Edgar Filing: LNR PROPERTY CORP

For the quarterly period ended August 31, 2004

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-13223

LNR Property Corporation

(Exact name of registrant as specified in its charter)


Delaware		65-0777234
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1601 Washington Avenue, Suite 800, Miami Beach, Florida		33139
(Address of principal executive offices)		(Zip Code)

(305) 695-5500

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Common shares outstanding as of the end of the current fiscal quarter:


Common		20,094,779
Class B Common		9,770,298

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements.

LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands, except per share amounts)


	*(Unaudited)*
	August 31, 2004			November 30, 2003
ASSETS

Cash and cash equivalents	$	31,684		29,667
Restricted cash		81,323		23,732
Investment securities		1,033,804		900,334
Mortgage loans, net		455,379		462,545
Operating properties and equipment, net		744,325		483,407
Land held for investment		69,218		58,578
Investments in unconsolidated entities		494,007		426,576
Assets held for sale		60,494		159,829
Other assets		116,717		88,346

Total assets	$	3,086,951		2,633,014

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	14,889		10,402
Accrued expenses and other liabilities		218,784		177,848
Liabilities related to assets held for sale		53,354		96,305
Mortgage notes and other debts payable		1,630,928		1,296,536

Total liabilities		1,917,955		1,581,091

Minority interests		10,668		1,056

Commitments and contingent liabilities (Notes 10 and 11)

Stockholders’ equity:
Common stock, $.10 par value, 150,000 shares authorized, 20,095 and 19,941 shares issued and outstanding in 2004 and 2003, respectively		2,009		1,994
Class B common stock, $.10 par value, 40,000 shares authorized, 9,770 and 9,775 shares issued and outstanding in 2004 and 2003, respectively		977		977
Additional paid-in capital		467,271		459,378
Retained earnings		629,857		538,799
Unamortized value of restricted stock grants		(25,599	)	(28,890	)
Deferred compensation plan; 166 common shares at August 31, 2004		(4,297	)	—
Deferred compensation liability		4,297		—
Accumulated other comprehensive earnings		83,813		78,609

Total stockholders’ equity		1,158,328		1,050,867

Total liabilities and stockholders’ equity	$	3,086,951		2,633,014

See accompanying notes to unaudited consolidated condensed financial statements.

LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)


	*(Unaudited)*					*(Unaudited)*
	Three Months Ended August 31,					Nine Months Ended August 31,
	2004			2003		2004		2003
Revenues
Rental income	$	28,689		19,112		76,010		58,143
Management and servicing fees		21,641		12,274		44,570		30,830

Total revenues		50,330		31,386		120,580		88,973

Other operating income
Equity in earnings of unconsolidated entities		14,759		11,088		61,314		36,898
Interest income		40,345		40,059		123,595		125,497
Gains on sales of:
Real estate		1,473		2,220		6,046		11,522
Investment securities		3,393		29,764		21,270		29,764
Mortgage loans		3,807		—		3,960		—
Lease termination fee		—		15,115		—		15,115
Other, net		(1,129	)	(2,578	)	(1,929	)	(885	)

Total other operating income		62,648		95,668		214,256		217,911

Costs and expenses
Cost of rental operations		18,779		10,705		47,156		31,067
General and administrative		27,397		21,895		75,147		65,121
Depreciation		5,883		3,976		15,464		11,794
Impairment of long-lived assets		—		15,050		—		15,050
Minority interests		(136	)	(215	)	(209	)	(7	)
Interest		26,430		25,098		77,051		69,151
Loss on early extinguishment of debt		—		10,343		3,440		10,343

Total costs and expenses		78,353		86,852		218,049		202,519

Earnings from continuing operations before income taxes		34,625		40,202		116,787		104,365
Income taxes		12,283		13,382		40,201		34,540

Earnings from continuing operations		22,342		26,820		76,586		69,825

Discontinued operations:
Loss from operating properties sold or held for sale, net of tax		(5,308	)	(1,666	)	(5,605	)	(1,552	)
Gains on sales of operating properties, net of tax		5,461		5,176		27,540		21,667

Earnings from discontinued operations		153		3,510		21,935		20,115

Net earnings	$	22,495		30,330		98,521		89,940

(continued)

See accompanying notes to unaudited consolidated condensed financial statements.

LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS - CONTINUED

(In thousands, except per share amounts)


	*(Unaudited)*			*(Unaudited)*
	Three Months Ended August 31,			Nine Months Ended August 31,
	2004		2003	2004	2003
Weighted average shares outstanding:

Basic - Common stock		19,102	18,624	18,937	19,791

Basic - Class B common stock		9,770	9,776	9,772	9,784

Diluted		30,426	30,119	30,361	30,898

Earnings per share from continuing operations ⁽¹⁾:

Basic - Common stock	$	0.80	0.98	2.76	2.44

Basic - Class B common stock	$	0.72	0.88	2.49	2.20

Diluted	$	0.73	0.89	2.52	2.26

Earnings per share from discontinued operations ⁽¹⁾:

Basic - Common stock	$	0.00	0.12	0.79	0.71

Basic - Class B common stock	$	0.00	0.11	0.70	0.63

Diluted	$	0.01	0.12	0.72	0.65

Net earnings per share ⁽¹⁾:

Basic - Common stock	$	0.80	1.10	3.55	3.15

Basic - Class B common stock	$	0.72	0.99	3.19	2.83

Diluted	$	0.74	1.01	3.24	2.91

Dividends declared per share:

Common stock	$	0.0125	0.0125	0.0375	0.0375

Class B common stock	$	0.01125	0.01125	0.0338	0.0338

(1)	Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not equal per share amounts for the year-to-date period.

See accompanying notes to unaudited consolidated condensed financial statements.

LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)


	*(Unaudited)*					*(Unaudited)*
	Three Months Ended August 31,					Nine Months Ended August 31,
	2004			2003		2004		2003
Net earnings	$	22,495		30,330		98,521		89,940

Other comprehensive earnings (loss), net of tax:
Unrealized gains (losses) on available-for-sale securities arising during the period		15,050		(7,469	)	12,569		(19,479	)
Less: reclassification adjustment for gains on available-for-sale securities included in net earnings		(627	)	(18,946	)	(11,148	)	(18,946	)
Unrealized gains (losses) on foreign currency translation		2,221		(3,718	)	2,607		5,685
Unrealized gains on derivative financial instruments		280		1,013		1,176		1,622

Other comprehensive earnings (loss), net of tax		16,924		(29,120	)	5,204		(31,118	)

Comprehensive earnings		$39,419		1,210		103,725		58,822

See accompanying notes to unaudited consolidated condensed financial statements.

LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)


	*(Unaudited)*
	Nine Months Ended August 31,
	2004			2003
Cash flows from operating activities:
Net earnings	$	98,521		89,940
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		19,345		18,408
Minority interests		(209	)	(26	)
Accretion of discount on investment securities and mortgage loans, net of write-downs		9,101		(6,600	)
Amortization of deferred costs		10,596		7,027
Equity in earnings of unconsolidated entities		(61,314	)	(36,898	)
Distributions of earnings from unconsolidated entities		53,805		56,543
Interest received on investment securities in excess of income recognized		35,892		22,540
Impairment of long-lived assets		7,250		15,050
Loss on early extinguishment of debt		3,440		10,343
Deferred lease costs charged against lease termination fee		—		8,885
Gains on sales of real estate		(51,193	)	(47,042	)
Gains on sales of investment securities		(21,270	)	(29,764	)
Gains on sales of mortgage loans		(3,960	)	—
Other, net		2,901		(2,378	)
Changes in assets and liabilities:
Increase in other assets		(30,417	)	(13,740	)
Increase (decrease) in accounts payable and accrued liabilities		12,736		(49,157	)

Net cash provided by operating activities		85,224		43,131

Cash flows from investing activities:
Operating properties and equipment:
Additions		(242,471	)	(113,329	)
Sales		206,539		92,587
Land held for investment:
Additions		(35,903	)	(7,823	)
Sales		18,304		10,213
Investments in unconsolidated entities		(234,463	)	(55,597	)
Proceeds from sales of unconsolidated entity interests		3,846		—
Distributions of capital from unconsolidated entities		71,744		31,058
Purchase of mortgage loans held for investment		(189,603	)	(180,868	)
Proceeds from principal collections and sales of mortgage loans held for investment		277,734		288,183
Purchase of investment securities		(248,918	)	(333,477	)
Proceeds from principal collections and sales of investment securities		113,656		464,474
Increase in restricted cash		(57,591	)	(7,222	)
Proceeds from sales and syndications of interests in affordable housing entities		36,790		24,588

Net cash (used in) provided by investing activities		(280,336	)	212,787

(continued)

LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED

(In thousands)


	*(Unaudited)*
	Nine Months Ended August 31,
	2004			2003
Cash flows from financing activities:
Proceeds from stock option exercises and stock purchase plan sales		5,962		5,104
Purchase and retirement of treasury stock		(9,290	)	(144,763	)
Payment of dividends		(1,073	)	(1,080	)
Net distributions to minority partners in consolidated entities		(466	)	(216	)
Repurchase agreements and revolving credit lines		25,519		(344,808	)
Senior subordinated notes:
Proceeds from borrowings		50,250		574,375
Principal and prepayment premium payments		(47,715	)	(209,376	)
Mortgage notes and other debts payable:
Proceeds from borrowings		280,208		31,275
Principal payments		(106,266	)	(151,758	)

