries have committed to $518.3 million
in equity subscriptions to SC-European Realty, of which $375.7 million had been
funded as of June 30, 1999, and an additional $25.9 million in July 1999. In
addition, as of June 30, 1999, Security Capital has committed to invest an
additional $25.6 million in Belmont. Security Capital expects to use the cash
proceeds from a sale of Strategic Hotel primarily to reduce debt and, to a
lesser extent, repurchase shares of stock.
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) and funds currently available under its revolving line of
credit will be sufficient to enable Security Capital to satisfy its anticipated
cash requirements for operations and currently committed investments. In the
longer term, Security Capital intends to finance its business activities
(including investments in new business initiatives, additional investments in
existing affiliates and potential repurchases of shares) through the selective
sale of assets and redeployment of capital, its line of credit and future
issuances of equity and debt securities. In addition, Security Capital
anticipates that its operating affiliates will separately finance their
activities through cash flow from operations, selective sales of assets and
redeployment of capital, sales of equity and debt securities and the incurrence
of mortgage debt or line of credit borrowings.
Security Capital's consolidated investee, Homestead, had the following
financing activities:
On February 23, 1999, Homestead completed a sale and leaseback of 18
of the 26 properties previously collaterizing a $122 million mortgage
note held by Merrill Lynch Mortgage Capital Inc. ("MLMC"). Hospitality
Properties Trust purchased the properties for $145 million. Proceeds of
the sale were used to repay the $122 million debt that was due June
1999. Homestead will continue to operate the properties under a
long-term lease through 2015 with options to renew through 2045 and pay
minimum rent of approximately $16 million per year, which rent may
increase based on payment of percentage rents beginning July 2000 based
on increases in revenues over a base period. Homestead also posted a
security deposit equal to one year's rent. As a result of payment of
the $122 million mortgage note, eight properties which were used as
collateral for the mortgage note were subsequently pledged as
collateral for its Working Capital Facilities, described below under
"Lines of Credit - Homestead", enabling Homestead to draw approximately
$21 million in additional borrowings under the line.
On March 18, 1999, Homestead renewed its Working Capital Facilities
with an extension of the maturity date to December 31, 2000. In
addition to the renewal, Homestead's lines of credit were amended. See
"Lines of Credit - Homestead," below.
On March 25, 1999, Homestead announced a rights offering for $225
million of common stock, the proceeds of which were used to repay
31
<PAGE>
Homestead's $200 million bridge facility and for purposes allowed under
the Working Capital Facilities. Security Capital participated in the
rights offering, which closed on May 28, 1999, purchasing $213.8
million shares of Homestead common stock.
With the accomplishment of these reductions of short-term debt and the
decision to cease additional development efforts, Homestead intends to focus on
generation of cash from sales of land to be used to retire debt and reduction of
overhead costs to adjust the company to an organization sized to operate 136
stabilized properties.
Lines of Credit
Security Capital
Security Capital's line of credit with Wells Fargo, was amended and
extended on April 13, 1999. The unsecured line was decreased to $470 million
from $650 million to match Security Capital's anticipated intermediate-term
requirements. The agreement is effective through April 6, 2002, with an option
to renew for successive one-year periods with the approval of Wells Fargo and
participating lenders. Borrowings accrue interest at LIBOR plus a margin (1.30%)
based upon Security Capital's credit rating or a Base Rate (defined as the
higher of Wells Fargo prime rate or the Federal Funds rate plus .50%).
Commitment fees on the amended line range from 0.125% to 0.20% per annum based
on the average unfunded line of credit balance. The line of credit is guaranteed
by SC Realty and SC Realty Shares Limited, each of which is a wholly owned
subsidiary of Security Capital.
The line of credit contains various financial and other covenants
applicable to Security Capital, including a minimum shareholders' equity test, a
total liabilities-to-net-worth ratio, a cash flow to fixed charge coverage
ratio, a secured debt limit, an unsecured liabilities to unencumbered pool value
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 agreement provides that so long as no event of default has occurred and is
continuing, Security Capital may pay cash dividends in an aggregate amount not
to exceed 50% of cash flow available for distribution and pay cash dividends to
the holders of the Series B Preferred Shares. As of June 30, 1999, there was
$276 million outstanding under this line of credit and Security Capital, SC
Realty and SC Realty Shares Limited were in compliance with all financial
covenants.
