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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 May 31, 2002
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 24,861,634
Class B Common 9,786,568
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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) May 31, November 30,
2002 2001
---------------- -------------
Assets
------
Cash and cash equivalents $ 10,334 6,578
Restricted cash 57,343 81,955
Investment securities:
Investment securities pledged to creditors which can be repledged or
sold by creditors 770,986 719,605
Other investment securities 584,088 495,516
---------------- -------------
Total investment securities 1,355,074 1,215,121
Mortgage loans, net 355,054 331,517
Operating properties and equipment, net 752,684 719,662
Land held for investment 45,072 42,229
Investments in unconsolidated partnerships 417,879 352,142
Other assets 91,409 87,443
---------------- -------------
Total assets $ 3,084,849 2,836,647
================ =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Accounts payable $ 11,207 20,914
Accrued expenses and other liabilities 218,173 253,669
Mortgage notes and other debts payable 1,675,373 1,417,207
---------------- -------------
Total liabilities 1,904,753 1,691,790
---------------- -------------
Minority interests 25,589 25,688
---------------- -------------
Commitments and contingent liabilities (Note 3)
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 24,862 and 24,445
shares issued and outstanding in 2002 and 2001, respectively 2,486 2,444
Class B common stock, $.10 par value, 40,000 shares authorized, 9,786 and
9,949 shares issued and outstanding in 2002 and 2001, respectively 979 995
Additional paid-in capital 511,331 513,977
Retained earnings 463,565 404,611
Unamortized value of restricted stock grants (8,675) (10,273)
Accumulated other comprehensive earnings 184,821 207,415
---------------- -------------
Total stockholders' equity 1,154,507 1,119,169
---------------- -------------
Total liabilities and stockholders' equity $ 3,084,849 2,836,647
================ =============
See accompanying notes to unaudited consolidated condensed financial statements.
2
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Earnings
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
(In thousands, except per share amounts) May 31, May 31,
----------------------- ----------------------
2002 2001 2002 2001
----------- --------- --------- --------
Revenues
Rental income $ 29,037 29,512 54,190 59,977
Equity in earnings of unconsolidated partnerships 10,373 12,159 22,350 29,501
Interest income 47,736 44,920 92,797 91,104
Gains on sales of:
Real estate 16,443 35,392 24,144 43,871
Investment securities - - 1,608 -
Management and servicing fees 7,561 8,264 18,283 17,440
Other, net (752) (250) (660) (604)
----------- --------- --------- --------
Total revenues 110,398 129,997 212,712 241,289
----------- --------- --------- --------
Costs and expenses
Cost of rental operations 13,855 15,022 26,066 30,501
General and administrative 18,466 18,955 37,019 36,702
Depreciation 6,224 6,549 12,263 13,374
Minority interests 449 849 980 1,692
----------- --------- --------- --------
Total costs and expenses 38,994 41,375 76,328 82,269
----------- --------- --------- --------
Operating earnings 71,404 88,622 136,384 159,020
Interest expense 24,746 29,136 47,800 59,285
----------- --------- --------- --------
Earnings before income taxes 46,658 59,486 88,584 99,735
Income taxes 15,164 21,112 28,790 35,396
----------- --------- --------- --------
Net earnings $ 31,494 38,374 59,794 64,339
=========== ========= ========= ========
Weighted average shares outstanding:
Basic 33,913 33,356 33,803 33,232
=========== ========= ========= ========
Diluted 35,129 34,895 35,110 34,825
=========== ========= ========= ========
Net earnings per share:
Basic $ 0.93 1.15 1.77 1.94
=========== ========= ========= ========
Diluted $ 0.90 1.10 1.70 1.85
=========== ========= ========= ========
Dividends declared per share:
Common stock $ 0.0125 0.0125 0.0125 0.0125
=========== ========= ========= ========
Class B common stock $ 0.01125 0.01125 0.01125 0.01125
=========== ========= ========= ========
See accompanying notes to unaudited consolidated condensed financial statements.
3
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Comprehensive earnings
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
May 31, May 31,
------------------------- -----------------------
(In thousands) 2002 2001 2002 2001
------------ ---------- ---------- ----------
Net earnings $ 31,494 38,374 59,794 64,339
---------- -------- -------- -------
Other comprehensive earnings (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities, net and
other (5,960) (6,152) (21,452) 8,855
Unrealized gain (loss) on derivative financial instruments (407) (660) 227 (3,879)
Transition adjustment related to accounting for derivative
financial instruments and hedging activities - - - 4,388
Reclassification adjustment for (gains) losses included in net
earnings (1,745) 2,408 (1,369) (4,687)
---------- -------- -------- -------
Other comprehensive earnings (loss), net of tax (8,112) (4,404) (22,594) 4,677
---------- -------- -------- -------
Comprehensive earnings $ 23,382 33,970 37,200 69,016
========== ======== ======== =======
See accompanying notes to unaudited consolidated condensed financial statements.
4
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In thousands) Six Months Ended May 31,
-------------------------------
2002 2001
------------- -----------
Cash flows from operating activities:
Net earnings $ 59,794 64,339
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation 12,263 13,374
Minority interests 980 1,692
Accretion of discount on CMBS and mortgage loans (25,143) (22,847)
Amortization of deferred costs 3,103 2,738
Equity in earnings of unconsolidated partnerships (22,350) (29,501)
Gains on sales of real estate (24,144) (43,871)
Gains on sales of investment securities (1,608) -
Losses on hedging activities 708 652
Changes in assets and liabilities:
Decrease (increase) in restricted cash 24,612 (9,983)
Increase in other assets (5,740) (20,491)
(Decrease) increase in accounts payable and accrued liabilities (27,426) 527
--------- --------
Net cash used in operating activities (4,951) (43,371)
--------- --------
Cash flows from investing activities:
Operating properties and equipment
Additions (77,175) (86,773)
Sales 62,686 110,254
Land held for investment
Additions (26,824) (3,700)
Sales 32,369 23,112
Investments in unconsolidated partnerships (96,701) (46,923)
Proceeds from sales of unconsolidated partnership interests 4,829 -
Distributions from unconsolidated partnerships 46,584 66,743
Purchase of mortgage loans held for investment (43,224) (16,263)
Proceeds from mortgage loans held for investment 54,322 34,749
Purchase of investment securities (115,949) (89,173)
Proceeds from principal collections on and sales of investment securities 36,343 35,912
Interest received on CMBS in excess of income recognized 11,296 11,766
Syndication of affordable housing communities - 15,198
--------- --------
Net cash (used in) provided by investing activities (111,444) 54,902
--------- --------
Cash flows from financing activities:
Proceeds from stock option exercises 2,750 1,470
Purchase of treasury stock (5,246) (6,150)
Payment of dividends (839) (829)
Net borrowings (payments) under repurchase agreements and revolving credit lines 113,283 (199,954)
Mortgage notes and other debts payable:
Proceeds from borrowings 68,127 290,325
Principal payments (57,924) (80,333)
--------- --------
Net cash provided by financing activities 120,151 4,529
--------- --------
Net increase in cash and cash equivalents 3,756 16,060
Cash and cash equivalents at beginning of period 6,578 1,986
--------- --------
Cash and cash equivalents at end of period $ 10,334 18,046
========= ========
(Continued)
5
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows-continued
(Unaudited)
Six Months Ended May 31,
-----------------------------
(In thousands) 2002 2001
----------- ------------
Supplemental disclosure of non-cash investing and financing activities:
Purchases of investment securities financed by seller $ 85,382 28,508
Purchases of mortgage loans financed by seller $ 26,625 40,224
Supplemental disclosure of non-cash transfers:
Transfer of land held for investment to operating properties $ - 2,323
Transfer from investment securities to mortgage loans $ 4,310 -
Transfer from other assets to investments in unconsolidated partnerships $ 3,691 -
Supplemental disclosure of cash flow information:
Purchase of partnership interest and consolidation of entity previously
accounted for under the equity method:
Operating properties $ 27,560 -
Other assets 4,119 -
Mortgage notes and other debts payable (19,801) -
Investments in unconsolidated partnerships (3,741) -
--------- --------
Cash paid $ 8,137 -
========= ========
See accompanying notes to unaudited consolidated condensed financial statements.