Net cash provided by (used in) financing activities		197,129		(241,247	)

Net increase in cash and cash equivalents		2,017		14,671
Cash and cash equivalents at beginning of period		29,667		5,711

Cash and cash equivalents at end of period	$	31,684		20,382

Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	72,318		77,125
Cash paid for taxes	$	61,585		77,103

Supplemental disclosure of non-cash investing and financing activities:
Mortgage note on acquired operating property	$	15,703		—
Purchases of investment securities financed by seller	$	23,960		20,873
Mortgage loans received on sales of operating properties	$	—		101,688
Purchases of mortgage loans financed by seller	$	—		18,255

Supplemental disclosure of non-cash transfers:
Distribution of mortgage loans and operating property from CMBS trusts	$	29,126		—
Distribution of investment securities from unconsolidated entity	$	21,956		—
Transfer from other assets to investments in unconsolidated entities	$	—		8,287
Transfer from other assets to mortgage loans	$	—		7,225
Transfer from operating properties to land held for investment	$	14,696		—
Transfer from land held for investment to operating properties	$	26,150		4,701
Consolidation of entities previously accounted for as unconsolidated entities:
Cash and cash equivalents	$	2,123		—
Mortgage loans, net	$	57,353		—
Operating properties and equipment, net	$	84,053		—
Investments in unconsolidated entities	$	(68,143	)	—
Other assets	$	2,451		—
Other liabilities	$	(14,380	)	—
Mortgage notes and other debts payable	$	(53,170	)	—
Minority interests	$	(10,287	)	—

See accompanying notes to unaudited consolidated condensed financial statements.

LNR PROPERTY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Consolidated Condensed Financial Statements

1. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited consolidated condensed financial statements include our accounts and those of our wholly owned subsidiaries and certain other entities we are required to consolidate. We consolidate the assets, liabilities, and results of operations of entities (both corporations and partnerships) in accordance with Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” Statement of Financial Accounting Standards (“SFAS”) No. 94, “Consolidation of All Majority-Owned Subsidiaries – an amendment of ARB No. 51, with related amendments of Accounting Principles Board (“APB”) Opinion No. 18 and ARB No. 43, Chapter 12,” and the Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities,” as revised.

Variable interest entities (“VIEs”) are entities in which equity investors do not have a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In accordance with FIN No. 46, we consolidate VIEs of which we are the primary beneficiary – those in which we have a variable interest or a combination of variable interests that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, based on an assessment performed at the time we become involved with the entity. We reconsider this assessment only if (i) the entity’s governing documents or the contractual arrangements among the parties involved change in a manner that changes the characteristics or adequacy of the entity’s equity investment at risk, (ii) some or all of the equity investment is returned to the investors and other parties become exposed to expected losses of the entity, (iii) the entity undertakes additional activities or acquires additional assets beyond those that were anticipated at inception or at the last reconsideration date that increase its expected losses, or (iv) the entity receives an additional equity investment that is at risk, or curtails or modifies its activities in a way that decreases its expected losses.

Entities not deemed to be VIEs are consolidated if we own a majority of the voting securities or interests, except in those instances in which the minority voting interest owner effectively participates through substantive participative rights, as discussed in Emerging Issues Task Force (“EITF”) No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights.” Substantive participative rights include the ability to select, terminate, and set compensation of the investee’s management, if applicable, and the ability to participate in capital and operating decisions of the investee, including budgets, in the ordinary course of business.

We invest in organizations with varying structures, many of which do not have voting securities or interests, such as general partnerships, limited partnerships, and limited liability companies. In many of these structures, control of the entity rests with the general partners or managing members, while other members hold passive interests. The general partner or managing member may hold anywhere from a relatively small percentage of the total financial interests to a majority of the financial interests. For entities not deemed to be VIEs, where we serve as the sole general partner or managing member, we are considered to have the controlling financial interest and therefore the entity is consolidated, regardless of our financial interest percentage, unless there are other limited partners or investing members that effectively participate through substantive participative rights as outlined in EITF No. 96-16. In those circumstances where we, as majority owner, cannot cause the entity to take actions that are significant in the ordinary course of business, because such actions could be vetoed by the minority owner, we do not consolidate the entity.

When we consolidate entities, the ownership interests of any minority parties are reflected as minority interests.

Investments in entities which are not consolidated are generally accounted for by the equity method or by the cost method if our investment is considered to be minor.

All significant intercompany transactions and balances among consolidated entities and intercompany profits and/or losses with unconsolidated entities 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, 2003 audited financial statements in our 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.

Stock-Based Compensation

As permitted by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” and SFAS No. 123, “Accounting for Stock-Based Compensation,” we continue to apply the accounting provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, with regard to the measurement of employee compensation cost for options and restricted stock granted under our equity compensation plan. No stock-based employee compensation cost relative to stock options is reflected in net income as all options granted under the plan had an exercise price not less than the market value of the underlying common stock on the date of grant and the number of shares was fixed at the date of grant. Deferred compensation related to restricted stock grants is amortized to expense over the vesting period. Had expense been recognized using the fair value method described in SFAS No. 123, using the Black-Scholes option-pricing model, we would have reported the following results of operations:


	Three Months Ended August 31,					Nine Months Ended August 31,
	2004			2003		2004		2003
	*(In thousands, except per share amounts)*
Net earnings allocable to common stockholders	$	15,407		20,600		67,287		62,248

Net earnings allocable to Class B common stockholders		7,088		9,730		31,234		27,692

Net earnings, as reported		22,495		30,330		98,521		89,940

Add: Total stock-based employee compensation expense included in reported net earnings, net of related tax effects		1,567		1,475		4,639		3,077

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,365	)	(2,113	)	(6,981	)	(4,949	)

Pro forma net earnings	$	21,697		29,692		96,179		88,068

Net earnings per share ⁽¹⁾:
Basic - common stock - as reported	$	0.80		1.10		3.55		3.15

Basic - common stock - pro forma	$	0.78		1.08		3.47		3.08

Basic - Class B common stock - as reported	$	0.72		0.99		3.19		2.83

Basic - Class B common stock - pro forma	$	0.70		0.97		3.12		2.77

Diluted - as reported	$	0.74		1.01		3.24		2.91

Diluted - pro forma	$	0.71		0.99		3.17		2.85

(1)	Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not equal per share amounts for the year-to-date period.

New Accounting Pronouncements

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” which was subsequently revised in December 2003. The revisions to FIN No. 46 issued in December 2003 did not significantly affect the conclusions reached in the adoption of FIN No. 46 for entities with which we became involved after January 31, 2003, and accordingly the revisions to FIN No. 46 did not have a material effect on our results of operations or financial position. On May 31, 2004, we adopted the provisions of FIN No. 46, as revised, for entities created before February 1, 2003, and we consolidated thirteen real estate entities that were deemed VIEs and of which we were determined to be the primary beneficiary. Upon adoption, assets and liabilities of these entities were $163.3 million and $67.6 million, respectively, including mortgage notes and other debts payable of $53.2 million. See Note 12 for further discussion on variable interest entities at August 31, 2004.

In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP No. 03-3 addresses income recognition on certain loans or debt securities purchased subsequent to origination. SOP No. 03-3 also supercedes Practice Bulletin 6 (“PB 6”), “Amortization of Discounts on Certain Acquired Loans,” which addresses income recognition on and impairment evaluation of certain bonds. SOP No. 03-3 is effective after November 30, 2005. We are currently evaluating whether the adoption of SOP No. 03-3 will impact our results of operations or financial position.

In November 2003, the EITF reached a consensus on the “disclosure” provisions of EITF No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF No. 03-1 requires that certain quantitative and qualitative disclosures be made for debt securities subject to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” that are in an unrealized loss position at the balance sheet date but for which an other-than-temporary impairment has not been recognized. We plan to adopt the required disclosure provisions of EITF No. 03-1 during the quarter ending November 30, 2004.

In March 2004, the EITF reached a consensus on the “recognition” provisions of EITF No. 03-1. EITF No. 03-1 requires that a loss be recognized for an impairment that is other-than-temporary. A three-step impairment model should be applied to debt securities subject to SFAS No. 115, including those debt securities subject to EITF No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” EITF 03-1 originally required that we adopt the “recognition” provisions of EITF No. 03-1 prospectively to all current and future investments during the quarter ended November 30, 2004. However, on September 30, 2004, the FASB issued FASB Staff Position (FSP) EITF No. 03-1-1, “Effective Date of Paragraph 16 of EITF Issue No. 03-1,” which delayed the effective date of the recognition provisions of EITF No. 03-1 until the issuance of the final FSP EITF Issue 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1.” Until the final FSP is issued, we are not able to evaluate whether the adoption of the “recognition” provisions under such guidance will have a material effect on our results of operations or financial position.