Homestead
Homestead's Working Capital Facilities were amended along with the
extension of the lines on March 18, 1999. The line secured by suburban
properties was increased to $170 million total borrowing capacity and the
sliding interest terms amended to 3.0% over LIBOR and 2% over prime or 2.5% over
the federal funds rate. Future additional collateral will be limited to suburban
properties which are construction complete and stabilized. The line secured by
urban properties has been decreased to $30 million total borrowing capacity and
the interest terms amended to 3.0% over LIBOR and 2.0% over prime or 2.5% over
the federal funds rate.
The amended and restated Working Capital Facilities require maintenance
of the following financial covenants effective with the first quarter of 1999:
limiting total liabilities to no more than 55% of gross asset value, as
defined;
limiting total indebtedness to no more than 50% of gross asset value,
as defined;
maintaining a ratio of earnings before interest, taxes, depreciation
and amortization, as defined, to interest expense ranging from
1.25 to 1.0 for the first quarter 1999 up to 1.90 to 1.0 by the
fourth quarter of 2000;
maintaining a ratio of earnings before interest, taxes, depreciation
and amortization, as defined, to debt service and preferred stock
dividends ranging from 1.0 to 1.0 for the first quarter of 1999 to
1.25 to 1.0 by the fourth quarter of 2000;
32
<PAGE>
maintaining a ratio of net property operating income to implied debt
service, as defined, ranging from 1.4 to 1.0 for the first quarter
of 1999 to 2.25 to 1.0 by the fourth quarter of 2000;
maintaining a minimum tangible net worth, as defined, of no less than
85% of the year end 1998 amount, as defined, adjusted for net
proceeds of equity offerings, and
maintaining positive net sources and uses of funds.
In addition, under the renewed and amended Working Capital Facilities
distributions or dividends on equity are prohibited; total cost, as defined, of
projects in development cannot exceed 25% of gross asset value, as defined, in
1999 or 15% in 2000; and Homestead's business activities will be limited to
development, ownership and operation of extended stay hotels. As of June 30,
1999, Homestead was in compliance with all financial covenants.
With the second quarter 1999 decision to cease development of all land
sites owned, other than those already in construction, and to cease pursuit of
acquisition of additional sites for development, Homestead's needs for financing
are reduced. Funding needs are primarily for operations, the completion of the
properties in construction, funding of the severance of personnel and debt
service.
Homestead had at June 30, 1999, unfunded commitments for properties in
construction of approximately $17 million. Homestead may generate cash inflows
by the sale of unencumbered land sites, but no assurance can be given that such
sales will occur or provide significant net proceeds.
While Homestead believes it will continue to generate positive cash
flow from operation of its properties, there can be no assurance of generation
of cash from future operations due to the risks of operation of lodging
properties including competitive pressures, rates, occupancies, and costs of
operation. Additionally, Homestead's ability to meet its obligations could be
adversely affected by incurrence of unexpected construction costs for those
properties not yet open and by increases in interest rates.
Senior Unsecured Notes
Under the medium-term note program, in the first quarter of 1999,
Security Capital issued $5.0 million of 7.75% Senior Unsecured Notes due January
11, 2005; $54.55 million of 7.80% Senior Unsecured Notes due January 12, 2005;
and $25.75 million of 7.80% Senior Unsecured Notes due January 19, 2005. The
total outstanding principal balance of Senior Unsecured Notes was $700 million
as of June 30, 1999.
All of the foregoing Senior Unsecured Notes are redeemable at any time
at the option of Security Capital, in whole or in part, at a redemption price
equal to the sum of the principal amount of the Senior Unsecured Notes being
redeemed plus accrued interest thereon to the redemption date plus an
adjustment, if any, based on the yield to maturity relative to market yields
available at redemption. The securities are governed by the terms and provisions
of the indentures applicable to all Security Capital's debt securities.
Mortgage Notes Payable
Homestead has $221.3 million of convertible mortgage notes which are
convertible, at the option of Archstone, into shares of Homestead common stock.
The conversion price is equal to one share of Homestead common stock for every
$10.44 of principal amount outstanding.