6
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 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 non-controlling 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 in
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, 2001 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 the fair presentation of the
accompanying unaudited consolidated condensed financial statements have been
made.
2. Earnings Per Share
The following reconciles the numerator and denominator of the basic and diluted
earnings per share calculations for the three and six months ended May 31, 2002
and 2001:
Three Months Ended Six Months Ended
May 31, May 31,
----------------------- -----------------------
(In thousands, except per share amounts) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator
Numerator for basic and diluted earnings per
share - net earnings $ 31,494 38,374 59,794 64,339
========== ========== ========== ==========
Denominator
Denominator for basic earnings per share -
weighted average shares 33,913 33,356 33,803 33,232
Effect of dilutive securities
Stock option grants 528 659 565 715
Restricted stock grants 663 880 720 878
Stock purchase plan and other 25 - 22 -
---------- ---------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 35,129 34,895 35,110 34,825
========== ========== ========== ==========
Basic earnings per share $ 0.93 1.15 1.77 1.94
========== ========== ========== ==========
Diluted earnings per share $ 0.90 1.10 1.70 1.85
========== ========== ========== ==========
7
3. Commitments and Contingencies
The Company is committed under various standby letters of credit or other
agreements to provide certain guarantees, which are not otherwise reflected in
the financial statements. Outstanding standby letters of credit, guarantees,
performance bonds and other commercial commitments under these arrangements
totaled approximately $302.3 million at May 31, 2002. They include a letter of
credit of $55.3 million, which is collateralized by short-term investment
securities included in restricted cash on the Company's unaudited consolidated
condensed balance sheet. Subsequent to the quarter ended May 31, 2002, this
letter of credit was released. Due to this release, restricted cash will be
reclassified to unrestricted cash.
4. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires 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. 142 is effective for the fiscal year ending November 2003
and the interim periods within fiscal year 2003. The adoption of SFAS No. 142 is
not expected to have a material effect on the Company's results of operations or
financial position as the Company has no goodwill on its balance sheet.
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. Upon initial recognition of a liability for an asset retirement
obligation, the Company must capitalize an asset retirement cost by increasing
the carrying amount of the related long-lived asset by the same amount as the
liability. That asset retirement cost is then subsequently allocated to expense
using a systematic and rational method over its useful life. 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.
The adoption of SFAS No. 143 is not expected to have a material effect on the
Company's results of operations or financial position.
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 Accounting Practices Bulletin 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 Accounting
Research Bulletin 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 the interim periods within fiscal 2003, with early application
encouraged. The provisions of this statement generally are to be applied
prospectively. The Company has determined that adoption of this statement will
not have a material impact on the Company's results of operations. It may,
however, have an impact on the presentation of the financial position and
related operating results of certain Company assets.
8
In December 2001, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 01-6, "Accounting by Certain Entities (Including Entities
With Trade Receivables) That Lend to or Finance the Activities of Others." This
SOP clarifies that accounting and financial reporting practices for lending and
financing activities should be the same regardless of the type of entity
engaging in those activities. Changes in accounting and financial reporting
required by this SOP are to be applied prospectively and will be effective for
the fiscal year ending November 30, 2003, and the interim periods within fiscal
2003. The Company does not expect the adoption of SOP 01-6 to have a material
effect on the Company's results of operations or financial position.
5. Reclassifications
Certain reclassifications have been made to the prior year consolidated
condensed financial statements to conform to the current period presentation.
6. Subsequent Event
Subsequent to the end of the quarter, the Company transferred non-investment
grade commercial mortgage backed securities ("CMBS") with a face amount of
approximately $800 million to a bankruptcy remote, qualified special purpose
entity ("QSPE"). These CMBS were securitized into various classes of
non-recourse, fixed- and floating-rate notes, approximately $416 million of
which was investment grade, and preferred shares of the QSPE. The Company sold
all of the investment grade notes to unrelated third parties for net proceeds of
approximately $402 million. The proceeds were used to repay short-term debt, the
majority of which can be re-borrowed. In accordance with the provisions of SFAS
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the Company expects to recognize a gain on the
sale of the senior notes in the Company's third quarter. The Company has
retained interests, including non-investment grade fixed-rate notes and the
preferred shares, with a face amount of approximately $384 million, all of which
are subordinate to the interests sold.
9
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.
GENERALLY, THE WORDS "BELIEVE," "EXPECT," "INTEND," "ANTICIPATE," "WILL," "MAY"
AND SIMILAR EXPRESSIONS IDENTIFY FORWARD LOOKING STATEMENTS. 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, (V)
CHANGES IN THE MARKET FOR VARIOUS TYPES OF REAL ESTATE BASED SECURITIES, (VI)
CHANGES IN AVAILABILITY OF CAPITAL OR THE TERMS ON WHICH IT IS AVAILABLE, (VII)
CHANGES IN AVAILABILITY OF QUALIFIED PERSONNEL AND (VIII) CHANGES IN GOVERNMENT
REGULATIONS, INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL REGULATIONS. SEE THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED NOVEMBER 30, 2001, 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 properties, (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 under-performing
and non-performing loans). For the following discussion, these businesses are
grouped as follows: (a) real estate properties, (b) real estate loans and (c)
real estate securities.
