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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2001
Commission file number 1-13223
LNR Property Corporation
(Exact name of registrant as specified in its charter)
Delaware 65-0777234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
760 Northwest 107th Avenue, Miami, Florida 33172
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (305) 485-2000
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 requirements for the past 90 days. YES X NO ___
---
Common shares outstanding as of the end of the current fiscal quarter:
Common 24,421,531
Class B Common 9,951,456
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
LNR Property Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(unaudited)
(In thousands, except per share amounts) August 31, November 30,
2001 2000
----------------- --------------
Assets
------
Cash and cash equivalents $ 12,651 1,986
Restricted cash 67,577 85,282
Investment securities 952,470 696,402
Mortgage loans, net 240,263 243,987
Operating properties and equipment, net 756,625 818,486
Land held for investment 43,117 52,969
Investments in and advances to partnerships 355,448 353,975
Other assets 111,053 95,769
----------------- ----------------
Total assets $ 2,539,204 2,348,856
================= ================
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Accounts payable and other liabilities $ 168,800 136,546
Mortgage notes and other debts payable 1,453,551 1,404,374
----------------- ----------------
Total liabilities 1,622,351 1,540,920
----------------- ----------------
Minority interests 27,919 29,492
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Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 24,422 and
24,215 shares issued and outstanding in 2001 and 2000, respectively 2,442 2,422
Class B common stock, $.10 par value, 40,000 shares authorized, 9,951
and 9,999 shares issued and outstanding in 2001 and 2000, respectively 995 1,000
Additional paid-in capital 513,750 516,516
Retained earnings 369,470 272,772
Unamortized value of restricted stock grants (11,072) (13,195)
Accumulated other comprehensive earnings (loss) 13,349 (1,071)
----------------- ----------------
Total stockholders' equity 888,934 778,444
----------------- ----------------
Total liabilities and stockholders' equity $ 2,539,204 2,348,856
================= ================
See accompanying notes to unaudited consolidated condensed financial statements.
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Earnings
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------- -------------------------
(In thousands, except per share amounts) 2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues
Rental income $ 26,201 38,437 86,178 101,482
Equity in earnings of partnerships 17,282 16,050 46,783 67,312
Interest income 44,315 38,493 135,419 107,511
Gains on sales of:
Real estate 13,786 15,736 57,657 19,495
Partnership interests - 505 - 23,671
Investment securities 4,842 13,134 4,842 13,134
Management and servicing fees 11,549 7,940 28,989 18,106
Other, net (607) 47 (1,211) 297
------------ ------------ ------------ ------------
Total revenues 117,368 130,342 358,657 351,008
------------ ------------ ------------ ------------
Costs and expenses
Cost of rental operations 13,183 21,391 43,684 57,795
General and administrative 18,245 16,995 54,947 47,344
Depreciation 6,088 9,901 19,462 27,106
Minority interests 570 2,030 2,262 2,839
------------ ------------ ------------ ------------
Total costs and expenses 38,086 50,317 120,355 135,084
------------ ------------ ------------ ------------
Operating earnings 79,282 80,025 238,302 215,924
Interest expense 26,978 32,108 86,263 88,456
------------ ------------ ------------ ------------
Earnings before income taxes 52,304 47,917 152,039 127,468
Income taxes 17,088 14,853 52,484 39,514
------------ ------------ ------------ ------------
Net earnings $ 35,216 33,064 99,555 87,954
============ ============ ============ ============
Weighted average shares outstanding:
Basic 33,492 33,336 33,320 33,505
============ ============ ============ ============
Diluted 35,077 34,932 34,916 34,851
============ ============ ============ ============
Net earnings per share:
Basic $ 1.05 0.99 2.99 2.63
============ ============ ============ ============
Diluted $ 1.00 0.95 2.85 2.52
============ ============ ============ ============
See accompanying notes to unaudited consolidated condensed financial statements.
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Comprehensive Earnings
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
August 31, August 31,
--------------------------- --------------------------
(In thousands) 2001 2000 2001 2000
------------- ------------- ------------ ------------
Net earnings $ 35,216 33,064 99,555 87,954
------------- ------------- ------------ ------------
Other comprehensive earnings (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities, net and
other 14,822 1,951 19,250 (1,040)
Unrealized loss on hedging activities (70) - (3,939) -
Transition adjustment related to accounting for derivative
financial instruments and hedging activities - - 4,118 -
Less: reclassification adjustment for gains included in net earnings (5,009) (8,122) (5,009) (13,889)
------------- ------------- ------------ ------------
Other comprehensive earnings (loss) 9,743 (6,171) 14,420 (14,929)
------------- ------------- ------------ ------------
Comprehensive earnings $ 44,959 26,893 113,975 73,025
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See accompanying notes to unaudited consolidated condensed financial statements.
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
August 31,
--------------------------------
(In thousands) 2001 2000
--------------- -------------
Cash flows from operating activities:
Net earnings $ 99,555 87,954
Adjustments to reconcile net earnings to net cash (used in) provided by operating
activities:
Depreciation 19,462 27,106
Minority interests 2,262 2,839
Amortization of discount on CMBS, mortgage loans and other (27,100) (21,648)
Gains on sales of real estate (57,657) (19,495)
Gains on sales of partnership interests - (23,671)
Gains on sales of investment securities (4,842) (13,134)
Equity in earnings of partnerships (46,783) (67,312)
Losses on hedging activities 1,312 -
Changes in assets and liabilities:
Decrease (increase) in restricted cash 17,651 (3,419)
Increase in other assets (22,807) (38,918)
Decrease in mortgage loans held for sale 4,397 50,802
Increase in accounts payable and other liabilities 9,544 32,655
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Net cash (used in) provided by operating activities (5,006) 13,759
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Cash flows from investing activities:
Operating properties and equipment
Additions (123,609) (226,838)
Sales 134,559 73,627
Land held for investment
Additions (4,652) (21,832)
Sales 28,122 15,203
Investments in and advances to partnerships (66,153) (36,620)
Distributions from partnerships 101,303 91,221
Proceeds from sales of partnership interests - 75,236
Purchase of mortgage loans held for investment (25,579) (34,546)
Proceeds from mortgage loans held for investment 99,271 11,305
Purchase of investment securities (247,359) (81,188)
Proceeds from principal collections on and sales of investment securities 62,082 64,016
Interest received on CMBS in excess of income recognized 17,572 11,151
Proceeds from sale of other assets 12,675 14,753
Syndication of affordable housing communities 41,776 15,974
------------- -------------
Net cash provided by (used in) investing activities 30,008 (28,538)
------------- -------------
Cash flows from financing activities:
Proceeds from stock option exercises 1,520 286
Purchase of treasury stock (6,150) (34,064)
Payment of dividends (1,246) (1,238)
Net payments borrowings under repurchase agreements and revolving credit lines (225,047) (80,727)
Mortgage notes and other debts payable:
Proceeds from borrowings 328,799 195,021
Principal payments (112,213) (45,612)
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Net cash (used in) provided by financing activities (14,337) 33,666
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Net increase in cash and cash equivalents 10,665 18,887
Cash and cash equivalents at beginning of period 1,986 8,587
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Cash and cash equivalents at end of period $ 12,651 27,474
============= =============
(Continued)
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows - continued
(Unaudited)
Nine Months Ended
August 31,
---------------- ----------------
(In thousands) 2001 2000
---------------- ----------------
Supplemental disclosure of non-cash investing and financing activities:
Mortgage loan received on sale of operating property $ 24,440 -
Purchases of mortgage loans financed by seller $ 40,224 102,720
Purchases of investment securities financed by seller $ 28,508 80,999
Grant of restricted stock $ 268 15,714
Supplemental disclosure of non-cash transfers:
Transfers between operating properties and land held for investment $ 5,391 29,759
Transfers between certain assets and liabilities and investments in partnerships $ - 45,798
See accompanying notes to unaudited consolidated condensed financial statements.