In March 2004, the EITF reached a consensus on Issue 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128, “Earnings per Share” (“EITF No. 03-6”), requiring the use of the two-class method of computing earnings per share for those enterprises with participating securities or multiple classes of common stock. Because our Class B common stock can receive per share dividends equal to not more than 90% of the cash dividends declared and paid on our common stock, our Class B common stock is considered a participating security under EITF No. 03-6. Accordingly, we are required to compute basic earnings per share using the two-class method, rather than the if-converted method. The two-class method for each period allocates the amount of undistributed earnings using a participation percentage which reflects the dividend rights of each class of common stock. Diluted earnings per share continues to be computed using the if-converted method. See Note 2 for further discussion.

Reclassifications

Certain reclassifications have been made to the prior year consolidated condensed financial statements to conform to the current year presentation.

2. Earnings Per Share

The following reconciles the numerator and denominator of the basic and diluted earnings per share calculations for the three and nine months ended August 31, 2004 and 2003:


	Three Months Ended August 31,			Nine Months Ended August 31,
	2004		2003	2004	2003
	*(In thousands)*
Numerator
Numerator for basic earnings per share from continuing operations:
Earnings allocable to common shareholders	$	15,302	18,216	52,308	48,327
Earnings allocable to Class B common shareholders		7,040	8,604	24,278	21,498

Earnings from continuing operations	$	22,342	26,820	76,586	69,825

Numerator for basic earnings per share from discontinued operations:
Earnings allocable to common shareholders	$	105	2,384	14,979	13,921
Earnings allocable to Class B common shareholders		48	1,126	6,956	6,194

Earnings from discontinued operations	$	153	3,510	21,935	20,115

Denominator
Denominator for basic earnings per share - weighted average common shares		19,102	18,624	18,937	19,791

Denominator for basic earnings per share - weighted average Class B common shares		9,770	9,776	9,772	9,784

Denominator for basic earnings per share - total weighted average shares		28,872	28,400	28,709	29,575

Effect of dilutive securities
Stock options		538	416	531	380
Restricted stock		963	1,267	1,067	915
Other		53	36	54	28

Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions		30,426	30,119	30,361	30,898

In the second quarter of 2003, we issued $235.0 million principal amount of 5.5% convertible senior subordinated notes due 2023. The notes are convertible into our common stock if the market price of our common stock exceeds 120% of the conversion price (currently $45.28) during certain periods or in other specified instances, at a rate of 22.0848 shares per $1,000 principal amount, which totals 5.2 million shares. These shares were not included in the calculation of diluted earnings per share for the three and nine months ended August 31, 2004 and 2003, because the notes were not convertible during these periods.

3. Proposed Sale

On August 29, 2004, we entered into a merger agreement with a newly formed company, which will be majority owned by funds managed by Cerberus Capital Management, L.P. and other investors selected by Cerberus, under which holders of our common stock and Class B common stock will receive $63.10 per share in cash and we will become indirectly wholly owned by the newly formed company, Riley Property Holdings.

The transaction will require approval by the holders of a majority in voting power of LNR’s stock. Stuart A. Miller, Chairman of the LNR Board of Directors, partnerships owned by his family and a trust of which he is a primary beneficiary, together own shares carrying the power to cast 77.35% of the votes that can be cast with regard to the transaction. Mr. Miller, the partnerships and the trust have agreed to vote their shares in favor of the merger as long as our Board of Directors and a special committee of our Board continue to recommend the transaction.

Mr. Miller, the partnerships owned by his family, and the trust have also agreed to acquire an approximately 20.4% interest in Riley Property Holdings. Other members of our management have agreed to acquire an additional approximately 4.6% interest in Riley Property Holdings. The purchase price per unit to be paid by Mr. Miller, the partnerships owned by his family, the trust and management for their interests in Riley Property Holdings will be the same as the price to be paid by Cerberus.

In addition to being subject to approval by the holders of a majority of our shares, the consummation of the transaction is subject to regulatory approvals, consents or waivers under agreements, completion of the Miller family and management investments in Riley Property Holdings, and other customary closing conditions. The merger is expected to be completed by the end of 2004 or early in 2005.

In September 2004, four class action lawsuits (three of which have been consolidated) seeking declaratory and injunctive relief and monetary damages, were filed against us and the members of our Board of Directors. Each of these lawsuits alleges, among other things, that the terms of the sale transaction are unfair to our stockholders, that the consideration to be paid to our stockholders is inadequate, and that our Board of Directors breached its fiduciary duties to our stockholders. Each of them states that the allegedly unfair terms and inadequate consideration were intended to benefit the Miller family through their investment in Riley Property Holdings. We believe that each of these actions is without merit and intend to defend each of them vigorously.

4. Acquisition

In July 2003, we and Lennar Corporation (“Lennar”) formed, and obtained 50% interests in, NWHL Investment LLC (“NWHL”). In January 2004, NWHL completed the acquisition of The Newhall Land and Farming Company (“Newhall”) for approximately $1.0 billion. Newhall’s primary business is developing two master-planned communities in Southern California.

In addition, in November 2003, we and Lennar each contributed our 50% interests in certain of our jointly-owned unconsolidated entities that had significant assets to a new limited liability company named LandSource Communities Development LLC (“LandSource”), in exchange for 50% interests in LandSource. LandSource was formed as a vehicle to obtain financing based on the value of the combined assets of the joint venture entities that we and Lennar contributed to LandSource. We and Lennar used LandSource’s financing capacity, together with the financing value of Newhall’s assets, to obtain improved financing for part of the purchase price of Newhall and for working capital to be used by the LandSource subsidiaries and Newhall. We and Lennar may merge LandSource and the joint venture entity that acquired Newhall, and we and Lennar may use LandSource for future joint ventures.

In order to enable NWHL to pay the acquisition price of Newhall, we and Lennar each contributed approximately $200 million to NWHL, and NWHL and LandSource jointly obtained $600 million of bank financing commitments, of which $400 million was used by NWHL to pay part of the acquisition price of Newhall. The remainder of the acquisition price was paid with proceeds from the sale of income producing commercial properties from Newhall to us for approximately $216 million. We are not obligated with regard to the borrowings of NWHL and LandSource, except that we and Lennar have committed to complete any property development commitments on which NWHL and LandSource default and have guaranteed that, in the event of fraud or similar unlawful activities by the borrowers, or distributions by the borrowers that are not permitted by the loan documents, we will pay the lenders the amount of any resulting damages they suffer and we will pay anything that is required to reduce the loan balances to specified percentages of the appraised values of the properties that secure the borrowings.

During the third quarter, we completed our allocation of the purchase price of the income producing commercial properties acquired from Newhall to the assets acquired and liabilities assumed. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the time of acquisition:


	Estimated Fair Value at Acquisition		Weighted Average Useful Life of Intangibles
	*(In thousands)*		*(In years)*
Assets
Operating properties
Land	$	74,426
Buildings and tenant improvements		124,130
Above market lease intangible asset		8,384	7
In-place lease intangible asset		7,107	20

		214,047
Investments in unconsolidated entities		9,518

Total assets		223,565
Accrued expenses and other liabilities - Below market lease intangible liability		7,284	11

Net assets acquired	$	216,281

5. Intangibles

At August 31, 2004, we had the following intangibles on our balance sheet:


	August 31, 2004
	Gross Carrying Amount			Accumulated Amortization		Net
	*(In thousands)*
Above market leases	$	8,505		(678	)	7,827
In-place leases		7,139		(329	)	6,810
Acquired loan servicing contracts		6,141		(109	)	6,032
Below market leases		(7,912	)	418		(7,494	)

Total intangibles, net	$	13,873		(698	)	13,175

Amortization expense related to these intangibles was $698,000 for both the three- and nine-month periods ended August 31, 2004 and is expected to be in the range of approximately $1.5 million to $1.6 million annually from 2005 to 2009.

6. Investment Securities and Mortgage Loans, Net

Included in our balances of investment securities and of mortgage loans, net, were $285.8 million and $60.0 million, respectively, at August 31, 2004, and $373.0 million and $46.2 million, respectively, at November 30, 2003, of assets which were pledged to creditors and can be repledged or sold by the creditors under reverse repurchase agreements.

7. Securitization Transaction

In February 2004, we sold $50.4 million face amount of a non-investment grade commercial mortgage backed security (“CMBS”) to a qualified special purpose entity (“QSPE”). This CMBS bond was resecuritized into various classes of non-recourse fixed-rate bonds comprised of $28.7 million face amount of investment grade rated bonds and $21.7 million face amount of non-investment grade rated bonds. The QSPE sold the investment grade rated bonds to unrelated third parties for net proceeds of $30.3 million, which was used to pay us for the CMBS collateral. In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” we recognized a pretax gain on the sale of the CMBS collateral to the QSPE of $17.3 million in the quarter ended February 29, 2004. We retained the non-investment grade rated bonds (the “retained interests”), which had an aggregate face amount and amortized cost at the time of the resecuritization of $21.7 million and $7.5 million, respectively. The retained interests are carried on our balance sheet at August 31, 2004 at an estimated fair value of $16.6 million and are classified as available-for-sale. We measure the estimated fair value of the retained interests based on the present value of the expected future cash flows, which are determined based on the expected future cash flows from the underlying CMBS. The difference between the amortized cost of the retained interests and their fair value is recorded, net of tax, in stockholders’ equity as a component of accumulated other comprehensive earnings.