10
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 six months ended
May 31, 2002 and 2001 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 Six Months Ended
May 31, May 31,
-------------------------- --------------------------
(In thousands) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues
Real estate properties $ 55,760 67,993 92,832 112,620
Real estate loans 10,089 11,007 21,598 30,337
Real estate securities 44,549 50,997 98,282 98,332
----------- ----------- ----------- -----------
Total revenues 110,398 129,997 212,712 241,289
----------- ----------- ----------- -----------
Operating expenses
Real estate properties 27,152 29,816 52,392 59,760
Real estate loans 1,464 1,917 3,127 3,688
Real estate securities 4,542 4,034 9,081 7,607
Corporate and other 5,836 5,608 11,728 11,214
----------- ----------- ----------- -----------
Total operating expenses 38,994 41,375 76,328 82,269
----------- ----------- ----------- -----------
Operating earnings
Real estate properties 28,608 38,177 40,440 52,860
Real estate loans 8,625 9,090 18,471 26,649
Real estate securities 40,007 46,963 89,201 90,725
Corporate and other (5,836) (5,608) (11,728) (11,214)
----------- ----------- ----------- -----------
Total operating earnings 71,404 88,622 136,384 159,020
Interest expense 24,746 29,136 47,800 59,285
Income tax expense 15,164 21,112 28,790 35,396
----------- ----------- ----------- -----------
Net earnings $ 31,494 38,374 59,794 64,339
=========== =========== =========== ===========
Three months and six months ended May 31, 2002 compared to three months and six
months ended May 31, 2001
The Company reported net earnings of $31.5 million and $59.8 million for the
three- and six-month periods ended May 31, 2002, respectively, compared to $38.4
million and $64.3 million for the same periods in 2001. The year-over-year
decrease in net earnings for both the quarter and the six months ended May 31,
2002 is primarily attributable to (i) a decrease in gains on sales of operating
properties, (ii) a decline in equity in earnings of unconsolidated partnerships
within the real estate securities segment and (iii) a decrease in interest
income within the real estate loan segment primarily from lower interest rates
on the Company's floating-rate loans. These decreases were offset somewhat by
(i) a decrease in interest expense due primarily to lower interest rates, (ii)
an increase in interest income from the Company's growing CMBS portfolio, (iii)
an increase in equity in earnings of unconsolidated partnerships within the real
estate property segment, and (iv) a decrease in income tax expense.
Consistent with its strategic plan, over the past two years, LNR has remained
balance sheet focused. The Company has been methodically diversifying its
investments in terms of property type, geography and position in the capital
structure, while recycling operating cash flow and proceeds from the sale of
matured assets to enhance its financial position.
11
As reported in previous quarters, the Company elected to reduce the pace of new
investing towards the latter part of 2001, opting instead for a strategy of
higher long-term earnings growth versus less compelling short-term results. As
planned, the Company more recently has been actively identifying and acquiring
new assets. Additionally, the Company has been shifting its new investment
dollars from properties into CMBS and B-notes because of the greater
risk-adjusted returns and because of the Company's unique position in the
marketplace. Partly as a result of this shift in investment strategy into higher
net margin assets, partly due to reduced income on floating-rate assets, and
partly due to the timing of asset sales, total revenues declined 15% and 12%
during the three- and six-month periods ended May 31, 2002, compared to the same
periods in the prior year, respectively.
Asset sales fluctuate from quarter to quarter and come from a variety of
sources, including wholly owned real estate assets, real estate assets owned by
unconsolidated partnerships or sales of partnership interests in connection with
the syndication of tax credits in the affordable housing business. Gains from
sales activity in the three- and six-month periods ended May 31, 2002 amounted
to $16.4 million ($0.32 per share diluted) and $25.8 million ($0.50 per share
diluted), respectively. In the three- and six-month periods ended May 31, 2001,
revenues included $35.4 million ($0.65 per share diluted) and $43.9 million
($0.81 per share diluted) of gains, respectively.
While lower interest rates on floating-rate assets impact revenues, these assets
are match-funded with floating-rate debt, and therefore have only a minor impact
on bottom-line earnings. Even without accounting for any impact of lower
interest rates, after backing out the gains from asset sales, and netting costs
of rental operations from rental income, total net revenues in the three- and
six-month periods ending May 31, 2002 were $80.1 million and $160.9 million
compared with $79.6 million and $166.9 million for the same periods in the prior
year, respectively.
12
Real estate properties
Three Months Ended Six Months Ended
May 31, May 31,
-------------------------------- --------------------------------
(In thousands) 2002 2001 2002 2001
-------------- -------------- -------------- --------------
Rental income $ 29,037 29,512 54,190 59,977
Equity in earnings of unconsolidated
partnerships 6,809 1,478 9,973 5,601
Interest income 1,346 574 1,417 1,036
Gains on sales of real estate 16,443 35,392 24,144 43,871
Management fees 2,120 1,037 3,103 2,135
Other, net 5 - 5 -
-------------- -------------- -------------- --------------
Total revenues 55,760 67,993 92,832 112,620
-------------- -------------- -------------- --------------
Cost of rental operations 13,855 15,022 26,066 30,501
Other operating expenses/(1)/ 7,052 8,220 13,967 15,853
Depreciation 6,224 6,549 12,263 13,374
Minority interests 21 25 96 32
-------------- -------------- -------------- --------------
Total operating expenses/(1)/ 27,152 29,816 52,392 59,760
-------------- -------------- -------------- --------------
Operating earnings $ 28,608 38,177 40,440 52,860
============== ============== ============== ==============
Balance sheet data:
Operating properties and equipment,
net $ 752,684 786,484 752,684 786,484
Land held for investment 45,072 41,607 45,072 41,607
Investments in unconsolidated
partnerships 296,954 245,797 296,954 245,797
Other assets 49,408 56,976 49,408 56,976
-------------- -------------- -------------- --------------
Total segment assets $ 1,144,118 1,130,864 1,144,118 1,130,864
============== ============== ============== =============
(1) Operating expenses do not include interest expense.
Real estate properties include rental apartment communities (market-rate and
affordable housing communities, substantially all of which qualify for
Low-Income Housing Tax Credits under Section 42 of the Internal Revenue Code),
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 partnerships that are either
consolidated or accounted for by the equity method, and therefore reflected on
the Company's balance sheet only as an investment in unconsolidated
partnerships. Real estate properties also include the Company's 50% interest in
Lennar Land Partners ("LLP"), an unconsolidated partnership accounted for under
the equity method, which is engaged in the acquisition, development and sale of
land. Total revenues from real estate properties include rental income from
consolidated operating properties, equity in earnings of unconsolidated
partnerships that own and operate real estate properties, gains on sales of
properties or interests in those unconsolidated partnerships and fees earned
from managing 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 some of the partnerships.