On February 23, 1999, Homestead completed the sale and leaseback of 18
Homestead Village properties with Hospitality Properties Trust. Hospitality
Properties Trust purchased the properties for $145 million. Homestead will
33
<PAGE>
continue to operate the properties under a long-term lease through December 2015
and pay a minimum rent of approximately $16 million per year. Homestead has
posted a security deposit equal to one year's rent. The properties sold were
among the 26 properties pledged as collateral for a $122 million mortgage note,
which was due to mature in June 1999. The $122 million mortgage note was repaid
in February 1999 with a portion of the proceeds of the sale and leaseback
transaction between Homestead and Hospitality Properties Trust.
EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES ("EBDADT")
Before Homestead's special charge and the Strategic Hotel provision,
basic EBDADT decreased from $64.6 million to $61.1 million, a 5% decrease for
the three months ended June 30, 1999, compared to the same period in 1998 and
decreased from $126.9 million to $111.9 million, a 12% decrease for the six
months ended June 30, 1999, compared to the same period in 1998. The decrease
was primarily due to lower equity in EBDADT from Homestead, lower Capital
Markets revenues and higher interest expense. These results were partially
offset by an increase in Security Capital's share of EBDADT of its other direct
investees, deployment of capital by SC-European Realty into its investees and an
increase in fees earned by the Global Capital Management Group due to higher
assets under management.
EBDADT represents net earnings computed in accordance with generally
accepted accounting principles before gains/losses on dispositions of
depreciated property, plus real estate depreciation and amortization, plus
deferred tax expense, plus EBDADT net of dividends received by SC-U.S.Realty and
SC-European Realty from their strategic investees, plus/minus unrealized losses/
gains on non-strategic investments, and plus other non-cash, non-recurring items
Management considers EBDADT to be the appropriate measure of its ownership of
real estate enterprises, as it most clearly reflects the impact of both
operating performance and capital structure.
With respect to Security Capital investees in which Security Capital
has less than a 20% interest, and does not have the ability to significantly
influence management, Security Capital includes only dividends or interest
received in its EBDADT. SC-U.S.Realty and SC-European Realty use the same
approach for investees in which they own less than 20%. EBDADT is not to be
construed as a substitute for net earnings in evaluating operating results nor
as a substitute for cash flow in evaluating liquidity.
34
<PAGE>
Presented below is a reconciliation of net earnings (loss) to EBDADT
for the three and six months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ----------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net loss attributable to common shares $ (28,654) $ (42,070) $ (122,785) $ (38,043)
Investee reconciling items:
Real estate depreciation 47,379 38,151 91,268 70,223
Gain on sale of depreciated real estate (5,290) (3,533) (7,629) (9,518)
Unrealized (gains) losses (92,111) 58,865 20,800 88,692
EBDADT, net of dividends, from
Strategic Investees of SC-U.S.Realty
and SC-European Realty 12,616 3,451 25,285 7,460
Other (770) 5,488 1,808 3,068
---------------- ---------------- ---------------- ---------------
(38,176) 102,422 131,532 159,925
---------------- ---------------- ---------------- ---------------
Security Capital reconciling items:
Deferred tax (benefit) expense 27,578 (10,818) (13,026) (9,983)
Adoption of an accounting principle -- -- 16,002 --
Non-cash preferred share dividend -- 19,842 -- 19,842
Other (474) (4,825) (657) (4,825)
---------------- --------------- ---------------- ---------------
27,104 4,199 2,319 5,034
---------------- ---------------- ---------------- ---------------
EBDADT $ (39,726) $ 64,551 $ 11,066 $ 126,196
================ ================ ================ ===============
</TABLE>
YEAR 2000 ISSUE
The "Year 2000 Issue" has arisen because many existing computer
programs and chip-based embedded technology systems use only the last two digits
to refer to a year, and therefore do not properly recognize a year that begins
with "20" instead of the familiar "19." If not corrected, many computer
applications could fail or create erroneous results. The following disclosure
provides information regarding the current status of Security Capital's Year
2000 compliance program.
Security Capital has been working on the Year 2000 issue since July
1997. Security Capital and most of its affiliates have had action programs since
that time to certify or replace all technology systems that might be affected,
including "embedded" systems such as elevators and HVAC equipment. As of August
1, 1999, Security Capital has either certified or replaced all of its critical
systems with Year 2000 compliant systems. Among Security Capital's affiliates,
most have certified all of their systems; the remaining affiliates are in
various stages of conversion to Year 2000 compliant systems and expect to be
fully compliant.
Security Capital, as a real estate research, investment and operating
management company, believes that it has relatively modest potential exposure to
Year 2000 issues. Security Capital intends to focus its efforts to ensure that
35
<PAGE>
none of its affiliates will encounter the Year 2000 issue, including providing
advice to those companies.