8. Deferred Compensation Plan

In April 2004, we adopted the LNR Property Corporation Non-Qualified Deferred Compensation Plan (the “Plan”) that allows a selected group of members of management to defer a portion of their salaries and bonuses and to exchange up to 100% of their restricted stock for the right to receive shares in the future. All participant contributions to the Plan are vested. Salaries and bonuses that are deferred under the Plan are credited with earnings or losses based on investment decisions made by the participants. We fund our obligations under the Plan with assets that are held in a trust, but are subject to the claims of our general creditors in the event of our insolvency. At August 31, 2004, the fair market value of these assets was $1.7 million.

When a participant surrenders restricted stock under the Plan, the participant receives in exchange the right to receive in the future a number of shares of our common stock equal to the number of restricted shares that are surrendered. The surrender is reflected as a reduction in stockholders’ equity equal to the value of the restricted stock when it was issued, with an offsetting increase in stockholders’ equity to reflect a deferral of the compensation expense related to the surrendered restricted stock. Changes in the value of the shares that will be issued in the future are not reflected in the financial statements.

As of August 31, 2004, approximately 165,800 shares of restricted stock had been surrendered in exchange for rights under the Plan, resulting in a reduction of stockholders’ equity of $4.3 million fully offset by an increase in stockholders’ equity to reflect the deferral of compensation in that amount. Shares that we are obligated to issue in the future under the Plan are treated as outstanding shares in both our basic and diluted earnings per share calculations for the three and nine months ended August 31, 2004.

9. Loss on Early Extinguishment of Debt

In the first quarter of 2004, we issued $50.0 million principal amount of 7.25% senior subordinated notes due in 2013. Proceeds from the sale were primarily used to redeem $45.3 million principal amount of our 10.5% senior subordinated notes due in 2009 at a redemption price equal to 105.375%

of principal plus interest accrued to the redemption date. The redemption of the 10.5% notes at a premium resulted in a pretax loss from continuing operations of $3.4 million during the first quarter of 2004, which was included in the “Corporate and Interest” segment.

10. Commitments and Contingencies

We are obligated to provide guarantees and other commitments under various types of agreements. Except for the amounts disclosed in Note 11, none of these obligations are reflected in our financial statements. The obligations not reflected in our financial statements totaled $391.9 million at August 31, 2004. Included in this amount are $34.1 million of commitments to fund capital contributions to unconsolidated entities required by agreements or pursuant to approved annual business plans. Also included are guarantees of $357.8 million at August 31, 2004, which are discussed in Note 11.

In addition, we have been named as a defendant in certain class action lawsuits which are further discussed in Note 3.

11. Guarantees

In the ordinary course of business, we provide various guarantees which are included under the recognition, measurement, and disclosure provisions of FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others,” including: (i) standby letters of credit, generally to enhance credit or guarantee our performance under contractual obligations; (ii) guarantees of debt, generally in order for unconsolidated entities in which we own interests to obtain financing for the acquisition and development of their properties; (iii) limited maintenance guarantees, generally to certain of our unconsolidated entities’ lenders, which may require us to provide funds to these entities to maintain a required loan-to-value ratio or upon default by the borrower; (iv) surety bond reimbursement guarantees, generally related to our affordable housing syndications or to support our development obligations under development agreements with municipalities, and (v) guarantees in connection with our syndication of affordable housing tax credits, generally to provide additional funding to cover operating cash flow deficiencies, maintain specified debt service coverage ratios and cover financing shortfalls to projects upon completion if the projects’ permanent financing is insufficient to repay the projects’ construction loans. These guarantees have varying expiration dates ranging from less than one year to 28 years, and totaled $357.8 million at August 31, 2004. The fair value of these types of guarantees issued after December 31, 2002, was not material.

In accordance with SFAS No. 5, “Accounting for Contingencies,” we have recorded $11.7 million of liabilities related to obligations under certain guarantees, where payments are considered both probable and reasonably estimable. In addition, in accordance with SFAS No. 66, “Accounting for Sales of Real Estate,” we have recorded $3.5 million of liabilities representing our maximum liability under non-operating guarantees and operating guarantees of an extended duration which we provided at the time we sold interests in certain affordable housing community entities, even though we do not expect to be required to perform under these guarantees.

12. Variable Interest Entities

We evaluated all of our investments and other interests in entities that may be deemed VIEs under the provisions of FIN No. 46. These included interests in CMBS and investments in certain real estate entities, including partnerships and limited liability companies.

Commercial Mortgage Backed Securities

CMBS are securities backed by loans on commercial and multi-family residential real estate properties and possess many of the characteristics of large portfolios of performing loans. Generally, the interests we own in CMBS are through qualifying special-purpose entities (“QSPE”), which are

exempted from consolidation under the provisions of FIN No. 46, providing that we do not have the ability to unilaterally dissolve them. Only two of the CMBS structures in which we have an interest did not meet the requirements to be a QSPE, and were determined to be VIEs due to insufficient equity. We, however, were not deemed to be the primary beneficiary of these entities and therefore we were not required to consolidate them. At August 31, 2004, assets and liabilities of these entities were $1,108.9 million and $1,104.1 million, respectively, and our maximum exposure to loss in these entities was limited to our recorded investment of $14.2 million.

Investments In Certain Real Estate Entities

Affordable Housing Communities

During 1998, we entered into the business of owning, developing and syndicating affordable housing communities. Our ownership interests in these communities typically approximate 99% of the entities we have not yet syndicated. We continue to hold a small interest (typically ranging from less than 1% to 10%) in the communities we have syndicated, and we continue to manage those communities, for which we earn management fees. All sixty of our affordable housing unconsolidated entity interests which have been syndicated and twelve of our affordable housing unconsolidated (prior to FIN No. 46) entity interests which have not yet been syndicated are VIEs due to disproportionate voting and economic rights. We were deemed to be the primary beneficiary on the twelve entities not yet syndicated, and accordingly we consolidated these entities into our financial statements on May 31, 2004. See Note 1 for impact upon adoption of FIN No. 46. At August 31, 2004, these entities had assets and liabilities of $90.1 million and $62.8 million, respectively, including mortgage notes and other debts payable of $54.3 million. The remaining sixty unconsolidated entities had assets and liabilities of $479.6 million and $341.6 million, respectively, at August 31, 2004. Our maximum exposure to loss in these entities was limited to our investment of $18.9 million and guarantees of $70.7 million at August 31, 2004.

International Entities

We have an investment in a European unconsolidated (prior to FIN No. 46) entity, which owns a pool of commercial real estate properties located throughout France. This entity, which had assets and liabilities of $32.8 million and $0.5 million, respectively, at August 31, 2004, is a VIE due to disproportionate voting and economic rights. We were deemed to be the primary beneficiary, and accordingly consolidated this entity into our financial statements on May 31, 2004. See Note 1 for impact upon adoption of FIN No. 46.

Madison Square Company LLC

Formed in March 1999, Madison Square Company LLC (“Madison”) invests in real estate securities, primarily CMBS. Madison is a VIE; however, we were not deemed to be the primary beneficiary of Madison, and accordingly we did not consolidate the entity. At August 31, 2004, the assets and liabilities of this entity were $668.8 million and $520.6 million, respectively. The debt of the entity is in the form of securitized notes which are non-recourse to us, although we own $61.3 million face amount of those notes at a discount. At August 31, 2004, our maximum exposure to loss was limited to the amount of our recorded investment of $37.4 million (representing our 25.8% ownership interest), as well as our $36.1 million investment in the securitized notes issued by Madison.

Single-Asset Entities

We have investments in single-asset unconsolidated entities that were established to acquire, develop, reposition, manage and sell real estate assets. One of these entities, in which we purchased an interest during the second quarter of 2004, owns and operates a commercial office building and was deemed to

be a VIE due to disproportionate voting and economic rights; however, we were not deemed to be the primary beneficiary of this entity, and therefore we were not required to consolidate it. At August 31, 2004, assets and liabilities of this partnership were $17.0 million and $0.7 million, respectively, and our maximum exposure to loss in this entity was limited to our investment of $2.3 million.

13. Assets Held for Sale

In the normal course of our business, we acquire, develop, redevelop, or reposition real estate properties, and then dispose of those properties when we believe they have reached optimal values. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we reflect the historical operating results of properties sold or held for sale as well as our gain or loss on sale from these properties as discontinued operations in our consolidated statements of earnings and their assets and liabilities as held for sale in our consolidated balance sheets for periods prior to their sale. During the period from our adoption of SFAS No. 144 (December 1, 2002) through August 31, 2004, we sold several such properties and have reflected these properties’ assets and liabilities as held for sale in our consolidated condensed balance sheets prior to their sale date, and their historical operating results for periods prior to their sale, as well as the gain or loss on sale, as results of discontinued operations in our consolidated statements of earnings.

