<PAGE>
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 1999 was:
Class A Common Shares, $.01 par value - 1,342,840 shares
Class B Common Shares, $.01 par value - 54,979,870 shares
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
INDEX
Page
Number(s)
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1999 (unaudited)
and December 31, 1998................................... 1
Consolidated Statements of Operations - Three months ended
March 31, 1999 and 1998 (unaudited)..................... 2-3
Consolidated Statement of Shareholders' Equity -Three months
ended March 31, 1999 (unaudited)........................ 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 1999 and 1998 (unaudited)..................... 5-6
Notes to Consolidated Financial Statements (unaudited)....... 7-22
Report of Independent Public Accountants..................... 23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 24-37
Item 3. Quantitative and Qualitative Disclosure About Market Risk.... 37-38
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................. 39
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
------
Investments, at equity:
Archstone Communities Trust $ 822,383 $ 827,977
ProLogis Trust 608,255 623,715
Security Capital European Realty 363,129 379,971
Security Capital Preferred Growth Incorporated 72,493 77,782
Security Capital U.S. Realty 715,281 791,562
Strategic Hotel Capital Incorporated 372,174 370,197
-------------- --------------
2,953,715 3,071,204
Real estate, less accumulated depreciation 1,185,405 1,164,869
Investments in publicly traded real estate securities, at market value 84,143 117,878
-------------- --------------
Total real estate investments 4,223,263 4,353,951
Cash and cash equivalents 30,996 13,209
Deferred income tax asset 5,147 --
Other assets 153,586 142,629
-------------- --------------
Total assets $ 4,412,992 $ 4,509,789
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Lines of credit $ 455,700 $ 520,480
Mortgage notes payable 221,334 343,362
Long-term debt 699,553 614,236
Convertible debentures 321,261 322,774
Capital lease obligations 143,260 --
Accounts payable and accrued expenses 113,240 118,152
Deferred income tax liability -- 35,457
-------------- --------------
Total liabilities 1,954,348 1,954,461
Minority interests 128,126 132,718
Shareholders' Equity:
Class A (NYSE: SCZ.A) Shares, $.01 par value; 20,000,000 shares
authorized; 1,405,973 and 1,487,109 shares issued and outstanding
in 1999 and 1998, respectively 14 15
Class B (NYSE: SCZ) Shares, $.01 par value; 229,537,385 shares
authorized; 51,806,162 and 47,628,481 shares issued and outstanding
in 1999 and 1998, respectively 518 476
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 2,418,121 2,416,123
Accumulated deficit (345,777) (251,646)
-------------- --------------
Total shareholders' equity 2,330,518 2,422,610
-------------- --------------
Total liabilities and shareholders' equity $ 4,412,992 $ 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
March 31,
1999 1998
-------------- --------------
<S> <C> <C>
INCOME:
Equity in earnings (loss) of:
Archstone Communities Trust $ 14,586 $ 20,775
ProLogis Trust 1,005 11,699
Security Capital European Realty (16,660) --
Security Capital Preferred Growth Incorporated (4,030) 458
Security Capital U.S. Realty (77,966) (17,950)
Strategic Hotel Capital Incorporated 5,248 2,512
Realized capital gains, net 1,468 2,234
Change in unrealized gain or loss on investments (2,888) (834)
Financial Services Division revenues from related parties 18,754 17,787
Other income, net 944 2,579
Property revenue 49,467 27,171
-------------- --------------
(10,072) 66,431
EXPENSES:
Interest expense 31,018 12,799
Financial Services Division expenses 19,992 12,347
General, administrative and other 16,018 11,560
Depreciation and amortization 11,053 6,847
Property expenses 23,641 12,253
-------------- --------------
101,722 55,806
-------------- --------------
Earnings (loss) from operations (111,794) 10,625
Provision for income tax expense (benefit):
Current 4,220 2,698
Deferred (40,604) 835
-------------- --------------
Total income tax expense (benefit) (36,384) 3,533
-------------- --------------
Minority interests in net earnings (loss)
of subsidiaries (1,790) 459
-------------- --------------
Earnings (loss) before change in accounting principle (73,620) 6,633
Less Preferred Share dividends 4,509 2,606
-------------- --------------
Earnings (loss) before change in accounting principle
attributable to common shares (78,129) 4,027
Change in accounting principle - Cumulative
effect on prior years of expensing costs of
start-up activities, net of minority interests 16,002 --
-------------- --------------
Net earnings (loss) attributable to common shares $ (94,131) $ 4,027
============== ==============
</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
March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Weighted-average Class B common shares outstanding:
Basic 120,438 123,402
============== ==============
Diluted 120,438 126,813
============== ==============
Earnings (loss) per share:
Basic net earnings (loss) before change in accounting
principle $ (0.65) $ 0.03
Change in accounting principle - expensing costs of
start-up activities (0.13) --
-------------- --------------
Basic net earnings (loss) attributable to common
shares $ (0.78) $ 0.03
============== ==============
Diluted net earnings (loss) before change in accounting
principle $ (0.65) $ 0.03
Change in accounting principle - expensing costs of
start-up activities (0.13) --
-------------- --------------
Diluted net earnings (loss) attributable to common
shares $ (0.78) $ 0.03
============== ==============
</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
Three Months Ended March 31, 1999
(In thousands, except shares)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------------------------
Class A Class B Series B
------------------ ------------------ Preferred Stock Additional Total
Shares Par Shares Par At Liquidation Paid-in Accumulated Shareholders'
Outstanding Value Outstanding 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 (81,723) (1) 4,086,131 41 -- (40) -- --
Conversion of 2016 Convertible
Debentures to Class B Shares -- -- 65,532 1 -- 1,512 -- 1,513
Issuance of Shares, net 587 -- 26,018 -- -- 526 -- 526
Net loss -- -- -- -- -- -- (89,622) (89,622)
Preferred Share dividends -- -- -- -- -- -- (4,509) (4,509)
=========== ===== ========== ===== ============== ============= =========== ============
Balances at March 31, 1999 1,405,973 $ 14 51,806,162 $ 518 $ 257,642 $ 2,418,121 $ (345,777) $ 2,330,518
=========== ===== ========== ===== ============== ============= =========== ============
</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>
Three Months Ended
March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Operating Activities:
Net earnings (loss) $ (89,622) $ 6,633
Adjustments to reconcile net earnings (loss) to cash flows
provided by operating activities:
Deferred income tax expense (benefit) (40,604) 835
Minority interests (1,790) 459
Cumulative effect on prior years of expensing costs
of start-up activities, net of minority interests 16,002 --
Equity in (earnings) loss of unconsolidated investees 81,087 (15,649)
Distributions from unconsolidated investees 37,324 34,744
Change in unrealized gain or loss on investments 2,667 834
Depreciation and amortization 11,053 6,847
Other 933 930
Decrease (increase) in other assets 895 (16,156)
Increase in accounts payable and accrued expenses 5,100 17,141
-------------- --------------
Net cash flows provided by operating activities 23,045 36,618
-------------- --------------
Investing Activities:
Real estate investments (51,692) (125,571)
Redemptions from (investments in):
Security Capital U.S. Realty (1,685) (5,405)
Security Capital European Realty -- (67,800)
Strategic Hotel Capital Incorporated -- (75,000)
Security Capital Preferred Growth Incorporated -- (25,000)
Publicly traded real estate securities, net 31,068 (2,901)
Other (1,188) (5,953)
-------------- --------------
Net cash flows used in investing activities (23,497) (307,630)
</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>
Three Months Ended
March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Financing Activities:
Proceeds from lines of credit $ 68,930 $ 379,392
Payments on lines of credit (133,710) (114,000)
Proceeds from long-term debt offerings 85,317 --
Proceeds from unsecured note and mortgage notes payable -- 4,000
Payments on mortgage notes payable (122,028) --
Proceeds from issuance of common shares to minority
interest holders 1,722 27,134
Sale of real estate, net 127,262 --
Preferred dividends paid (4,509) (2,606)
Other (4,745) 527
-------------- --------------
Net cash flows provided by financing activities 18,239 294,447
-------------- --------------
Net increase in cash and cash equivalents 17,787 23,435
Cash and cash equivalents, beginning of period 13,209 11,454
-------------- --------------
Cash and cash equivalents, end of period $ 30,996 $ 34,889
============== ==============
Non-Cash Investing and Financing Activities:
Increase in property and equipment from capital lease $ 145,000 $ --
============== ==============
Increase in property and equipment and development cost payable $ -- $ 1,241
============== ==============
Conversions of 2016 Convertible Debentures $ 1,513 $ --
============== ==============
</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 lead and profit from global real estate
securitization. Security Capital has invested in various companies (the Capital
Division) (see note 2) and provides various capital management and financial
services through a Financial Services Division (see note 3). The Capital
Division invests in real estate investment trusts and other real estate-related
companies either directly or indirectly. Its objective is to identify and
underwrite attractive new investment opportunities and enhance the value of
existing investee companies. The Financial Services Division provides
operational and capital deployment oversight, capital management, capital
markets, corporate services and research services primarily for the companies in
which Security Capital and its affiliates have invested either directly or
indirectly. Security Capital is a Maryland corporation.
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
March 31, 1999, minority interest relates mainly to Homestead and SC-US Real
Estate Shares.
The consolidated financial statements of Security Capital as of March
31, 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.
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 three-month period ended March
31, 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
7
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) REAL ESTATE INVESTMENTS
Security Capital holds the following investments at March 31, 1999, and
December 31, 1998:
<TABLE>
<CAPTION>
Security Capital's Net
% Ownership as of Investments (Redemptions)
March 31, December 31, for the Three Months
Investment Type of Entity 1999 1998 Ended March 31, 1999
- -------------------------------------- --------------------------- --------- ------------ ------------------------
<S> <C> <C> <C> <C>
EQUITY-METHOD INVESTEES:
Archstone Communities Trust Apartment REIT 39.2% 38.1% $ --
("Archstone") (publicly traded)
ProLogis Trust("ProLogis") (a) Industrial REIT 31.0% 40.4% --
(publicly traded)
Security Capital European Realty Global real estate 34.6% 34.6% --
("SC-European Realty") investments
(private entity)
Security Capital Preferred Growth Convertible security 9.7% 9.8% --
Incorporated ("SC-Preferred Growth") investments in real
estate companies
(private REIT)
Security Capital U.S. Realty U.S. real estate 35.1% 35.0% 1,685
("SC-U.S.Realty") investments
(publicly traded)
Strategic Hotel Capital Incorporated Luxury and 30.4% 30.4% --
("Strategic Hotel") upscale hotels
(private entity)
CONSOLIDATED INVESTEES:
BelmontCorp Senior assisted living 100% 100% 7,468
(private entity)
Homestead Village Incorporated Extended-stay lodging 69.8% 69.8% --
(publicly traded)
Security Capital European Real Estate European real 99.9% 99.9% 3,000
Shares estate securities fund
(investment fund)
Security Capital U.S. Real Estate U.S. real estate 83.8% 89.9% (28,000)
Shares securities fund
(investment fund)
</TABLE>
(a) On March 30, 1999, ProLogis merged with Meridian Industrial Trust, Inc.
Security Capital continues to be ProLogis' largest shareholder.
8
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Security Capital received dividends and interest (Strategic Hotel
only) from its investees for the three months ended March 31, 1999 and 1998, as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Dividends Received
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Dividends:
Archstone $ 20,180 $ 10,434
Security Capital Atlantic
Incorporated (a) -- 9,541
ProLogis 15,884 14,223
SC-European Real Estate Shares 34 --
SC-Preferred Growth 1,260 547
SC-US Real Estate Shares 700 3,764
-------------- --------------
38,058 38,509
-------------- --------------
Interest:
Strategic Hotel 3,271 1,845
-------------- --------------
$ 41,329 $ 40,354
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Dividend Amount
Per Investee Share
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Archstone $ 0.3700 $ 0.3400
Security Capital Atlantic
Incorporated (a) -- 0.4000
ProLogis 0.3183 0.2850
SC-European Real Estate Shares 0.0348 --
SC-Preferred Growth 0.3200 0.1700
SC-US Real Estate Shares 0.1199 0.3902
</TABLE>
(a) Security Capital Atlantic Incorporated ("Atlantic") merged into Archstone in
July 1998.