For the past two years, based on its overall view of the comparative returns in
the U.S. property markets, the Company has limited its new property acquisitions
in favor of adding value to its existing portfolio through development,
repositioning and leasing. While continuing to maintain this strategy, during
the quarter, the Company began to invest in real estate property in Europe
through a strategic relationship it formed with CDC Ixis Capital Markets
("ICM"). ICM is a subsidiary of Caisse-de Depots et Consignations of France, a
AAA-rated financial institution that is one of the largest investors in Europe.
At May 31, 2002, the Company's investment in unconsolidated partnerships in
Europe amounted to $64.5 million.
13
The Company's existing consolidated portfolio (including market-rate operating
properties and affordable housing communities) continues to mature and just
since year-end, the portion that is not yet stabilized has decreased from
approximately 58% to approximately 48%. As these additional properties came on
line, net operating income (rental income less cost of rental operations)
("NOI") in the second quarter of 2002 increased approximately 17% over the first
quarter of 2002 and approximately 44% over the fourth quarter of 2001. The
majority of the properties that are not yet stabilized are pre-leased, so the
Company anticipates that these properties will contribute to net operating
income as they come on line and tenants begin to pay rent.
Three months and six months ended May 31, 2002 compared to three months and six
months ended May 31, 2001
Overall operating earnings from real estate properties were $28.6 million and
$40.4 million for the three- and six-month periods ended May 31, 2002,
respectively, compared to $38.2 million and $52.9 million for the same periods
in 2001. These decreases were primarily due to lower gains on sales of operating
properties, partially offset by an increase in equity in earnings of
unconsolidated partnerships.
Gains on sales of real estate decreased by $18.9 million and $19.7 million for
the three- and six-month periods ended May 31, 2002, respectively, over the same
periods in 2001, reflecting a significant decrease in real estate property sales
activity during 2002. Gains on sales of real estate fluctuate from period to
period based on the timing of asset sales. Gains from sales activity in the
second quarter of 2002 were derived primarily from the sale of one office
complex, while gains from sales activity in the second quarter of 2001 were
derived primarily from the sale of eight stabilized operating properties. Gains
from sales activity for the six months ended May 31, 2002 were derived primarily
from the sale of one office complex and land, while gains from sales activity
for the six months ended May 31, 2001 were derived primarily from the sale of
the eight stabilized operating properties and land.
Equity in earnings of unconsolidated partnerships increased to $6.8 million and
$10.0 million for the three- and six-month periods ended May 31, 2002,
respectively, from $1.5 million and $5.6 million for the same periods in 2001.
These increases were primarily attributable to higher earnings from Lennar Land
Partners ("LLP"): a 50% owned partnership engaged in the acquisition,
development and sale of land. Equity in earnings from LLP may vary from period
to period depending upon, among other things, the timing of housing starts by
Lennar Corporation and other homebuilders. Lennar Corporation is the other
partner in and a purchaser of land from LLP.
Total rental income and cost of rental operations decreased to $29.0 million and
$13.9 million, respectively, for the three-month period ended May 31, 2002
compared to $29.5 million and $15.0 million, respectively, for the same period
in 2001. Property net operating income increased by 5%, or $0.7 million for the
three months ended May 31, 2002 compared to the same period in 2001. Total
rental income and cost of rental operations decreased to $54.2 million and $26.1
million, respectively, for the six-month period ended May 31, 2002 compared to
$60.0 million and $30.5 million, respectively, for the same period in 2001.
Property net operating income decreased by 5%, or $1.4 million for the six
months ended May 31, 2002 compared to the same period in 2001. The primary
factor contributing to the fluctuations in property net operating income for the
three- and six-month periods in 2002 compared to 2001 was the timing of sales of
stabilized properties relative to new stabilized properties coming on line. The
primary factor contributing to the increase in net operating income as a
percentage of rental income for the three- and six-month periods in 2002
compared to 2001 was a change in the mix of property types and leases.
14
Other operating expenses, which represent an allocation of salary, professional
and other administrative expenses, decreased to $7.1 million and $14.0 million
for the three- and six-month periods ended May 31, 2002, respectively, from $8.2
million and $15.9 million for the same periods in 2001. These decreases were due
to less administrative costs necessary to support the smaller portfolio of
properties under development or repositioning.
Management fees increased to $2.1 million and $3.1 million for the three- and
six-month periods ended May 31, 2002, respectively, compared to $1.0 million and
$2.1 million for the same periods in 2001. These increases were primarily due to
fees earned in the second quarter of 2002 from one of the Company's
partnerships.
The net book value of operating properties and equipment at May 31, 2002 and the
annualized net operating income for the six-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/(1)/ (NOI)/(2)/ Value
-----------------------------------------------------------------
Market-rate operating properties
Stabilized operating properties
Office $ 257,062 94% $ 33,146 13%
Retail 14,498 91% 2,051 14%
Industrial / warehouse 48,714 100% 6,611 14%
Ground leases 11,104 100% 2,152 19%
----------------------------- --------------------------------
Commercial 331,378 97% 43,960 13%
Hotel 15,403 52% 744 5%
----------------- --------------------------------
346,781 44,704 13%
----------------- ------------------
Under development or repositioning
Office 187,769 9,415
Retail 35,314 2,751
----------------- ------------------
Commercial 223,083 12,166
Multi-family 78,657 2,293
Hotel 29,859 892
----------------- ------------------
331,599 15,351
----------------- ------------------
Total market-rate operating properties 678,380 60,055
----------------- ------------------
Affordable housing communities
Stabilized 40,184 91% 4,540
Under development 28,981 -
----------------- ------------------
Total affordable housing communities 69,165 4,540
----------------- ------------------
Furniture, fixtures and equipment 5,139 -
----------------- ------------------
Total $ 752,684 $ 64,595
================= ==================
(1) Occupancy rate at May 31, 2002.
(2) Annualized NOI for purposes of this schedule is rental income less cost of
rental operations before commissions and non-operating expenses during the
six-month period ended May 31, 2002, multiplied by two.
15
As of May 31, 2002, approximately 51% of the Company's market-rate operating
properties, based on net book value, had reached stabilized occupancy levels and
were yielding in total 13% on net book value. 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 are generally
lower than for market-rate rentals. However, the Company receives its desired
yield from these investments after adding in (i) the impact of lower income
taxes as a result of the tax credits and other related tax deductions and (ii)
profits from sales of tax credits to others.
