================================================================================
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, 2000
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
Yes X No____
The number of shares outstanding of the Registrant's common stock as of
April 30, 2000 was:
Class A Common Shares, $.01 par value - 1,172,030 shares
Class B Common Shares, $.01 par value - 49,162,590 shares
================================================================================
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
INDEX
Page
Number(s)
---------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2000 (unaudited) and
December 31, 1999........................................... 1
Consolidated Statements of Operations and Comprehensive Income -
Three months ended March 31, 2000 and 1999 (unaudited)...... 2
Consolidated Statement of Shareholders' Equity - Three months
ended March 31, 2000 (unaudited)............................ 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and 1999 (unaudited)......................... 5
Notes to Consolidated Financial Statements (unaudited)........... 7
Report of Independent Public Accountants......................... 19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 20
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 29
PART II. Other Information
Item 1. Legal Proceedings ............................................... 29
Item 6. Exhibits and Reports on Form 8-K................................. 30
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
ASSETS (unaudited)
<S> <C> <C>
Investments, at equity:
Archstone Communities Trust $ 821,408 $ 826,957
ProLogis Trust 581,609 591,449
Security Capital European Realty 407,908 419,039
Security Capital Preferred Growth Incorporated 76,725 75,504
Security Capital U.S. Realty 719,435 746,449
SC-US Real Estate Shares 24,915 --
----------- ------------
2,632,000 2,659,398
----------- ------------
Real estate, less accumulated depreciation 1,061,136 1,073,474
Investments in publicly traded real estate securities, at market value 9,984 10,505
SC-US Real Estate Shares, at market value -- 49,466
----------- ------------
Total real estate investments 3,703,120 3,792,843
Cash and cash equivalents 8,778 30,567
Deferred income taxes 2,541 --
Other assets 128,040 133,741
----------- ------------
Total assets $ 3,842,479 $ 3,957,151
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Lines of credit $ 196,649 $ 216,349
Mortgage and construction notes payable 241,245 237,356
Long-term debt 699,624 699,606
Convertible debentures 272,252 278,951
Capital lease obligation 139,929 140,854
Accounts payable and accrued expenses 103,436 96,300
Deferred income taxes -- 12,225
----------- --------------
Total liabilities 1,653,135 1,681,641
Minority interests 69,775 94,723
Shareholders' Equity:
Class A Common Shares, $.01 par value; 20,000,000 shares authorized;
1,193,251 and 1,218,411 shares issued and outstanding in
2000 and 1999, respectively 12 12
Class B Common Shares, $.01 par value; 229,537,385 shares authorized;
50,292,181 and 52,695,620 shares issued and outstanding in
2000 and 1999, respectively 503 527
Series B Preferred Shares, $.01 par value; 257,642 shares issued and
outstanding in 2000 and 1999; stated liquidation preference of $1,000
per share 257,642 257,642
Additional paid-in capital 2,246,913 2,308,274
Accumulated other comprehensive income (loss) (24,218) (12,020)
Accumulated deficit (361,283) (373,648)
----------- --------------
Total shareholders' equity 2,119,569 2,180,787
----------- ---------------
Total liabilities and shareholders' equity $ 3,842,479 $ 3,957,151
=========== ==============
</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 AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
INCOME:
Equity in earnings (loss) of:
Archstone Communities Trust $ 15,449 $ 14,586
ProLogis Trust 13,822 1,005
Security Capital European Realty 679 (408)
Security Capital Preferred Growth Incorporated 2,278 (4,030)
Security Capital U.S. Realty 519 (77,966)
Strategic Hotel Capital Incorporated -- 5,248
SC-US Real Estate Shares 1,173 --
Realized capital gains (losses) (259) 412
Change in unrealized gain or loss on investments (255) 87
Financial Services Division revenues from related parties 20,191 19,180
Property revenue 61,860 49,467
Other income, net 1,545 (1,401)
--------- ---------
117,002 6,180
--------- ---------
EXPENSES:
Financial Services Division expenses 15,824 19,992
General, administrative and other expenses 9,171 16,018
Depreciation and amortization 11,922 11,053
Interest expense 31,787 31,018
Property expenses 27,720 23,641
--------- ---------
96,424 101,722
--------- ---------
Earnings (loss) from operations 20,578 (95,542)
Provision for income tax benefit (expense):
Current (3,394) (4,220)
Deferred 787 34,916
--------- ---------
Total income tax benefit (expense) (2,607) 30,696
Minority interests in net (earnings) loss of subsidiaries (1,097) 1,790
--------- ---------
Earnings (loss) before change in accounting principle 16,874 (63,056)
Change in accounting principle - cumulative effect on prior
years of expensing costs of start-up activities, net of
minority interest of $4,297 -- 16,136
--------- ---------
Net earnings (loss) 16,874 (79,192)
Less Preferred Share dividends (4,509) (4,509)
--------- ---------
Net earnings (loss) attributable to common shares $ 12,365 $ (83,701)
========= =========
</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 AND
COMPREHENSIVE INCOME - (Continued)
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
-------- ---------
<S> <C> <C>
Net earnings (loss) attributable to common shares $ 12,365 $ (83,701)
Other comprehensive income (loss):
Foreign currency translation adjustments (12,198) (16,655)
-------- ---------
Comprehensive income (loss) $ 167 $(100,356)
======== ==========
Weighted-average Class B common shares outstanding:
Basic 110,055 120,438
======== =========
Diluted 111,070 120,438
======== =========
Earnings (loss) per share:
Basic earnings (loss) before change in accounting principle $ 0.11 $ (0.56)
Change in accounting principle - cumulative effect of
expensing costs of start-up activities -- (0.13)
-------- ---------
Basic net earnings (loss) attributable to common shares $ 0.11 $ (0.69)
======== =========
Diluted earnings (loss) before change in accounting principle $ 0.11 $ (0.56)
Change in accounting principle - cumulative effect of
expensing cost of start-up activities -- (0.13)
-------- ---------
Diluted net earnings (loss) attributable to common shares $ 0.11 $ (0.69)
======== =========
</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, 2000
(In thousands, except shares)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------------------ Series B Accumulated
Class A Class B Preferred Other
------------------ ----------------- Stock at Additional Comprehensive Total
Shares Par Shares Par Liquidation Paid-in Income Accumulated Shareholders'
Outstanding Value Outstanding Value Value Capital (loss) Deficit Equity
----------- ----- ----------- ----- ----------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999 1,218,411 $ 12 52,695,620 $527 $ 257,642 $2,308,274 $ (12,020) $ (373,648) $ 2,180,787
Conversion of Class A Shares
to Class B Shares (9,642) -- 482,121 5 -- (5) -- -- --
Conversion of 2016 Convertible
Debentures -- -- 4,064 -- -- 94 -- -- 94
Share repurchase program (16,408) -- (2,890,500) (29) -- (47,305) -- -- (47,334)
Issuance of Shares, net 890 -- 876 -- -- (389) -- -- (389)
Net earnings -- -- -- -- -- -- -- 16,874 16,874
Series B Preferred Share
dividends -- -- -- -- -- -- -- (4,509) (4,509)
Effect of affiliate's sale of
Shares, net of taxes -- -- -- -- -- (13,756) -- -- (13,756)
Foreign currency translation
adjustments -- -- -- -- -- -- (12,198) -- (12,198)
--------- ---- ---------- ---- ----------- ---------- ---------- --------- -----------