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 three months ended March 31, 1999 and
1998 (in thousands):
<TABLE>
<CAPTION>
Archstone Atlantic(a) ProLogis Strategic Hotel
---------------------- ----------- ---------------------- ----------------------
1999 1998 1998 1999 1998 1999 1998
---------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental revenue and other
income, net $ 161,387 $ 95,611 $ 48,306 $ 93,766 $ 90,292 $ 166,934 $ 105,984
Expenses 123,170 66,312 32,131 77,377 54,834 157,693 103,266
---------- ---------- ----------- ---------- ---------- ---------- ----------
Net earnings before minority
interest 38,217 29,299 16,175 16,389 35,458 9,241 2,718
Minority interest share of
net earnings -- -- -- 1,168 979 2,745 1,080
---------- ---------- ----------- ---------- ---------- ---------- ----------
Net earnings from operations 38,217 29,299 16,175 15,221 34,479 6,496 1,638
Gain on disposition of
real estate 5,319 15,484 -- 714 2,066 -- --
---------- ---------- ----------- ---------- ---------- ---------- ----------
Net earnings 43,536 44,783 16,175 15,935 36,545 6,496 1,638
Less Preferred Share dividends 5,691 4,712 1,078 13,445 8,799 -- --
---------- ---------- ----------- ---------- ---------- ---------- ----------
Net earnings attributable to common
shares before change in accounting
principle $ 37,845 $ 40,071 $ 15,097 $ 2,490 $ 27,746 $ 6,496 $ 1,638
========== ========== =========== ========== ========== ========== ==========
Security Capital share of net earnings
before change in accounting
principle $ 14,586 $ 13,234 $ 7,541 $ 1,005 $ 11,699 $ 1,977 $ 667
========== ========== =========== ========== ========== ========== ==========
Interest income from affiliate $ -- $ -- $ -- $ -- $ -- $ 3,271 $ 1,845
========== ========== =========== ========== ========== ========== ==========
</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) $ (3,436) $ -- $ 13,096 $ 4,108 $ 13,152 $ 20,964
Realized gains (losses) on investments (1,808) -- (12,332) -- 580 17,186
Decrease in market value of investments (42,974) -- (41,882) (919) (236,666) (92,837)
Elimination of a related party transaction -- -- -- -- 106 --
---------- ---------- ---------- ---------- ---------- ----------
Adjusted net earnings (loss) $ (48,218) $ -- $ (41,118) $ 3,189 $ (222,828) $ (54,687)
========== ========== ========== ========== ========== ==========
Security Capital share of adjusted net earnings (loss) $ (16,660) $ -- $ (4,030) $ 458 $ (77,966) $ (17,950)
========== ========== ========== ========== ========== ==========
</TABLE>
(a) Atlantic merged into Archstone in July 1998.
(b) SC-European Realty commenced operations in April 1998.
10
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A condensed consolidating balance sheet for Security Capital as of
March 31, 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 $ 3,365,582 $ -- $ -- $ 2,953,715
Net real estate investments 36,078 1,155,595 -- 1,185,405
Investments in publicly traded real estate
securities, at market value -- -- 84,143 84,143
Cash and other assets 132,341 101,738 2,485 189,729
------------------- ------------- ------------- ---------------
Total assets $ 3,534,001 $ 1,257,333 $ 86,628 $ 4,412,992
=================== ============= ============= ===============
Lines of credit $ 56,700 $ 399,000 $ -- $ 455,700
Long-term debt 1,020,814 364,594 -- 1,385,408
Other liabilities 101,855 54,660 1,573 113,240
------------------- ------------- ------------- ---------------
Total liabilities 1,179,369 818,254 1,573 1,954,348
Minority interests 19,320 -- -- 128,126
Shareholders' equity 2,335,312 439,079 85,055 2,330,518
------------------- ------------- ------------- ---------------
Total liabilities and
shareholders' equity $ 3,534,001 $ 1,257,333 $ 86,628 $ 4,412,992
=================== ============= ============= ===============
</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 three months ended March 31, 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 (loss) of investees $ (82,340) $ -- $ -- $ (77,817)
Financial Services Division revenues from
related parties 20,784 -- -- 18,754
Property revenue 473 48,994 -- 49,467
Other income (loss) 1,183 181 (1,219) (476)
------------- ------------ ------------ ---------------
(59,900) 49,175 (1,219) (10,072)
------------- ------------ ------------ ---------------
Interest expense 19,842 11,317 -- 31,018
Financial Services Division expenses 19,992 -- -- 19,992
General, administrative and other 8,008 9,487 280 16,018
Depreciation and amortization 1,677 9,997 -- 11,053
Property expenses 535 23,106 -- 23,641
------------- ------------ ------------ ---------------
50,054 53,907 280 101,722
------------- ------------ ------------ ---------------
Loss before income taxes, minority
interests and change in accounting
principle (109,954) (4,732) (1,499) (111,794)
Income tax benefit (36,384) -- -- (36,384)
Minority interests -- -- -- (1,790)
------------- ------------ ------------ ----------------
Net loss before change in accounting
principle (73,570) (4,732) (1,499) (73,620)
Less Preferred Share dividends 4,509 -- -- 4,509
------------- ------------ ------------ ---------------
Loss attributable to common shares (78,079) (4,732) (1,499) (78,129)
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 attributable to common shares $ (94,081) $ (18,962) $ (1,499) $ (94,131)
============= ============ ============ ===============
</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 months ended March 31,
1999 and 1998, were earned from the following sources (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Capital Markets Group fees $ 900 $ 4,638
Corporate Services Group fees 5,507 3,784
Global Capital Management Group fees 14,254 10,106
Real Estate Research Group fees 229 317
---------------- ----------------
Total Financial Services Division
revenues from related parties 20,890 18,845
Less amounts eliminated in
consolidation (2,136) (1,058)
---------------- ----------------
Consolidated Financial Services
Division revenue from related parties $ 18,754 $ 17,787
================ ================
</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:
<TABLE>
<S> <C>
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)
</TABLE>
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 months ended March 31, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Capital Division:
Equity in Investees' EBDADT $ 85,726 $ 78,364
Interest and other income 787 587
-------------- --------------
86,513 78,951
-------------- --------------
Operating expenses 8,213 7,438
Interest expense 19,831 9,820
Current income tax expense 3,869 2,266
Convertible preferred share dividends 4,509 2,606
-------------- --------------
Capital Division EBDADT(1) 50,091 56,821
-------------- --------------
Financial Services Division:
Revenues 20,890 18,845
-------------- --------------
Operating expenses 19,838 12,869
Current income tax expense 351 432
-------------- --------------
Financial Services Division EBDADT 701 5,544
-------------- --------------
EBDADT $ 50,792 $ 62,365
============== ==============
</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 earnings (loss) to EBDADT
for the three months ended March 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
<S> <C> <C>
Net earnings (loss) attributable
to common shares $ (94,131) $ 4,027
Investee reconciling items:
Real estate depreciation 43,889 32,072
Gain on sale of undepreciated real estate (2,339) (5,985)
Unrealized (gains) losses 112,911 29,827
EBDADT, net of dividends, from
Strategic Investees of SC-U.S.Realty and
SC-European Realty 12,669 4,009
Interest rate hedge expense 378 --
Loss on extinguishment of debt 429 --
Other 1,771 (2,420)
------------------- ------------------
169,708 57,503
------------------- ------------------
Security Capital reconciling items:
Deferred tax (benefit) expense (40,604) 835
Adoption of an accounting principle 16,002
Other (183) --
------------------- ------------------
(24,785) 835
------------------- ------------------
EBDADT $ 50,792 $ 62,365
=================== ==================
</TABLE>
Presented below is a reconciliation of segment assets at fair value to assets
presented in accordance with generally accepted accounting principles ("GAAP")
as of March 31, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Capital Division assets at fair value (1) $ 3,763,496 $ 3,973,091
Excess of assets at fair value over cost
of unconsolidated GAAP assets (241,351) (300,707)
Consolidation of Homestead and
investment funds 900,840 847,584
Proceeds from assumed exercise
of options and warrants (2) (9,993) (10,179)
---------------- ----------------
GAAP Assets $ 4,412,992 $ 4,509,789
================ ================
</TABLE>
(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 March 31, 1999, Security Capital had a $650,000,000 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 (1.00% as of March 31, 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. Under
the amended agreement borrowings accrue interest at LIBOR plus a margin (1.30%
as of April 13, 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%).
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 and SC Realty Shares Limited, each of which is a wholly
owned subsidiary of Security Capital.
During a non-monetary default, no payments other than dividends paid on
Security Capital's Series B Preferred Shares are permitted. Distributions and
dividends paid, other than those on Security Capital's Series B Preferred
Shares, cannot exceed 50% of the cash flow available for distributions, provided
no event of default has occurred and is continuing. In the event of a monetary
default, all distributions are prohibited.
16
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 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 the
$50,000,000) federal funds rate
$ 200,000,000 October 1, 1999 Eurodollar rate plus 1.25% 0.25% Subscription receivable from Security
or base rate of prime Capital for $200,000,000 of Homestead
plus 0.25% convertible subordinated debentures, which
Homestead may convert to Homestead common
stock if it is not in default. Homestead
is currently conducting a rights offering
in which Security Capital has agreed to
invest up to $225,000,000, and upon
completion of which the $200,000,000
equity subscription will terminate after
being funded. Proceeds of the rights
offering will be used first to pay off the
$200,000,000 loan. And, second, for other
working capital and general corporate
purposes.
</TABLE>
On April 22, 1999, Homestead, the lenders under the bank lines of
credit, and Security Capital executed a letter agreement (i) extending the
maturity of the $200,000,000 line of credit to the earliest of October 31, 1999,
the date of any business combination or sale of substantially all of Homestead's
assets, or 45 days after the termination of negotiations with third parties
regarding business combinations; (ii) allowing Homestead to incur up to
$25,000,000 of unsecured, subordinated debt to Security Capital; and (iii)
prohibiting incurrence of any indebtedness other than the note to Security
Capital, the lines of credit, the capital lease obligation, and the convertible
mortgage notes. Homestead paid a fee to the banks of $494,000 in connection with
this extension and amendment. As of May 13, 1999, no amounts had been borrowed
by Homestead under the line with Security Capital.
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 March 31, 1999.
17
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Senior Unsecured Notes:
Security Capital has the following long-term debt outstanding as
of March 31, 1999 (in thousands):
<TABLE>
<S> <C>
6.95% Senior Unsecured Notes, due June 15, 2005, original principal of
$200,000,000, net of original issue discount. Interest is payable on June
15 and December 15 of each year. $ 199,809
7.15% Senior Unsecured Notes, due June 15, 2007, original principal of
$100,000,000, net of original issue discount. Interest is payable on June
15 and December 15 of each year. 99,829
7.70% Senior Unsecured Notes, due June 15, 2028, original principal of
$200,000,000. Interest is payable on June 15 and December 15 of each year. 200,000
7.75% Senior Unsecured Notes, due November 15, 2003, original
principal of $100,000,000, net of original issue discount. Interest is
payable on May 15 and November 15 of each year, commencing May 15, 1999. 99,913
7.66% Senior Unsecured Notes, due December 21, 2004, original principal
of $14,700,000, including original issue premium. Interest is payable
on March 15 and September 15 of each year, commencing March 15, 1999. 14,702
7.75% Senior Unsecured Notes, due January 11, 2005, original principal of
$5,000,000. Interest is payable on March 15 and September 15 of each year,
commencing March 15, 1999. 5,000
7.80% Senior Unsecured Notes, due January 12, 2005, original principal of
$54,550,000. Interest is payable on March 15 and September 15 of each
year,commencing March 15, 1999. 54,550
7.80% Senior Unsecured Notes, due January 19, 2005, original principal of
$25,750,000. Interest is payable on March 15 and September 15 of each
year,commencing March 15, 1999. 25,750
-------------
$ 699,553
</TABLE>
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.
18
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Convertible Debt:
As of March 31, 1999 and December 31, 1998, Security Capital had
$321,261,000 and $322,774,000, respectively, of 6.50% convertible subordinated
debentures due 2016 ("2016 Convertible Debentures") outstanding. The 2016
Convertible Debentures accrue interest at 6.50% per annum and pay interest
semi-annually in June and December.
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 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 $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 March 31, 1999, was $143,260,000.
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.
Interest:
Presented below are the interest costs incurred by Security Capital and
its consolidated subsidiaries for the three months ended March 31, 1999 and 1998
(in thousands).
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Total interest incurred $ 35,458 $ 19,303
================ ================
Homestead and Belmont capitalized
interest included in total interest incurred $ 4,440 $ 6,504
================ ================
Interest paid in cash $ 13,149 $ 3,266
================ ================
Amortization of deferred financing costs
included in interest incurred $ 1,565 $ 1,264
================ ================
</TABLE>
19
<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
March 31,
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net income (loss) attributable to common shares
and assumed conversions $ (94,131) $ 4,027
============== ==============
Basic weighted-average Class B common
shares outstanding 120,438 123,402
Increase in shares which would result from:
Exercise of options -- 2,528
Exercise of warrants -- 883
-------------- --------------
Diluted weighted-average Class B common
shares outstanding 120,438 126,813
============== ==============
Per share net earnings (loss) attributable to
Class B common shares:
Basic $ (0.78) $ 0.03
============== ==============
Diluted $ (0.78) $ 0.03
============== ==============
</TABLE>
For all periods the Convertible Debentures and the Convertible
Preferred Shares are not assumed converted for the purpose of calculating
diluted earnings per Class B Common Share as the effects are anti-dilutive, and
for loss periods the conversion of options and warrants are not assumed
exercised as the effect is anti-dilutive.
(7) 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 March 31, 1999,
$375,737,000 had been funded by Security Capital and its affiliates.
At March 31, 1999, Homestead had approximately $42,000,000 of unfunded
commitments for developments under construction. Homestead anticipates
completing development of properties under construction utilizing cash on hand,
any cash available from net proceeds of the rights offering after repayment of
the $200,000,000 line of credit, proceeds from future sales, if any, of
unencumbered land, and cash flow from operations.
In connection with a line of credit agreement entered into by Homestead
in June 1998, Security Capital committed, during the term of the line of credit,
to retain its ownership of Homestead common shares and to purchase up to
$200,000,000 of convertible subordinated debentures of Homestead under certain
20
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
circumstances. Homestead has pledged this investment obligation of Security
Capital as security under Homestead's June 1998 line of credit. In addition, on
March 25, 1999, Homestead announced a rights offering for $225,000,000 of common
stock, the proceeds of which will be used to repay Homestead's $200,000,000
bridge facility and for purposes allowed under the Working Capital Facilities.