LNR Property Corporation and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
1. Basis of Presentation and Consolidation
The accompanying unaudited consolidated condensed financial statements include
the accounts of LNR Property Corporation and its wholly-owned subsidiaries (the
"Company"). The assets, liabilities and results of operations of entities (both
corporations and partnerships) in which the Company has a controlling interest
have been consolidated. The ownership interests of noncontrolling owners in such
entities are reflected as minority interests. The Company's investments in
partnerships (and similar entities) in which less than a controlling interest is
held or of which control is shared are accounted for by the equity method (when
significant influence can be exerted by the Company), or the cost method. All
significant intercompany transactions and balances have been eliminated. The
financial statements have been prepared by management without audit by
independent public accountants and should be read in conjunction with the
November 30, 2000 audited financial statements in the Company's Annual Report on
Form 10-K for the year then ended. However, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for fair
presentation of the accompanying unaudited consolidated condensed financial
statements have been made.
2. Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivative
instruments be recorded as either an asset or liability on the balance sheet at
their fair value, and that changes in the fair value be recognized currently in
earnings unless specified criteria are met. This statement was effective for
fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" extended the effective date to all
fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133." This
statement amends the accounting and reporting standards of SFAS No. 133 for
certain derivative instruments and certain hedging activities. The Company
adopted the provisions of these standards on December 1, 2000. In accordance
with these standards, the Company carries all derivative instruments in the
balance sheet at fair value. At August 31, 2001, the Company has a derivative
liability of $23.6 million which is included in accounts payable and other
liabilities in the Consolidated Condensed Balance Sheets. Periods prior to
December 1, 2000 have not been restated. The accounting for changes in the fair
value of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship.
Hedging Objectives and Strategies
With regard to risk management in general, and interest rate risk in particular,
the Company's fundamental philosophy is centered on a desire to tolerate only a
relatively small amount of risk. The Company has an interest rate risk
management policy with the objective of: (1) managing its interest costs and (2)
reducing the impact of unpredictable changes in asset values related to
movements in interest rates on the Company's available-for-sale securities. To
meet these objectives, the Company employs hedging strategies to limit the
effects of changes in interest rates on its operating income and cash flows and
on the value of its available-for-sale securities.
The Company does not acquire derivative instruments for any purpose other than
cash flow and fair value hedging purposes. That is, the Company does not
speculate using derivative instruments.
The Company believes its interest rate risk management policy is generally
effective. Nonetheless, the Company's profitability may be adversely affected
during particular periods as a result of changing interest rates. In addition,
hedging transactions using derivative instruments involve risks such as
counter-party credit risk and legal enforceability of hedging contracts. The
counter-parties to the Company's arrangements are major financial institutions
with which the Company and its affiliates may also have other financial
relationships. These counter-parties potentially expose the Company to loss in
the event of their nonperformance.
Cash Flow Hedging Instruments
The Company's approach to managing interest cost is based primarily on match
funding, with the objective that variable-rate assets be primarily financed by
variable-rate liabilities and fixed-rate assets be primarily financed by
fixed-rate liabilities. Management continually identifies and monitors changes
in interest rate exposures that may adversely impact expected future cash flows
by evaluating hedging opportunities. The Company maintains risk management
control systems to monitor interest rate cash flow risk attributable both to the
Company's outstanding or forecasted debt obligations and to the Company's
offsetting hedge positions. The risk management control systems involve the use
of analytical techniques, including cash flow sensitivity analyses, to estimate
the impact of changes in interest rates on the Company's future cash flows.
The Company periodically enters into derivative financial arrangements,
primarily interest rate swap agreements, to manage fluctuations in cash flows
resulting from interest rate risk. These swap agreements effectively change the
variable-rate cash flows on debt obligations to fixed-rate cash flows. Under the
terms of the interest rate swap agreements, the Company receives payments equal
to interest at variable rates on specified nominal amounts and makes payments
equal to interest at fixed rates on the same nominal amounts, thereby generating
variable rate income to offset variable rate interest obligations and creating
the equivalent of fixed-rate debt. At August 31, 2001, the Company had 14 such
interest rate swap agreements with a notional amount of $292.6 million, which
mature through February 2004.
The Company records the fair value of interest rate swap agreements designated
as hedging instruments for variable-rate debt obligations as a derivative asset
or liability. Changes in the fair value of the interest rate swap agreements are
reported as unrealized gains or losses in stockholders' equity as a component of
accumulated other comprehensive earnings. If a derivative instrument is not
designated as a hedge, the gain or loss resulting from a change in fair value is
recognized in earnings in the period of change. If a derivative instrument is
designated as a hedge but the derivative instrument is not fully effective in
hedging the designated risk, the ineffective portion of the gain or loss is
reported in earnings immediately.
Interest expense for the quarter and nine months ended August 31, 2001 includes
no net gains or losses representing cash flow hedge ineffectiveness arising from
differences between the critical terms of interest rate swap agreements and the
hedged debt obligations, since the terms of the Company's swap agreements and
debt obligations are matched.
Fair Value Hedging Instruments
To manage the risk associated with unpredictable changes in asset values related
to the effect of movements in interest rates on the Company's fixed-rate
available-for-sale securities, the Company periodically uses derivative
financial instruments, primarily interest rate swap agreements. Under the terms
of these swap agreements, the Company receives variable interest rate payments
and makes fixed interest rate payments. At August 31, 2001, the Company had
eight such interest rate swap agreements with a notional amount of $279.7
million, which mature through December 2011.