The majority of the operating and financial management functions of the
affiliated operating companies supported by computer systems are billing tenants
and leasing space. Neither of these functions is likely in the worst case
scenarios to represent a serious financial impact since they could be manually
corrected or circumvented without significant revenue loss to the affiliated
operating companies.
Exposure to embedded system problems in elevators, HVAC, access control
and refrigeration systems for affiliated operating companies is expected to be
minimal. Most of these systems are no more than six years old and surveys
conducted by affiliates show that these systems are already compliant or can be
readily upgraded to Year 2000 compliant versions. Most of the potential costs
for determining compliance of embedded systems is due to the internal and
external staffing costs to identify, survey and test each system.
Assessing suppliers' readiness for Year 2000 has not been completed.
Security Capital and its affiliates have numerous properties throughout the
United States and in Europe and Mexico serviced by many generic service
providers such as utilities and telecommunications. In general, tenants have
individual contracts for generic services, so Security Capital's affiliates'
exposure is generally limited to "common area" facilities. Security Capital and
its affiliates have little influence over utility providers and local exchange
carriers; however, Security Capital expects little potential risk in this highly
scrutinized area.
Specialty (as opposed to commodity) services providers such as banks
and benefit administration companies have responded to surveys stating that they
are Year 2000 compliant. There are no commodity or specialty services provided
to Security Capital or its affiliates that are believed to represent a material
risk or result in a material adverse financial impact in the most likely worst
case scenario.
Security Capital provides shared service functions to a number of
affiliated companies. These services include accounting, cash management, human
resources and benefits administration, information systems, internal audit, risk
management, tax planning and compliance services. All of the internal
computer systems used to provide these services are Year 2000 compliant. Outside
suppliers of services that support the shared service functions, such as banks
that perform electronic funds transfers, have been surveyed to determine their
Year 2000 compliance level. The survey process has been substantially completed,
and all respondents so far have stated that they are Year 2000 compliant.
Security Capital believes that there are no outside suppliers that have not yet
responded that represent a material risk to the provision of shared services to
its affiliates.
All of the major systems used by Security Capital are Year 2000
compliant, specifically the corporate accounting, mutual fund management and
cash management systems. Security Capital is a tenant in a number of office
buildings in the United States and Europe. Landlord and supplier surveys for
those buildings are not yet complete, but no material impact is expected to be
caused by building related problems.
Third party costs to address the Year 2000 issue have been less than
$100,000 to date and are not expected to exceed $250,000 in any likely worst
case scenario. Security Capital's internal costs incurred for Year 2000
compliance issues have been less than $50,000 to date. Such costs are
principally the related payroll costs of its information technology group.
Security Capital's investment in new accounting, payroll and cash management
systems is due to rapid growth over the last five years and a desire to automate
a greater number of processes, and is not attributable to Year 2000 issues.
However, in considering and implementing these new systems, Security Capital
believes it took all appropriate steps to ensure that these new systems are Year
2000 compliant.
Contingency plans to deal with unexpected and undetected problems
caused by the Year 2000 issue are focused on manual correction and rework. No
material revenue loss is expected to be caused by late billings or accounting
entries.
36
<PAGE>
Potential liabilities to third parties would be limited to private and
public investors, because Security Capital is not providing management or
operating real estate. There is no "reasonably likely worst case" known or
apparent to Security Capital that would result in a material liability to a
third party. The risk of increased cost or lost revenue in the event of the most
reasonably likely worst case scenario is not expected to be material in any
series of events or potential problems caused by the Year 2000 issue, either for
Security Capital directly or to any of its affiliated companies.
There can be no assurance that the Year 2000 issue remediation by
Security Capital and its affiliates or third parties will be properly and timely
completed and failure to do so could have a material adverse effect on Security
Capital, its business and its financial condition. Security Capital cannot
predict the actual effects to it of the Year 2000 issue, which depends on
numerous uncertainties, many of which are outside its control, such as (i)
whether significant third parties, such as banks and utilities, properly and
timely address the Year 2000 issue and (ii) whether broad-based or systemic
economic failures may occur. Security Capital will continue to monitor these
issues through its Year 2000 compliance program.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Security Capital's exposures to market risks consist of interest rate
risks related primarily to its variable rate line of credit, equity price risks
related to its investments in marketable equity securities and interest rate
risk related to its consolidated investment in Homestead described below, none
of which have changed significantly since December 31, 1998, except as noted
below for Homestead.