Security Capital will participate in the rights offering. Security Capital has
committed to purchase all rights not exercised by other shareholders. The rights
expire on May 21, 1999, with funding anticipated on May 28, 1999. Upon
completion of the Homestead rights offering, Security Capital's obligation under
its subscription agreement for Homestead convertible subordinated debentures
will be reduced or terminated.
As of March 31, 1999, $47,719,000 had been funded by Security Capital
to Belmont and an additional $32,710,000 of unfunded commitments remained. At
March 31, 1999, Belmont had approximately $27,897,000 of unfunded commitments
for developments under construction.
(8) 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, including $763,000 from
investees accounted for by the equity method of accounting. No financial
statement amounts were restated upon adoption of the new standard.
(9) SUBSEQUENT EVENTS
Homestead Special Charge
Homestead has made substantial investments in ownership of land held
for development and in costs of pursuit of additional development sites. 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. All land previously held for
development will be held for sale, all pursuits for acquisition of additional
sites for development will be abandoned, and Homestead will reduce overhead
costs and personnel to reflect a company with stabilized opertions of 136
properties. Homestead will record a special charge in the second quarter of
1999 for the write-down of the carrying cost of land held for sale to its
estimated fair value less estimated costs to dispose, write-offs of costs of
pursuits and loss of non-refundable earnest money deposits and for the costs
of severance of personnel. The special charge to earnings is expected to
approximate $65 million.
The majority of costs of curtailment of the development program are due
to the expected write-downs on land to be held for sale. Substantial effort and
costs have been incurred in the planning stage for design, engineering, and
architectural work and capitalization of carrying costs, all of which the
company expects to be lost upon sale of the sites.
Carrying costs on the land sites, such as interest and property taxes,
will be expensed until the sites are disposed of and will materially adversely
affect earnings until disposal. The majority of the land sites are pledged as
collateral for the Working Capital Facilities and upon sale of these sites any
such proceeds must be used to repay the Working Capital Facilities.
21
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Strategic Hotel
On May 4, 1999, Security Capital formally notified one of its operating
companies, Strategic Hotel, of its intent to sell its entire ownership position
in Strategic Hotel. The offer was made pursuant to a transfer rights agreement
between Security Capital and Strategic Hotel dated as of February 28, 1998.
There can be no assurance that Security Capital will sell its ownership position
or if it does sell its ownership position whether there will be a gain or loss
on the sale.
22
<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 March 31, 1999, and the
related consolidated statements of operations for the three-month periods ended
March 31, 1999 and 1998, the consolidated statement of shareholders' equity for
the three-month period ended March 31, 1999, and the consolidated statements of
cash flows for the three-month periods ended March 31, 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 March 31, 1999, and
whose income represent 7.6% and 20.0% of the total income in the consolidated
statements of operations of Security Capital Group Incorporated and subsidiaries
for the three-month periods ended March 31, 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
May 13, 1999
23
<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 obtains income from five sources:
(1) the Capital Division's share of earnings from its investees; (2) Capital
Markets revenues; (3) Corporate Services revenues for information technology,
accounting and administrative services; (4) Global Capital Management Group
revenues; and (5) Real Estate Research revenues. Revenues from Corporate
Services, Capital Markets, 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-US Real Estate Shares and SC-European Real Estate Shares) are
eliminated in Security Capital's consolidated financial statements.
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Capital Division Investments
Dividends Received
Security Capital's dividends received decreased from $38.5 million to
$38.1 million, for the three months ended March 31, 1999, compared to the same
period in 1998. The decrease resulted primarily from a decrease in the dividend
rate of SC-US Real Estate Shares because they did not pay a capital gains
distribution in 1999 as they did in 1998 (see "dividends per investee share"
chart in note 2 to the consolidated financial statements). During the first
quarter, Security Capital redeemed $28 million of its investment in SC-US Real
Estate Shares, which immaterially reduced dividend income.
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 began generally to increase. If
this recent trend continues, it will have a positive effect on Security
Capital's equity in earnings of these investees.
24
<PAGE>
Presented below is Security Capital's equity in earnings (loss) of
affiliates for the three months ended March 31, 1999 and 1998, and Security
Capital's common share ownership interest in affiliates as of March 31, 1999 and
1998 (Dollar amounts in millions):
<TABLE>
<CAPTION>
Equity in Earnings (Loss) % Ownership
Three Months Ended as of
March 31, March 31,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Archstone $ 14.6 $ 20.8 39.2% 33.0%
ProLogis 1.0 11.7 31.0 41.1
SC-European Realty (16.7) -- 34.6 --
SC-Preferred Growth (4.0) 0.5 9.7 13.3
SC-U.S.Realty (78.0) (18.0) 35.1 33.1
Strategic Hotel:
Earnings 2.0 0.7 30.4 39.5
Interest income 3.2 1.8
---------- ----------
$ (77.9) $ 17.5
========== ==========
</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 months ended March 31, 1998. The decrease in Security Capital's
equity in Archstone's earnings for the three months ended March 31, 1999,
compared to the same period in 1998, is primarily due to a decrease in gains on
dispositions of depreciated real estate of $10.2 million and increased
depreciation and general and administrative expenses.
The decrease in Security Capital's equity in ProLogis' earnings for the
three months ended March 31, 1999, compared to the same period in 1998, is
primarily due to an increase in interest expense of $11.3 million, an increase
in preferred dividends of $4.6 million, an increase in depreciation of $4.2
million and foreign exchange losses of $8.3 million for the three months ended
March 31, 1999, compared to a foreign exchange gain of $1.6 million for the
three months ended March 31, 1998. This is partially offset by an increase in
net operating income of $17.3 million.
Security Capital's decreased ownership in ProLogis is due to ProLogis'
merger with Meredian Industrial Trust, Inc. which was effective March 30, 1999.
Security Capital continues to be ProLogis' largest shareholder.
The decrease in Security Capital's equity in SC-Preferred Growth's
earnings for the three months ended March 31, 1999, compared to the same period
in 1998, is primarily due to a change in unrealized gain or loss on investments
($41.9 million decrease in 1999 and $0.9 million decrease in 1998) due to the
decline in the fair value of stocks owned by SC-Preferred Growth and a realized
loss of $12.3 million recorded in the first quarter of 1999.
The decrease in Security Capital's equity in SC-U.S.Realty's earnings
for the three months ended March 31, 1999, compared to the same period in 1998,
is primarily due to the change in unrealized gain or loss on investments ($236.7
million and $92.8 million decrease for the three months ended March 31, 1999 and
1998, respectively), due to the decline in the market value of REIT stocks
generally, 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 $16.6
million for the three months ended March 31, 1999, compared to the same period
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 $7.8 million for the three months ended 1999 compared to
the same period in 1998.
The increase in Security Capital's equity in Strategic Hotel's
earnings for the three months ended March 31, 1999, compared to the same period
in 1998, is primarily due to additional property acquisitions by Strategic Hotel
in 1998 and the first quarter of 1999. On May 4, 1999, Security Capital formally
notified Strategic Hotel of its intent to sell its entire ownership position in
Strategic Hotel. The offer was made pursuant to a transfer rights agreement
between Security Capital and Strategic Hotel dated as of February 28, 1998.
There can be no assurance that Security Capital will sell its ownership position
or if it does sell its ownership position whether there will be a gain or loss
on the sale.
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
25
<PAGE>
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
Homestead's room revenue increased from $27.2 million to $49.0 million,
an 80% increase for the three months ended March 31, 1999, compared to the same
period in 1998. Homestead's rental expenses increased from $12.3 million to
$23.1 million, an 88% increase for the three months ended March 31, 1999,
compared to the same period in 1998. Homestead's 43 operating property openings
from the end of the first quarter of 1998 through the end of the first 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 months ended March 31, 1999, as
compared to the same period in 1998. The occupancy decrease is attributable to
the effect of competition.
Homestead's results for the first quarter 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 October 1998, Homestead reorganized its development effort and
recorded $7.24 million of special charges in the fourth quarter of 1998. Such
charges primarily related to the severance of development personnel and
abandonment of certain pursuits of development sites due to the limited
availability of additional funds for development. 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 will be held for
sale, all pursuits for acquisition of additional sites for development will be
abandoned, and Homestead will reduce overhead costs and personnel to reflect a
company with stabilized operations of 136 properties. A special charge will be
recorded in Second Quarter 1999 which is expected to approximate $65 million for
write-downs of land to be held for sale, write-offs of costs of pursuits, and
the costs of severance of personnel. This is expected to have a materially
adverse affect on Homestead's reported earnings for the second quarter of 1999.
The majority of costs of the special charge related to the expected
allowance for the write-downs of land to be held for sale. Substantial effort
and costs have been incurred in the planning stage for design, engineering, and
architectural work and capitalization of carrying costs, all of which Homestead
expects to be lost value upon sale of the sites to other parties.
Carrying costs on the land sites, such as interest and property taxes,
will be expensed until the sites are disposed of and will materially adversely
affect earnings until disposal. The majority of the land sites are encumbered by
the Working Capital Facilities and upon sale will require use of the proceeds to
repay the Working Capital Facilities.
26
<PAGE>
Financial Services Division Revenues
The components of Financial Services Division revenues were as follows
for the three months ended March 31, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Capital Markets $ 0.9 $ 4.6
Corporate Services 5.5 3.8
Global Capital Management 14.3 10.1
Real Estate Research 0.2 0.3
------------ ------------
Total Financial Services Division revenues 20.9 18.8
Less amounts eliminated in consolidation (2.1) (1.0)
------------ ------------
Consolidated Financial Services
Division revenues $ 18.8 $ 17.8
============ ============
</TABLE>
The increase in Financial Services Division revenues for the three
months ended March 31, 1999, compared to the same period in 1998 was primarily
attributable to the growth in assets managed by Global Capital Management (shown
in the following table), which generated increased advisory and management fees,
and an increase in corporate services and real estate research services revenue;
partially offset by a 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.
The following table reflects the market value of assets under
management by the Global Capital Management Group as of March 31, 1999 and 1998
(in millions):
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
SC-European Realty $ 1,084 $ --
SC-Preferred Growth 746 613
SC-U.S.Realty 2,629 3,046
Investment Funds 85 134
Other 75 --
------------ ------------
$ 4,619 $ 3,793
============ ============
</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 may make it
more difficult to attract assets to the company's investment funds and investees
which could, in turn, impact future revenue growth for the Global Capital
Management Group or 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 began to increase materially
due to rising real estate security prices.
27
<PAGE>
Realized capital gains
Realized capital gains decreased from net capital gains of $2.2 million
to net capital gains of $1.5 million for the three months ended March 31, 1999,
compared to the same period in 1998. This decrease is due to the decrease 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 a decrease of
$2.9 million for the three months ended March 31, 1999 compared to a decrease of
$0.8 million for the same period in 1998. The decrease in 1999 is due to the
decrease in the market value of SC-US Real Estate Shares' investments.
At March 31, 1999, SC-US Real Estate Shares had investments at cost and
fair market value of approximately $67.4 million and $64.6 million,
respectively. At March 31, 1999, SC-European Real Estate Shares had investments
at cost and fair market value of approximately $17.0 million and $19.5 million,
respectively.
Other Income, net
Other income decreased from $2.6 million for the three months ended
March 31, 1998, to $0.9 million for the three months ended March 31, 1999. The
decrease is primarily due to decreased dividend income for the investment funds
due to Security Capital redeeming $28.0 million of its investments in SC-US Real
Estate Shares.
Financial Services Division Expenses
Financial Services Division expenses increased from $12.3 million to
$20.0 million, a 63% increase for the three months ended March 31, 1999,
compared to the same period in 1998. This increase primarily resulted from
increased personnel in the Global Capital Management Group and the Capital
Markets Group during 1998, primarily due to the establishment of European-based
capabilities for capital markets and certain capital management activities.
General, Administrative and Other
General, administrative and other expenses increased from $11.6 million
to $16.0 million, a 38% increase for the three months ended March 31, 1999,
compared to the same period in 1998. These increases resulted primarily from
additional personnel and costs related to Security Capital's capital division
and administrative infrastructure.
28
<PAGE>
Interest Expense
Interest expense for the three months ended March 31, 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 $ 5.3 $ 5.3 $ -- $ -- $ 5.3 $ 5.3
Lines of credit 1.8 4.7 7.5 1.7 9.3 6.4
Senior unsecured notes 13.0 -- -- -- 13.0 --
Mortgage notes payable -- -- 6.5 7.6 6.5 7.6
Capital lease -- -- 1.4 -- 1.4 --
Capitalized interest (0.3) (0.2) (4.2) (6.3) (4.5) (6.5)
-------- -------- -------- -------- -------- --------
Total $ 19.8 $ 9.8 $ 11.2 $ 3.0 $ 31.0 $ 12.8
======== ======== ======== ======== ======== ========
</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 $6.8 million to $11.1
million, a 64% increase for the three months ended March 31, 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 benefit rate for the three months ended March 31,
1999, is less than 35%. This reduced benefit rate is primarily created by
unbenefited net deferred tax assets in consolidated subsidiaries. The effective
tax provision rate for the three months ended March 31, 1998, is less than 35%.