The Company has designated these interest rate swap agreements as hedges of
interest rates on certain available-for-sale securities and records the fair
value of the agreements as derivative assets or liabilities. Changes in the fair
value of the interest rate swap agreements are recorded in earnings, as are the
changes in the fair value of the hedged available-for-sale securities resulting
from changes in interest rates.
The Company recorded a loss of $0.6 million and $1.3 million, respectively, for
hedge ineffectiveness during the three-month and nine-month periods ended August
31, 2001. These amounts are included in other revenue, net in the Consolidated
Condensed Statements of Earnings.
Transition
Upon the adoption of SFAS No. 133, the Company recognized $4.1 million, net of
tax benefit, of deferred hedging losses on derivative instruments. This amount
was offset by $4.1 million, net of tax expense, of realized gains related to the
hedged available-for-sale securities. Both of these amounts were previously
recorded in stockholders' equity as a component of accumulated other
comprehensive earnings. Also upon adoption of SFAS No. 133, the Company
transferred $102.8 million of securities which were previously classified as
held-to-maturity to available-for-sale. Upon this reclassification, the Company
recorded a transition adjustment of $4.1 million, net of tax expense, which was
the difference between the market value and the book value of the securities on
December 1, 2000, the date the Company adopted SFAS No. 133. This adjustment is
reported in stockholders' equity as a component of accumulated other
comprehensive income.
3. New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101 is applicable to the Company
beginning no later than the fourth quarter of the year ending November 30, 2001.
The Company believes that its revenue recognition policies conform to SAB No.
101.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued in September 2000, and replaces SFAS
No. 125. It revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001, and is effective
for disclosures relating to securitizations and other transfers of financial
assets and collateral for the fiscal year ending November 30, 2001. Disclosures
about securitizations and other transfers of financial assets and collateral
need not be reported for prior periods presented for comparative purposes. The
adoption of SFAS No. 140 insofar as it relates to accounting for transfers and
servicing of financial assets and extinguishments of liabilities has not had a
material effect on the Company's results of operations or financial position.
The adoption of SFAS No. 140 insofar as it relates to disclosures relating to
securitizations and other transfers of financial assets and collateral is not
expected to have a material effect on the Company's results of operations or
financial position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method combinations completed after
June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet to be recognized
and reported apart from goodwill. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually on a basis set forth in SFAS
No. 142, and that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment. SFAS No. 141 is effective July 1,
2001, and SFAS No. 142 is effective for the fiscal year ending November 30,
2001. Adoption of these two standards is not expected to have a material effect
on the Company's results of operations or financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development, and/or normal use of the
asset, and the associated asset retirement costs. SFAS No. 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The fair value of the liability is added to the carrying amount of the
related asset and depreciated over the life of the asset. The liability is
accreted each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The Company is required and plans to
adopt the provisions of SFAS No. 143 for the quarter ending February 28, 2003.
To accomplish this, the Company must identify all legal obligations associated
with the retirement of tangible long-lived assets, if any, and determine the
fair value of these obligations on the date of adoption. The Company has not
determined the effect, if any, adoption of SFAS No. 143 will have on the
Company's financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of a Disposal of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. This Statement also amends ARB No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. SFAS No. 144 is effective for the
fiscal year ending November 30, 2003, and interim periods within fiscal 2003,
with early application encouraged. The provisions of this Statement generally
are to be applied prospectively. The Company has not determined the effect, if
any, adoption of SFAS No. 144 will have on the Company's financial position and
results of operations.
4. Reclassifications
Certain reclassifications have been made to the prior year consolidated
condensed financial statements to conform to the current year presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINS INFORMATION WHICH CONSTITUTES FORWARD LOOKING STATEMENTS.
FORWARD LOOKING STATEMENTS INHERENTLY INVOLVE RISKS AND UNCERTAINTIES. THE
FACTORS, AMONG OTHERS, THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD LOOKING STATEMENTS IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS INCLUDE (i) CHANGES IN DEMAND FOR COMMERCIAL REAL ESTATE NATIONALLY,
IN AREAS IN WHICH THE COMPANY OWNS PROPERTIES, OR IN AREAS IN WHICH PROPERTIES
SECURING MORTGAGES DIRECTLY OR INDIRECTLY OWNED BY THE COMPANY ARE LOCATED, (ii)
INTERNATIONAL, NATIONAL OR REGIONAL BUSINESS CONDITIONS WHICH AFFECT THE ABILITY
OF MORTGAGE OBLIGORS TO PAY PRINCIPAL OR INTEREST WHEN IT IS DUE, (iii) THE
CYCLICAL NATURE OF THE COMMERCIAL REAL ESTATE BUSINESS, (iv) CHANGES IN INTEREST
RATES, AND (v) CHANGES IN THE MARKET FOR VARIOUS TYPES OF REAL ESTATE BASED
SECURITIES. SEE THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
NOVEMBER 30, 2000, FOR A FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES
APPLICABLE TO THE COMPANY'S BUSINESS.
OVERVIEW
LNR Property Corporation (together with its subsidiaries, the "Company") is a
real estate investment, finance and management company. The Company engages
primarily in (i) acquiring, developing, managing and repositioning commercial
and multi-family residential real estate, (ii) investing in high yielding real
estate loans and purchasing at a discount portfolios of loans backed by real
estate, and (iii) investing in unrated and non-investment grade rated commercial
mortgage-backed securities ("CMBS") as to which the Company has the right to be
special servicer (i.e., to oversee workouts of underperforming and
non-performing loans).
1. RESULTS OF OPERATIONS
The following discussion and analysis presents the significant changes in
results of operations of the Company for the three months and nine months ended
August 31, 2001 and 2000 after allocating among the core business segments
certain non-corporate general and administrative expenses. The following
discussion should be read in conjunction with the unaudited consolidated
condensed financial statements and notes thereto.