Assets held for sale and liabilities related to assets held for sale were comprised of the following at August 31, 2004 and November 30, 2003:


	August 31, 2004		November 30, 2003
	*(In thousands)*
Assets
Operating properties and equipment, net	$	59,644	157,535
Other assets		850	2,294

Total assets	$	60,494	159,829

Liabilities
Accounts payable	$	383	847
Accrued expenses and other liabilities		2,071	9,208
Mortgage notes and other debts payable		50,900	86,250

Total liabilities	$	53,354	96,305

The results of discontinued operations for the three and nine months ended August 31, 2004 and 2003, related to assets that had been sold or were held for sale after November 30, 2002, were as follows:


	Three Months Ended August 31,				Nine Months Ended August 31,
	2004		2003		2004	2003
	*(In thousands)*
Rental income	$	4,544	7,457		19,531	31,553
Management and servicing fees		—	—		798	—
Interest income		3	15		104	47
Gains on sales of real estate		8,952	8,485		45,147	35,520

Total revenues and other operating income		13,499	15,957		65,580	67,120

Cost of rental operations		3,490	5,195		12,733	17,754
Depreciation		1,146	1,880		3,881	6,614
Impairment of long-lived assets		7,250	—		7,250	—
Minority interests		—	(18	)	—	(19	)
Interest		1,362	3,147		5,757	10,863

Total costs and expenses		13,248	10,204		29,621	35,212

Earnings before income taxes		251	5,753		35,959	31,908
Income taxes		98	2,243		14,024	11,793

Net earnings	$	153	3,510		21,935	20,115

14. Impairment of Long-Lived Assets

During the quarter ended August 31, 2004, we recorded in results of discontinued operations a $7.3 million impairment charge on an office property we decided to offer for sale earlier than originally planned.

During 2003, we received a $24.0 million lease termination fee from a tenant that had originally leased 100% of one of our office buildings for ten years. Approximately $8.9 million of that fee was a recovery of capitalized and deferred costs associated with the lease. The remaining $15.1 million was recorded as other operating income. In accordance with SFAS No. 144, a loss provision in the amount of $15.1 million was recorded in 2003 for the impairment of this property to reflect the current market value of the building without the tenant. The fair value of this property was determined based on the discounted expected future cash flows from the property.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SOME OF THE STATEMENTS CONTAINED IN THE FOLLOWING MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE “FORWARD-LOOKING STATEMENTS” AS THAT TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. GENERALLY, THE WORDS “BELIEVE,” “EXPECT,” “INTEND,” “ANTICIPATE,” “WILL,” “MAY” AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INHERENTLY INVOLVE RISKS AND UNCERTAINTIES. THE FACTORS, AMONG OTHERS, THAT COULD CAUSE OUR 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, BUT ARE NOT LIMITED TO, (I) CHANGES IN DEMAND FOR COMMERCIAL REAL ESTATE NATIONALLY AND INTERNATIONALLY, IN AREAS IN WHICH WE OWN PROPERTIES, OR IN AREAS (INCLUDING AREAS OUTSIDE THE UNITED STATES) IN WHICH PROPERTIES SECURING MORTGAGES DIRECTLY OR INDIRECTLY OWNED BY US ARE LOCATED, (II) CHANGES IN 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 OUR CAPITAL STRUCTURE, DUE TO AVAILABILITY OF CAPITAL OR THE TERMS ON WHICH IT IS AVAILABLE DUE TO A PROPOSED ACQUISITION OF US OR OTHERWISE, (VII) CHANGES IN AVAILABILITY OF QUALIFIED PERSONNEL AND (VIII) CHANGES IN GOVERNMENT REGULATIONS, INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL REGULATIONS. SEE OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED NOVEMBER 30, 2003, FOR A FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES APPLICABLE TO OUR BUSINESS.

OVERVIEW

LNR Property Corporation is a real estate investment, finance and management company. We engage primarily in (i) acquiring, developing, repositioning, managing and selling commercial and multi-family residential real estate properties, (ii) investing in high-yielding real estate loans and acquiring at a discount portfolios of loans backed by commercial or multi-family residential real estate and (iii) investing in unrated and non-investment grade rated commercial mortgage-backed securities (“CMBS”) as to which we have the right to be special servicer (i.e., to oversee workouts of underperforming 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.

1. RESULTS OF OPERATIONS

Adoption of SFAS No. 144

On December 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires that whenever we sell or hold for sale a commercial real estate property that has its own operations and cash flows, which is a frequent occurrence since selling properties is a regular part of our business, we must reclassify the revenues and expenses of that property, both with regard to the current period and with regard to the past, and classify the gain or loss on sale of that property, as results of discontinued operations. Primarily because of this, 22% of our net earnings during the first nine months of 2004 were characterized as earnings from discontinued operations. Because selling properties is a regular part of our business, our expectation is that each year we will report a significant portion of our earnings as results of discontinued operations, and we will be required to restate prior years for comparability. Accordingly, we believe that reclassifying our operating income from properties we sell or hold for sale and treating our gain or loss from sale of those properties as results of discontinued operations, makes it difficult to determine and evaluate from our statements of earnings the performance of our real estate properties business. Because of that, in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and particularly in the section regarding Real Estate Properties, we provide information that combines revenues, expenses and gains on sales with regard to properties we have sold or hold for sale, which are reflected on our statements of earnings as discontinued operations, with the operating income from commercial properties we continue to own which are not classified as held for sale. Our management uses this combined information in evaluating the performance of the real estate properties business, and believes investors may find the information helpful for this purpose as well.

The following tables show the effects of the combination with regard to the three and nine months ended August 31, 2004 and 2003:


	Three Months Ended August 31, 2004							Three Months Ended August 31, 2003
	As Reported			Discontinued Operations		Combined⁽¹⁾		As Reported		Discontinued Operations		Combined⁽¹⁾
	*(In thousands)*
Revenues
Rental income	$	28,689		4,544		33,233		19,112		7,457		26,569
Management and servicing fees		21,641		—		21,641		12,274		—		12,274

Total revenues		50,330		4,544		54,874		31,386		7,457		38,843

Other operating income
Equity in earnings of unconsolidated entities		14,759		—		14,759		11,088		—		11,088
Interest income		40,345		3		40,348		40,059		15		40,074
Gains on sales of:
Real estate		1,473		8,952		10,425		2,220		8,485		10,705
Investment securities		3,393		—		3,393		29,764		—		29,764
Mortgage loans		3,807		—		3,807		—		—		—
Lease termination fee		—		—		—		15,115		—		15,115
Other, net		(1,129	)	—		(1,129	)	(2,578	)	—		(2,578	)

Total other operating income		62,648		8,955		71,603		95,668		8,500		104,168

Costs and expenses
Cost of rental operations		18,779		3,490		22,269		10,705		5,195		15,900
General and administrative		27,397		—		27,397		21,895		—		21,895
Depreciation		5,883		1,146		7,029		3,976		1,880		5,856
Impairment of long-lived assets		—		7,250		7,250		15,050		—		15,050
Minority interests		(136	)	—		(136	)	(215	)	(18	)	(233	)
Interest		26,430		1,362		27,792		25,098		3,147		28,245
Loss on early extinguishment of debt		—		—		—		10,343		—		10,343

Total costs and expenses		78,353		13,248		91,601		86,852		10,204		97,056

Earnings before income taxes		34,625		251		34,876		40,202		5,753		45,955
Income taxes		12,283		98		12,381		13,382		2,243		15,625

Earnings from continuing operations		22,342		153		22,495		26,820		3,510		30,330

Discontinued operations:
Loss from operating properties sold or held for sale, net of tax		(5,308	)	5,308		—		(1,666	)	1,666		—
Gains on sales of operating properties, net of tax		5,461		(5,461	)	—		5,176		(5,176	)	—

Earnings from discontinued operations		153		(153	)	—		3,510		(3,510	)	—

Net earnings	$	22,495		—		22,495		30,330		—		30,330

(1)	See discussion entitled, “Adoption of SFAS No. 144.”


	Nine Months Ended August 31, 2004							Nine Months Ended August 31, 2003
	As Reported			Discontinued Operations		Combined⁽¹⁾		As Reported		Discontinued Operations		Combined⁽¹⁾
	*(In thousands)*
Revenues
Rental income	$	76,010		19,531		95,541		58,143		31,553		89,696
Management and servicing fees		44,570		798		45,368		30,830		—		30,830

Total revenues		120,580		20,329		140,909		88,973		31,553		120,526

Other operating income
Equity in earnings of unconsolidated entities		61,314		—		61,314		36,898		—		36,898
Interest income		123,595		104		123,699		125,497		47		125,544
Gains on sales of:
Real estate		6,046		45,147		51,193		11,522		35,520		47,042
Investment securities		21,270		—		21,270		29,764		—		29,764
Mortgage loans		3,960		—		3,960		—		—		—
Lease termination fee		—		—		—		15,115		—		15,115
Other, net		(1,929	)	—		(1,929	)	(885	)	—		(885	)

Total other operating income		214,256		45,251		259,507		217,911		35,567		253,478

Costs and expenses
Cost of rental operations		47,156		12,733		59,889		31,067		17,754		48,821
General and administrative		75,147		—		75,147		65,121		—		65,121
Depreciation		15,464		3,881		19,345		11,794		6,614		18,408
Impairment of long-lived assets		—		7,250		7,250		15,050		—		15,050
Minority interests		(209	)	—		(209	)	(7	)	(19	)	(26	)
Interest		77,051		5,757		82,808		69,151		10,863		80,014
Loss on early extinguishment of debt		3,440		—		3,440		10,343		—		10,343

Total costs and expenses		218,049		29,621		247,670		202,519		35,212		237,731

Earnings before income taxes		116,787		35,959		152,746		104,365		31,908		136,273
Income taxes		40,201		14,024		54,225		34,540		11,793		46,333

Earnings from continuing operations		76,586		21,935		98,521		69,825		20,115		89,940

Discontinued operations:
Loss from operating properties sold or held for sale, net of tax		(5,605	)	5,605		—		(1,552	)	1,552		—
Gains on sales of operating properties, net of tax		27,540		(27,540	)	—		21,667		(21,667	)	—

Earnings from discontinued operations		21,935		(21,935	)	—		20,115		(20,115	)	—

Net earnings	$	98,521		—		98,521		89,940		—		89,940

(1)	See discussion entitled, “Adoption of SFAS No. 144.”