This reduced taxable rate is primarily created by income generated on
permanently invested capital in a foreign jurisdiction which has a substantially
lower tax rate.
Preferred Share Dividends
Preferred Share dividends increased to $4.5 million for the three
months ended March 31, 1999, compared to $2.6 million for the same period in
1998. This increase is due to 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 three months ended March 31, 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.
29
<PAGE>
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 which 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 $13.6 million during
the first three months of 1999 as compared to the same period in 1998. This
decrease is primarily due to an increase in debt outstanding due to increased
investments in non-dividend paying investees. Increased operating expenses
relative to smaller revenue increases have also affected cash flow.
Investing and Financing Activities
Security Capital's investing activities used approximately $49.3
million, and Homestead's used approximately $49.3 million, for the three months
ended March 31, 1999, compared to $182.1 million and $125.5 million,
respectively, for the three months ended March 31, 1998. Security Capital's
investing activities during the three months ended March 31, 1999, primarily
consisted of (i) $31.1 million net redemption of publicly traded real estate
securities; (ii) $1.7 million invested in SC-U.S.Realty; and (iii) $2.9 million
investment by Belmont in real estate. Security Capital's investing activities
during the three months ended March 31, 1998, consisted primarily of (i) $173.2
million investment by Security Capital in securities of various affiliates; and
(ii) $2.9 million investment by Security Capital in securities of other publicly
traded real estate securities.
Security Capital's financing activities provided net cash of $18.2
million for the three months ended March 31, 1999, compared to providing $294.4
million for the three months ended March 31, 1998. Security Capital's financing
activities for the three months ended March 31, 1999, primarily consisted of:
(i) net usage from the lines of credit borrowings of $64.8 million; (ii)
proceeds from the 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. Security Capital's financing activities for the three months ended
March 31, 1998, primarily consisted of: (i) $265.4 million of net proceeds from
the lines of credit borrowings; and (ii) proceeds from the sale of common stock
to minority interest holders (Homestead) of $27.1 million.
Security Capital has committed, through June 30, 1999, to purchase up
to $225 million of Homestead shares in the rights offering discussed below.
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 March 31, 1999. In addition, as of March 31, 1999, Security Capital has
committed to invest an additional $32.7 million in Belmont.
Based on Security Capital's current level of operations and anticipated
growth as a result of pending new business initiatives, Security Capital expects
30
<PAGE>
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 and additional investments in
existing affiliates) 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:
o On February 23, 1999, Homestead completed a sale and lease-back 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 which 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.
o 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.
o On March 25, 1999, Homestead announced a rights offering for $225
million of common stock, the proceeds of which will be used to repay
Homestead's $200 million bridge facility and for purposes allowed under
the Working Capital Facilities. Security Capital will participate in
the rights offering, purchasing as much as $225 million therein. To the
extent Homestead raises proceeds of up to $200 million in the rights
offering from third parties or Security Capital which are used to repay
its $200 million bridge facility, Security Capital's obligation under
its subscription agreement for Homestead convertible subordinated
debentures will be reduced or terminated.
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 along
with the extension of the line on April 13, 1999. The unsecured line has been
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
31
<PAGE>
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/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 March 31, 1999, there was $56.7 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 has been increased to $170 million total borrowing capacity from $150
million and the sliding interest terms amended to be 2.0% to 3.0% over LIBOR and
1% to 2% over prime or 1.5% to 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 from $50 million 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:
o limiting total liabilities to no more than 55% of gross asset value, as
defined;
o limiting total indebtedness to no more than 50% of gross asset
value, as defined;
o 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;
o 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;
o 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;
o 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
o 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.
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 drastically reduced. The immediate need to repay the $200 million bridge
facility is expected to be accomplished with the proceeds of the rights offering
which is scheduled to be funded May 28, 1999. Other funding needs are primarily
for the completion of the properties in construction, funding of the severance
of personnel, and debt service.
32
<PAGE>
Homestead had at March 31, 1999, unfunded commitments for properties
in construction of approximately $42 million.
Based upon the expectation that Security Capital will participate in
the rights offering to assure gross proceeds of $225 million, Homestead expects
to have approximately $21 million of net cash proceeds available from the
closing of the rights offering after repayment of the $200 million bridge
facility. Homestead believes it will have adequate cash resources from cash on
hand, net proceeds from the rights offering after repayment of the bridge
facility, and cash flow from operations to fund its needs for debt service,
payment of severances, and completion of properties in construction. In addition
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.
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 Security Capital's other 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
$11.50 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 $145,000,000. 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 has
posted a security deposit equal to one year's rent. The properties sold were
among the 26 properties pledged as collateral for the $122,000,000 mortgage note
which was due to mature in June 1999. The $122 million of indebtedness was
repaid in February 1999 with a portion of the proceeds of the sale and leaseback
transaction between Homestead and Hospitality Properties Trust.
33
<PAGE>
AMENDMENT TO INVESTOR AGREEMENT WITH HOMESTEAD
In connection with Security Capital's agreement to purchase enough
shares in theHomestead rights offering to ensure that gross proceeds of the
offering are not less than $225 million, Homestead and Security Capital amended
the investor agreement ("Investor Agreement") between the two companies
providing Security Capital with a variety of rights regarding the management of
Homestead. Under the Investor Agreement, as amended, for so long as Security
Capital beneficially owns at least 50.1% of Homestead's outstanding shares
("Shares"), Security Capital has the right to approve, among other things: (i)
Homestead's annual budget; (ii) the incurrence of expenses in any year exceeding
(A) any line item in the annual budget by $500,000 or 10% and (B) the total
expenses set forth in the annual budget by 5%; (iii) the offer or sale of any
Shares or any securities convertible into or exchangeable for Shares other than
pursuant to (A) an employee benefit plan approved by Homestead's shareholders,
(B) previously issued warrants, options or rights, (C) a dividend reinvestment
plan or share purchase plan approved by Homestead's Board of Directors ("the
Board") or (D) an issuance of rights, options, or warrants for shares issued to
all shareholders; (iv) the issuance or sale of securities that are subject to
mandatory redemption or redemption at the option of the holder; (v) the adoption
of any employee benefit plan pursuant to which Shares may be issued and any
action with respect to senior officers' compensation; (vi) the incurrence,
restructuring, renegotiation or repayment of indebtedness in which the aggregate
amount involved exceeds $1 million; (vii) the declaration or payment of any
dividend or other distribution; (viii) the acquisition or disposition in a
single transaction or group of related transactions where the purchase price
exceeds $1 million; (ix) the entering into of service contracts (A) for property
management, investment management or leasing services, or (B) that contemplate
annual payments in excess of $500,000; (x) the entering into of any new
contract, including for construction, development, other capital expenditure,
for which the total cost is reasonably expected to exceed $1 million for any
contract or $5 million in the aggregate; (xi) the entering into of any joint
venture for the development of any properties owned by Homestead in which the
book value of any property to be contributed by Homestead exceeds $1 million
individually or $5 million in the aggregate; (xii) the entering into of any
franchising or licensing agreements; (xiii) the amendment of the articles of
incorporation or bylaws of Homestead; and (xiv) the waiver of anti-takeover
provisions of Maryland law or Homestead's Charter.
In addition, so long as Security Capital owns at least 50% of the
Shares, Homestead will maintain an operating committee consisting of the two
senior Homestead officers and two nominees of Security Capital that will meet
weekly to review all operations of Homestead.
The Investor Agreement also provides that, so long as Security Capital
owns at least 10% of the outstanding Shares, Homestead may not increase the
number of directors on the Board to more than seven without the approval of
Security Capital. Security Capital also is entitled to designate one or more
persons as directors of Homestead, as follows: (i) so long as Security Capital
owns at least 10% but less than 25% of the outstanding Shares, it is entitled to
nominate one person; and (ii) so long as Security Capital owns at least 25% of
the outstanding shares, it is entitled to nominate that number of persons as
shall bear approximately the same ratio to the total number of members of the
Board as the number of Shares beneficially owned by Security Capital bears to
the total number of outstanding Shares, provided that Security Capital shall be
entitled to designate no more than two persons so long as the Homestead Board
consists of no more than seven members. C. Ronald Blankenship is Security
Capital's only current designee on the Board.
EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES ("EBDADT")
Basic EBDADT decreased from $62.4 million to $50.8 million, a 19%
decrease for the three months ended March 31, 1999, compared to the same period
in 1998, primarily because Security Capital's share of Homestead's operating
results were $2.1 million lower, Capital Markets Group revenues were $3.7
million lower and interest expense was $10.0 million higher due to greater
average long-term debt balances. EBDADT represents net earnings computed in
34
<PAGE>
accordance with generally accepted accounting principles before gains/losses on
dispositions of depreciated property, plus real estate deprecation 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
unrealized losses, minus unrealized gains, 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.
Presented below is a reconciliation of net earnings (loss) to EBDADT
for the three months ended March 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Net earnings (loss) attributable
to common shares $ (94,131) $ 4,027
Investee reconciling items:
Real estate depreciation 43,889 32,072
Gain on sale of depreciated real estate (2,339) (5,985)
Unrealized (gains) losses 112,911 29,827
EBDADT, net of dividends, from
Strategic Investees of SC-U.S.Realty
and SC-European Realty 12,669 4,009
Interest rate hedge expense 378 --
Loss on extinguishment of debt 429 --
Other 1,771 (2,420)
------------------- -------------------
169,708 57,503
------------------- -------------------
Security Capital reconciling items:
Deferred tax (benefit) expense (40,604) 835
Change in accounting principle 16,002 --
Other (183) --
------------------- -------------------
(24,785) 835
------------------- -------------------
EBDADT $ 50,792 $ 62,365
=================== ===================
</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 May 14,
1999, Security Capital has either certified or replaced all of its critical
35
<PAGE>
systems with Year 2000 compliant systems. The remaining non-critical systems are
expected to be upgraded or replaced by June 1999. Among Security Capital's
affiliates, three have certified all of their systems; the other affiliates are
in various stages of conversion to Year 2000 compliant systems. The latest
expected date for full compliance is July 1999.
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
none of its affiliates will encounter the Year 2000 issue, including providing
direct and indirect assistance 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 6 years old and partially
completed 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
expect to be Year 2000 compliant early in 1999. Security Capital and its
affiliates will perform tests of these systems during the first half of 1999 but
expect no major problem or exposure from any of the specialty service providers.
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 and 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 not been completed, but all
respondents so far have stated that they are Year 2000 compliant, and 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. The survey of suppliers is expected to be completed by the end of
the second quarter of 1999.
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.
36
<PAGE>
Third party costs to address the Year 2000 issue have been less than
$50,000 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.
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 and variable rate mortgage
note debt. Homestead has no involvement with derivative financial instruments.
37
<PAGE>
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
March 31, 1999:
<TABLE>
<CAPTION>
Expected Maturity/Principal Repayment December 31,
Nominal ---------------------------------------------------------------------------------
Interest Total Fair
Rate 1999(2) 2000 2001 2002 2003 Thereafter Balance Value
-------- -------- -------- -------- -------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Liabilities:
Lines of Credit Facilities -
variable rate (1) 8.10% $200,000 $199,000 $ -- $ -- $ -- $ -- $ 399,000 $399,000
Convertible Mortgage Notes - 9.00% $ -- $ -- $ -- $ -- $ -- $ 221,334 $ 221,334 $218,363
fixed rate
Capital lease obligation - 9.80% $ 2,630 $ 3,821 $ 4,213 $ 4,647 $ 5,124 $ 122,825 $ 143,260 $143,260
fixed rate
Other Long-Term Obligation - 9.74% $ 9 $ 13 $ 14 $ 16 $ 17 $ 7,853 $ 7,922 $ 7,910
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. Additionally, on March 25, 1999,
Homestead initiated a rights offering for $225 million of common stock, the
proceeds of which will be used to repay Homestead's $200 million bridge
facility and for purposes allowed under Homestead's Working Capital
Facilities.
(2) Amounts represent expected maturities and principal repayments for the
nine months remaining for 1999.
38
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 First amendment to credit agreement dated as of October 15,
1998, by and among Security Capital Group Incorporated, the
financial institutions party thereto and, Chase Bank of Texas,
National Association, as Documentation Agent and Wells Fargo
Bank, National Association, as Agent
10.2 Second amendment to credit agreement dated as of April 13,
1999, by and among Security Capital Group Incorporated, the
financial institutions party thereto and Wells Fargo Bank,
National Association, as Agent
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 May 13, 1999, regarding
unaudited financial information
27 Financial data schedule
(b) Reports on Form 8-K
None
39
<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: May 14, 1999
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
dated as of October 15, 1998
by and among
SECURITY CAPITAL GROUP INCORPORATED
as Borrower,
THE FINANCIAL INSTITUTIONS PARTY THERETO
AND THEIR ASSIGNEES UNDER SECTION 10.8 THEREOF
as Lenders,
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
as Documentation Agent and
WELLS FARGO BANK, NATIONAL ASSOCIATION
as Agent
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT dated as of October 15, 1998 by
and among SECURITY CAPITAL GROUP INCORPORATED (the "Borrower"), the financial
institutions party thereto and their assignees under Section 10.8 thereof (the
"Lenders"), CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, as Documentation Agent
(the "Documentation Agent") and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Agent
(the "Agent").