Three Months Ended Nine Months Ended
August 31, August 31,
-------------------------- ---------------------------
(In thousands) 2001 2000 2001 2000
----------- ----------- ----------- ------------
Revenues
Real estate properties $ 50,913 62,939 162,497 149,895
Real estate loans 11,150 14,746 42,523 66,361
Real estate securities 55,305 52,657 153,637 134,752
--------- --------- --------- ----------
Total revenues 117,368 130,342 358,657 351,008
--------- --------- --------- ----------
Operating expenses
Real estate properties 26,125 38,229 85,885 101,169
Real estate loans 1,706 2,193 5,394 7,007
Real estate securities 3,527 2,665 11,134 8,202
Corporate and other 6,728 7,230 17,942 18,706
--------- --------- --------- ----------
Total operating expenses 38,086 50,317 120,355 135,084
--------- --------- --------- ----------
Operating earnings
Real estate properties 24,788 24,710 76,612 48,726
Real estate loans 9,444 12,553 37,129 59,354
Real estate securities 51,778 49,992 142,503 126,550
Corporate and other (6,728) (7,230) (17,942) (18,706)
--------- --------- --------- ----------
Total operating earnings 79,282 80,025 238,302 215,924
Interest expense 26,978 32,108 86,263 88,456
Income tax expense 17,088 14,853 52,484 39,514
--------- --------- --------- ----------
Net earnings $ 35,216 33,064 99,555 87,954
========= ========= ========= ==========
Three months and nine months ended August 31, 2001 compared to three months and
nine months ended August 31, 2000
The Company reported net earnings of $35.2 million and $99.6 million for the
three- and nine-month periods ended August 31, 2001, respectively, compared to
$33.1 million and $88.0 million for the same periods in 2000.
The quarter-over-quarter improvement in net earnings is primarily attributable
to (i) an increase in recurring income (net rents, interest and fees including
the Company's pro-rata share of net rents, interest and fees from partnerships),
(ii) a reduction in interest expense primarily due to a decrease in interest
rates and, to a lesser extent, reduced borrowing levels, and (iii) a decrease in
depreciation expense primarily due to the timing of property sale activity
relative to new acquisitions or development properties coming on line. These
increases were offset somewhat by a decrease in gains on sales of real estate
and investment securities.
The year-over-year improvement in net earnings is primarily attributable to (i)
an increase in recurring income, (ii) an increase in gains on sales of real
estate and (iii) a decrease in depreciation expense. These increases were offset
somewhat by (i) a decrease in gains on sales of partnership interests due to the
sale of the Company's investment interests in its Japanese
discount loan portfolios in April of 2000, (ii) a decrease in equity in earnings
of partnerships from both the Company's domestic and Japanese discount loan
portfolio businesses and from the Company's real estate property partnerships,
(iii) a decrease in gains on sales of investment securities and (iv) an increase
in general and administrative expenses from the Company's growing businesses.
The Company's total revenues were down $13.0 million for the quarter and up $7.6
million for the year-to-date period. Revenues were down 10% for the quarter and
only up 2% for the year, primarily due to the timing of asset sales, reduced
interest income on floating-rate assets and the shift in the mix of the
Company's investments. Lower interest income is a result of transactions that
are match-funded with floating-rate debt, with no impact to net earnings. The
shift in mix relates primarily to recycling sales proceeds from stabilized
properties into other investments that produce higher net margins including
primarily securities and loans.
Real estate properties
Three Months Ended Nine Months Ended
August 31, August 31,
----------------------------- -----------------------------
(In thousands) 2001 2000 2001 2000
----------- ----------- ----------- -----------
Rental income $ 26,201 38,437 86,178 101,482
Equity in earnings of partnerships 6,477 7,381 12,078 23,726
Gains on sales of real estate 13,786 15,736 57,657 19,495
Gains on sales of partnership
interests - 505 - 3,335
Management fees 4,449 880 6,584 1,857
----------- ----------- ----------- -----------
Total revenues 50,913 62,939 162,497 149,895
----------- ----------- ----------- -----------
Cost of rental operations 13,183 21,391 43,684 57,795
Other operating expenses 6,602 5,727 22,455 15,923
Minority interests 252 1,210 284 345
Depreciation 6,088 9,901 19,462 27,106
----------- ----------- ----------- -----------
Total operating expenses (1) 26,125 38,229 85,885 101,169
----------- ----------- ----------- -----------
Operating earnings $ 24,788 24,710 76,612 48,726
=========== =========== =========== ===========
Balance sheet data:
Operating properties and
equipment, net $ 756,625 998,153 756,625 998,153
Land held for investment 43,117 106,794 43,117 106,794
Investments in and advances to
partnerships 243,048 182,403 243,048 182,403
----------- ----------- ----------- -----------
Total segment assets $ 1,042,790 1,287,350 1,042,790 1,287,350
=========== =========== =========== ===========
(1) Operating expenses do not include interest expense.
Real estate properties include rental apartment communities (market-rate and
affordable housing communities), office buildings, industrial/warehouse
facilities, hotels, retail centers and land that the Company acquires and
develops, redevelops or repositions. These properties may be wholly owned or
owned through a partnership that is either consolidated or reflected as an
investment in partnership. Real estate properties also include the Company's 50%
interest in Lennar Land Partners ("LLP"), a partnership engaged in the
acquisition, development and sale of land. Total revenues from real estate
properties include rental income from operating properties, equity in earnings
of partnerships that own and operate real estate properties, gains on sales of
the properties and the partnership interests and fees earned from managing the
partnerships. Operating expenses include the direct costs of operating the real
estate properties, the related depreciation and the overhead associated with
managing the properties and partnerships.
Throughout the year, the Company has sold stabilized properties at prices it
believes to be favorable and has not been replacing stabilized properties in the
portfolio as quickly as they have been sold. The Company has had limited new
acquisitions in the property segment and instead has concentrated on completing
the development, repositioning and lease-up of its existing portfolio.
Additionally, an increasing share of the Company's newer development and
repositioning property investments have been through partnerships, most of which
are reflected as investments in partnerships. This has resulted in an overall
lower investment in the property segment for the Company. Approximately half of
the Company's remaining property portfolio is still undergoing development or
repositioning. The majority of these properties are pre-leased, which will
result in their contribution to net rents/recurring income as these properties
are completed and tenants begin to pay rent.
Three months and nine months ended August 31, 2001 compared to three months and
nine months ended August 31, 2000
Overall, operating earnings from real estate properties were $24.8 million and
$76.6 million for the three- and nine-month periods ended August 31, 2001,
respectively, compared to $24.7 million and $48.7 million for the same periods
in 2000.
Operating earnings from real estate properties was slightly higher for the three
months ended August 31, 2001, primarily due to lower depreciation expense and
increased management fees. These increases were offset by lower net rents from
wholly owned or consolidated property partnerships and fewer gains on sales of
real estate.
Operating earnings from real estate properties increased by 57% or $27.9 million
for the nine months ended August 31, 2001. The increase was primarily due to
higher gains on sales of real estate, lower depreciation expense and higher
recurring income. These increases were partially offset by a decrease in equity
in earnings and gains on sales of partnerships, and an increase in other
operating expenses.
Recurring income in the real estate property segment (net rents and fees
including the Company's pro-rata share of net rents and fees from properties
owned through partnerships that are reflected as investments in partnerships),
increased to $21.9 million and $66.5 million for the three- and nine-month
periods ended August 31, 2001, respectively, from $20.7 million and $53.3
million for the same periods in 2000. Recurring income grew despite increased
property sales, reflecting the Company's success in leasing up newly developed
and repositioned properties.