The net investment in the Company's affordable housing communities at May 31,
2002 is as follows:
(In thousands)
Operating properties $ 69,165
Investments in unconsolidated partnerships 82,789
Debt and other (56,032)
-----------
Net investment in affordable housing communities $ 95,922
===========
As of May 31, 2002, the Company had been awarded and held rights to
$133.7 million in gross tax credits, with approximately 61% 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 majority of the partnership interests in the affordable housing communities
and then using 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 has shifted its strategy away from
owning the majority of the partnership interests in the affordable housing
communities toward syndicating those interests. After such syndications, the
Company continues to hold small interests (typically ranging from 1% to 10%) in
the partnerships and continues to manage the communities, for which it earns
management fees. The Company expects to generate fee income and gains in future
years from such syndications. As a result, the Company expects its investment in
affordable housing communities, as well as the amount of tax credits it holds
and utilizes to reduce its tax rate, to decline during the remainder of 2002.
16
Real estate loans
Three Months Ended Six Months Ended
May 31, May 31,
------------------------------- ---------------------------
(In thousands) 2002 2001 2002 2001
------------- ----------- ----------- -----------
Interest income $ 9,695 10,794 19,401 26,325
Equity in earnings (losses) of
unconsolidated partnerships 111 (185) 1,226 1,188
Management fees 221 357 928 2,776
Other, net 62 41 43 48
----------- --------- --------- ---------
Total revenues 10,089 11,007 21,598 30,337
----------- --------- --------- ---------
Operating expenses/(1)/ 1,036 1,325 2,258 2,456
Minority interests 428 592 869 1,232
----------- --------- --------- ---------
Total operating expenses/(1)/ 1,464 1,917 3,127 3,688
----------- --------- --------- ---------
Operating earnings $ 8,625 9,090 18,471 26,649
=========== ========= ========= =========
Balance sheet data:
Mortgage loans, net $ 355,054 272,419 355,054 272,419
Other investments 55,327 52,348 55,327 52,348
Investments in unconsolidated
partnerships 8,574 14,015 8,574 14,015
Other assets 2,447 3,141 2,447 3,141
----------- --------- --------- ---------
Total segment assets $ 421,402 341,923 421,402 341,923
=========== ========= ========= =========
/(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 discount loan portfolio investments, owned primarily
through unconsolidated partnerships, and related loan workout operations. Total
revenues include interest income, equity in earnings of unconsolidated
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 six months ended May 31, 2002 compared to three months and six
months ended May 31, 2001
Overall operating earnings from real estate loans were $8.6 million and $18.5
million for the three- and six-month periods ended May 31, 2002, respectively,
compared to $9.1 million and $26.6 million for the same periods in 2001. These
decreases were primarily attributable to lower interest income and management
fees, despite a larger average real estate loan portfolio.
Interest income decreased to $9.7 million and $19.4 million for the three- and
six-month periods ended May 31, 2002, respectively, from $10.8 million and $26.3
million for the same periods in 2001. These decreases reflect lower interest
rates on floating-rate loans, offset in part by an increase in interest from a
higher average level of loan investments. The decrease for the six-month period
compared to the same period in 2001 also reflects $4.2 million of interest
income recognized in the first quarter of 2001 resulting from the payoff of two
loan investments, which had been acquired at a discount. The majority of the
Company's interest income from its real estate loan segment is earned on
investments in structured junior participations in high-quality short- to
medium-term variable-rate real estate loans ("B-notes"). Because these
floating-rate loans are match-funded with floating-rate debt, the reduction in
interest income due to declining interest
17
rates has virtually no impact on net earnings. To date, the Company has not
experienced any delinquencies in its B-note portfolio.
During the second quarter of 2002, the Company funded two additional B-note
investments for $32.7 million, bringing the total portfolio of B-note
investments at May 31, 2002 to $293.1 million.
Management fees decreased to $0.2 million and $0.9 million for the three- and
six-month periods ended May 31, 2002, respectively compared to $0.4 million and
$2.8 million for the same periods in 2001. The year-to-date decrease was
primarily due to fees earned in the first quarter of 2001 from the disposition
of assets in one of the Company's domestic discount loan portfolios.
Real estate securities
Three Months Ended Six Months Ended
May 31, May 31,
------------------------------- ---------------------------
(In thousands) 2002 2001 2002 2001
------------ ----------- ---------- ---------
Interest income $ 36,695 33,552 71,979 63,743
Equity in earnings of unconsolidated
partnerships 3,453 10,866 11,151 22,712
Gains on sales of investment
securities - - 1,608 -
Management and servicing fees 5,220 6,870 14,252 12,529
Other, net (819) (291) (708) (652)
------------ --------- --------- ---------
Total revenues 44,549 50,997 98,282 98,332
------------ --------- --------- ---------
Operating expenses/(1)/ 4,542 3,802 9,066 7,179
Minority interests - 232 15 428
------------ --------- --------- ---------
Total operating expenses/(1)/ 4,542 4,034 9,081 7,607
------------ --------- --------- ---------
Operating earnings $ 40,007 46,963 89,201 90,725
============ ========= ========= =========
Balance sheet data:
Investment securities $ 1,355,074 803,993 1,355,074 803,993
Investments in unconsolidated
partnerships 112,351 102,892 112,351 102,892
Other assets 27,946 35,432 27,946 35,432
------------ --------- --------- ---------
Total segment assets $ 1,495,371 942,317 1,495,371 942,317
============ ========= ========= =========
/(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 primarily 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.
18
Three months and six months ended May 31, 2002 compared to three months and six
months ended May 31, 2001
Overall operating earnings from real estate securities decreased to $40.0
million and $89.2 million for the three- and six-month periods ended May 31,
2002, respectively, from $47.0 million and $90.7 million for the same periods in
2001. These decreases were primarily due to a decline in equity in earnings of
unconsolidated partnerships and an increase in operating expenses, offset in
part by an increase in interest income.
Interest income from direct CMBS investments increased 9% and 13% to $36.7
million and $72.0 million for the three- and six-month periods ended May 31,
2002, respectively. These increases were primarily due to growth in the
Company's CMBS portfolio, as well as greater recognition of earnings as actual
CMBS performance continued to exceed original expectations. Not only is the
Company's CMBS portfolio continuing to perform better than original
expectations, but it is also performing better than the industry averages.
Delinquencies on the Company's CMBS conduit investments are running at
approximately one-third less than those shown in Standard & Poor's latest
industry report.
In recording CMBS interest income, the Company recognizes the amount by which
cash flows over the life of a security are expected to exceed the Company's
initial investment as interest income to achieve a level yield over the life of
the security. 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 cash flows from CMBS investments are based on a number of
assumptions that are subject to business and economic conditions, the most
significant of which is the timing and magnitude of credit losses on the
underlying mortgages.