WHEREAS, the Borrower, the Lenders, the Documentation Agent and the
Agent are parties to that certain Credit Agreement dated as of June 5, 1998 (the
"Credit Agreement");
WHEREAS, the Borrower, the Lenders, the Documentation Agent and the
Agent desire to amend certain provisions of the Credit Agreement on the terms
and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
hereto hereby agree as follows:
Section 1. Specific Amendments to Credit Agreement.
(a) The Credit Agreement is amended by deleting from Section 7.1(a)
thereof the reference to the number "95" and substituting in its place the
number "135".
(b) The Credit Agreement is amended by deleting from Section 7.1(b)
thereof the reference to "50 days" and substituting in its place "65 days".
(c) The Credit Agreement is amended by deleting Section 7.1(d) in its
entirety and substituting in its place the following:
"(d) as soon as possible and in any event within 5 Business Days
following the end of each calendar month or promptly upon the reasonable
request of Agent, an Unencumbered Pool Certificate;"
(d) The Credit Agreement is amended by supplementing Schedule 6.6
thereto with the additional information set forth on the "Supplement to Schedule
6.6" attached hereto.
Section 2. Effectiveness of Amendments and Waivers. The effectiveness of
Section 1 is subject to receipt by the Agent of each of the following in form
and substance satisfactory to the Agent: (a) Counterparts of this Amendment
executed by each of the parties hereto; and (b) Such other documents and
instruments as the Agent may reasonably request. Section 3. Representations of
the Borrower. The Borrower represents and warrants to the Agent and the Lenders
that:
(a) Authorization. The Borrower has the right and power, and has taken
all necessary action to authorize it, to execute and deliver this Amendment and
to perform its obligations hereunder and under the Credit Agreement, as amended
by this Amendment, in accordance with their respective terms. This Amendment has
been duly executed and delivered by a duly authorized officer of the Borrower
and each of this Amendment and the Credit Agreement, as amended by this
Amendment, is a legal, valid and binding obligation of the Borrower enforceable
against the Borrower in accordance with its respective terms, except as the same
may be limited by bankruptcy, insolvency, and other similar laws affecting the
rights of creditors generally and the availability of equitable remedies for the
enforcement of certain obligations contained herein or therein may be limited by
equitable principles generally.
(b) Compliance with Laws, etc. The execution and delivery by the
Borrower of this Amendment and the performance by the Borrower of this Amendment
and the Credit Agreement, as amended by this Amendment, in accordance with their
respective terms, do not and will not, by the passage of time, the giving of
notice or otherwise: (i) require any Government Approval or violate any
Applicable Law relating to the Borrower the failure to possess or to comply with
which would have a Materially Adverse Effect; (ii) conflict with, result in a
breach of or constitute a default under the Organizational Documents of the
Borrower or any indenture, agreement or other instrument to which the Borrower
is a party or by which it or any of its properties may be bound and the
violation of which would have a Materially Adverse Effect; or (iii) result in or
require the creation or imposition of any Lien upon or with respect to any
property now owned or hereafter acquired by the Borrower other than Permitted
Liens.
Section 4. Reaffirmation by Borrower. The Borrower hereby repeats and
reaffirms all representations and warranties made by the Borrower to the Agent
and the Lenders in the Credit Agreement and the other Loan Documents to which it
is a party on and as of the date hereof (and after giving effect to this
Amendment) with the same force and effect as if such representations and
warranties were set forth in this Amendment in full.
Section 5. Reaffirmation by Guarantor. The Guarantor hereby reaffirms
its continuing obligations to the Agent and the Lenders under the Guaranty, and
agrees that the transactions contemplated by this Amendment shall not in any way
affect the validity and enforceability of the Guaranty, or reduce, impair or
discharge the obligations of the Guarantor thereunder.
Section 6. References to the Credit Agreement. Each reference to the
Credit Agreement in any of the Loan Documents (including the Credit Agreement)
shall be deemed to be a reference to the Credit Agreement, as amended by this
Amendment.
Section 7. Benefits. This Amendment shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns.
Section 8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA.
Section 9. Effect. Except as expressly herein amended, the terms and
conditions of the Credit Agreement and the other Loan Documents shall remain in
full force and effect.
Section 10. Effective Date. This Amendment shall not be
effective until its execution and delivery by all of the parties hereto
whereupon its shall be deemed effective as of the date first written above.
Section 11. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original and shall be
binding upon all parties, their successors and assigns.
Section 12. Definitions. All capitalized terms not otherwise defined herein
are used herein with the respect ive definitions given them in the Credit
Agreement.
[Signatures Begin on the Following Page]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to Credit Agreement to be executed as of the date first above written.
BORROWER:
SECURITY CAPITAL GROUP INCORPORATED
By:______________________________________
Name:______________________________
Title:______________________________
GUARANTOR:
SC REALTY INCORPORATED
By:______________________________________
Name:______________________________
Title:______________________________
[Signatures Continued on Following Page]
<PAGE>
[Signature Page to First Amendment to Credit Agreement dated as of October
__, 1998 with Security Capital Group Incorporated]
AGENT AND LENDERS:
WELLS FARGO BANK, NATIONAL ASSOCIATION,
individually and as the Agent
By:______________________________________
Name:______________________________
Title:______________________________
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, individually and as
Documentation Agent
By:______________________________________
Name:______________________________
Title:______________________________
CREDIT LYONNAIS NEW YORK BRANCH
By:______________________________________
Name:______________________________
Title:______________________________
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:______________________________________
Name:______________________________
Title:______________________________
[Signatures Continued on Following Page]
<PAGE>
[Signature Page to First Amendment to Credit Agreement dated as of October
__, 1998 with Security Capital Group Incorporated]
BANK OF MONTREAL, CHICAGO BRANCH
By:______________________________________
Name:______________________________
Title:______________________________
NATIONSBANK, N.A.
By:______________________________________
Name:______________________________
Title:______________________________
GUARANTY FEDERAL BANK, F.S.B.
By:______________________________________
Name:______________________________
Title:______________________________
DRESDNER BANK, AG, NEW YORK BRANCH AND
GRAND CAYMAN BRANCH
By:______________________________________
Name:______________________________
Title:______________________________
By:______________________________________
Name:______________________________
Title:______________________________
[Signatures Continued on Following Page]
<PAGE>
[Signature Page to First Amendment to Credit Agreement dated as of October
__, 1998 with Security Capital Group Incorporated]
FIRST UNION NATIONAL BANK
By:______________________________________
Name:______________________________
Title:______________________________
TRANSAMERICA LIFE INSURANCE AND ANNUITY
COMPANY
By:______________________________________
Name:______________________________
Title:______________________________
BANKBOSTON, N.A.
By:______________________________________
Name:______________________________
Title:______________________________
KBC BANK N.V.
By:______________________________________
Name:______________________________
Title:______________________________
By:______________________________________
Name:______________________________
Title:______________________________
<PAGE>
[Signature Page to First Amendment to Credit Agreement dated as of October
__, 1998 with Security Capital Group Incorporated]
AMSOUTH BANK
By:______________________________________
Name:______________________________
Title:______________________________
BANK ONE ARIZONA
By:______________________________________
Name:______________________________
Title:______________________________
<PAGE>
EXHIBIT 10.2
AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT dated as of April 13, 1999 by
and among SECURITY CAPITAL GROUP INCORPORATED (the "Borrower"), the financial
institutions party thereto and their assignees under Section 10.8 thereof (the
"Lenders"), and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Agent (the "Agent").
WHEREAS, the Borrower, the Lenders and the Agent are parties to that
certain Credit Agreement dated as of June 5, 1998, as amended as of October 15,
1998 (the "Credit Agreement");
WHEREAS, the Borrower, the Lenders and the Agent desire to amend certain
provisions of the Credit Agreement on the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
hereto hereby agree as follows:
Section 1. Specific Amendments to Credit Agreement.
(a) The Credit Agreement is amended by deleting the "WHEREAS" paragraph
appearing on the first page thereof and substituting in its place the following:
WHEREAS, Lenders desire to make available to Borrower a
$470,000,000 revolving credit facility, pursuant to the terms hereof.
(b) The Credit Agreement is amended by deleting the definitions of the
terms "Pacific", "Real Estate Company Securities", and "Revolving Period" from
Section 1.1. thereof in their entirety.
(c) The Credit Agreement is amended by deleting clause (d) of the
definition of the term "Qualifying Security" contained in Section 1.1. in its
entirety and substituting in its place the following:
(d) the ratio of (i) such Issuer's Indebtedness to (ii) its Net
Worth plus the amount of accumulated depreciation of such Issuer,
determined as of such Issuer's fiscal quarter most recently ending and
in accordance with generally accepted accounting principles (or other
method of accounting acceptable to Agent) as in effect on April 13,
1999, does not exceed 1.0 to 1.0 (or 1.20 to 1.00 solely in the case of
Homestead)(for purposes of this clause (d) only, convertible debentures
issued by Strategic Hotel Capital Incorporated and outstanding as of
April 13, 1999 shall be deemed to have been converted pursuant to their
terms); and
(d) The Credit Agreement is amended by restating the definitions of the
terms "Applicable Margin", "Cash Flow", "Cash Flow Available for Distribution",
"Fixed Charges", "Indebtedness", "Market Value", "Market Value Net Worth",
"Principal Companies", "Revolving Credit Termination Date", "Strategic
Investee", "Termination Date", "Total Liabilities", "Unencumbered Pool Value"
and "Unsecured Liabilities" from Section 1.1. thereof in their entirety as
follows:
"Applicable Margin" means the percentage per annum determined at
any time based on the range into which Borrower's Credit Rating then
falls, in accordance with the table set forth below. Any change in
Borrower's Credit Rating which would cause the Applicable Margin to be
determined based on a different Level in the table shall take effect on
the date on which such change occurs. Notwithstanding anything to the
contrary in this paragraph, during any period in which Borrower has no
Credit Rating from either S&P or Moody's, the Applicable Margin shall be
percentage corresponding to Level 5 in the table. During any period in
which Borrower shall only have one Credit Rating, the Applicable Margin
shall be based on such Credit Rating. During any period that Borrower
receives only two Credit Ratings and such Credit Ratings are not
equivalent, the Applicable Margin shall be determined by the lower of
such two Credit Ratings. During any period that Borrower receives more
than two Credit Ratings and such Credit Ratings are not equivalent, the
Applicable Margin shall be determined by the lower of the two highest
Credit Ratings.
<TABLE>
<CAPTION>
Borrower's Credit Rating
Level (S&P/Moody's or equivalent) Applicable Margin
- --------- ---------------------------------- -----------------
<S> <C> <C>
1 A/A2 or equivalent 1.00%
2 A-/A3 or equivalent 1.10%
3 BBB+/Baa1 or equivalent 1.20%
4 BBB/Baa2 (or equivalent) 1.30%
5 BBB-/Baa3 (or equivalent) 1.40%
6 Lower than BBB-/Baa3 or 1.80%
equivalent
</TABLE>
"Cash Flow" means, with respect to a Person for the four fiscal
quarter period ending as of the date of determination, such Person's net
income for such period determined in accordance with generally accepted
accounting principles (excluding capital gains and losses for such
period on any disposition of Investments in any Real Estate Companies
that are Strategic Investees and, to the extent included in net income,
any unrealized gains and losses), except that cash dividends and other
cash received from Investments in Consolidated Subsidiaries, other
Subsidiaries or any other Persons shall be substituted for net income of
Consolidated Subsidiaries and for equity in earnings of any such
Subsidiaries or other Persons, plus the sum of the following amounts
(but only to the extent that any of the following amounts were taken
into account when determining such net income): (a) income taxes accrued
for such period, plus (b) interest expense paid or accrued for such
period, plus (c) depreciation and amortization expenses for such period,
plus (d) the return of the capital component of dividends received for
such period (to the extent that such component is not reflected already
in net income), plus (e) non-recurring extraordinary expenses,
non-recurring special charges (such as restructuring charges,
non-recurring asset write-downs, and costs and charges related to asset
acquisitions and dispositions), and non-recurring costs or charges
related to accounting charges for such period; provided, however, to the
extent that the cash component of the expenses, costs and charges
referred to in this clause (e) would exceed $10,000,000 in the aggregate
for such period, such excess shall not be added back to net income.
"Cash Flow Available for Distribution" means, with respect to a
Person for a given period, such Person's net income for such period
determined in accordance with generally accepted accounting principles
(excluding capital gains and losses for such period on any disposition
of Investments in any Real Estate Companies that are Strategic
Investees, and to the extent included in net income, any unrealized
gains and losses), except that cash dividends and other cash received
from Investments in Consolidated Subsidiaries, other Subsidiaries or any
other Persons shall be substituted for net income of Consolidated
Subsidiaries and for equity in earnings of any such Subsidiaries or
other Persons, plus the sum of the following amounts (but only to the
extent that any of the following amounts were taken into account when
determining such net income): (a) interest expense accrued but not paid
for such period, plus (b) depreciation and amortization expenses for
such period, plus (c) the return of the capital component of dividends
received for such period (to the extent that such component is not
reflected already in net income), plus (d) non-recurring extraordinary
expenses, non-recurring special charges (such as restructuring charges,
non-recurring asset write-downs, and costs and charges related to asset
acquisitions and dispositions), and non-recurring costs or charges
related to accounting charges for such period; provided, however, to the
extent that the cash component of the expenses, costs and charges
referred to in this clause (d) would exceed $10,000,000 in the aggregate
for such period, such excess shall not be added back to net income.