For the three- and nine-month periods ended August 31, 2001, gains on sales of
real estate decreased by $2.0 million and increased by $38.2 million,
respectively, compared to the same prior year periods. For the three- and nine-
month periods ended Aug 31, 2001, respectively, gains on sales of real estate
were $11.0 million and $44.2 million from sales of stabilized market rate
operating properties, $2.1 million and $5.2 million from sales of the Company's
low income housing tax credit syndication program, and $0.7 million and $8.3
million from sales of land. Gains on sales of real estate may vary from period
to period based on activity levels and profit margins. During the three-month
period, the Company sold stabilized market rate properties with a book value of
$37.7 million for a net sales price of $48.7 million compared with sales of
stabilized market rate properties with a book value of $49.8 million for a net
sales price of $63.0 million in the prior year three-month period. During the
nine-month period, the Company sold stabilized market rate properties with a
book value of $120.2 million for a net sales price of $164.4 million compared
with sales of stabilized market rate properties with a book value of $60.1
million for a net sales price of $75.0 million in the prior year nine-month
period.
Equity in earnings of partnerships decreased to $6.5 million and $12.1 million
for the three- and nine-month periods ended August 31, 2001, respectively, from
$7.4 million and $23.7 million for the same periods in 2000. The decrease for
the three months ended August 31, 2001 compared to the same period in 2000 is
primarily due to an increase in the Company's stabilized affordable housing
partnership investments. These partnerships typically generate pre-tax operating
losses
which are more than offset by the tax credits and benefits which directly reduce
the Company's overall income taxes. The decrease in equity in earnings of
partnerships for the nine months ended August 31, 2001 compared to the same
period in 2000 is primarily due to an increase in the Company's stabilized
affordable housing partnership investments and lower earnings from LLP. LLP
primarily sells land to Lennar Corporation, its former parent company and its
partner in LLP, and other homebuilders. Equity in earnings from LLP may vary
from period to period depending on the timing of housing starts.
Gains on sales of partnership interests decreased $0.5 million and $3.3 million
for the three- and nine-month periods ended August 31, 2001, respectively,
compared to the same periods in 2000. The decrease for the nine-month period is
because the Company sold its interest in a single-asset partnership in the
second quarter of 2000.
Management fees increased to $4.4 million and $6.6 million for the three- and
nine-month periods ended August 31, 2001, respectively, from $0.9 million and
$1.9 million for the same periods in 2000. This increase is primarily due to
developer and other fees the Company receives for managing the value-add process
for its partners.
Depreciation expense decreased to $6.1 million and $19.5 million for the three-
and nine-month periods ended August 31, 2001, respectively, from $9.9 million
and $27.1 million for the same periods in 2000. Since the Company has not been
replacing stabilized assets in the property segment as quickly as they have been
sold, this has resulted in a lower investment in operating properties and a
corresponding lower depreciation expense for the three- and nine-month periods.
Other operating expenses, which represent an allocation of salary, professional
and other administrative expenses, increased to $6.6 million and $22.5 million
for the three- and nine-month periods ended August 31, 2001, respectively, from
$5.7 million and $15.9 million for the same periods in 2000. These increases
were due to additional personnel and administrative costs necessary to support
the growth in the overall real estate portfolio managed by the Company,
including real estate owned and managed through partnerships.
The net book value of market-rate operating properties and equipment, excluding
affordable housing communities, at August 31, 2001 and the annualized net
operating income for the nine-month period ended on that date with regard to
various types of property owned by the Company were as follows:
Annualized Annualized
Net Operating NOI as a %
Net Book Occupancy Income of Net Book
(In thousands, except percentages) Value Rate (NOI) (1) Value
-------------- ------------- -------------- -------------
Stabilized operating properties
Office $ 188,454 93% $ 26,236 14%
Retail 28,424 96% 3,259 11%
Industrial / Warehouse 49,612 100% 6,592 13%
Ground Leases 18,907 100% 2,950 16%
-------------- ------- ---------------- ------
Commercial 285,397 97% 39,037 14%
Hotel 15,571 58% 1,919 12%
-------------- ---------------- ------
300,968 40,956 14%
-------------- ---------------- ------
Under development or repositioning
Office 232,895 6,669
Retail 32,440 1,988
--------------- ----------------
Commercial 265,335 8,657
Multi-family 77,617 205
Hotel 29,492 677
-------------- ---------------
372,444 9,539
-------------- ---------------
Furniture, fixtures and equipment 6,370 -
-------------- ----------------
Total (2) $ 679,782 $ 50,495
============== ================
_________________
(1) Annualized NOI for purposes of this schedule is rental income less cost of
rental operations before commissions and non-operating expenses.
(2) Total market-rate operating properties and equipment, net, excluding
affordable housing communities.
At August 31, 2001, approximately 45% of the Company's market-rate operating
properties, based on net book value, had reached stabilized occupancy levels and
were yielding in total 14% on net book cost. At August 31, 2000, these
percentages were 40% and 14%, respectively. The anticipated improvements in the
earnings of the not yet stabilized market-rate operating properties are not
expected to be recognized until future periods.
Pre-tax operating margins for the affordable housing communities, which qualify
for Low-Income Housing Tax Credits, are generally lower than for market-rate
rentals. However, the Company receives its desired yield from these investments
after adding in (1) the impact of lower income taxes as a result of the tax
credits and other related tax deductions and (2) profits from sales of tax
credits to others.
The net investment in the Company's affordable housing communities at August 31,
2001 and the annualized yield on the stabilized affordable housing communities
for the nine-month period then ended, were as follows:
(In thousands, except percentages)
Net book value of apartment communities $ 54,851
Investments in partnerships 45,495
Debt and other (45,288)
---------------
Net investment in stabilized apartment communities 55,058
Net investment in apartment communities under development 41,101
---------------
Net investment in affordable housing communities $ 96,159
===============
Stabilized apartment communities:
Annualized NOI as a % of net book value 10%
Annualized adjusted NOI as a % of net book value (1) 15%
-------------
(1) Annualized adjusted NOI includes the annualized effect of tax credits and
other related tax deductions.
As of August 31, 2001, the Company had been awarded and held rights to over $174
million in tax credits, with approximately 64% relating to apartment communities
that have not yet reached stabilized occupancy levels.