The Company invests in subordinated classes of CMBS, and does not receive
principal payments until the principal of the senior classes of that issue is
paid in full. The Company is currently receiving principal payments from 11
classes of its CMBS securities, and an additional 21 classes have reached
economic maturity either through the collection of principal, liquidation of the
trust, or sale. 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 primarily from its success in managing and working out the
underlying loans and stable real estate fundamentals. However, the positive
experience on these older transactions does not necessarily mean there will be
similar yield improvements on newer investments.
During the quarter ended May 31, 2002, the Company acquired $325.7 million face
amount of fixed-rate CMBS for $158.3 million and $31.2 million face amount of
short-term floating-rate CMBS for $25.1 million. The following is a summary of
the CMBS portfolio held by the Company at May 31, 2002:
19
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 $ 489,067 6.57% $ 351,515 71.9% 9.2% 11.7%
B rated 623,745 6.50% 332,615 53.3% 11.6% 14.0%
Unrated 967,268 6.89% 218,571 22.6% 28.5% 26.6%
-------------------------- --------------------------------------------------------
Total 2,080,080 6.70% 902,701 43.4% 14.8% 16.2%
Floating-rate/short-term
BB rated or above $ 12,789 3.14% $ 11,573 90.5% 3.5% 7.5%
B rated 25,822 8.52% 24,618 95.3% 8.9% 11.9%
Unrated 132,096 13.68% 107,129 81.1% 16.9% 18.2%
-------------------------- --------------------------------------------------------
Total 170,707 12.06% 143,320 84.0% 14.4% 16.2%
Total amortized
cost 2,250,787 7.09% 1,046,021 46.5% 14.7% 16.2%
Excess of fair
value over
amortized cost - 309,053
-------------- --------------
Total CMBS
portfolio /(3)/ $ 2,250,787 $ 1,355,074
============== ==============
(1) Cash yield is determined by annualizing the actual cash received during the
month of May 2002, and dividing the result by the book value at May 31,
2002.
(2) Book yield is determined by annualizing the interest income for the month
of May 2002, and dividing the result by the book value at May 31, 2002.
(3) This table excludes CMBS owned through unconsolidated partnerships.
The Company's annualized cash yield on its fixed-rate CMBS portfolio is
approximately 15%. The cash yield on the unrated portion of this portfolio is
approximately 28%.
Equity in earnings of unconsolidated partnerships primarily represents the
Company's participation in Madison. The venture owns a $1.8 billion pool of CMBS
at May 31, 2002. The Company's investment in the venture at May 31, 2002 was
$106.1 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 $3.6 million and $11.6 million of equity in earnings of
unconsolidated partnerships to the real estate securities line of business for
the three- and six-month periods ended May 31, 2002, respectively, compared to
$10.9 million and $22.7 million for the same periods in 2001. The decrease in
earnings from Madison primarily resulted from lower interest income due to asset
pay downs, as well as the timing and amount of principal collections on one of
the larger securities owned by the venture.
At least in part through the Company's efforts as special servicer, the
underlying collateral in the Company's CMBS pools continues to perform at much
higher levels than originally anticipated. In recognition of this improvement,
the rating agencies continue to upgrade many of the Company's bond positions,
which increases their value. As a result, in the first quarter of 2002, the
Company sold three CMBS securities, which were originally purchased at
discounts, at or above par for a gain of $1.6 million. Gains on sales of
securities can fluctuate from period to period depending on the timing of asset
sales.
20
Operating expenses increased to $4.5 million and $9.1 million for the three- and
six-month periods ended May 31, 2002, respectively, from $3.8 million and $7.2
million for the same periods in 2001. These increases were primarily due to
increased personnel and out-of-pocket expenses directly related to the growth of
the Company's CMBS portfolio.
Corporate and Other, Interest and Income Tax Expenses
Three months and six months ended May 31, 2002 compared to three months and six
months ended May 31, 2001
Corporate and other operating expenses were $5.8 million and $11.7 million for
the three- and six-month periods ended May 31, 2002, respectively, compared to
$5.6 million and $11.2 million for the same periods in 2001, remaining
relatively flat year over year as the Company has grown.
Interest expense decreased to $24.7 million and $47.8 million for the three- and
six-month periods ended May 31, 2002, respectively, compared to $29.1 million
and $59.3 million for the same periods in 2001. These decreases were primarily
due to a decline in interest rates. The weighted average interest rate on
outstanding debt was 5.9% at May 31, 2002 compared to 7.7% at May 31, 2001.
Income tax expense decreased to $15.2 million and $28.8 million for the three-
and six-month periods ended May 31, 2002, respectively, from $21.1 million and
$35.4 million for the same periods in 2001. These decreases were attributable to
lower pre-tax income and, to a lesser extent, a lower effective tax rate.
2. LIQUIDITY AND FINANCIAL RESOURCES
The Company's operating activities used $5.0 million and $43.4 million of cash
during the six months ended May 31, 2002 and 2001, respectively. This decrease
in cash used for operating activities was primarily due to a decrease in
restricted cash, a lower increase in other assets, and higher net earnings after
adjusting for the effects of non-cash items, whose contributions to cash flow
are reflected in cash flow from investing activities. These decreases in cash
used were partly offset by a higher decrease in accounts payable and accrued
liabilities.
The Company's investing activities used $111.4 million of cash during the six
months ended May 31, 2002, and provided $54.9 million of cash during the same
period in 2001. This increase in cash used for investing activities is primarily
due to (i) a higher level of purchases of investment securities and mortgage
loans, (ii) a higher level of investment in unconsolidated partnership interests
primarily related to the Company's investment in Europe, (iii) more acquisitions
of land held for investment, (iv) less proceeds from the sale of operating
properties and the syndication of affordable housing partnership interests, and
(v) less distributions from unconsolidated partnerships. These increases in cash
used for investing activities were partly offset by a higher level of
collections from mortgage loans.
The Company's financing activities provided cash flows of $120.2 million and
$4.5 million during the six months ended May 31, 2002 and 2001, respectively.
This increase in cash provided by
21
financing activities is primarily due to increased net borrowings required to
fund a higher level of investing activity.
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 matching the maturities of its debt with the expected lives of its
assets.
At May 31, 2002, the Company had approximately $950 million of available
liquidity, which included approximately $891 million of cash and availability
under credit facilities, and approximately $59 million of committed project
level term financing.
The Company has a $350.0 million unsecured revolving credit facility, which
matures in July 2004 assuming a one-year extension option is exercised. At May
31, 2002, $155.0 million was outstanding under this facility, and the Company
had $28.2 million of outstanding standby letters of credit that used the
facility.