"Fixed Charges" means, with respect to a Person for the four
fiscal quarter period ending as of the date of determination, the sum of
(a) the total amount of accrued or paid interest (including, without
limitation, interest expense attributable to Capitalized Lease
Obligations but excluding interest accrued in respect of any "zero
coupon" Indebtedness and other similar Indebtedness for which interest
is not due and payable) of such Person for such period, and in any event
shall include all accrued, paid or capitalized interest with respect to
any Indebtedness or other obligation in respect of which such Person is
wholly or partially liable, whether pursuant to any repayment, interest
carry, performance Guarantee or otherwise (excluding any such "zero
coupon" Indebtedness and other similar Indebtedness) and in any event
shall include all letter of credit fees paid or accrued by such Person
during such period plus (b) regularly scheduled principal payments on
Indebtedness of such Person during such period, other than (i) any
balloon, bullet or similar principal payment payable on any Indebtedness
of such Person which spreads the final payment thereof over a period and
thereby reduces refinancing risk and repays such Indebtedness in full
and (ii) in the case of the Borrower, principal payments in respect of
the Term Loans. "Fixed Charges" shall include such Person's ownership
share of all of the foregoing of any Affiliate of such Person that is
not a Consolidated Subsidiary (with such ownership share being based on
the greater of such Person's nominal ownership interest or economic
interest in any such Affiliate). When determining the Borrower's
compliance with Section 7.7.(c), the amount of Fixed Charges of
Strategic Investees and Capital Management Entities shall be
disregarded.
"Indebtedness" of any Person means at any date, without
duplication, (a) all obligations of such Person for borrowed money, (b)
all obligations of such Person evidenced by bonds, debentures, notes or
other similar debt instruments, (c) all obligations of such Person to
pay the purchase price of property or services if such obligations are
payable after the receipt of such property or rendition of such
services, except (i) accounts payable arising in the ordinary course of
business, (ii) obligations incurred in the ordinary course to pay the
purchase price of Securities so long as such obligations are paid within
customary settlement periods and (iii) obligations to purchase
Securities pursuant to subscription or stock purchase agreements, or
otherwise make capital contributions, in or with respect to Strategic
Investees or Capital Management Entities, (d) all Capitalized Lease
Obligations of such Person, (e) all reimbursement obligations of such
Person under letters of credit or acceptances in respect of drawings
thereunder to the extent not reimbursed, (f) all Indebtedness secured by
a Lien on any asset of such Person, whether or not such Indebtedness is
otherwise an obligation of such Person, and (g) all Indebtedness of
others Guaranteed by such Person or which is otherwise recourse to such
Person, including all Indebtedness of any partnership of which such
Person is a general partner. Notwithstanding the foregoing, for purposes
of calculating Borrower's compliance with Section 7.7., accounts payable
(other than deferred compensation and obligations incurred in the
ordinary course to pay the purchase price of Securities so long as such
obligations are paid within customary settlement periods) of Borrower in
excess of 3.0% of the undepreciated book value (determined in accordance
with generally accepted accounting principles) of the assets of the
Borrower, at any time outstanding shall be treated as Indebtedness to
the extent of such excess.
"Market Value" means, with respect to a Security and on the date
of determination thereof, the value determined in accordance with the
following method applicable to such Security:
(a) in the case of a Security listed on the New York
Stock Exchange, the American Stock Exchange, or some other
principal national securities exchange in the United States of
America, the reported last sale price of a unit of such security
regular way on a given day, or, in case no such sale takes place
on such day, the average of the reported closing bid and asked
prices regular way, in each case on the New York Stock Exchange
Composite Tape, the American Stock Exchange Composite Tape or the
principal national securities exchange in the United States of
America on which the security is listed or admitted to trading,
as applicable, or, if such Security is not listed or admitted to
trading on any national securities exchange in the United States
of America, the closing sales price, or if there is no closing
sales price, the average of the closing bid and asked prices, in
the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotation System,
(b) in the case of a Security listed on a principal
national securities exchange in Luxembourg, Amsterdam or other
European country, the price of such Security as reported on such
exchange by the most widely recognized reporting method
customarily relied upon by financial institutions in such country
and which method is reasonably acceptable to Agent,
(c) in the case of a Security issued by an investment
fund which invests primarily in the Securities of publicly traded
real estate companies and the net asset value of which is
regularly determined (and in any event at least every three
months) and reported publicly, the reported net asset value of
such Security,
(d) in the case of any other Security, one of the
following, as provided below (determined on a per share basis in
a manner acceptable to Agent):
(i) in the case of a Security issued by a private
investment fund which invests primarily in the Securities
of publicly traded real estate companies and the net
asset value of which is regularly determined (and in any
event at least every three months) and reported to its
shareholders, the reported net asset value of such
Security,
(ii) the sum of (A) EBITDA of the Issuer of such
Security for the fiscal quarter of such Issuer most
recently ending times 4 divided by 9.25%, plus (B) with
respect to any tangible assets of such Issuer that did
not generate income included in the determination of
EBITDA, the book value of such assets as of the end of
such fiscal quarter, minus (C) the total liabilities of
such Issuer as of the end of such fiscal quarter, or
(iii) the book value of such Security as reflected
on the balance sheet of Borrower thereof as of the fiscal
quarter of Borrower most recently ending.
Securities issued by Strategic Hotel Capital Incorporated
and by BelmontCorp shall initially be valued in
accordance with the method described in the immediately
preceding clause (ii), Securities issued by Security
Capital European Real Estate Shares, Security Capital
Preferred Growth Incorporated and Security Capital U.S.
Real Estate Shares shall initially be valued in
accordance with the method described in the immediately
preceding clause (i), and Securities issued by Security
Capital European Realty shall initially be valued in
accordance with the method described in the immediately
preceding clause (iii). Securities of any other Issuer
shall be valued in accordance with one of such methods as
Agent and Borrower may agree. The value of Securities of
an Issuer may be determined in accordance with the method
described in the immediately preceding clause (iii) for a
maximum period of two years beginning April 13, 1999,
after which such value shall be determined in accordance
with the immediately preceding clause (ii) (or clause (i)
in the case of a private investment fund, if such method
is then acceptable to Agent) if no other valuation method
referred to above should then apply.
Any determination of the "Market Value" of a Security pursuant to this
definition shall be based on the assumption that offers of such Security
are exempt from registration under the Securities Act. In addition if
the "Market Value" of a Security determined pursuant to the above
provisions of this definition would be less than zero, then such "Market
Value" shall be equal to zero.
"Market Value Net Worth" means, on a given date, (a) the sum of
(i) the Market Value on and as of such date of all Securities (excluding
preferred stock referred to in the immediately following clause (ii))
owned by Borrower and its Consolidated Subsidiaries and which Securities
are issued by Real Estate Companies, (ii) the aggregate liquidation
preference value of any preferred stock owned by the Borrower and its
Consolidated Subsidiaries on and as of such date, (iii) the book value
of all other assets of Borrower and its Consolidated Subsidiaries
(excluding all Intangible Assets) on and as of such date and (iv) all
cash and cash equivalents of Borrower and its Consolidated Subsidiaries
on and as of such date, minus (b) the Total Liabilities (excluding
deferred taxes on unrealized gains) of Borrower and its Consolidated
Subsidiaries as of such date as determined in accordance with generally
accepted accounting principles. The Market Value of Securities which are
the subject of purchase obligations, repurchase obligations, forward
commitments and other unfunded obligations shall be included in Market
Value Net Worth to the extent that the amount of such purchase
obligations, repurchase obligations, forward commitments and other
unfunded obligations are included in Total Liabilities.
"Principal Companies" means Archstone, ProLogis, U.S. Realty and
Homestead.
"Revolving Credit Termination Date" means the earlier to occur of
(a) April 6, 2002, or such later date to which such date may be extended
in accordance with Section 2.10. or (b) the date on which the Revolving
Loans are converted into Term Loans pursuant to Section 2.11.
"Strategic Investee" means, with respect to the Borrower, any
Person (other than any of the Service Subsidiaries) of which the
Borrower initially owns, directly or indirectly, more than 25% of the
outstanding securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other
individuals performing similar functions.
"Termination Date" means April 6 in the year two calendar years
immediately following the year in which the Revolving Loans are
converted into Term Loans.
"Total Liabilities" means, as to any Person, at a particular
date, all liabilities which would, in conformity with generally accepted
accounting principles, be properly classified as a liability on the
balance sheet of such Person as at such date, and in any event shall (a)
include (without duplication) (i) Indebtedness of such Person, (ii) all
Contingent Obligations of such Person, (iii) liabilities of any
Affiliate of such Person that is not a Consolidated Subsidiary of such
Person, which liabilities such Person has Guaranteed or is otherwise
obligated on a recourse basis, (iv) such Person's ownership share (based
on the greater of such Person's nominal ownership interest or economic
interest in such Affiliate) of the Nonrecourse Indebtedness of any such
Affiliate, and (v) all purchase obligations, repurchase obligations,
forward commitments (including forward commitments to purchase equity
interests, to make investments or to make loans) and any other unfunded
obligations of such Person; and (b) not include (i) any accounts payable
owing to a trade creditor and which is not evidenced by any instrument
and any accounts payable representing deferred compensation, (ii)
accrued expenses, (iii) deferred taxes on unrealized gains, (iv)
declared but unpaid dividends and (v) in the case of the Borrower and
its Subsidiaries, Indebtedness or other liabilities of Strategic
Investees or Capital Management Entities.
"Unencumbered Pool Value" means, at any given time, the aggregate
Market Value of all Qualifying Securities subject, however, to the
following limitations: (a) at least 90% of the Unencumbered Pool Value
shall be attributable to Traded Securities issued by Approved Issuers
each having a Cash Flow to Interest Ratio for the period of four
consecutive fiscal quarters most recently ending of not less than 1.5 to
1.0 and (b) of the Unencumbered Pool Value attributable to such Issuers,
no more than (i) 50% of such value shall be individually attributable to
Securities issued by ProLogis or Archstone, respectively, (ii) 40% of
such value shall be attributable to Securities issued by U.S. Realty,
(iii) 30% of such value shall be attributable to Securities issued by
Homestead and (iv) 20% of such value shall be collectively attributable
to Securities issued by any other Persons. The amount of the obligation
to purchase Securities that are the subject of purchase obligations,
repurchase obligations, forward commitments and other unfunded
obligations of the Borrower or any Guarantor, shall be included when
determining the Unencumbered Pool Value to the extent that the amount of
such purchase obligations, repurchase obligations, forward commitments
and other unfunded obligations are included in Unsecured Liabilities.
For purposes of this definition, the Market Value of Securities that are
subject to purchase obligations, repurchase obligations, forward
commitments and other unfunded obligations of the Borrower or any
Guarantor shall not be less than the amount of these obligations.
"Unsecured Liabilities" means, as to any Person as of a given
date, all liabilities which would, in conformity with generally accepted
accounting principles, be properly classified as a liability on the
consolidated balance sheet of such Person that are not secured in any
manner by a Lien in any property, and shall in any event include
(without duplication) the following: (a) all unsecured Indebtedness of
such Person; (b) all purchase obligations, repurchase obligations,
forward commitments and unfunded obligations; (c) all accounts payable
of such Person; (d) all Guarantees by such Person of Unsecured
Liabilities of other Persons and (e) unsecured subordinated debt.
(e) The Credit Agreement is amended by adding to Section 1.1. thereof
the following new definitions in the appropriate alphabetical locations:
"Archstone" means Archstone Communities Trust, as real estate
investment trust formed under the laws of the State of Maryland.
"Capital Management Entity" means a Subsidiary of the Borrower
which (i) provides investment management or investment advisory services
pursuant to any contract or agreement or series of contracts or
agreements; or (ii) is a Person that (A) is registered under the
Investment Company Act of 1940, as amended (the "Investment Company
Act") or (B) is exempt from registration under the Investment Company
Act and makes passive investments in companies or funds in which such
Person does not have representation on the board of directors or similar
body or participate on a regular basis in the management of such company
or fund.
"EBITDA" means, with respect to a Person and for a given period,
the sum of each of the following of such Person during such period,
determined on a consolidated basis: (i) net income, (ii) income taxes
paid or accrued, (iii) interest expense paid or accrued, (iv)
depreciation and amortization deductions and (v) non-recurring
extraordinary expenses, non-recurring special charges (such as
restructuring charges, non-recurring asset write-downs, and costs and
charges related to asset acquisitions and dispositions), and
non-recurring costs or charges related to accounting charges for such
period; provided, however, to the extent that the cash component of the
expenses, costs and charges referred to in this clause (v) would exceed
$10,000,000 in the aggregate for such period, such excess shall not be
added back to net income (but only to the extent, in each case, that
such taxes, expenses and deductions are reflected in the calculation of
such Person's net income for such period).
"Nonrecourse Indebtedness" means, with respect to a Person,
Indebtedness for borrowed money in respect of which recourse for payment
(except for customary exceptions for fraud and other similar exceptions
acceptable to the Agent in its sole discretion) is contractually limited
to specific assets of such Person encumbered by a Lien securing such
Indebtedness.