The following tables summarize our results of operations for the three and nine months ended August 31, 2004 and 2003, after allocating among the core business segments certain non-corporate general and administrative expenses:


	Three Months Ended August 31, 2004							Three Months Ended August 31, 2003
	As Reported			Discontinued Operations		Combined⁽¹⁾		As Reported		Discontinued Operations		Combined⁽¹⁾
	*(In thousands)*
Revenues and other operating income
Real estate properties	$	50,050		13,499		63,549		48,845		15,957		64,802
Real estate loans		18,630		—		18,630		14,678		—		14,678
Real estate securities		44,298		—		44,298		63,531		—		63,531

Total revenues and other operating income		112,978		13,499		126,477		127,054		15,957		143,011

Costs and expenses
Real estate properties		31,587		11,886		43,473		37,091		7,057		44,148
Real estate loans		1,162		—		1,162		950		—		950
Real estate securities		7,825		—		7,825		5,207		—		5,207
Corporate and interest		37,779		1,362		39,141		43,604		3,147		46,751

Total costs and expenses		78,353		13,248		91,601		86,852		10,204		97,056

Earnings from continuing operations before income taxes
Real estate properties		18,463		1,613		20,076		11,754		8,900		20,654
Real estate loans		17,468		—		17,468		13,728		—		13,728
Real estate securities		36,473		—		36,473		58,324		—		58,324
Corporate and interest		(37,779	)	(1,362	)	(39,141	)	(43,604	)	(3,147	)	(46,751	)

Earnings before income taxes		34,625		251		34,876		40,202		5,753		45,955
Income taxes		12,283		98		12,381		13,382		2,243		15,625

Earnings from continuing operations		22,342		153		22,495		26,820		3,510		30,330

Discontinued operations:
Loss from operating properties sold or held for sale, net of tax		(5,308	)	5,308		—		(1,666	)	1,666		—
Gains on sales of operating properties, net of tax		5,461		(5,461	)	—		5,176		(5,176	)	—

Earnings from discontinued operations		153		(153	)	—		3,510		(3,510	)	—

Net earnings	$	22,495		—		22,495		30,330		—		30,330

(1)	See discussion entitled, “Adoption of SFAS No. 144.”


	Nine Months Ended August 31, 2004							Nine Months Ended August 31, 2003
	As Reported			Discontinued Operations		Combined⁽¹⁾		As Reported		Discontinued Operations		Combined⁽¹⁾
	*(In thousands)*
Revenues and other operating income
Real estate properties	$	154,038		65,580		219,618		126,154		67,120		193,274
Real estate loans		46,708		—		46,708		37,852		—		37,852
Real estate securities		134,090		—		134,090		142,878		—		142,878

Total revenues and other operating income		334,836		65,580		400,416		306,884		67,120		374,004

Costs and expenses
Real estate properties		83,458		23,864		107,322		80,722		24,349		105,071
Real estate loans		3,371		—		3,371		3,134		—		3,134
Real estate securities		21,343		—		21,343		17,456		—		17,456
Corporate and interest		109,877		5,757		115,634		101,207		10,863		112,070

Total costs and expenses		218,049		29,621		247,670		202,519		35,212		237,731

Earnings before income taxes
Real estate properties		70,580		41,716		112,296		45,432		42,771		88,203
Real estate loans		43,337		—		43,337		34,718		—		34,718
Real estate securities		112,747		—		112,747		125,422		—		125,422
Corporate and interest		(109,877	)	(5,757	)	(115,634	)	(101,207	)	(10,863	)	(112,070	)

Earnings before income taxes		116,787		35,959		152,746		104,365		31,908		136,273
Income taxes		40,201		14,024		54,225		34,540		11,793		46,333

Earnings from continuing operations		76,586		21,935		98,521		69,825		20,115		89,940

Discontinued operations:
Loss from operating properties sold or held for sale, net of tax		(5,605	)	5,605		—		(1,552	)	1,552		—
Gains on sales of operating properties, net of tax		27,540		(27,540	)	—		21,667		(21,667	)	—

Earnings from discontinued operations		21,935		(21,935	)	—		20,115		(20,115	)	—

Net earnings	$	98,521		—		98,521		89,940		—		89,940

(1)	See discussion entitled, “Adoption of SFAS No. 144.”

Three and nine months ended August 31, 2004 compared to three and nine months ended August 31, 2003

Net earnings for the three-month period ended August 31, 2004 were $22.5 million compared to $30.3 million for the same period in 2003. The decrease was primarily due to (i) lower gains on sales of securities, primarily due to a resecuritization transaction completed in the prior year, (ii) a $7.3 million impairment charge recorded in 2004 on a real estate property asset we decided to offer for sale earlier than originally planned and (iii) higher general and administrative expenses. These decreases were partially offset by (i) a pretax loss of $10.3 million in the prior year related to the redemption at a premium of $200.0 million principal amount of our 9.375% senior subordinated notes due 2008, (ii) higher management and servicing fee income due to the growth of our special servicing activity, (iii) higher gains on sales of mortgage loans, (iv) higher equity in earnings of unconsolidated entities primarily due to higher gains on sales of assets within real estate property entities, and (v) lower income tax expense primarily due to lower pretax income. Additionally, during the third quarter of 2003, we received a lease termination fee and recorded an asset impairment charge related to one property asset which offset each other, as discussed under the caption Real Estate Properties below. Net earnings for the nine-month period ended August 31, 2004 were $98.5 million compared to $89.9 million for the same period in 2003. The increase was primarily due to (i) higher gains on sales of real estate property assets, including sales of property assets within unconsolidated entities and gains on sales of property assets characterized as earnings from discontinued operations, (ii) higher management and servicing fee income, (iii) a lower pretax loss in 2004 from the early extinguishment of debt, and (iv) higher gains on sales of mortgage loans. These increases were partially offset by (i) higher general and administrative expenses, (ii) lower gains on sales of real estate securities in 2004, (iii) the impairment charge recorded in 2004 on a real estate property asset, as discussed above, (iv) higher income tax expense primarily due to a higher pretax income, and (v) lower net rents (rental income less cost of rental operations, including net rents characterized as earnings from discontinued operations), primarily resulting from the sale of properties throughout 2003 and 2004.

On an as reported basis, revenues and other operating income for the three- and nine-month periods ended August 31, 2004 were $113.0 million and $334.8 million, respectively, compared to $127.1 million and $306.9 million for the same respective periods in 2003. On a combined basis (i.e., including revenues and gains on sales of properties classified as discontinued operations), revenues and other operating income for the three- and nine-month periods ended August 31, 2004 were $126.5 million and $400.4 million, respectively, compared to $143.0 million and $374.0 million for the same respective periods in 2003. The decrease in revenues and other operating income on a combined basis for the three-month period was primarily due to (i) lower gains on sales of securities primarily due to a resecuritization transaction completed in the prior year, and (ii) lease termination fee income received in the prior year, as discussed under the caption Real Estate Properties below. These decreases were partially offset by (i) higher management and servicing fee income, (ii) higher rental income primarily due to the acquisition of a portfolio of income producing properties in the first quarter of 2004, (iii) higher gains on sales of mortgage loans, and (iv) higher equity in earnings of unconsolidated entities, primarily due to higher gains on sales of assets within real estate property entities. The increase in revenues and other operating income on a combined basis for the nine-month period was primarily due to (i) higher gains on sales of real estate property assets, including sales of property assets within unconsolidated entities, (ii) higher management and servicing fee income, (iii) higher rental income, and (iv) higher gains on sales of mortgage loans. These increases were partially offset by the lease termination fee received in 2003 and higher gains on sales of real estate securities recorded in 2003.

Real Estate Properties


	Three Months Ended August 31, 2004						Three Months Ended August 31, 2003
	As Reported			Discontinued Operations	Combined⁽¹⁾		As Reported		Discontinued Operations		Combined⁽¹⁾
	*(In thousands)*
Revenues
Rental income	$	28,689		4,544	33,233		19,112		7,457		26,569
Management fees		596		—	596		586		—		586

Other operating income
Equity in earnings of unconsolidated entities		19,193		—	19,193		12,075		—		12,075
Interest income		61		3	64		68		15		83
Gains on sales of real estate		1,473		8,952	10,425		2,220		8,485		10,705
Lease termination fee		—		—	—		15,115		—		15,115
Other, net		38		—	38		(331	)	—		(331	)

Total revenues and other operating income		50,050		13,499	63,549		48,845		15,957		64,802

Costs and expenses
Cost of rental operations		18,779		3,490	22,269		10,705		5,195		15,900
General and administrative		7,061		—	7,061		7,575		—		7,575
Depreciation		5,883		1,146	7,029		3,976		1,880		5,856
Impairment of long-lived assets		—		7,250	7,250		15,050		—		15,050
Minority interests		(136	)	—	(136	)	(215	)	(18	)	(233	)

Total costs and expenses⁽²⁾		31,587		11,886	43,473		37,091		7,057		44,148

Earnings before income taxes	$	18,463		1,613	20,076		11,754		8,900		20,654

(1)	See discussion entitled, “Adoption of SFAS No. 144.”