At the time of the acquisition of the Affordable Housing Group ("AHG") in 1998,
the Company's strategy was to retain the tax credits generated through owning
the partnership interests in the affordable housing communities and then use
those credits to reduce the Company's overall effective tax rate. However, the
demand for credits has since increased significantly and the Company found it
could generate higher returns on its investment by selling the credits than by
using them. The Company began to shift its strategy away from owning the
partnership interests in the affordable housing communities toward syndicating
such interests. The Company expects to generate fee income and gains in future
years from such syndications. As a result, the Company's investment in
affordable housing communities, as well as the amount of tax credits it holds
and utilizes to reduce its tax rate, has been declining in 2001.
Real estate loans
Three Months Ended Nine Months Ended
August 31, August 31,
----------------------------- -----------------------------
(In thousands) 2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest income $ 9,874 8,770 37,235 25,601
Equity in earnings of partnerships 463 2,004 1,651 15,710
Gains on sales of partnership
interests - - - 20,336
Management fees 760 3,925 3,536 4,417
Other income 53 47 101 297
----------- ----------- ----------- -----------
Total revenues 11,150 14,746 42,523 66,361
----------- ----------- ----------- -----------
Operating expenses 1,184 1,625 3,640 5,237
Minority interests 522 568 1,754 1,770
----------- ----------- ----------- -----------
Total operating expenses (1) 1,706 2,193 5,394 7,007
----------- ----------- ----------- -----------
Operating earnings $ 9,444 12,553 37,129 59,354
=========== =========== =========== ===========
Balance sheet data:
Mortgage loans, net $ 240,263 227,207 240,263 227,207
Other investments 52,361 49,536 52,361 49,536
Investments in and advances to
partnerships 9,593 14,293 9,593 14,293
----------- ----------- ----------- -----------
Total segment assets $ 302,217 291,036 302,217 291,036
=========== =========== =========== ===========
(1) Operating expenses do not include interest expense.
Real estate loans include the Company's direct investments in high yielding
loans, as well as its domestic and foreign discount loan portfolio investments,
owned primarily through partnerships, and related loan workout operations. Total
revenues include interest income, equity in earnings of partnerships and
management fees earned from those partnerships. Operating expenses include the
overhead associated with servicing the loans and managing the partnerships.
Three months and nine months ended August 31, 2001 compared to three months and
nine months ended August 31, 2000
Operating earnings from real estate loans were $9.4 million and $37.1 million
for the three- and nine-month periods ended August 31, 2001, respectively,
compared to $12.6 million and $59.4 million for the same periods in 2000. These
decreases were primarily due to lower earnings from the Company's domestic and
Japanese discount loan portfolio businesses. These decreases were offset by
increases in the earnings from the Company's growing portfolio of high-yielding
loans.
Interest income increased to $9.9 million and $37.2 million for the three- and
nine-month periods ended August 31, 2001, respectively, from $8.8 million and
$25.6 million for the same periods in 2000. Interest income primarily includes
interest earned on investments in structured junior participations in
high-quality short- to medium-term variable rate first mortgage real estate
loans ("B-Notes"). During the third quarter of 2001, the Company funded one
additional B-Note investment for $9.9 million and three B-Note investments with
a face amount of $77.7 million paid off in full, bringing the portfolio of
B-Note investments at August 31, 2001 to $183.5 million. These investments
contributed approximately $6.0 million and $19.6 million to interest income for
the three- and nine-month periods ended August 31, 2001, respectively, compared
to $5.9 million and $15.3 million for the comparable periods in 2000. For the
nine-month period ended August 31, 2001, interest income also included $4.2
million from the early payoff of a discounted mortgage loan in the first quarter
of 2001.
Equity in earnings of partnerships decreased $1.5 million and $14.1 million for
the three- and nine-month periods ending August 31, 2001, respectively, compared
to the same periods in 2000. The decrease for the three-month period was due to
a decrease in earnings from the Company's domestic discount loan portfolios
because most of the assets in those portfolios had been liquidated. The decrease
for the nine-month period was partly due to a decrease in earnings from the
Company's domestic discount loan portfolios and partly due to a decrease in
earnings from the Company's Japanese discount loan portfolios. The Company sold
its remaining interests in its Japanese discount loan portfolios in April 2000.
Gains on sales of partnership interests of $20.3 million for the nine-month
period ended August 31, 2000 represents the gain on sale of the Company's
interests in its Japanese discount loan portfolios.
Management fees decreased to $0.8 million and $3.5 million for the three- and
nine-month periods ended August 31, 2001, respectively, from $3.9 million and
$4.4 million for the same periods in 2000. The decreases were due to a fee
received from one of the domestic discount loan portfolios in the third quarter
of 2000.
Operating expenses decreased to $1.2 million and $3.6 million for the three- and
nine-month periods ended August 31, 2001, respectively, from $1.6 million and
$5.2 million for the same periods in 2000, primarily due to the sale of the
Company's interests in its Japanese discount loan portfolios in April 2000,
partially offset by increased general and administrative expenses to support the
growth in the Company's mortgage loan portfolio.
Real estate securities
Three Months Ended Nine Months Ended
August 31, August 31,
----------------------------- -----------------------------
(In thousands) 2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest income $ 34,441 29,723 98,184 81,910
Equity in earnings of partnerships 10,342 6,665 33,054 27,876
Gains on sales of securities 4,842 13,134 4,842 13,134
Management and servicing fees 6,340 3,135 18,869 11,832
Other, net (660) - (1,312) -
----------- ----------- ----------- -----------
Total revenues 55,305 52,657 153,637 134,752
----------- ----------- ----------- -----------
Operating expenses 3,731 2,413 10,910 7,478
Minority interests (204) 252 224 724
----------- ----------- ----------- -----------
Total operating expenses (1) 3,527 2,665 11,134 8,202
----------- ----------- ----------- -----------
Operating earnings $ 51,778 49,992 142,503 126,550
=========== =========== =========== ===========
Balance sheet data:
Investment securities $ 952,470 623,904 952,470 623,904
Investments in and advances to
partnerships 102,807 107,632 102,807 107,632
Other investments - 8,820 - 8,820
----------- ----------- ----------- -----------
Total segment assets $ 1,055,277 740,356 1,055,277 740,356
=========== =========== =========== ===========
(1) Operating expenses do not include interest expense.
Real estate securities include unrated and non-investment grade rated
subordinated CMBS which are collateralized by pools of mortgage loans on
commercial and multi-family residential real estate properties. It also includes
the Company's investment in Madison Square Company LLC ("Madison"), a limited
liability company that invests in CMBS, as well as investments in entities in
related businesses. Total revenues from real estate securities include interest
income, equity in the earnings of Madison, gains on sales of securities,
servicing fees from acting as special servicer for CMBS transactions and fees
earned from managing Madison. Operating expenses include the
overhead associated with managing the investments and Madison, and costs of the
special servicing responsibilities.