Balances at March 31, 2000 1,193,251 $ 12 50,292,181 $503 $ 257,642 $2,246,913 $ (24,218) $(361,283) $ 2,119,569
========= ===== ========== ==== =========== ========== ========== ========= ===========
</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,
------------------------
2000 1999
--------- --------
<S> <C> <C>
Operating Activities:
Net earnings (loss) $ 16,874 $(79,192)
Adjustments to reconcile net earnings (loss) to cash flows
provided by operating activities:
Deferred income tax benefit (787) (34,916)
Minority interests 1,097 (1,790)
Cumulative effect on prior years of expensing costs of
start-up activities, net of minority interests -- 16,136
Equity in (earnings) loss of unconsolidated investees (33,920) 64,835
Distributions from unconsolidated investees 39,373 37,324
Change in unrealized gain or loss on investments 255 87
Depreciation and amortization 11,922 11,053
Other 496 538
(Increase) decrease in other assets 2,640 (1,933)
Increase in accounts payable and accrued expenses 7,145 8,271
Net operating cash flows of SC-US Real Estate Shares -- 2,632
--------- -------
Net cash flows provided by operating activities 45,095 23,045
--------- -------
Investing Activities:
Real estate investments (7,723) (51,692)
Proceeds from sale of land 9,996 --
Redemptions from (investments in):
Security Capital U.S. Realty -- (1,685)
SC-US Real Estate Shares 1,250 --
Other 322 3,342
Net investing cash flows of SC-US Real Estate Shares -- 26,538
--------- -------
Net cash flows provided by (used in) investing activities 3,845 (23,497)
--------- -------
</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,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Financing Activities:
Proceeds from lines of credit $ 95,000 $ 68,930
Payments on lines of credit (114,700) (133,710)
Proceeds from long-term debt offerings -- 85,317
Proceeds from mortgage notes 3,889 --
Payments on capital leases (924) (122,028)
Proceeds from issuance of common shares, net (389) --
Repurchase of common shares (47,334) --
Sale of real estate, net -- 127,262
Preferred dividends paid (4,509) (4,509)
Debt issuance costs (1,419) (3,194)
Other (343) (1,310)
Net financing cash flows of SC-US Real Estate Shares -- 1,481
---------- ---------
Net cash flows provided by (used in) financing activities (70,729) 18,239
---------- ---------
Net increase (decrease) in cash and cash equivalents (21,789) 17,787
Cash and cash equivalents, beginning of period 30,567 13,209
---------- ---------
Cash and cash equivalents, end of period $ 8,778 $ 30,996
========== =========
Non-Cash Investing and Financing Activities:
Conversion of 2016 Convertible Debentures $ 94 $ 1,513
========== =========
Increase in property and equipment and lease obligation
from capital lease $ -- $ 145,000
========== =========
Effect of affiliates sale of Shares $ 13,756 $ --
========== =========
</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 hold significant ownership positions in
real estate operating companies that generate substantial internal growth and
third-party service income and are able to become market leaders by creating
brand value. Security Capital operates its business through two divisions. The
Capital Division provides operational and capital deployment oversight to direct
and indirect investments in real estate investment trusts ("REITs") and real
estate operating companies. The Capital Division generates earnings principally
from its ownership of these affiliates (see note 2). The Financial Services
Division generates fees principally from capital management and capital markets
activities. In addition, corporate services and research services are provided
which enable Security Capital and its affiliates to consolidate certain
activities to benefit from economies of scale. 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") and Security Capital
European Real Estate Shares ("SC-European Real Estate Shares"). All significant
intercompany accounts and transactions have been eliminated in consolidation. At
March 31, 2000, minority interest relates mainly to Homestead.
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 1999 consolidated financial statements
and notes to consolidated financial statements in order to conform to the 2000
presentation. The results of operations for the three-month period ended March
31, 2000, are not necessarily indicative of the results to be expected for the
entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses recognized during
the reporting period. Actual results could differ from those estimates.
The consolidated financial statements of Security Capital as of March
31, 2000, 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 1999 audited consolidated financial statements contained in
Security Capital's 1999 Annual Report on Form 10-K.
-7-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restatement of prior period results:
In the fourth quarter of 1999, the Board of Directors of Security
Capital European Realty ("SC-European Realty") approved a change in operating
strategy by determining to retain, in general, at least an 80% interest in its
investees and by becoming more active in the day-to-day operations of its
investees.
As a result of this change in strategy, SC-European Realty has changed
its basis of accounting from fair value accounting to historical cost
accounting. Under generally accepted accounting principles ("GAAP"), such a
change in accounting requires a restatement of all prior periods so that the
results of those periods are reported as if this change had been made
retroactive to the entity's inception. Accordingly, Security Capital has
restated its March 31, 1999, consolidated financial statements.
Security Capital accounts for its investment in SC-European Realty by
the equity method. The impact of this restatement on Security Capital's
financial statements for the three months ended March 31, 1999, is as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
As Previously
Reported Restated
------------- ----------
<S> <C> <C>
Consolidated Statement of Operations
and Comprehensive Income:
Revenues, including equity in
earnings (loss) $ (10,072) $ 6,180
Loss from operations (111,794) (95,542)
Net loss attributable to
common shares (94,131) (83,701)
Basic loss per Class B Share $ (0.78) $ (0.69)
Diluted loss per Class B Share $ (0.78) $ (0.69)
</TABLE>
-8-
<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, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
Security Capital's
Net Investments
% Ownership as of (Redemptions) for the
------------------------- Three Months Ended
March 31, December 31, March 31, 2000
Investment Type of Entity 2000 1999 (in thousands)
- --------------------------- --------------------- ---------- -------------- ---------------------
<S> <C> <C> <C>
EQUITY-METHOD INVESTEES:
Archstone Communities Trust Apartment REIT 39.2% 39.2% --
("Archstone") (publicly traded)
ProLogis Trust Industrial REIT 30.7% 30.8% --
("ProLogis") (publicly traded)
SC- European Realty Global real estate 34.6% 34.6% 11
investments
(private entity)
Security Capital Preferred Growth Convertible security 9.3% 9.3% 266
Incorporated investments in real
("SC- Preferred Growth") estate companies
(private REIT)
Security Capital U.S. Realty U.S. real estate 40.6% 39.6% --
("SC-U.S. Realty") investments
(publicly traded)
Security Capital U.S. Real Estate U.S. real estate 41.9% 51.6% (1,250)
Shares securities fund
("SC-US Real Estate Shares")(a) (mutual fund)
CONSOLIDATED INVESTEES:
Belmont Senior assisted living 100% 100% 5,595
(private entity)
Homestead Extended-stay lodging 87.0% 87.0% 63
(publicly traded)
SC-European Real Estate Shares European real 99.7% 99.4% --
estate securities fund
(mutual fund)
</TABLE>
(a) During the quarter ended March 31, 2000, Security Capital's ownership in
SC-US Real Estate Shares fell below 50%. As a result, Security Capital's
investment in SC-US Real Estate Shares is now being accounted for under the
equity method in 2000.