Homestead's Interest Rate Risk
Homestead's exposure to market risk for changes in interest rates
relates primarily to its line of credit facilities. Homestead has no involvement
with derivative financial instruments.
The table below presents the: (i) effective interest rates; (ii)
expected maturity/principal repayment schedules; (iii) carrying values; and (iv)
estimated fair values for Homestead's interest rate sensitive liabilities as of
June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Expected Maturity/Principal Repayment
---------------------------------------------------------------------------------
Nominal
Interest Total Fair
Rate 1999(2) 2000 2001 2002 2003 Thereafter Balance Value(2)
---------- -------- -------- ------ ------ ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Liabilities:
Lines of Credit Facilities -
variable rate (1) 8.32% $ -- $199,000 $ -- $ -- $ -- $ -- $ 199,000 $ 199,000
Convertible Mortgage Notes - 9.00% $ -- $ -- $ -- $ -- $ -- $ 221,334 $ 221,334 $ 218,363
fixed rate
Capital lease obligation - 9.80% $ 2,006 $ 3,821 $4,213 $4,647 $5,124 $ 122,825 $ 142,636 $ 142,636
fixed rate
Other Long-Term Obligation - 9.74% $ 3 $ 13 $ 14 $ 16 $ 17 $ 7,853 $ 7,916 $ 7,907
fixed rate
</TABLE>
(1) On March 18, 1999, Homestead renewed and amended its lines of credit
Working Capital Facilities ($199 million outstanding in the above table),
to a December 31, 2000, due date.
(2) Amounts represent expected maturities and principal repayment for the six
months remaining for 1999.
37
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Security Capital held the annual meeting of shareholders on May 20, 1999. On the
record date of April 6, 1999, there were 1,405,823 Class A Shares outstanding
and 55,106,149 Class B Shares outstanding. Each Class A Share is entitled to one
vote and each Class B Share is entitled to 1/200th of a vote. 994,683 Class A
Shares were voted and 45,197,042 Class B Shares were voted for a total possible
number of votes of 1,220,669.
The shareholders of Security Capital elected the following Class III Directors
to serve three-year terms expiring in 2002 by the following votes:
1,170,809 votes for the election of Mr. John T. Kelley III (49,860 votes
against); and,
1,215,721 votes for the election of Mr. William D. Sanders (4,948 votes
against); and,
1,175,054 votes for the election of Mr. Peter S. Willmott (45,615 votes
against).
In addition, shareholders of Security Capital also elected the following Class I
Director to serve a one-year term expiring in 2000 by the following votes:
1,207,195 votes for the election of Mr. C. Ronald Blankenship (13,474 votes
against).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends
15 Letter from Arthur Andersen LLP, dated August 13, 1999,
regarding unaudited financial information
27 Financial data schedule
(b) Reports on Form 8-K
None
38
<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/ James C. Swaim
James C. Swaim, Sr. Vice President
(Principal Accounting Officer)
Date: August 13, 1999
39
<PAGE>
<PAGE>
Exhibit 12.1
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------------------------- -----------------------------------------------------------------
1999 1998 1998 1997 1996 1995(a) 1994
----------- ----------- ------------ ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $ (94,155) $ 59,696 $ 67,480 $ 38,241 $ (9,693) $ (21,274) $ 11,849
Add:
Interest Expense 66,100 30,091 82,203 104,434 117,224 103,804 53,789
----------- ----------- ------------ ----------- ----------- ----------- ---------
Earnings as Adjusted $ (28,055) $ 89,787 $ 149,683 $ 142,675 $ 107,531 $ 82,530 $ 65,638
=========== =========== ============ =========== =========== =========== =========
Fixed Charges:
Interest Expense $ 66,100 $ 30,091 $ 82,203 $ 104,434 $ 117,224 $ 103,804 $ 53,789
Capitalized Interest 6,624 14,157 26,703 69,883 11,448 4,404 3,184
----------- ----------- ------------ ----------- ----------- ----------- ---------
Total Fixed Charges $ 72,724 $ 44,248 $ 108,906 $ 174,317 $ 128,672 $ 108,208 $ 56,973
=========== =========== ============ =========== =========== =========== =========
Ratio of Earnings to Fixed Charges (b) 2.0 1.4 0.8 0.8 0.8 1.2
=========== =========== ============ =========== =========== =========== =========
<FN>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred in
acquiring the Financial Services Division from a related party.