Three months and nine months ended August 31, 2001 compared to three months and
nine months ended August 31, 2000
Overall, operating earnings from real estate securities increased to $51.8
million and $142.5 million for the three- and nine-month periods ended August
31, 2001, respectively, from $50.0 million and $126.6 million for the same
periods in 2000. Earnings were higher for both periods primarily due to (i)
increased interest income and fees resulting from the growth of the Company's
CMBS portfolio and (ii) greater recognition of earnings due to actual CMBS
performance continuing to exceed original expectations. These increases were
partially offset by (i) a decrease in gains on sales of investment securities
and (ii) higher operating expenses.
In recording CMBS interest income, the Company recognizes interest received plus
the amortization of the difference between the carrying value and the face
amount of the securities to achieve a level yield. To date, this has resulted in
less recognition of interest income than the amount of interest actually
received. The excess interest received is applied to reduce the Company's CMBS
investment. The Company's initial and ongoing estimates of its returns on CMBS
investments are based on a number of assumptions that are subject to various
business and economic conditions, the most significant of which is the timing
and magnitude of credit losses on the underlying mortgages.
The Company has already begun to receive principal payments from twelve of its
securities, and four have matured entirely. Actual loss experience to date,
particularly for older transactions (3 to 8 years in age), is significantly
lower than originally underwritten by the Company. Therefore, changes to
original estimated yields have resulted, and the Company believes they should
continue to result, in improved earnings from these transactions. The Company
believes these improvements resulted from its success in managing and working
out the underlying loans and strong real estate fundamentals. However, the
positive experience on these older transactions will not necessarily translate
into yield improvements on newer investments.
During the quarter ended August 31, 2001, the Company acquired $241.9 million
face amount of fixed-rate CMBS for $117.4 million and $46.0 million face amount
of short-term floating-rate CMBS for $40.6 million. The following is a summary
of the CMBS portfolio held by the Company at August 31, 2001:
Weighted Weighted Weighted
Average Average Average
Face Interest Book % of Face Cash Book
Amount Rate Value Amount Yield (1) Yield (2)
------------------------------------------------------ ----------- -----------
(In thousands, except percentages)
Fixed-rate
BB rated or above $ 374,666 6.78% $ 265,541 70.9% 9.6% 12.2%
B rated 561,768 6.51% 300,735 53.5% 11.8% 10.3%
Unrated 922,219 7.05% 214,854 23.3% 28.1% 32.1%
------------ ----- ------------ ----- ----- -----
Total 1,858,653 6.83% 781,130 42.0% 15.5% 16.9%
Floating-rate/
short-term
BB rated or above $ 12,789 5.11% $ 11,201 87.6% 5.8% 9.5%
B rated 22,413 9.88% 20,783 92.7% 10.7% 13.4%
Unrated 108,609 12.97% 88,982 81.9% 15.8% 13.7%
------------ ----- ------------ ----- ----- -----
Total 143,811 11.79% 120,966 84.1% 14.4% 13.3%
Unrealized gains
on securities - 50,374
------------ ------------
Total CMBS
portfolio (3) $ 2,002,464 7.21% $ 952,470 47.6% 14.5% 15.5%
============ ============
____________________________
(1) Cash yield is determined by annualizing the actual cash received during the
month of August 2001, and dividing the result by the book value at August 31,
2001.
(2) Book yield is determined by annualizing the interest income for the month of
August 2001, and dividing the result by the book value at August 31, 2001 .
(3) This table excludes CMBS owned through non-consolidated partnerships.
Equity in earnings of partnerships primarily represents the Company's
participation in Madison, which was formed in April 1999. The venture owns
approximately $1.5 billion of real estate related securities. The Company's
investment in the venture at August 31, 2001 was $102.8 million, representing a
25.8% ownership interest. In addition to its investment in the venture, the
Company maintains a significant ongoing role in the venture, for which it earns
fees, both as the special servicer for the purchased CMBS transactions and as
the provider of management services. Madison contributed $10.3 million and $33.1
million of equity in earnings of partnerships to the real estate securities line
of business for the three- and nine-month periods ended August 31, 2001,
respectively.
The $4.8 million gain on sale of investment securities recognized during the
third quarter of 2001 primarily represents the sale of six investment grade CMBS
securities for $38.3 million. Due to the excellent performance of these
investments and the Company's efforts as special servicer, the rating agencies
upgraded these bonds from non-investment grade levels. These bonds, which were
originally purchased at substantial discounts, were sold at or above par. During
the third quarter of 2000, the Company recognized a gain on sale of investment
securities of $13.1 million for the sale of its remaining 417,000 shares of
common stock in Bank United Corporation.
Management and servicing fees increased to $6.3 million and $18.9 million for
the three- and nine-month periods ended August 31, 2001, respectively, from $3.1
million and $11.8 million for the same periods in 2000. This increase was
primarily attributable to an increase in the number of CMBS mortgage pools (81
at August 31, 2001 versus 63 at August 31, 2000) for which the Company acts as
special servicer.
Operating expenses increased to $3.7 million and $10.9 million for the three-
and nine-month periods ended August 31, 2001, respectively, from $2.4 million
and $7.5 million for the same periods in 2000. This increase is primarily due to
increased personnel and out-of-pocket expenses directly related to the growth of
the Company's CMBS portfolio.
Corporate, Other, Interest and Income Tax Expenses
Three months and nine months ended August 31, 2001 compared to three months and
nine months ended August 31, 2000
Corporate and other operating expenses decreased to $6.7 million and $17.9
million for the three- and nine-month periods ended August 31, 2001,
respectively, from $7.2 million and $18.7 million for the same periods in 2000.
Interest expense decreased to $27.0 million and $86.3 million for the three- and
nine-month periods ended August 31, 2001, respectively, from $32.1 million and
$88.5 million for the same periods in 2000. These decreases were primarily due
to a decrease in interest rates and reduced borrowing levels. The Company's
mortgage notes and other debts payable decreased to $1.45 billion at August 31,
2001 from $1.55 billion at August 31, 2000.
Income tax expense increased to $17.1 million and $52.5 million for the three-
and nine-month periods ended August 31, 2001, respectively, from $14.9 million
and $39.5 million for the same periods in 2000, primarily due to an increase in
pre-tax earnings, and to a lesser extent, a lower level of Low-Income Housing
Tax Credits utilized. The Company's effective tax rate was 33% and 35% for the
three- and nine-month periods ended August 31, 2001, respectively, compared to
31% for the same periods in 2000.