-9-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Security Capital received dividends and interest (Strategic Hotel only in
1999) from its investees as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Dividend Amount Per
Dividends Received Investee Share
Three Months Ended Three Months Ended
March 31, March 31,
---------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Dividends:
Archstone $ 20,998 $ 20,180 $ 0.3850 $ 0.3700
ProLogis 16,718 15,884 0.3350 0.3183
SC-European Real Estate Shares -- 34 -- 0.0348
SC-Preferred Growth 1,323 1,260 0.3350 0.3200
SC-US Real Estate Shares 334 700 0.1249 0.1199
-------- --------
39,373 38,058
-------- --------
Interest:
Strategic Hotel -- 3,271
-------- --------
$ 39,373 $ 41,329
======== ========
</TABLE>
Presented below is summarized earnings information for Security Capital's
equity-method investees for the three months ended March 31, 2000 and 1999 (in
thousands):
Historical cost accounting investees:
<TABLE>
<CAPTION>
SC-European Strategic
Archstone ProLogis(a) Realty Hotel
-------------------- -------------------- --------------------- ---------
2000 1999 2000 1999 2000 1999(b) 1999(c)
--------- --------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 177,016 $ 161,387 $ 162,992 $ 102,049 $ 42,482 $ 26,018 $ 166,934
Net earnings before extraordinary items
and change in accounting principle 45,885 44,649 59,343 15,935 1,964 (1,181) 6,496
Net earnings attributable to common shares
before change in accounting principle 39,454 37,845 44,938 2,490 1,964 (2,099) 6,496
Security Capital share of net earnings
before change in accounting principle 15,449 14,586 13,822 1,005 679 (408) 1,977
Security Capital interest income from
affiliate - - - - - - 3,271
</TABLE>
-10-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value accounting investees:
<TABLE>
<CAPTION>
SC-US Real
Estate
SC-Preferred Growth Shares(d) SC-U.S. Realty
----------------------- ---------- -------------------------
2000 1999 2000 2000 1999
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net investment income $ 13,285 $ 13,096 $ 788 $ 16,507 $ 13,151
Realized gains (losses) on investments (2,650) (12,332) (411) (83,556) 580
Increase (decrease) in market value
of investments 13,862 (41,882) 2,337 68,639 (236,666)
Adjusted net earnings (loss)(e) 24,497 (41,118) 2,714 1,590 (222,828)
Security Capital share of adjusted
net earnings (loss) 2,278 (4,030) 1,173 519 (77,966)
</TABLE>
(a) Results for 2000 include Meridian Industrial Trust, Inc. for a full
quarter. Meridian was acquired by ProLogis on March 30, 1999.
(b) 1999 amounts have been restated as discussed in Note 1.
(c) On September 10, 1999, Security Capital sold its entire ownership position
in Strategic Hotel.
(d) During the quarter ended March 31, 2000, Security Capital's ownership
in SC-US Real Estate Shares fell below 50%. As a result, Security Capital's
investment in SC-US Real Estate Shares is now being accounted for under
the equity method.
(e) SC-U.S. Realty's earnings are adjusted to exclude its realized losses on
sale of Security Capital securities in 2000 and to exclude unrealized
losses on its investment in Security Capital in 1999.
(3) Financial Services Division
Financial Services Division revenues were earned from the following
sources (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
-------- -------
<S> <C> <C>
Capital Markets Group $ 3,013 900
Global Capital Management Group 14,185 14,254
Corporate Services Group 4,124 5,512
Real Estate Research Group 110 229
-------- ---------
Total Financial Services Division revenues 21,432 20,895
Less amounts eliminated in consolidation (1,241) (1,715)
-------- ---------
Consolidated Financial Services Division
revenue from related parties $ 20,191 $ 19,180
======== =========
</TABLE>
-11-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Segment Reporting
Security Capital operates its business based on two reportable
segments. These segments are managed separately due to the nature of their
operations. The first segment, the Capital Division, records revenues by
reporting its pro-rata share of its investees' earnings before depreciation,
amortization and deferred taxes ("EBDADT") and the second segment, the Financial
Services Division, records revenues based on the services provided to its
customers and includes all revenues received from affiliates. These segments are
described in notes 2 and 3 above.
Presented below is a Statement of EBDADT by reportable segment (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended,
March 31,
--------------------------
2000 1999
-------- ---------
<S> <C> <C>
Capital Division:
Equity in Investees' EBDADT(1) $ 91,611 $ 84,027
Interest and other income 790 441
-------- ---------
92,401 84,468
-------- ---------
Operating expenses(2) 5,401 8,213
Interest expense 20,486 19,831
Current income tax expense 3,146 3,869
Convertible preferred share dividends 4,509 4,509
-------- ---------
Capital Division EBDADT(3) 58,859 48,046
-------- ---------
Financial Services Division:
Revenues 21,432 20,895
Operating expenses(2) 16,617 19,838
Current income tax expense 224 351
-------- ---------
Financial Services Division EBDADT 4,591 706
-------- ---------
EBDADT before special items 63,450 48,752
Realized losses (794) (6)
Homestead special credit(4) 1,673 --
-------- ---------
EBDADT $ 64,329 $ 48,746
======== =========
</TABLE>
(1) 1999 equity in Capital Division EBDADT has been restated to conform 1999
results with the new definition of Funds From Operations, which was revised
by the National Association of Real Estate Investment Trusts effective
January 1, 2000. In addition, SC-U.S. Realty restated its first quarter
results to reflect discontinued operations at one of its investees.
(2) Included in operating expenses are allocations of general and
administrative expenses to each division based on revenues. Prior to such
allocation, Capital Division expenses were $1,561 in 2000 and $2,492 in
1999, Financial Services Division expenses were $14,398 in 2000 and $19,106
in 1999 and general and administrative expenses were $6,059 in 2000 and
$6,453 in 1999.
(3) 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. 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.
(4) The special credit in the first quarter of 2000 represents the excess of
the Homestead's 1999 original special charge over current estimates. In the
second quarter of 1999, Homestead recorded a special charge for land write-
downs, employee severance and other expenses related to terminating its
development program.