"Swingline Termination Date" means the date which is 10 Business
Days prior to the Revolving Credit Termination Date.
(f) The Credit Agreement is amended by deleting Section 2.8.(c) thereof
in its entirety and substituting in its place the following:
(c) Payment of Principal of Term Loans. Borrower shall repay the
principal balance of the Term Loans in consecutive quarterly
installments due on the last day of each August, November, February and
May following the Revolving Credit Termination Date until the Term Loans
have been paid in full. Each such installment shall be in an amount
equal to 12.5% of the initial aggregate principal balance of the Term
Loans. Notwithstanding the foregoing, the entire outstanding principal
balance of all Term Loans shall be due and payable in full on the
Termination Date.
(g) The Credit Agreement is amended by deleting Section 2.10.(a) thereof
in its entirety and substituting in its place the following:
(a) Borrower may request Agent and Lenders to extend the current
Revolving Credit Termination Date by successive one-year intervals by
executing and delivering to Agent no later than March 15 (and not before
March 1) of the year one year prior to the current Revolving Credit
Termination Date, a written request for such extension (an "Extension
Request"). Agent shall forward to each Lender a copy of each Extension
Request delivered to Agent promptly upon receipt thereof. Borrower
understands that this Section has been included in this Agreement for
Borrower's convenience in requesting an extension and acknowledges that
none of Lenders nor Agent has promised (either expressly or impliedly),
nor has any obligation or commitment whatsoever, to extend the Revolving
Credit Termination Date at any time. If all Lenders shall have notified
Agent on or prior to May 1 of the year one year prior to the Revolving
Credit Termination Date that they accept such Extension Request, the
Revolving Credit Termination Date shall be extended for one year. If any
Lender shall not have notified Agent on or prior to such May 1 that it
accepts such Extension Request, the Revolving Credit Termination Date
shall not be extended. Agent shall promptly notify Borrower whether the
Extension Request has been accepted or rejected as well as which Lender
or Lenders rejected Borrower's Extension Request (each such Lender a
"Rejecting Lender").
(h) The Credit Agreement is amended by deleting Section 2.11. thereof in
its entirety and substituting in its place the following:
SECTION 2.11. Term Loan Conversion.
Subject to the terms and conditions of this Agreement, if any
Extension Request of Borrower shall be denied, Borrower may then elect
to convert on June 15 immediately preceding the current Revolving Credit
Termination Date the aggregate principal amount of Revolving Loans then
owing to each Lender and outstanding on the date of such conversion into
a term loan owing to such Lender (each a "Term Loan") provided (a)
Borrower has given Agent not less than 15 days' prior notice of
Borrower's intention to so convert the Revolving Loans and (b) the
conditions set forth in Section 5.3. have been satisfied as of the date
of such conversion. Upon the effectiveness of the conversion of the
outstanding principal balance of Revolving Loans into Term Loans as
contemplated by this Section, Borrower shall have no right to borrow,
and neither Swingline Lender nor any Lender shall have any obligation to
make, any Swingline Loans or Revolving Loans, as applicable.
(i) The Credit Agreement is amended by deleting the first sentence of
Section 2.15.(a) thereof in its entirety and substituting in its place the
following:
Subject to the terms and conditions hereof, including without
limitation, Section 2.16., if necessary to meet Borrower's funding
deadline, Swingline Lender agrees to make Swingline Loans to Borrower,
during the period from the Effective Date to but excluding the Swingline
Termination Date, in an aggregate principal amount at any one time
outstanding up to, but not exceeding, the amount of the Swingline
Commitment.
(j) The Credit Agreement is amended by deleting the first sentence of
Section 2.15.(c) thereof in its entirety and substituting in its place the
following:
Swingline Loans shall bear interest at a per annum rate equal to (i) the
Base Rate as in effect from time to time minus (ii) 1.30%, or at such
other rate or rates as Borrower and Swingline Lender may agree from time
to time in writing.
(k) The Credit Agreement is amended by deleting the second sentence of
Section 2.15.(e) thereof in its entirety and substituting in its place the
following:
Notwithstanding the foregoing, Borrower shall repay the entire
outstanding principal amount of, and all accrued but unpaid interest on,
the Swingline Loans on the Swingline Termination Date (or such earlier
date as Swingline Lender and Borrower may agree in writing).
(l) The Credit Agreement is amended by deleting subsections (a) through
(c) of Section 3.1. thereof in their entirety and substituting in their place
the following:
(a) During the period from the Effective Date to but excluding
the Revolving Credit Termination Date, Borrower agrees to pay Agent for
the account of Lenders an unused facility fee equal to the portion of
the daily amount by which the aggregate amount of the Commitments
exceeds the aggregate outstanding principal balance of Revolving Loans
set forth in the table below multiplied by the corresponding per annum
rate applicable to that portion:
<TABLE>
<CAPTION>
Portion of Amount by Which
Commitments Exceeds Revolving Loans Unused Fee
- ------------------------------------------ ----------
<S> <C>
$0 to and including an amount equal to 0.125%
50% of the aggregate amount of the
Commitments
Greater than an amount equal to 50% of 0.20%
the aggregate amount of the Commitments
</TABLE>
Such fee shall be payable quarterly in arrears on the first day of each
January, April, July and October during the term of this Agreement and
on the Revolving Credit Termination Date. Borrower acknowledges that the
commitment fees payable hereunder are bona fide commitment fees and are
intended as reasonable compensation to Lenders for committing to make
funds available to Borrower as described herein and for no other
purposes.
(b) If, pursuant to Section 2.10., Lenders grant an extension of
the Revolving Credit Termination Date, Borrower agrees to pay to Agent
for the account of each Lender consenting to such extension an extension
fee equal to two-tenths of one percent (0.20%) of such Lender's
Commitment at such time. Such fee shall be payable on the date on which
Lenders grant such extension.
(c) If, pursuant to Section 2.11., the outstanding balance of
Revolving Loans is converted into Term Loans, Borrower agrees to pay to
Agent for the account of each Lender a conversion fee equal to
one-quarter of one percent (0.25%) per annum of the principal balance of
the Term Loans outstanding on each date such fee is payable. Such fee
shall be payable on the first anniversary date of such conversion and
shall be paid within 5 Business Days of such anniversary date.
(m) The Credit Agreement is amended by deleting Section 7.7.(a) thereof
in its entirety and substituting in its place the following:
(a) Minimum Shareholders' Equity. Borrower shall not at any time
permit the Shareholders' Equity of Borrower and its Consolidated
Subsidiaries to be less than (i) $1,806,145,000 plus (ii) 75% of the
amount by which the Shareholders' Equity of Borrower and its
Consolidated Subsidiaries has been increased by the issuance after
December 31, 1998 of capital stock.
(n) The Credit Agreement is amended by deleting Section 7.7.(e) thereof
in its entirety and substituting in its place the following:
(e) Ratio of Unsecured Liabilities to Unencumbered Pool Value.
Borrower shall not permit the ratio of (i) the Unencumbered Pool Value
to (ii) the Unsecured Liabilities of Borrower and its Consolidated
Subsidiaries, to be less than 2.00 to 1.00 at any time.
(o) The Credit Agreement is amended by deleting Section 7.10. thereof in
its entirety and substituting in its place the following:
SECTION 7.10. Consolidations, Mergers and Sales of Assets.
Neither Borrower nor any of its Subsidiaries (other than any
Public Subsidiary) may (a) consolidate or merge with or into any other
Person, (b) sell, lease or otherwise transfer, directly or indirectly,
and whether by one or a series of related transactions, a substantial
portion of any of its assets to any other Person, or (c) purchase or
otherwise acquire, directly or indirectly, by one or a series of related
transactions, all or substantially all of the assets of, or outstanding
capital stock of or other equity interest in, another Person, except
that (x) a Subsidiary (other than a Guarantor) may merge or consolidate
with another Person or sell, lease or otherwise transfer a substantial
portion of its assets to another Person, and (y) Borrower or a
Subsidiary may purchase or otherwise acquire, all or substantially all
of the assets of, or outstanding capital stock of or other equity
interests in, another Person, so long as (i) Borrower shall have given
Agent at least 10 days prior notice thereof (except in the case of a
acquisition of capital stock of or other equity interest in, existing
Affiliates), (ii) after giving effect thereto, no Default or Event of
Default shall have occurred and be continuing, and Borrower shall have
delivered to Agent a certificate of an Authorized Representative of
Borrower setting forth in reasonable detail the calculations required to
establish whether Borrower will be in compliance with the requirements
of Sections 7.7. and 7.14. after giving pro forma effect thereto and
(iii) in the case of a consolidation or merger, the Person surviving
such consolidation or merger will be a Subsidiary after giving effect
thereto.
(p) The Credit Agreement is amended by deleting Section 7.11. thereof in
its entirety and substituting in its place the following:
SECTION 7.11. Use of Proceeds.
Borrower will use the proceeds of all subsequent Loans made under
this Agreement only (a) to finance (i) the purchase by Borrower
(directly, or indirectly through wholly-owned Subsidiaries) of
Securities issued by the Principal Companies and by other Persons
created by Borrower or specified by Borrower consistent with the
business objectives of Borrower and (ii) loans by Borrower permitted
under Section 7.15., and (b) for general corporate purposes, in each
case to the extent otherwise permitted hereunder, and for no other
purposes. Borrower will not use any proceeds of the Loans for the
purpose of purchasing or carrying any "margin stock" within the meaning
of Regulations T, U and X if such use would result in a violation by any
party hereto of any of Regulations T, U and X. In addition, Borrower may
use proceeds of Revolving Loans to acquire, directly or indirectly,
shares of any of its capital stock but only to the extent Borrower has
previously repaid Revolving Loans with cash proceeds received by
Borrower since January 1, 1999 upon the sale, transfer or other
disposition of Securities owned by Borrower and has not subsequently
reborrowed such proceeds as contemplated by this sentence. In connection
with (x) any borrowing of Revolving Loans to acquire shares of any of
its capital stock and (y) any repayment by Borrower of any such
Revolving Loans with proceeds received by Borrower upon any such
disposition of Securities, Borrower shall advise Agent in writing
thereof. Further, Borrower shall keep sufficiently detailed records of
all such borrowings and repayments and shall provide copies thereof to
Agent promptly upon request.
(q) The Credit Agreement is amended by deleting subsections (a) and (b)
of Section 7.19. thereof in their entirety and substituting in their place the
following:
(a) Indebtedness and Accounts Payable. Borrower will not permit
Guarantors to incur, assume or suffer to exist any of the following
(determined on a collective basis): (i) accounts payable
(excludingobligations to purchase Securities pursuant to subscription or
stock purchase agreements, or otherwise make capital contributions, in
or with respect to Strategic Investees or Capital Management Entities)
in excess of $10,000,000 in the aggregate at any time outstanding and
(ii) any Indebtedness other than:
(w) Indebtedness owing to Borrower;
(x) Indebtedness under the Guaranty and, subject to
compliance with Section 7.18., under Guarantees of senior
unsecured long term Indebtedness of Borrower so long as such
Indebtedness so Guaranteed is of a type described in clause (a)
or (b) of the definition of Indebtedness; and
(y) Indebtedness represented by declared but unpaid
dividends.
(b) Asset Transfers. Borrower will not permit any Guarantor to
sell, transfer or otherwise convey any of its assets other than:
(x) sales and transfers of Securities of Principal
Companies and other Unencumbered Pool Securities to the extent
permitted under Section 7.8.; and
(y) transfers of assets to Borrower and any other
Guarantor so long as no Default or Event of Default shall have
occurred and be continuing or would result from such transfer.
(r) The Credit Agreement is amended by adding to the end of Article VII
thereof the following new Section 7.20.:
SECTION 7.20. Investment Limitation.
The Borrower shall not permit aggregate value of all Securities
of Strategic Investees and Securities held by the Capital Management
Entities in real estate companies, the value of which is determined in
accordance with the method referred to in clause (d)(iii) of the
definition of Market Value, to exceed 15% of the value of all Securities
held by the Borrower and its Subsidiaries. For purposes of this Section,
the value of Securities held by the Borrower and the Capital Management
Entities referred to in this Section shall be determined in accordance
with the valuations methods referred to in the definition of Market
Value.
(s) The Credit Agreement is amended by changing the Documentation Agent
to NationsBank, N.A. and by appointing Chase Bank of Texas, National Association
as Syndication Agent. In addition, the Credit Agreement is amended by deleting
Section 9.9. thereof in its entirety and substituting in its place the
following:
SECTION 9.9. Documentation Agent and Syndication Agent.
Neither the Documentation Agent nor the Syndication Agent in such
respective capacity, assumes any responsibility or obligation hereunder,
including, without limitation, for servicing, enforcement or collection
of any of the Loans, nor any duties as an agent hereunder for Lenders.
The titles of "Documentation Agent" and "Syndication Agent" are solely
honorific and imply no fiduciary responsibility on the part of the
Documentation Agent or the Syndication Agent, in its respective capacity
as such, to Agent, Borrower or any Lender and the use of such titles
does not impose on the Documentation Agent or the Syndication Agent any
duties or obligations greater than those of any other Lender or entitle
the Documentation Agent or the Syndication Agent to any rights other
than those to which any other Lender is entitled.
(t) The Credit Agreement is amended by replacing Schedules 6.2. and 6.6.
attached thereto with Schedules 6.2. and 6.6. attached to this Amendment.