2. LIQUIDITY AND FINANCIAL RESOURCES
The Company's operating activities used $5.0 million of cash during the nine
months ended August 31, 2001, and provided $13.8 million of cash during the nine
months ended August 31, 2000. This increase in cash used in operating activities
is primarily due to a lower decrease in mortgage loans held for sale and a
smaller increase in accounts payable and other liabilities. This increase in
cash used was offset by a decrease in restricted cash resulting from less cash
held in escrow related to the sale of operating properties, a lower increase in
other assets and an increase in cash flow from net earnings of $13.6 million,
after adjusting for the effects of non-cash items, whose contributions to cash
flow are reflected in cash from investing activities below.
The Company's investing activities provided $30.0 million of cash during the
nine months ended August 31, 2001, and used $28.5 million of cash during the
same period in 2000. This increase in cash provided by investing activities is
primarily due to fewer acquisitions of and less development spending on
properties, more proceeds from sales of operating properties and land
investments, increased principal collections on mortgage loans and more proceeds
from the syndication of affordable housing partnership interests. These
increases were offset by additional purchases of investment securities, fewer
proceeds from the sale of partnership interests and an increase in investments
in and advances to partnerships.
The Company's financing activities used $14.3 million of cash during the nine
months ended August 31, 2001, and provided $33.7 million of cash during the same
period in 2000. This increase in cash used in financing activities is primarily
due to $144.3 million more of net payments made under the Company's repurchase
agreements and revolving credit lines and $66.6 million more of principal
payments made on mortgage notes and other debt. These increases in cash used
were offset by $133.8 million more of proceeds received from borrowings under
the Company's mortgage notes and other debts payable and $27.9 million less in
purchases of treasury stock.
The Company continues to diversify its capital structure and to manage its debt
position with a combination of short-, medium- and long-term financings, with a
goal of properly matching the maturities of its debt with the expected lives of
its assets.
At August 31, 2001, the Company had approximately $802 million of available
liquidity, which included approximately $689 million of cash and availability
under credit facilities, and approximately $113 million of committed project
level term financing.
The Company has a $350 million unsecured revolving credit facility, which
matures in July 2004 assuming a one-year extension option is exercised. At
August 31, 2001, $0 was outstanding under this facility, although the Company
had issued and outstanding $31.3 million of standby letters of credit utilizing
the facility.
The Company has various secured revolving lines of credit with an aggregate
commitment of $364.6 million, of which $151.5 million was outstanding at August
31, 2001. These lines are collateralized by CMBS and mortgage loans and mature
through January 2006.
The Company has financed some of its purchases of CMBS under reverse repurchase
obligation facilities ("repos"). The repo agreements contain provisions which
may require the Company to repay amounts or post additional collateral prior to
the scheduled maturity dates if the market values of the bonds which
collateralize them significantly decline. At August 31, 2001, the Company had
three repo lines through which it financed selected CMBS. The first facility had
a commitment of $80.4 million, of which $44.9 million was outstanding, and is
required to be paid in full by June 2004. The second facility had a commitment
of $50.0 million of which $0 was outstanding. This facility matures in June
2002. The third facility is a $150 million non-recourse facility, which matures
in March 2003, and had an outstanding balance of $101.5 million at August 31,
2001. Additionally, the Company has received seller financing in the form of
term repos for nine specific CMBS transactions. These agreements had an
aggregate commitment of $138.2 million with an outstanding balance of $138.2
million at August 31, 2001 and expire through August 2004.
Because the Company borrows significant sums in connection with its activities,
the Company could be adversely affected by reluctance of lenders to make loans
to companies in real estate related businesses. Difficulty obtaining financing
can reduce the Company's ability to take advantage of investment opportunities.
In February 2001, the Company issued $150 million of long-term unsecured senior
subordinated notes, bringing the Company's total long-term unsecured senior
subordinated notes to $450 million. The $150 million of notes bear interest at
10.5% and are due in January 2009. The Company used the proceeds from the
issuance to pay down debt, primarily secured credit facilities, and for general
corporate purposes.
During the second quarter of 2001, Standard and Poor's upgraded the Company's
senior unsecured credit rating to BB from BB- and the Company's senior
subordinated note rating to B+ from B.
At August 31, 2001, the Company had scheduled maturities on existing debt of
$261.3 million through August 31, 2002, assuming the Company takes advantage of
extensions which are exercisable at the Company's option. The Company's ability
to make scheduled payments of principal or interest on or to refinance this
indebtedness depends on its future performance, which to a certain extent, is
subject to general economic, financial, competitive and other factors beyond the
Company's control. The Company believes its borrowing availability under
existing credit facilities, its operating cash flow and unencumbered asset
values, and its ability to obtain new borrowings and/or raise new capital,
should provide the funds necessary to meet its working capital requirements,
debt service and maturities and short- and long-term needs based upon currently
anticipated levels of growth. However, limitations on access to financing
constrain the Company's ability to take advantage of opportunities which might
lead to more significant growth.
Approximately 63% of the Company's existing indebtedness bears interest at
variable rates. However, most of the Company's investments generate interest or
rental income at essentially
fixed rates. The Company has entered into derivative financial instruments to
manage its interest costs and hedge against risks associated with changing
interest rates on its debt portfolio. At August 31, 2001, 32% of the Company's
variable-rate debt had been swapped to fixed rates and 48% was match-funded
against floating-rate assets. After considering the variable-rate debt that had
been swapped or was match-funded, 12% of the Company's debt remained variable-
rate and 88% of the debt was fixed-rate or match-funded. As of August 31, 2001,
the Company estimates that a 100 basis point change in LIBOR would impact net
earnings by $0.4 million and earnings per share by approximately 0.3% of the
Company's 2001 earnings per share goal of $3.70 to $3.85.
The weighted average interest rate on outstanding debt, after giving
consideration to the interest rate swap agreements mentioned above, at August
31, 2001 and August 31, 2000, was 7.6% and 8.5%, respectively.
In December 2000, the Company purchased 300,000 shares of its common stock,
bringing the total purchases to date under the Company's buy-back program to
3,244,100 shares. This represents 59% of the Company's repurchase authorization
and over 9% of the Company's total stock outstanding when the buy-back program
began. At the end of the third quarter, the Company had authorization under its
buy-back program to purchase an additional 2,255,900 shares.
3. NEW ACCOUNTING PRONOUNCEMENTS
Information about new accounting pronouncements appears in Note 3 to the
unaudited consolidated condensed financial statements in Item 1.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not subject to any legal proceedings other than suits in the
ordinary course of its business, most of which are covered by insurance. The
Company believes these suits will not, in the aggregate, have a material adverse
effect upon the Company.
Items 2-5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements 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:
Signature and Title Date
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/s/ Shelly Rubin October 15, 2001
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Shelly Rubin
Chief Financial Officer (Principal
Financial Officer)