-12-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Presented below is a reconciliation of net earnings (loss) to EBDADT
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended,
March 31,
---------------------
2000 1999
------- --------
<S> <C> <C>
Net earnings (loss) attributable
to common shares $12,365 $(83,701)
Investee reconciling items:
Real estate depreciation 42,397 48,157
Gain on sale of depreciated property (3,287) (2,505)
Unrealized gains, including foreign
currency 2,796 95,825
EBDADT, net of dividends from strategic
investees of SC-U.S. Realty 9,361 7,840
Other 2,399 2,093
------- --------
53,666 151,410
------- --------
Security Capital reconciling items:
Deferred tax benefit (787) (34,916)
Change in accounting principle -- 16,136
Other (915) (183)
------- --------
(1,702) (18,963)
------- --------
Total EBDADT $64,329 $ 48,746
======= ========
</TABLE>
(5) INDEBTEDNESS
Lines of Credit:
A summary of the lines of credit borrowings as of March 31, 2000, is as
follows (in thousands):
<TABLE>
<CAPTION>
Security
Capital Homestead Combined
-------- --------- --------
<S> <C> <C> <C>
Total lines of credit $470,000 $ 110,000 $580,000
Borrowings outstanding at March 31 115,700 80,949 196,649
</TABLE>
At March 31, 2000, Security Capital had a $470,000,000 unsecured
revolving line of credit with Wells Fargo Bank, National Association (Wells
Fargo), as agent for a group of lenders. Borrowings accrued interest at LIBOR
plus a margin (1.30% as of March 31, 2000), 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%). The agreement is effective through April 6, 2002,
with an option to renew for successive one-year periods with the approval of
lenders. Commitment fees on the line range from 0.125% to 0.20% per annum based
on the average unfunded line of credit balance. The line is guaranteed by SC
Realty Incorporated ("SC Realty") and SC Realty Shares Limited, each of which is
a wholly owned subsidiary of Security Capital.
-13-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
On February 29, 2000, Homestead entered into an amended and restated
bank credit facility which allows for $110,000,000 of total borrowings of which
$35,000,000 is available on a revolving basis. The amended and restated line
matures February 28, 2003, bears interest at LIBOR plus 2.5%, is secured by 64
operating properties, permits payment of dividends based upon a definition of
free cash flow and requires maintenance of financial ratio and coverage
covenants.
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, 2000.
Homestead Convertible Mortgage Notes Payable:
At March 31, 2000, Homestead had outstanding convertible mortgage notes
in the principal amount of $221,334,000, all of which were payable to Archstone.
The notes are collateralized by 54 Homestead properties.
Belmont Construction Notes Payable:
At March 31, 2000, Belmont had $49,711,000 in commitments outstanding
for construction loans. The loans bear interest at rates of 30-day LIBOR plus
2.5% during the construction period and 30-day LIBOR plus 2.35% after issuance
of certificates of occupancy and operating licenses. The outstanding balance and
weighted average interest rate as of March 31, 2000, was $19,911,000 and 8.62%,
respectively. The loans have a maturity date of September 2001 and are secured
by a deed of trust on land, building, furniture and fixtures and an assignment
of rents and leases.
The terms of the construction loans require Belmont to maintain certain
financial ratios. Belmont was in compliance with all such requirements as of
March 31, 2000.
-14-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Senior Unsecured Notes:
Security Capital has the following unsecured long-term debt outstanding
as of March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
Balance
Principal Interest Maturity Semi-annual interest Outstanding
Amount Rate Date Payment Dates March 31, 2000
--------- -------- -------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
$ 100,000 7.75% 11/15/03 May and November 15 $ 99,932
14,700 7.66% 12/21/04 March and September 15 14,702
5,000 7.75% 01/11/05 March and September 15 5,000
54,550 7.80% 01/12/05 March and September 15 54,550
25,750 7.80% 01/19/05 March and September 15 25,750
200,000 6.95% 06/15/05 June and December 15 199,840
100,000 7.15% 06/15/07 June and December 15 99,850
200,000 7.70% 06/15/28 June and December 15 200,000
--------- --------------
$ 700,000 $ 699,624
========= ==============
</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 treasury security market yields available at redemption.
Convertible Debentures:
At March 31, 2000, Security Capital had $272,252,000 of 6.50%
convertible subordinated debentures due 2016 outstanding. The convertible
debentures accrue interest at 6.5% per annum and pay interest semi-annually in
June and December. The convertible debentures are convertible into Class A
Shares at $1,153.90 per share, at the option of the holder. Security Capital can
redeem the convertible debentures at par plus accrued interest at any time, upon
not less than 60 days nor more than 90 days' prior written notice to the
holders.
In March 2000, SC-U.S. Realty sold its holdings in Security Capital's
convertible debentures to an unrelated party at a loss of $15,870,000. Security
Capital's pro rata portion of this loss ($6,370,000) was recorded as a discount
to convertible debentures.
-15-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest:
Presented below are the interest costs incurred by Security Capital and
its consolidated subsidiaries (in thousands):
<TABLE>
<CAPTION>
Three Months Ended,
March 31,
----------------------
2000 1999
--------- ----------
<S> <C> <C>
Total interest incurred $ 32,340 $ 35,458
========= ==========
Homestead and Belmont capitalized
interest included in total interest incurred $ 553 $ 4,440
========= ==========
Interest paid in cash $ 12,828 $ 13,149
========= ==========
Amortization of deferred financing costs
included in interest expense $ 1,136 $ 1,565
========= ==========
</TABLE>
(6) SHAREHOLDERS' EQUITY
Share Repurchase Program:
During 1999, Security Capital's Board of Directors authorized the
repurchase of up to $200,000,000 of Class A Shares and Class B Shares of
Security Capital. An additional $100,000,000 repurchase program for Class A
Shares and Class B Shares was announced on May 10, 2000. As of March 31, 2000,
under the share repurchase programs, Security Capital had repurchased 86,113
Class A Shares and 8,492,047 Class B Shares for a combined purchase price of
$166,417,000. Through May 10, 2000, Security Capital had repurchased 99,413
Class A Shares and 10,052,247 Class B Shares for a combined purchase price of
$198,745,000.
Affiliate Sale of Security Capital Shares:
In March 2000, SC-U.S. Realty sold its holding in Security Capital's
common stock to an unrelated party at a loss of $52,987,000. Security Capital's
pro rata portion of this loss ($21,163,000) was recorded as a reduction to
additional paid-in capital.