(b) The earnings as adjusted were insufficient to cover the fixed charges by
$100.8 million. Excluding the $65.3 million Homestead special charge and
the $55.2 million provision for loss on investment, the ratio of earnings
to fixed charges would be 1.3.
</FN>
</TABLE>
<PAGE>
Exhibit 12.2
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED SHARE DIVIDENDS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------------------- ----------------------------------------------------------------
1999 1998 1998 1997 1996 1995(a) 1994
----------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $ (94,155) $ 59,696 $ 67,480 $ 38,241 $ (9,693) $ (21,274) $ 11,849
Add:
Interest Expense 66,100 30,091 82,203 104,434 117,224 103,804 53,789
---------- ----------- ------------ ----------- ----------- ----------- ---------
Earnings as Adjusted $ (28,055) $ 89,787 $ 149,683 $ 142,675 $ 107,531 $ 82,530 $ 65,638
========== =========== ============ =========== =========== =========== =========
Combined Fixed Charges and
Preferred Share Dividends:
Interest Expense $ 66,100 $ 30,091 $ 82,203 $ 104,434 $ 117,224 $ 103,804 $ 53,789
Capitalized Interest 6,624 14,157 26,703 69,883 11,448 4,404 3,184
---------- ----------- ------------ ----------- ----------- ----------- ---------
72,724 44,248 108,906 174,317 128,672 108,208 56,973
Preferred Share Dividends (b)(c) 9,756 7,708(d) 22,315(d) 15,416 12,352 -- --
---------- ----------- ------------ ----------- ----------- ----------- ---------
Combined Fixed Charges and
Preferred Share Dividends $ 82,480 $ 51,956 $ 131,221 $ 189,733 $ 141,024 $ 108,208 $ 56,973
========== =========== ============ =========== =========== =========== =========
Ratio of Earnings to Combined Fixed
Charges and Preferred Share
Dividends (e) 1.7 1.1 0.8 0.8 0.8 1.2
=========== =========== ============ =========== =========== =========== ==========
<FN>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred in
acquiring the Financial Services Division from a related party.
(b) The Preferred dividends have been increased to show a pretax basis.
(c) Security Capital had no preferred dividends prior to 1996.
(d) Excludes a one-time non-cash dividend of $19.8 million incurred in
conjunction with the exchange of Series A Preferred Shares for Series B
Preferred Shares.
(e) The earnings as adjusted were insufficient to cover combined fixed charges
and preferred share dividends by $110.5 million. Excluding the $65.3
million Homestead special charge and the $55.2 million provision for loss
on investment, the ratio of earnings to combined fixed charges and
preferred share dividends would be 1.1.
</FN>
</TABLE>
<PAGE>
Exhibit 15
August 13, 1999
Board of Directors and Shareholders
of Security Capital Group Incorporated:
We are aware that Security Capital Group Incorporated has incorporated by
reference in its Registration Statement Nos. 333-38521, 333-38523, 333-38525,
333-38527, 333-38531, 333-38533, 333-38537, 333-38539, 333-48167, 333-61395,
333-61401 and 333-64979 its Form 10-Q for the six months ended June 30, 1999,
which includes our report dated August 13, 1999 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 the
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>
<ARTICLE> 5
<LEGEND>
(This schedule contains summary financial information extracted from the
Form 10-Q for the six month ended June 30, 1999, and is qualified in its
entirety by reference to such financial statements.)
</LEGEND>
<CIK> 0000923687
<NAME> SECURITY CAPITAL GROUP INCORPORATED
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 33,292
<SECURITIES> 84,292
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,181,610
<DEPRECIATION> 52,102
<TOTAL-ASSETS> 4,387,822
<CURRENT-LIABILITIES> 0
<BONDS> 1,384,291
0
257,642
<COMMON> 568
<OTHER-SE> 2,046,698
<TOTAL-LIABILITY-AND-EQUITY> 4,387,822
<SALES> 0
<TOTAL-REVENUES> 205,897
<CGS> 0
<TOTAL-COSTS> 268,118
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,100
<INCOME-PRETAX> (128,716)
<INCOME-TAX> (9,716)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 16,002
<NET-INCOME> (122,785)
<EPS-BASIC> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