Section 2. Effectiveness of Amendments and Waivers. The effectiveness of
Section 1 is subject to receipt by the Agent of eachof the following in form and
substance satisfactory to the Agent:
(a) counterparts of this Amendment executed by each of the parties
hereto;
(b) Notes executed by Borrower, payable to the order of each Lender and
in the original principal amount of such Lender's Commitment as set forth on
Schedule 1 attached hereto (the "New Notes");
(c) a copy of the resolutions of the respective Boards of Directors of
Borrower and each Guarantor authorizing the execution and delivery of this
Amendment and the New Notes (in the case of Borrower), and the increase in the
Revolving Commitment effected hereby, certified by the Secretary or an Assistant
Secretary of Borrower;
(d) an opinion of counsel to Borrower and each Guarantor, addressed to
Agent and Lenders, regarding the authority of Borrower and each Guarantor to
execute, deliver and perform this Amendment, and in the case of Borrower, the
Credit Agreement as amended hereby, and the New Notes, and such other matters as
Agent may request;
(e) a certificate of good standing or certificate of similar meaning
with respect to Borrower and each Guarantor issued as of a recent date by the
Secretary of State of the State (or corresponding governmental authority) of
formation of Borrower and each such Guarantor and certificates of qualification
to transact business or other comparable certificates issued by each Secretary
of State (and any state department of taxation, as applicable) of each state in
which Borrower or such Guarantor is required to be so qualified;
(f) payment of all accrued and unpaid fees owing under the Credit
Agreement; and
(g) such other documents and instruments as the Agent may reasonably
request.
Section 3. Acknowledgment of Lenders' Commitments; Adjustment of
Outstandings. The parties hereto agree that after giving effect to the
transactions contemplated by this Amendment, the amount of each Lender's
respective Commitment is as set forth on Schedule 1 attached hereto. The
Borrower and the Lenders agree that as of the date on which all of the
conditions precedent contained in Section 2 are satisfied (the "Amendment
Date"), all Revolving Loans outstanding under the Credit Agreement (after giving
effect to any principal repayments being made by the Borrower on the Amendment
Date) shall be allocated among Lenders in accordance with their respective Pro
Rata Shares (as set forth on Schedule 1 hereto), and each Lender agrees to make
such payments to the other Lenders and any Person who ceased to be a "Lender"
under the Credit Agreement upon the Amendment Date in such amounts as are
necessary to effect such allocation. All such payments shall be made to Agent
for the account of the Person to be paid and shall be made on a net basis.
Section 4. Representations of the Borrower. The Borrower
represents and warrants to the Agent and the Lenders that:
(a) Authorization. The Borrower has the right and power, and has taken
all necessary action to authorize it, to execute and deliver this Amendment and
to perform its obligations hereunder and under the Credit Agreement, as amended
by this Amendment, in accordance with their respective terms. This Amendment has
been duly executed and delivered by a duly authorized officer of the Borrower
and each of this Amendment and the Credit Agreement, as amended by this
Amendment, is a legal, valid and binding obligation of the Borrower enforceable
against the Borrower in accordance with its respective terms, except as the same
may be limited by bankruptcy, insolvency, and other similar laws affecting the
rights of creditors generally and the availability of equitable remedies for the
enforcement of certain obligations contained herein or therein may be limited by
equitable principles generally.
(b) Compliance with Laws, etc. The execution and delivery by the
Borrower of this Amendment and the performance by the Borrower of this Amendment
and the Credit Agreement, as amended by this Amendment, in accordance with their
respective terms, do not and will not, by the passage of time, the giving of
notice or otherwise: (i) require any Government Approval or violate any
Applicable Law relating to the Borrower the failure to possess or to comply with
which would have a Materially Adverse Effect; (ii) conflict with, result in a
breach of or constitute a default under the Organizational Documents of the
Borrower or any indenture, agreement or other instrument to which the Borrower
is a party or by which it or any of its properties may be bound and the
violation of which would have a Materially Adverse Effect; or (iii) result in or
require the creation or imposition of any Lien upon or with respect to any
property now owned or hereafter acquired by the Borrower other than Permitted
Liens.
(c) No Default. No Default or Event of Default has occurred and is
continuing as of the date hereof nor will exist immediately after giving effect
to this Amendment.
Section 5. Reaffirmation of Representations by Borrower. The Borrower
hereby repeats and reaffirms all representations and warranties made by the
Borrower to the Agent and the Lenders in the Credit Agreement and the other Loan
Documents to which it is a party on and as of the date hereof (and after giving
effect to this Amendment) with the same force and effect as if such
representations and warranties were set forth in this Amendment in full.
Section 6. Reaffirmation of Guaranty by Guarantors. Each Guarantor
hereby reaffirms its continuing obligations to the Agent and the Lenders under
the Guaranty, and agrees that the transactions contemplated by this Amendment
shall not in any way affect the validity and enforceability of the Guaranty, or
reduce, impair or discharge the obligations of such Guarantor thereunder.
Section 7. References to the Credit Agreement. Each reference to the
Credit Agreement in any of the Loan Documents (including the Credit Agreement)
shall be deemed to be a reference to the Credit Agreement, as amended by this
Amendment.
Section 8. Benefits. This Amendment shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns.
Section 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA.
Section 10. Effect. Except as expressly herein amended, the terms and
conditions of the Credit Agreement and the other Loan Documents shall remain in
full force and effect.
Section 11. Effective Date. This Amendment shall not be effective
until its execution and delivery by all of the parties hereto whereupon its
shall be deemed effective as of the date first written above.
Section 12. Counterparts. This Amendment may be executed in any number
of counterparts, each of which shall be deemed to be an original and shall
be binding upon all parties, their successors and assigns.
Section 13. Definitions. All capitalized terms not otherwise defined
herein are used herein with the respective definitions given them in the Credit
Agreement.
[Signatures Begin on the Following Page]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to Credit Agreement to be executed as of the date first above written.
BORROWER:
SECURITY CAPITAL GROUP INCORPORATED
By:_______________________________________
Name: _______________________________
Title: ______________________________
GUARANTORS:
SC REALTY INCORPORATED
By:_______________________________________
Name: _______________________________
Title: ______________________________
SC REALTY SHARES LIMITED
By:_______________________________________
Name: _______________________________
Title: ______________________________
[Signatures Continued on Following Page]
<PAGE>
[Signature Page to Second Amendment to Credit Agreement dated as of April 13,
1999 with Security Capital Group Incorporated]
AGENT AND LENDERS:
WELLS FARGO BANK, NATIONAL ASSOCIATION,
individually and as the Agent
By:_______________________________________
Name:_______________________________
Title:_______________________________
NATIONSBANK, N.A., individually and as
Documentation Agent
By:_______________________________________
Name:_______________________________
Title:_______________________________
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, individually and as
Syndication Agent
By:_______________________________________
Name:_______________________________
Title:_______________________________
CREDIT LYONNAIS NEW YORK BRANCH
By:_______________________________________
Name:_______________________________
Title:_______________________________
[Signatures Continued on Following Page]
<PAGE>
[Signature Page to Second Amendment to Credit Agreement dated as of April 13,
1999 with Security Capital Group Incorporated]
BANK OF MONTREAL, CHICAGO BRANCH
By:_______________________________________
Name:_______________________________
Title:_______________________________
THE FIRST NATIONAL BANK OF CHICAGO
By:_______________________________________
Name:_______________________________
Title:_______________________________
GUARANTY FEDERAL BANK, F.S.B.
By:_______________________________________
Name:_______________________________
Title:_______________________________
DRESDNER BANK, AG, NEW YORK BRANCH AND
GRAND CAYMAN BRANCH
By:_______________________________________
Name:_______________________________
Title:_______________________________
By:_______________________________________
Name:_______________________________
Title:_______________________________
[Signatures Continued on Following Page]
<PAGE>
[Signature Page to Second Amendment to Credit Agreement dated as of April 13,
1999 with Security Capital Group Incorporated]
FIRST UNION NATIONAL BANK
By:_______________________________________
Name:_______________________________
Title:_______________________________
TRANSAMERICA LIFE INSURANCE AND
ANNUITY COMPANY
By:_______________________________________
Name:_______________________________
Title:_______________________________
BANKBOSTON, N.A.
By:_______________________________________
Name:_______________________________
Title:_______________________________
KBC BANK N.V.
By:_______________________________________
Name:_______________________________
Title:_______________________________
By:_______________________________________
Name:_______________________________
Title:_______________________________
[Signatures Continued on Following Page]
<PAGE>
[Signature Page to Second Amendment to Credit Agreement dated as of April 13,
1999 with Security Capital Group Incorporated]
AMSOUTH BANK
By:_______________________________________
Name:_______________________________
Title:_______________________________
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
Commitments and Pro Rata Shares
Lender Commitment Pro Rata Share
- ------------------------------------------ ------------------ --------------
<S> <C> <C>
Wells Fargo Bank, National Association $75,000,000.00 15.9574469
Chase Bank of Texas, National Association $75,000,000.00 15.9574469
NationsBank, N.A. $75,000,000.00 15.9574469
Transamerica Life Insurance and Annuity $35,000,000.00 7.4468086
Co.
First Union National Bank $25,000,000.00 5.3191489
Dresdner Bank AG, New York Branch and $25,000,000.00 5.3191489
Grand Cayman Branch
Credit Lyonnais New York Branch $25,000,000.00 5.3191489
The First National Bank of Chicago $25,000,000.00 5.3191489
Bank of Montreal, Chicago Branch $25,000,000.00 5.3191489
AmSouth Bank $25,000,000.00 5.3191489
KBC Bank N.V. $20,000,000.00 4.2553191
Guaranty Federal Bank, F.S.B. $20,000,000.00 4.2553191
BankBoston, N.A. $20,000,000.00 4.2553191
TOTAL $470,000,000.00 100.0000000
</TABLE>
<PAGE>
Exhibit 12.1
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 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 $ 7,352 $ 33,485 $ 67,480 $ 38,241 $ (9,693) $ (21,274) $ 11,849
Add:
Interest Expense 31,018 12,799 82,203 104,434 117,224 103,804 53,789
---------- ---------- ---------- ---------- --------- ---------- ----------
Earnings as Adjusted $ 38,370 $ 46,284 $ 149,683 $ 142,675 $ 107,531 $ 82,530 $ 65,638
========== ========== ========== ========== ========== ========== ==========
Fixed Charges:
Interest Expense $ 31,018 $ 12,799 $ 82,203 $ 104,434 $ 117,224 $ 103,804 $ 53,789
Capitalized Interest 4,440 6,504 26,703 69,883 11,448 4,404 3,184
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Fixed Charges $ 35,458 $ 19,303 $ 108,906 $ 174,317 $ 128,672 $ 108,208 $ 56,973
========== ========== ========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges 1.1 2.4 1.4 0.8 0.8 0.8 1.2
========== ========== ========== ========== ========== ========== ==========
</TABLE>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred in
acquiring the Services Division from a related party.
<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>
Three Months Ended
March 31, 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 $ 7,352 $ 33,485 $ 67,480 $ 38,241 $ (9,693) $ (21,274) $ 11,849
Add:
Interest Expense 31,018 12,799 82,203 104,434 117,224 103,804 53,789
---------- ---------- ---------- ---------- ----------- ---------- ----------
Earnings as Adjusted $ 38,370 $ 46,284 $ 149,683 $ 142,675 $ 107,531 $ 82,530 $ 65,638
========== ========== ========== ========== ========== ========== ==========
Combined Fixed Charges and
Preferred Share Dividends:
Interest Expense $ 31,018 $ 12,799 $ 82,203 $ 104,434 $ 117,224 $ 103,804 $ 53,789
Capitalized Interest 4,440 6,504 26,703 69,883 11,448 4,404 3,184
---------- ---------- ---------- ---------- ---------- ---------- ----------
35,458 19,303 108,906 174,317 128,672 108,208 56,973
Preferred Share Dividends (b) (c) 6,685 3,904 22,315(d) 15,416 12,352 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Combined Fixed Charges and
Preferred Share Dividends $ 42,143 $ 23,207 $ 131,221 $ 189,733 $ 141,024 $ 108,208 $ 56,973
========== ========== ========== ========== ========== ========== ==========
Ratio of Earnings to Combined Fixed
Charges and Preferred Share
Dividends 0.9 2.0 1.1 0.8 0.8 0.8 1.2
========== ========== ========== ========== ========== ========== ==========
</TABLE>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred
in acquiring the 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.
<PAGE>
Exhibit 15
May 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 quarter ended March 31, 1999,
which includes our report dated May 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 three months ended March 31, 1999, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000923687
<NAME> SECURITY CAPITAL GROUP INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 30,996
<SECURITIES> 84,143
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,142,828
<DEPRECIATION> 42,577
<TOTAL-ASSETS> 4,412,992
<CURRENT-LIABILITIES> 0
<BONDS> 1,164,074
0
257,642
<COMMON> 532
<OTHER-SE> 2,072,344
<TOTAL-LIABILITY-AND-EQUITY> 4,412,992
<SALES> 0
<TOTAL-REVENUES> (10,072)
<CGS> 0
<TOTAL-COSTS> 70,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,018
<INCOME-PRETAX> (111,794)
<INCOME-TAX> (36,384)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 16,002
<NET-INCOME> (94,131)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