(2)	Costs and expenses do not include interest expense.


	Nine Months Ended August 31, 2004							Nine Months Ended August 31, 2003
	As Reported			Discontinued Operations		Combined⁽¹⁾		As Reported		Discontinued Operations		Combined⁽¹⁾
	*(In thousands)*
Revenues
Rental income	$	76,010		19,531		95,541		58,143		31,553		89,696
Management fees		1,592		798		2,390		2,355		—		2,355

Other operating income
Equity in earnings of unconsolidated entities		70,198		—		70,198		39,028		—		39,028
Interest income		400		104		504		313		47		360
Gains on sales of real estate		6,046		45,147		51,193		11,522		35,520		47,042
Lease termination fee		—		—		—		15,115		—		15,115
Other, net		(208	)	—		(208	)	(322	)	—		(322	)

Total revenues and other operating income		154,038		65,580		219,618		126,154		67,120		193,274

Costs and expenses
Cost of rental operations		47,156		12,733		59,889		31,067		17,754		48,821
General and administrative		21,054		—		21,054		22,825		—		22,825
Depreciation		15,464		3,881		19,345		11,794		6,614		18,408
Impairment of long-lived assets		—		7,250		7,250		15,050		—		15,050
Minority interests		(216	)	—		(216	)	(14	)	(19	)	(33	)

Total costs and expenses⁽²⁾		83,458		23,864		107,322		80,722		24,349		105,071

Earnings before income taxes	$	70,580		41,716		112,296		45,432		42,771		88,203

Balance sheet data:
Operating properties and equipment, net	$	744,325		59,644		803,969		500,657		182,196		682,853
Assets held for sale		60,494		(60,494	)	—		186,066		(186,066	)	—
Land held for investment		69,218		—		69,218		55,653		—		55,653
Investments in unconsolidated entities		450,067		—		450,067		284,921		—		284,921
Other assets		30,535		850		31,385		29,117		3,870		32,987

Total segment assets	$	1,354,639		—		1,354,639		1,056,414		—		1,056,414

(1)	See discussion entitled, “Adoption of SFAS No. 144.”

(2)	Costs and expenses do not include interest expense.

Real estate properties include office buildings, 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), industrial/warehouse facilities, hotels, retail centers and land that we acquire, develop, reposition, manage and sell. These properties may be wholly owned or owned through partnerships or other entities that are either consolidated or accounted for by the equity method, and therefore reflected on our balance sheets only as investments in unconsolidated entities. Total revenues and other operating income from real estate properties include

rental income from consolidated operating properties, equity in earnings of unconsolidated entities that own and operate real estate properties, gains on sales of properties or interests in those unconsolidated entities, and fees earned from managing those entities. Costs and 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 entities.

Three and nine months ended August 31, 2004 compared to three and nine months ended August 31, 2003

Earnings before income taxes from real estate properties on an as reported basis for the three- and nine-month periods ended August 31, 2004 were $18.5 million and $70.6 million, respectively, compared to $11.8 million and $45.4 million for the same respective periods in 2003. These increases were primarily due to higher gains on sales of real estate property assets within unconsolidated entities. Earnings before income taxes on a combined basis for the three- and nine-month periods ended August 31, 2004 were $20.1 million and $112.3 million, respectively, compared to $20.7 million and $88.2 million for the same respective periods in 2003. The slight decrease for the three-month period was primarily due to a $7.3 million property impairment charge taken in 2004, almost fully offset by higher gains on sales of real estate property assets within unconsolidated entities. The increase for the nine-month period was primarily due to higher gains on sales of real estate property assets, including sales of property assets within unconsolidated entities, partially offset by the impairment charge mentioned above and lower net rents.

Gains on sales of assets fluctuate from quarter to quarter primarily due to the timing of asset sales. Gains on sales of real estate property assets within unconsolidated entities were $5.9 million and $47.2 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $0.0 million and $18.5 million for the same respective periods in 2003. On an as reported basis, gains on sales of consolidated real estate property assets were $1.5 million and $6.0 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $2.2 million and $11.5 million for the same respective periods in 2003. On a combined basis, gains on sales of consolidated real estate property assets were $10.4 million and $51.2 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $10.7 million and $47.0 million for the same respective periods in 2003.

On a combined basis, net rents were $11.0 million and $35.7 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $10.7 million and $40.9 million for the same respective periods in 2003. The decrease for the nine-month period ended August 31, 2004 was primarily due to sales of properties throughout 2003 and 2004 and the loss of a tenant in the third quarter of 2003 that leased 100% of one of our office buildings, as discussed below. These decreases were partially offset by an increase in net rents from the portfolio of income producing properties acquired from Newhall Land and Farming Company (“Newhall”) late in the first quarter of 2004.

On an as reported basis and on a combined basis, the cost of rental operations as a percentage of rental income increased for both the three- and nine-month periods ended August 31, 2004, compared to the same periods in 2003, primarily due to the loss of a tenant that had leased 100% of one of our office buildings in 2003, as discussed below, and the acquisition of a hotel earlier this year (hotels generally have higher costs as a percentage of rental income). The increase for the nine-month period on a combined basis was also due to sales of operating properties in 2003 subject to triple net leases which have lower costs as a percentage of rental income.

During the third quarter of 2004, we recorded in results of discontinued operations a $7.3 million impairment charge on an office property which we decided to market for sale earlier than originally planned.

During the third quarter of 2003, we received a lease termination fee from a tenant that had originally leased 100% of one of our office buildings for ten years. As a result of the termination, we recorded lease termination fee income of $15.1 million in the third quarter of 2003, which was offset by a $15.1 million impairment charge to reflect the reduction in the building’s market value without the tenant.

The net book value of operating properties and equipment with regard to various types of properties we own at August 31, 2004, together with the yield and the occupancy for the stabilized operating properties, follows:


	Net Book Value			Occupancy Rate⁽¹⁾		Yield on Net Book Value⁽²⁾
	*(In thousands, except percentages)*
Market-rate operating properties
Stabilized operating properties:
Office	$	115,562		76	%	14	%
Retail		127,296		88	%	11	%
Industrial / warehouse		29,070		100	%	14	%
Ground leases		4,475		100	%	11	%

Commercial		276,403		86	%	12	%
Hotel		68,909		70	%	8	%

		345,312				12	%

Under development or repositioning:
Office		229,767
Retail		50,201
Industrial / warehouse		1,902
Ground leases		368

Commercial		282,238
Multi-family		17,881
Hotel		28,003

		328,122

Total market-rate operating properties		673,434
Affordable housing communities		119,030

Total operating properties		792,464
Furniture, fixtures and equipment		11,505

		803,969
Assets held for sale		(59,644	)

Total operating properties and equipment	$	744,325

(1)	Occupancy rate at August 31, 2004.

(2)	Yield for purposes of this schedule is rental income less cost of rental operations before commissions and non-operating expenses during the nine-month period ended August 31, 2004, annualized.

As of both August 31, 2004 and 2003, our market-rate stabilized operating property portfolio, including assets held for sale, was yielding in total approximately 12% on net book value. As of August 31, 2004 and 2003, our market-rate development or repositioning portfolio, including assets held for sale, was yielding in total 3% and 5%, respectively, on net book value.

Occupancy levels for our market-rate stabilized commercial real estate property portfolio, including assets held for sale, decreased to 86% at August 31, 2004, compared to 91% at August 31, 2003. The decrease in the occupancy levels was primarily due to a decrease in the square footage leased by a major tenant in a class “A” office building located in Atlanta, Georgia.

We entered the business of owning, developing and syndicating affordable housing communities in 1998. In this business, we create or invest in entities that hold interests in multi-family real estate properties that are eligible for affordable housing tax credits granted under Section 42 of the Internal Revenue Code. In 2000, we began to shift our strategy away from owning the majority of the interests in affordable housing community entities toward syndicating those interests. After such syndications, we continue to hold small interests (typically ranging from less than 1% to 10%) in these entities and provide certain limited guarantees to the investors. We may also continue to manage the communities and/or provide tax compliance and other services on behalf of the investors, for which we receive fees. As a result of the shift in strategy, our total investment in affordable housing communities, as well as the amount of tax credits we hold and utilize to reduce our tax rate, has continued to decline.