The Company has various secured revolving lines of credit with an aggregate
commitment of $355.0 million, of which $197.0 million was outstanding at May 31,
2002. 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") as well as other agreements which 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. Therefore, if the market
value of the Company's CMBS falls significantly, the Company could be required
to either pay down repos with cash flow the Company needs to operate and grow
its business, or to sell assets at a time when it may not be most appropriate
for the Company to do so to generate cash needed to repay repo obligations.
At May 31, 2002, the Company had four repo facilities through which it financed
selected CMBS. The first facility had a commitment and outstanding balance at
May 31, 2002 of $44.1 million and is required to be paid in full by June 2004.
The second facility had a commitment of $50.0 million, with no balance
outstanding at May 31, 2002, and matures in June 2003. The third facility is a
$150 million non-recourse facility, which matures in April 2005, and had an
outstanding balance of $61.0 million at May 31, 2002. The fourth facility is a
$100 million non-recourse facility, which matures in April 2007, and had an
outstanding balance of $29.0 million at May 31, 2002.
The Company also has a $430.0 million financing structured as a repo line with a
leading financial institution to finance the acquisition of securities and
loans. At May 31, 2002, there was $85.4 million outstanding under this facility.
This facility has limited recourse to the Company and matures in January 2006,
including a one-year extension option.
Additionally, the Company has received seller financing in the form of term
repos for eight specific CMBS transactions. These agreements had an aggregate
commitment of $96.6 million with an outstanding balance of $96.6 million at May
31, 2002 and expire through August 2004. The Company also has seller financing
in the form of term loans for three specific CMBS transactions which are
non-recourse to the Company but which contain similar provisions to a repo. The
loans had an outstanding balance of $27.8 million at May 31, 2002 and expire
through October 2002.
22
Because the Company borrows significant sums in connection with its activities,
the Company could be adversely affected by the reluctance of lenders to make
loans to companies in real estate related businesses. Difficulty obtaining
financing could reduce the Company's ability to take advantage of investment
opportunities.
At May 31, 2002, the Company had scheduled maturities on existing debt of $69.3
million through May 31, 2003, assuming the Company takes advantage of
extensions, which are available 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 that might
lead to more significant growth.
Approximately 67% 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 May 31,
2002, 18% of the Company's variable-rate debt had been swapped to fixed rates
and 57% was match-funded against variable-rate assets. After considering the
variable-rate debt that had been swapped or was match-funded, 17% of the
Company's debt remained variable-rate and 83% of the debt was fixed-rate or
match-funded. Therefore, a 100 basis point change in LIBOR would impact net
earnings by $0.8 million and earnings per share by approximately $0.02.
The Company is committed, under various standby letters of credit or other
agreements, to provide certain guarantees which are not otherwise reflected in
the financial statements. Outstanding standby letters of credit, guarantees,
performance bonds and other commercial commitments under these arrangements at
May 31, 2002 are as follows:
Amount of Commitment Expiration Per Period
------------------------------------------------
Outstanding Less Than 1 - 3 4 - 5 Over 5
(In millions) Commitments 1 Year Years Years Years
---------------------------------------------------------------
Standby letters of credit/(1)/ $ 96.4 89.3 7.1 - -
Guarantees of debt/(2)/ 42.8 28.1 4.8 2.2 7.7
Limited maintenance guarantees 48.4 12.0 36.4 - -
Committed capital contributions 28.4 22.6 5.8 - -
Performance bonds 42.1 17.0 9.5 - 15.6
Affordable housing
communities - other 44.2 21.6 12.2 10.4 -
---------------------------------------------------------------
Total commercial commitments $302.3 190.6 75.8 12.6 23.3
===============================================================
(1) Includes a $55.3 million letter of credit, which is collateralized by
short-term investment securities included in the Company's restricted cash
balance at May 31, 2002. See Note 3 to the unaudited consolidated condensed
financial statements in Item 1. As discussed in Note 3, this letter of
credit was released subsequent to quarter end.
(2) See "Unconsolidated Investments" section for further discussion.
UNCONSOLIDATED INVESTMENTS
The Company frequently makes investments jointly with others, through
partnerships and joint ventures. This (i) allows LNR to further diversify its
investment portfolio, spreading risk over a
23
wider range of investments, (ii) provides access to transactions which are
brought to the Company by other participants, (iii) provides access to capital
and (iv) enables the Company to participate in investments which are larger than
it is willing to make on its own. In many instances, the Company has a less than
controlling interest in the partnership or venture or control is shared, and
therefore, the Company accounts for its interest by the equity method, rather
than consolidating the assets and liabilities of the partnership or venture on
its balance sheet.
Typically, the Company either invests on a non-recourse basis, such as by
acquiring a limited partnership interest or an interest in a limited liability
company, or the Company acquires a general partner interest, but holds that
interest in a subsidiary which has few, if any, other assets. In those
instances, the Company's exposure to partnership liabilities is essentially
limited to the amounts the Company invests in the partnerships. However, in some
instances the Company is required to give limited guarantees of debt incurred or
other obligations undertaken by the partnerships or ventures. For certain
partnerships, typically those involving real estate property development, the
Company may commit to invest certain amounts in the future based on the
partnership's business plan.
At May 31, 2002, the Company had investments in unconsolidated partnerships of
$417.9 million. Summarized financial information on a combined 100% basis
related to the Company's investments in unconsolidated partnerships accounted
for by the equity method at May 31, 2002 follows:
LNR Total Total
LNR Ownership Partnership Partnership
(In thousands, except percentages) Investment Interest (1) Assets Liabilities
------------------------------------------------------------
Properties:
Single-asset partnerships $ 44,836 33% - 94% $ 303,226 $ 229,152 (2)
Partnerships with Lennar
LLP 66,695 50% 278,409 145,019 (3)
Other 32,993 50% 68,433 2,248
Affordable housing communities 82,789 1% - 99% 609,269 425,306 (4)
Other 3,590 5% - 99% 14,497 9,764
----------- --------------------------
Domestic 230,903 1,273,834 811,489
International 66,052 37.5% - 50% 180,393 8,075 (5)
----------- --------------------------
296,955 1,454,227 819,564
Loans:
Domestic non-performing loan
pools 8,574 15% - 50% 46,825 21,449
Securities:
Madison 106,070 25.8% 1,396,768 982,100
Other 6,280 69.5% 48,149 38,933
----------- --------------------------
112,350 1,444,917 1,021,033
----------- --------------------------
Total $ 417,879 $ 2,945,969 $1,862,046 (6)
=========== ==========================
(1) Although LNR may hold a majority financial interest in certain
partnerships, it does not consolidate those partnerships in which
control is shared or in which less than a controlling interest is held.
(2) Only $23.0 million is recourse to the Company.
(3) Only $2.2 million is recourse to the Company.
(4) Only $17.6 million is recourse to the Company.