-16-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 SFAS 128
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
------- --------
<S> <C> <C>
Net income (loss) before change
in accounting principle $ 16,874 $ (63,056)
Preferred Share dividends (4,509) (4,509)
-------- ---------
Net income (loss) before change in accounting
principle attributable to common share and
assumed conversions $ 12,365 $ (67,565)
======== =========
Basic weighted-average Class B common shares
outstanding 110,055 120,438
Increase in shares which would result from:
Exercise of options and warrants 1,015 --
-------- ---------
Diluted weighted-average Class B common
shares outstanding 111,070 120,438
======== =========
Per share net earnings (loss) attributable to
Class B common shares before change
in accounting principle:
Basic $ 0.11 $ (0.56)
======== =========
Diluted $ 0.11 $ (0.56)
======== =========
</TABLE>
For all periods the Convertible Debentures and the Convertible
Preferred Shares are not assumed converted and for loss periods the options and
warrants are not assumed exercised for the purpose of calculating diluted
earnings per Class B Share as the effects are anti-dilutive.
(7) Commitments and Contingencies
Security Capital and its affiliates have committed to invest up to
$518,258,000 in SC-European Realty. As of March 31, 2000, $440,542,000 had been
funded by Security Capital and its affiliates. As of March 31, 2000, $81,692,000
had been funded by Security Capital to Belmont and an additional $26,308,000 of
unfunded commitments remained. At March 31, 2000, Belmont had approximately
$44,541,000 of unfunded commitments for developments under construction.
-17-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) Homestead Merger
Homestead announced on May 2, 2000 that it has entered into a
definitive merger agreement providing for the acquisition by cash tender offer
by Security Capital for all the publicly-held shares of Homestead's common stock
and the associated preferred share purchase rights at $4.10 per share. Security
Capital currently owns 87% of Homestead's outstanding common stock. Any shares
of Homestead common stock and associated preferred share purchase rights not
purchased in the tender offer will be acquired by Security Capital in a
subsequent merger transaction at the same $4.10 per share cash price. Total
consideration will be approximately $63,800,000. On May 9, 2000, Security
Capital commenced a cash tender offer for all the shares of Homestead common
stock and the associated preferred share purchase rights for $4.10 per share.
-18-
<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, 2000, and the
related consolidated statements of operations for the three month periods ended
March 31, 2000 and 1999, the consolidated statement of shareholders' equity for
the three month period ended March 31, 2000, and the consolidated statements of
cash flows for the three month periods ended March 31, 2000 and 1999. 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 whose total assets represent
21.4% of the total assets of Security Capital Group Incorporated and
subsidiaries as of March 31, 2000, and whose income represents 13.1% and 8.3% of
the total income in the consolidated statements of operations of Security
Capital Group Incorporated and subsidiaries for the three month period ended
March 31, 2000 and 1999, 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, 1999, and, in our report dated March 23,
2000, 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, 1999, 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 11, 2000
-19-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The statements contained in this report that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are based on current expectations, management's
beliefs, and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance. Actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. Security Capital
undertakes no obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise.
See Security Capital's 1999 Annual Report on Form 10-K for a discussion
of various risk factors associated with forward-looking statements made in this
document.
Overview
The results of operations for each of Security Capital's reportable
segments, the Capital Division and the Financial Services Division, are
discussed below. These two sections are followed by a discussion of Security
Capital's Liquidity and Capital Resources. All three of these sections should be
read in conjunction with the consolidated financial statements and accompanying
notes thereto.
Results of Operations
Capital Division
Earnings from the Capital Division are generated by its strategic
investments. The majority of these investments are not consolidated and the
Capital Division reports its share of their respective earnings. The
consolidated investments include Homestead (which is the largest consolidated
investment), Belmont and SC-European Real Estate Shares. Cash flow for the
Capital Division is generated through receipt of dividends. (See note 2 to the
consolidated financial statements for detail of dividends received.)
Equity in Earnings of Unconsolidated Investees
The equity in earnings of the Capital Division's unconsolidated
investees includes changes in unrealized gains or losses for SC-U.S. Realty,
SC-Preferred Growth and SC-US Real Estate Shares in 2000. These changes are
generated as a result of fluctuating market prices for the shares in their
underlying investments and are reflected in earnings due to SC-U.S. Realty's,
SC-Preferred Growth's and SC-US Real Estate Shares' use of fair value
accounting. Fluctuations in market prices do not have an impact on cash flow,
but the general decline in real estate equity security prices in 1999 had a
materially adverse impact on Security Capital's equity in earnings of SC-U.S.
Realty during 1999.
-20-
<PAGE>
Presented below is Security Capital's equity in earnings (loss) and
common share ownership interest in unconsolidated investees for the periods
indicated. Explanations of earnings changes at the investee level, which
materially impacted Security Capital's equity in earnings, follow the table
(dollar amounts in millions).
<TABLE>
<CAPTION>
Equity in Earnings
(Loss)
Three Months Ended % Ownership
March 31, as of March 31,
------------------ -------------------
2000 1999 2000 1999
------ -------- ------ ------
<S> <C> <C> <C> <C>
Archstone $ 15.4 $ 14.6 39.2% 39.2%
ProLogis 13.8 1.0 30.7% 31.0%
SC-European Realty 0.7 (0.4) 34.6% 34.6%
SC-Preferred Growth 2.3 (4.0) 9.3% 9.7%
SC-U.S. Realty 0.5 (78.0) 40.6% 35.1%
SC-US Real Estate Shares 1.2 -- 41.9% 83.8%
Strategic Hotel -- 5.2 -- 30.4%
------ ------
$ 33.9 $(61.6)
====== ======
</TABLE>
Archstone
Archstone's increase in earnings for 2000 compared to 1999 was due
primarily to an increase in rental revenues of $15.2 million and improvement in
operating margins, partially offset by increases in minority interest expense,
preferred dividends and a decrease in gains from dispositions.
ProLogis
In March 1999, ProLogis merged with Meridian Industrial Trust. Security
Capital continues to be ProLogis' largest shareholder. ProLogis' increase in
earnings for 2000 over 1999 was due to increased distribution facilities
resulting from the Meridian merger, occupancy increases and an increase in
income generated by ProLogis' corporate distribution facilities business (which
provides build-to-suit services).
SC-European Realty
SC-European Realty's current investments are primarily in operating and
development companies with significant pre-stabilized assets. The improvement in
the first quarter 2000 results was primarily due to gains on sales of certain
assets developed by affiliates. It is expected that earnings for SC-European
Realty will increase as additional properties reach stabilization. However,
there is no assurance that this will occur and failure to do so would impair the
ability of SC-European Realty to grow both its portfolio and its earnings.
SC-Preferred Growth
SC-Preferred Growth's change in earnings for the three months ended
March 31, 2000, was due primarily to changes in unrealized gains or losses
on investments as a result of overall increases in the market prices of its
investments.
-21-
<PAGE>
SC-U.S. Realty
SC-U.S. Realty experienced a loss in the first quarter of 1999 due to
an overall decrease in the market prices for shares in its underlying
investments. As previously discussed, SC-U.S. Realty accounts for its
investments at fair value. Therefore, market value fluctuations affect net
income. In the first quarter of 2000, market prices were more stable than in
1999.
As of March 31, 2000, Security Capital's ownership position in SC-U.S.
Realty increased to 40.6% as SC-U.S. Realty repurchased approximately 13.5% of
its outstanding shares since initiating a stock repurchase program in May 1999.
SC - US Real Estate Shares
Effective with the first quarter of 2000, Security Capital's ownership
of SC-US Real Estate Shares fell below 50% and therefore its earnings are
recorded on the equity method in 2000 compared to being consolidated in 1999. If
SC-US Real Estate shares had been accounted for using the equity method during
both periods, results would have been similar.
Strategic Hotel
In September 1999, Security Capital sold its entire ownership in
Strategic Hotel for net proceeds of approximately $329 million. As a result of
the sale, equity in earnings from Strategic Hotel were not recorded after the
second quarter of 1999.
Consolidated Investments
Homestead
The following table sets forth the results of Homestead's operations.
<TABLE>
<CAPTION>
Homestead Total Portfolio
-------------------------
1Q00 1Q99
------ ------
<S> <C> <C>
Operating Properties 136 125
Average Occupancy 72.2% 62.8%
Average Weekly Rate $349 $352
Weekly RevPAR $252 $221
Property Operating Margin* 57.4% 54.2%
* Management targets an operating margin of 55% to 57%, but there are no
assurances that such margins will be achieved.
-22-
</TABLE>
<PAGE>
Overall property level results for Homestead are summarized below (in
millions):
<TABLE>
<CAPTION>
Three Months Ended,
March 31,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Total Room Revenue $ 59.6 $ 48.1
Total Room Expense 25.5 22.0
-------- --------
Net operating income $ 34.1 $ 26.1
======== ========
</TABLE>
The increase in net operating income from 1999 to 2000 was due to an
increase in occupancy and the number of operating facilities as well as a
restructuring of operations in 1999.
Interest Expense
Consolidated interest expense was $31.8 million in 2000 and $31.0
million in 1999. Total debt decreased by $291 million to $1.55 billion at March
31, 2000 compared to March 31, 1999, but overall interest reductions were offset
by higher interest expensed at Homestead, as no interest was capitalized after
the curtailment of development activity during the second quarter of 1999.
Homestead had capitalized a significant percentage of its interest costs during
the first half of 1999.
EBDADT
Earnings before depreciation, amortization and deferred taxes, or
"EBDADT," is considered by management to be an additional measure of operating
performance for Security Capital and its affiliates, supplementing net earnings
as measured by GAAP. Among other things, GAAP net earnings includes the impact
of real estate depreciation. The value of the real estate assets generally
changes in response to existing market conditions and does not necessarily
diminish in value predictably over time, as historical cost depreciation
implies. Therefore, consistent with real estate industry practice, EBDADT
adjusts GAAP net earnings by eliminating real estate related depreciation.
EBDADT also involves certain other adjustments (as described in note 4 to the
consolidated financial statements), the most material being the omission of
changes in unrealized gains and losses on real estate securities due to
fluctuations in market prices. EBDADT should not be considered as an alternative
to net earnings or any other GAAP measurement of performance or as an
alternative to cash flows from operating, investing or financing activities, or
as a measure of Security Capital's liquidity.
Capital Division EBDADT reflects equity in EBDADT before extraordinary
items from investees, less allocated general and administrative expenses,
interest expense, taxes and depreciation. The Capital Division earned $58.9
million and $48.0 million in EBDADT for the three months ended March 31, 2000
and 1999, respectively.
Favorable EBDADT performance (before special items) of the Capital
Division for 2000 compared to 1999 is primarily attributed to improved operating
performance by substantially all investees as described above. Security
Capital's equity in EBDADT from Homestead increased by $11.5 million to $15.0
million due to improvement in operations and an increase in Security Capital's
ownership from 69.8% at March 31, 1999 to 87.0% at March 31, 2000. In September
1999, Security Capital sold its entire ownership position in Strategic Hotel,
and as a result, equity in EBDADT was not recorded after the second quarter of
1999. SC-U.S. Realty's equity in EBDADT increased by 27% in 2000 primarily due
to increased operating performance of its investees and as a result of SC-U.S.
-23-
<PAGE>
Realty's stock repurchases which increased Security Capital's ownership from
35.1% at March 31, 1999 to 40.6% at March 31, 2000. Equity in EBDADT for SC-U.S.
Realty differs from GAAP equity in earnings because GAAP equity in earnings
reflects changes in fair value of investments, whereas EBDADT does not (SC-U.S.
Realty's EBDADT instead reflects the EBDADT performance of its investees).
In the second quarter of 1999, Homestead recorded a special charge for
expenses of $65.3 million related to terminating its development program. For
the three months ended March 31, 2000, the Capital Division recorded a special
credit of $1.7 million representing its share of the excess of the original
special charge over current estimates.
Financial Services Division
The primary components of the Financial Services Division are the
Capital Markets Group and the Global Capital Management Group. These two groups
are the Financial Services Division's primary earnings generators. In addition,
the Corporate Services Group and the Real Estate Research Group enable Security
Capital and its affiliates to consolidate certain activities to benefit from
economies of scale. All fees paid by affiliates to the Financial Services
Division are included for EBDADT purposes. Revenues for the Financial Services
Division were earned from the following sources (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
------ ------
<S> <C> <C>
Capital Markets Group $ 3.0 $ 0.9
Global Capital Management Group 14.2 14.3
Corporate Services Group 4.1 5.5
Real Estate Research Group 0.1 0.2
------ ------
Sub-total 21.4 20.9
Less amounts eliminated in
consolidation (1.2) (1.7)
------ ------
Total $ 20.2 $ 19.2
====== ======
</TABLE>
The decline in real estate security prices in 1999 made it more
difficult to attract assets to Security Capital's mutual funds and investees,
and to execute capital markets transactions, which, in turn, impacted revenues
for the Global Capital Management Group and the Capital Markets Group.
Additionally, the decline in real estate securities prices reduced the value of
assets under management in some of Security Capital's managed entities, thereby
decreasing fee income to the Global Capital Management Group for managing such
entities.
-24-
<PAGE>
During the later half of 1999, the Global Capital Management Group
became increasingly successful in adding new investment management clients,
which has continued in the first quarter of 2000. Assets managed for separate
accounts increased from $75 million at March 31, 1999 to $568 million at March
31, 2000. Additionally, during 2000, real estate equity prices have begun to
increase, modestly increasing the value of the asset basis on which fees are
earned, partially offset by the sale of SC-U.S. Realty's special opportunity
investments. Assets under management for the Global Capital Management Group
are as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
-------- --------
<S> <C> <C>
SC-European Realty $ 1,287 $ 1,084
SC-Preferred Growth 931 746
SC-U.S. Realty 2,316 2,629
Mutual Funds 72 85
Separate Accounts 568 75
-------- --------
$ 5,174 $ 4,619
======== ========
</TABLE>
Partially offsetting the increase in assets under management, average
fees earned have declined from 1.22% of assets at March 31, 1999 with no
performance incentives, to 1.12% of assets at March 31, 2000, with 5.4% of
assets reflecting additional fee opportunities based on performance.