(5) Total partnership assets include an investment in an unconsolidated
partnership which in turn has investments in properties with a net
book value of approximately $2.4 billion and non-recourse debt of
approximately $1.9 billion.
(6) Debt is non-recourse to the Company except for the $42.8 million
noted in footnotes 2, 3 and 4 above and in the commitments table
discussed above.
RECENT DEVELOPMENTS
Subsequent to the end of the quarter, the Company transferred non-investment
grade commercial mortgage backed securities ("CMBS") with a face amount of
approximately $800 million to a
24
bankruptcy remote, qualified special purpose entity ("QSPE"). These CMBS were
securitized into various classes of non-recourse, fixed- and floating-rate
notes, approximately $416 million of which was investment grade, and preferred
shares of the QSPE. The Company sold all of the investment grade notes to
unrelated third parties for net proceeds of approximately $402 million. The
proceeds were used to repay short-term debt, the majority of which can be
re-borrowed. In accordance with the provisions of SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
the Company expects to recognize a gain on the sale of the senior notes in the
Company's third quarter. The Company has retained interests, including
non-investment grade fixed-rate notes and the preferred shares, with a face
amount of approximately $384 million, all of which are subordinate to the
interests sold.
This transaction enabled the Company to maximize value from a pool of owned,
non-investment grade CMBS by creating a portion of cash flows that are
investment grade that the Company could sell. The Company was able to use a
portion of the proceeds from the sale to repay short-term debt, which was in the
form of repos that contain provisions, which may require the Company to repay
amounts or post additional collateral prior to the scheduled maturity dates if
the market value of the bonds which collateralize them significantly decline
("margin calls"). Through this transaction, the Company was able to eliminate
the refinancing risk, the short-term rate risk, and the margin call risk that
was associated with the financing of this pool of assets. This transaction
provided the Company with significant new liquidity, for the purchase of new
investments, for other general corporate purposes or for the repurchase of
stock under the Company's share repurchase program authorized in 1998.
As a result of this transaction, the Company's liquidity and financial position
were further strengthened. On a pro forma basis, the Company's available
liquidity at May 31, 2002 was $1.27 billion, compared to $950 million as
reported. In addition, repo debt outstanding at May 31, 2002 was $164 million
less than reported, and scheduled maturities over the next twelve months were
$20 million less than reported. On a pro forma basis, 12% of the Company's debt
remained variable rate after considering variable-rate debt that had been
swapped or match funded, and the Company's weighted average interest rate at May
31, 2002 was 6.7%.
Based on the success of this transaction, the Company may in the future
securitize CMBS it owns or purchases.
3. ACCOUNTING POLICIES
There has been no material change in the accounting policies since November 30,
2001. See the Company's Annual Report on Form 10-K for the year ended November
30, 2001 for further discussion.
4. NEW ACCOUNTING PRONOUCEMENTS
Information about new accounting pronouncements appears in Note 4 to the
unaudited consolidated condensed financial statements in Item 1.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has been no material change in the quantitative or qualitative market risk
since November 30, 2001. See the Company's Annual Report on Form 10-K for the
year ended November 30, 2001 for further discussion.
25
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 2-3. Not applicable.
Item 4. Submission of matters to a Vote of Security Holders
(a) The annual meeting of stockholders of LNR Property
Corporation was held on April 10, 2002.
(b) All director nominees described in (c) below were elected.
The following additional directors continued in office after
the meeting: Jeffery P. Krasnoff, Stuart A. Miller, Stephen
E. Frank, Leonard Miller, Brian L. Bilzin and Connie Mack.
(c) The votes cast at the Annual Meeting were:
ELECTION OF DIRECTORS
Common Stock:
Director Votes For Votes Withheld
-------- --------- --------------
Steven J. Saiontz 17,977,760 2,915,192
Edward Thaddeus Foote II 20,755,901 137,051
Charles E. Cobb, Jr. 20,755,301 137,651
Class B:
Director Votes For Votes Withheld
-------- --------- --------------
Steven J. Saiontz 97,637,040 62,400
Edward Thaddeus Foote II 97,639,040 60,400
Charles E. Cobb, Jr. 97,639,040 60,400
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.15 Master Repurchase Agreement dated as of March 20,
2002 between Liquid Funding, Ltd. and LNR CMBS
Holdings Corp.
10.16 Annex I to Master Repurchase Agreement,
Supplemental Terms and Conditions, dated as of
March 20, 2002 between Liquid Funding, Ltd., as
buyer and LNR CMBS Holdings Corp. as seller.
26
10.17 Annex I-A to Master Repurchase Agreement,
Definitions, dated as of March 20, 2002 between
Liquid Funding, Ltd., as buyer and LNR CMBS
Holdings Corp. as seller.
10.18 Annex II to Master Repurchase Agreement, Names and
Addresses for Communications Between Parties, dated
as of March 20, 2002 between Liquid Funding Ltd.,
as buyer and LNR CMBS Holdings Corp. as seller.
10.19 Terms Annex 2002-A to Master Repurchase Agreement
dated as of March 20, 2002 between Liquid Funding
Ltd., as buyer and LNR CMBS Holdings Corp. as
seller.
10.20 Terms Annex 2002-B to Master Repurchase Agreement
dated as of March 20, 2002 between Liquid Funding
Ltd., as buyer and LNR CMBS Holdings Corp. as
seller.
(b) Reports on Form 8-K:
None
27
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
------------------- ----
/s/ Shelly Rubin July 15, 2002
---------------------------------
Shelly Rubin
Vice President; Chief Financial Officer
(Principal Financial Officer)
28
Exhibit Index
Exhibit Description
10.15 Master Repurchase Agreement dated as of March 20, 2002 between Liquid
Funding, Ltd. and LNR CMBS Holdings Corp.
10.16 Annex I to Master Repurchase Agreement, Supplemental Terms and
Conditions, dated as of March 20, 2002 between Liquid Funding, Ltd.,
as buyer and LNR CMBS Holdings Corp. as seller.
10.17 Annex I-A to Master Repurchase Agreement, Definitions, dated as of
March 20, 2002 between Liquid Funding, Ltd., as buyer and LNR CMBS
Holdings Corp. as seller.
10.18 Annex II to Master Repurchase Agreement, Names and Addresses for
Communications Between Parties, dated as of March 20, 2002 between
Liquid Funding Ltd., as buyer and LNR CMBS Holdings Corp. as seller.
10.19 Terms Annex 2002-A to Master Repurchase Agreement dated as of March 20,
2002 between Liquid Funding Ltd., as buyer and LNR CMBS Holdings Corp.
as seller.
10.20 Terms Annex 2002-B to Master Repurchase Agreement dated as of March 20,
2002 between Liquid Funding Ltd., as buyer and LNR CMBS Holdings Corp.
as seller.