EBDADT
Financial Services Division EBDADT reflects allocations of Security
Capital's G&A, taxes and depreciation. EBDADT results were as follows (in
millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
------ ------
<S> <C> <C>
Capital Markets Group $ (0.7) $ (2.7)
Global Capital Management Group 7.2 5.7
Corporate Services Group (1.4) (1.0)
Real Estate Research Group (0.3) (0.9)
Income tax expense (0.2) (0.4)
------ ------
EBDADT before special items $ 4.6 $ 0.7
====== ======
</TABLE>
EBDADT results for both years can be attributed to the same factors
that impacted Financial Services Division revenues and expenses, as discussed
above.
-25-
<PAGE>
Other Items
The following items are not specific to either the Capital Division or
Financial Services Division, but had an impact on operations as a whole.
General, administrative and other expenses
General, administrative and other expenses for the three months ended
March 31, 2000 and 1999 were $9.2 million, and $16.0 million of which $4.8
million and $6.6 million, respectively, relate only to Security Capital,
excluding Homestead and Belmont. The decrease was primarily due to personnel
reductions resulting from automation of various processes. The decrease from
1999 to 2000 resulted primarily from personnel reductions and other cost
controls by Security Capital and Homestead.
Annualized overhead for Security Capital, excluding Homestead and
Belmont, decreased from $84.7 million as of December 31, 1999 to $82.8 million
as of March 31, 2000. The annualized amounts for the first quarter of 2000 were
$1.5 million for the Capital Division, $64.7 million for the Financial Services
Division and $16.6 million for general and administrative.
Provision for Income Taxes
The effective tax rate for the first quarter of 2000 varied from the
expected corporate tax rate of 35% primarily due to utilization of a net
operating loss carryforward of a consolidated subsidiary previously not
benefited, reduction in the valuation reserve relating to a portion of a capital
loss carryforward due to a capital gain recognized in the second quarter of
2000 and non taxable earnings of a foreign subsidiary.
The effective tax rate for the first quarter of 1999 was lower than the
expected corporate tax rate of 35% primarily due to losses in subsidiaries
which are consolidated for financial reporting purposes, but not for tax
purposes.
Liquidity and Capital Resources
Investment Activity
Security Capital's investment activity primarily consists of allocation
(redemptions) of its capital to its various affiliates. The following table
summarizes Security Capital's capital allocations to and redemptions of its
primary investments (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
------- --------
<S> <C> <C>
SC-US Real Estate Shares $(1,250) $(26,538)
Real estate investments:
Homestead 1,558 48,782
Belmont 6,165 2,910
Homestead proceeds from sale of land (9,996) --
</TABLE>
Real estate investments reflect development activity at Homestead and Belmont.
-26-
<PAGE>
Financing Activity
Security Capital decreased its total debt by $23.4 million from
December 31, 1999, primarily from repayments on its lines of credit balances.
In addition, Security Capital repurchased $47.3 million of common stock during
2000 as discussed below.
On February 29, 2000, Homestead entered into an amended and restated
bank credit facility, which allows for $110 million of total borrowings, of
which $35 million is available on a revolving basis. The amended and restated
line matures February 28, 2003, bears interest at LIBOR plus 2.5%, is secured by
64 operating properties, permits payment of dividends based upon a definition of
free cash flow, and requires maintenance of financial ratio and coverage
covenants.
Excluding Homestead and Belmont, Security Capital's March 31, 2000,
debt-to-total-capitalization ratio was 51%. The average maturity of Security
Capital's $972 million of fixed rate indebtedness (excluding Homestead and
Belmont) is 13.0 years, at an average fixed rate of 7.2%. The maximum maturity
in any year is $285 million in 2005.
Cash from Operations
Cash provided by operating activities increased by $22.0 million in the
first quarter of 2000 compared to the first quarter of 1999. This increase is
primarily due to an $11.4 million increase in Homestead's room revenues and a
reduction in expenses of $6.2 million.
Stock and Debenture Repurchase Programs
Security Capital's board has authorized a total expenditure of $300
million for the common share repurchase program and $60 million for the
debenture repurchase program. As of May 1, 2000, Security Capital had
repurchased 15,022,897 shares of Class B common stock equivalents (comprised of
99,413 Class A Shares and 10,052,247 Class B Shares) for a purchase price of
$198.7 million. As of May 1, 2000, Security Capital also repurchased $60
million of 6.5% convertible subordinated debentures ($80.5 million principal
amount).
Derivative Financial Instruments
As of March 31, 2000 and 1999, Security Capital had no derivative
financial instruments.
Future Capital Commitments and Liquidity
Security Capital and its subsidiaries have a remaining funding
commitment of $77.7 million to SC-European Realty, as of March 31, 2000. In
addition, as of March 31, 2000, Security Capital has committed to invest an
additional $26.3 million in Belmont.
Homestead announced on May 2, 2000 that it has entered into a
definitive merger agreement providing for the acquisition by cash tender offer
by Security Capital for all the publicly-held shares of Homestead's common stock
and the associated preferred share purchase rights at $4.10 per share. Security
Capital currently owns 87% of Homestead's outstanding common stock. Any shares
of Homestead common stock and associated preferred share purchase rights not
-27-
<PAGE>
purchased in the tender offer will be acquired by Security Capital in a
subsequent merger transaction at the same $4.10 per share cash price. On May 9,
2000, Security Capital commenced a cash tender offer under the merger agreement.
Total consideration will be approximately $63.8 million and will be funded by
Security Capital's line of credit.
Security Capital expects that cash flows from operations 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 through the selective sale of
assets, internally generated cash flow, its line of credit, and future issuance
of equity and debt securities. The business activities to be financed may
include investments in new business initiatives, additional investments in
certain existing affiliates and additional potential repurchases of Security
Capital securities.
Homestead believes it will have adequate cash resources from cash on
hand and cash flow from operations to fund its future business needs. However,
due to the risks of operation of lodging properties, including competitive
pressures, rates, occupancies, and costs of operation, there can be no assurance
of adequate future cash flow generation. In addition, Homestead may generate
cash flow from the sale of its remaining land sites, but no assurance can be
given that such sales will occur or provide significant net proceeds.
-28-
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See Form 10-K "Item 7A. Quantitative and Qualitative Disclosures About
Market Risk" for a more complete discussion of Security Capital's exposure to
interest rate and equity price risks. As of March 31, 2000, there have been no
material changes in the fair values of assets and liabilities disclosed in "Item
7A. Quantitative and Qualitative Disclosures About Market Risk" in Security
Capital's 1999 Form 10-K, as compared to their respective book values.
PART II
Item 1. Legal Proceedings
As a result of the announcement on March 23, 2000, of Security
Capital's proposal to Homestead to purchase all shares of Homestead common stock
not already owned by Security Capital for $3.40 per share, and before the
Homestead Board of Directors took any action with respect to the proposal,
several lawsuits were filed against Homestead, Security Capital and Homestead's
directors. Homestead, Security Capital, and Homestead's directors have been
named as defendants in four purported stockholder class actions. Three of these
actions have been filed in the Circuit Court for Baltimore City, Maryland, and
are captioned Earl Joseph Maisonneuve v. Eugene B. Vesell, et al.; Robert
Merritt v. Security Capital Group Incorporated; and Harold McClintock v. C.
Ronald Blankenship, et al. One of these actions has been filed in the Circuit
Court for Montgomery County, Maryland, and is captioned Aaron Rubin v. Homestead
Village, Inc. et al. The allegations in all four cases (the "Actions") are
substantially similar, and each complaint in the Actions alleges that (a)
Security Capital proposal of $3.40 in cash per share was unfair, (b) Security
Capital and the Homestead directors were breaching their duties to the
stockholders of Homestead not affiliated with Security Capital in connection
with the Homestead proposal, and (c) appropriate steps were not being taken to
insure that the stockholders of Homestead not affiliated with Security Capital
would receive fair value for their Homestead shares in any transaction that
might occur. As relief, the complaints in the Actions sought, among other
things, damages in an unspecified amount and rescission of the transaction, if
effected. In addition, the action brought by Harold McClintock was also filed in
a Georgia court and is captioned Harold McClintock v. C. Ronald Blankenship. The
plaintiff has filed a motion to dismiss the Georgia action; however, the court
has not yet granted the motion.
On May 2, 2000, as the result of negotiations between counsel for parties
in the Actions, an agreement in principle was reached providing for the
settlement of the Actions, subject to Court approval and the completion of the
merger, among other things.
-29-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement and Plan of Merger by and among Security Capital
Incorporated, HSD Acquisition Corporation and Homestead Village
Incorporated dated as of May 2, 2000 (previously filed as
Exhibit (d)(1) to Schedule to TO of Security Capital Group
Incorporated dated May 9, 2000, and incorporated by reference).
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 11, 2000, regarding
unaudited financial information
27 Financial data schedule
(b) Reports on Form 8-K
<TABLE>
<CAPTION>
Date Items Reported
---- --------------
<S> <C> <C>
March 23, 2000 Item 5, Item 7
</TABLE>
-30-
<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, Senior Vice President
(Principal Accounting Officer)
Date: May 15, 2000
-31-
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,
--------------------- ---------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995(a)
-------- --------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $ 26,031 $ 7,352 $ (59,666) $ 67,480 $ 38,241 $ (9,693) $ (21,274)
Add:
Interest Expense 31,787 31,018 133,454 82,203 104,434 117,224 103,804
-------- --------- ---------- ---------- --------- --------- ---------
Earnings as Adjusted $ 57,818 $ 38,370 $ 73,788 $ 149,683 $ 142,675 $ 107,531 $ 82,530
======== ========= ========== ========== ========= ========= =========
Fixed Charges:
Interest Expense $ 31,787 $ 31,018 $ 133,454 $ 82,203 $ 104,434 $ 117,224 $ 103,804
Capitalized Interest 553 4,440 8,209 26,703 69,883 11,448 4,404
-------- --------- ---------- ---------- --------- --------- ---------
Total Fixed Charges $ 32,340 $ 35,458 $ 141,663 $ 108,906 $ 174,317 $ 128,672 $ 108,208
======== ========= ========== ========== ========= ========= =========
Ratio of Earnings to Fixed Charges 1.8 1.1 0.5 1.4 0.8 0.8 0.8
======== ========= ========== ========== ========= ========= =========
</TABLE>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred in
acquiring the Financial Services Division from a related party.
-32-
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,
--------------------- -------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995(a)
-------- --------- ---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $ 26,031 $ 7,352 $ (59,666) $ 67,480 $ 38,241 $ (9,693) $ (21,274)
Add:
Interest Expense 31,787 31,018 133,454 82,203 104,434 117,224 103,804
-------- --------- -------- --------- --------- ----------- ----------
Earnings as Adjusted $ 57,818 $ 38,370 $ 73,788 $ 149,683 $142,675 $ 107,531 $ 82,530
======== ========= ======== ========= ========= =========== =========
Combined Fixed Charges and
Preferred Share Dividends:
Interest Expense $ 31,787 $ 31,018 $133,454 $ 82,203 $ 104,434 $ 117,224 $ 103,804
Capitalized Interest 553 4,440 8,209 26,703 69,883 11,448 4,404
-------- --------- -------- ---------- --------- ----------- ---------
32,340 35,458 141,663 108,906 174,317 128,672 108,208
Preferred Share Dividends (b)(c) 5,163 6,643 20,280 22,368(d) 15,416 12,352 --
-------- --------- --------- --------- --------- ----------- ---------
Combined Fixed Charges and
Preferred Share Dividends $ 37,503 $ 42,101 $ 161,943 $ 131,274 $ 189,733 $ 141,024 $ 108,208
======== ========= ========= ========== ========= ========= =========
Ratio of Earnings to Combined Fixed
Charges and Preferred Share
Dividends 1.5 0.9 0.5 1.1 0.8 0.8 0.8
======== ========= ========= ========== ======== ========= =========
</TABLE>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred in
acquiring the Financial Services Division from a related party.
(b) The preferred dividends have been increased to show a pretax basis.
(c) Security Capital had no preferred dividends prior to 1996.
(d) Excludes a one-time non-cash dividend of $19.8 million incurred in
conjunction with the exchange of Series A Preferred Shares for Series B
Preferred Shares.
-33-
Exhibit 15
May 11, 2000
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 three months ended March 31, 2000,
which includes our report dated May 11, 2000 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
-34-
<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, 2000, 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,778
<SECURITIES> 9,984
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,144,419
<DEPRECIATION> 83,283
<TOTAL-ASSETS> 3,842,479
<CURRENT-LIABILITIES> 0
<BONDS> 1,353,050
0
257,642
<COMMON> 515
<OTHER-SE> 1,861,412
<TOTAL-LIABILITY-AND-EQUITY> 3,842,479
<SALES> 0
<TOTAL-REVENUES> 117,002
<CGS> 0
<TOTAL-COSTS> 64,637
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,787
<INCOME-PRETAX> 20,578
<INCOME-TAX> 2,607
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,365
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