Our net investment in our affordable housing communities at August 31, 2004, was as follows:


	August 31, 2004
	*(In thousands)*
Operating properties	$	119,030
Investments in unconsolidated entities		18,868
Debt and other		(123,548	)

Net investment in affordable housing communities	$	14,350

As of August 31, 2004, we had been awarded and held rights to $17.7 million in gross tax credits, compared with $60.3 million in gross tax credits at August 31, 2003. Our net investment in affordable housing communities at August 31, 2004 was $14.4 million, compared to $49.2 million at August 31, 2003. The decrease in tax credits and in our investment in affordable housing communities primarily reflects the sale and syndication of interests in affordable housing community entities. For certain syndicated affordable housing communities under development, we have recorded the receipt of syndication proceeds as liabilities under the deposit method of accounting. We expect to record the sale of these properties upon completion and lease up, which will further reduce the balance of operating properties and debt related to our affordable housing communities.

Real Estate Loans


	Three Months Ended August 31,					Nine Months Ended August 31,
	2004			2003		2004		2003
	*(In thousands)*
Revenues
Management fees	$	159		592		691		1,278

Other operating income
Interest income		14,967		14,043		41,883		36,294
Equity in (losses) earnings of unconsolidated entities		(201	)	(47	)	275		204
Gains on sales of mortgage loans		3,807		—		3,960		—
Other, net		(102	)	90		(101	)	76

Total revenues and other operating income		18,630		14,678		46,708		37,852

Costs and expenses
General and administrative		1,162		950		3,371		3,134

Total costs and expenses⁽¹⁾		1,162		950		3,371		3,134

Earnings before income taxes	$	17,468		13,728		43,337		34,718

Balance sheet data:
Mortgage loans, net	$	455,379		449,811		455,379		449,811
Investments in unconsolidated entities		3,782		1,241		3,782		1,241
Other assets		7,426		2,609		7,426		2,609

Total segment assets	$	466,587		453,661		466,587		453,661

(1)	Costs and expenses do not include interest expense.

Real estate loans include our direct investments in high yielding loans, as well as our discount loan portfolio investments, owned primarily through unconsolidated entities, and related loan workout operations. Total revenues and other operating income from real estate loans include interest income, gains on sales of real estate loans, equity in earnings of unconsolidated entities and management fees earned from those entities. Costs and expenses include the overhead associated with servicing the loans and managing the unconsolidated entities.

Over the past several years, the majority of investing activity within the real estate loan segment has been in structured junior participations in short- to medium-term variable-rate real estate loans (“B-notes”), most of which represent participations in first mortgage loans. Most of our B-note investments are match-funded with variable-rate debt of similar term. At August 31, 2004, we had no delinquencies in our B-note portfolio.

Three and nine months ended August 31, 2004 compared to three and nine months ended August 31, 2003

Earnings before income taxes from real estate loans for the three- and nine-month periods ended August 31, 2004 were $17.5 million and $43.3 million, respectively, compared to $13.7 million and $34.7 million for the same respective periods in 2003. These increases were primarily attributable to higher gains on sales of mortgage loans and higher interest income.

Gains on sales of mortgage loans for the three- and nine-month periods ended August 31, 2004 were $3.8 million and $4.0 million, respectively, compared to $0.0 million and $0.0 million for the same respective periods in 2003. During the third quarter of 2004, we sold a mortgage loan assumed by us through the unwinding of a CMBS trust, which occurred during the second quarter of 2004, for a gain of $3.8 million.

Interest income from real estate loans for the three- and nine-month periods ended August 31, 2004 was $15.0 million and $41.9 million, respectively, compared to $14.0 million and $36.3 million for the same respective periods in 2003. The increase for the nine-month period primarily reflects a higher average level of loan investments during 2004, partially offset by income in 2003 realized from profit participation collections on certain mezzanine loans and the payoff of a loan acquired at a discount.

During the quarter ended August 31, 2004, we funded two additional B-note investments for $58.1 million and we received $94.4 million from the payment in full of four B-note investments and the partial sale of one B-note investment, bringing the total B-note principal balance to $455.6 million at August 31, 2004.

Real Estate Securities


	Three Months Ended August 31,					Nine Months Ended August 31,
	2004			2003		2004		2003
	*(In thousands)*
Revenues
Management and servicing fees	$	20,886		11,096		42,287		27,197

Other operating income
Interest income		25,317		25,948		81,312		88,890
Equity in losses of unconsolidated entities		(4,233	)	(940	)	(9,159	)	(2,334	)
Gains on sales of investment securities		3,393		29,764		21,270		29,764
Other, net		(1,065	)	(2,337	)	(1,620	)	(639	)

Total revenues and other operating income		44,298		63,531		134,090		142,878

Costs and expenses
General and administrative		7,825		5,207		21,336		17,449
Minority interests		—		—		7		7

Total costs and expenses⁽¹⁾		7,825		5,207		21,343		17,456

Earnings before income taxes	$	36,473		58,324		112,747		125,422

Balance sheet data:
Investment securities	$	1,033,804		986,723		1,033,804		986,723
Investments in unconsolidated entities		40,158		94,149		40,158		94,149
Other assets		31,507		16,253		31,507		16,253

Total segment assets	$	1,105,469		1,097,125		1,105,469		1,097,125

(1)	Costs and 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 our investment in non-investment grade notes and preferred shares related to resecuritization transactions which are collateralized by CMBS, our investment in Madison Square Company LLC (“Madison”), a limited liability company that invests primarily in CMBS, as well as investments in entities in similar businesses. Total revenues and other operating income from real estate securities include interest income, equity in earnings of unconsolidated entities, gains on sales of investment securities, servicing fees from acting as special servicer for CMBS transactions and fees earned from managing unconsolidated entities. Costs and expenses include the overhead associated with managing the investments and unconsolidated entities, and costs to perform our special servicing responsibilities.

During the third quarter of 2004, we acquired Hatfield Philips International (“HPI”), a European commercial real estate loan servicer. HPI is a Fitch and Standard & Poor’s rated servicer and special servicer, with several years of loan servicing experience across Europe. The acquisition of HPI did not have a material impact on our financial position or results of operation for the third quarter of 2004.

Three and nine months ended August 31, 2004 compared to three and nine months ended August 31, 2003

Earnings before income taxes from real estate securities for the three- and nine-month periods ended August 31, 2004 were $36.5 million and $112.7 million, respectively, compared to $58.3 million and $125.4 million for the same respective periods in 2003. For the three-month period ended August 31, 2004, the decrease reflects lower gains on sales of securities and higher equity in losses of unconsolidated entities, partially offset by higher management and servicing fees. The decrease for the nine-month period reflects lower gains on sales of securities, lower interest income, higher equity in losses of unconsolidated entities and higher operating expenses, partially offset by higher management and servicing fee income.

Gains on sales of securities were $3.4 million and $21.3 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $29.8 million and $29.8 million for the same respective periods in 2003. During the current year, gains on sales of securities were primarily due to the sale in the first quarter of 2004 of $28.7 million face amount of investment grade CMBS through a resecuritization of one non-investment grade rated CMBS bond. The $28.7 million face amount of investment grade bonds were sold to unrelated third parties for total cash proceeds of $30.3 million, resulting in a pretax gain of $17.3 million. During the third quarter of 2003, we sold $420 million face amount of investment grade CMBS through a resecuritization of a pool of non-investment grade CMBS investments and recognized a pretax gain of $29.3 million.

Equity in losses of unconsolidated entities were $4.2 million and $9.2 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $0.9 million and $2.3 million for the same respective periods in 2003. The decline in earnings was primarily due to reduced income from Madison because of lower interest income resulting from the timing and amount of expected principal collections related to short-term floating-rate securities owned by the venture and higher interest expense due to a refinancing within the venture. Madison refinanced its debt in the second quarter of 2004 through a resecuritization of most of its CMBS portfolio (the “CDO”). Approximately $1.1 billion face amount of non-investment grade CMBS was resecuritized into various classes of non-recourse bonds comprised of $524 million face amount of investment grade rated notes, $120 million face amount of non-investment grade rated notes, and $412 million of unrated notes. The investment grade notes were sold to one of the partners, generating sufficient proceeds to repay Madison’s existing debt. The non-investment grade notes were distributed pro rata to the Madison partners, and Madison retained the unrated notes. The CDO, which effectively match-term financed Madison’s assets with its liabilities, was accounted for as a financing. At the end of the third quarter of 2004, our investment in Madison was $37.4 million. Since inception, we have received $185.8 million in cash distributions and fees from Madison on an original investment of $90.1 million.

Interest income was $25.3 million and $81.3 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $25.9 million and $88.9 million for the same respective periods in 2003. The decrease for the nine-month period was primarily related to a lower average level of CMBS investments during the 2004 period, mostly due to the resecuritization transaction in 2003, and a higher level of write-downs on certain bonds due to cash flow projections where we utilized the highest anticipated level of loss severity among possible outcomes.

In recording CMBS interest income, we recognize the amount by which cash flows over the life of a security are expected to exceed our initial investment as interest income to achieve a level yield. Our initial and ongoing estimates of cash flows from CMBS investments are made by management based on certain assumptions, which include, but are not limited to, anticipated collectibility of principal and interest on the underlying loans and the anticipated amount and timing of projected principal repayments or losses. Changes in cash flow estimates could materially affect the interest income that is recognized in future periods.

Since we invest in subordinated classes of CMBS, we generally do not receive principal payments until the principal of the senior classes of an issue is paid in full. However, we are currently receiving principal payments from 18 classes of our CMBS securities, and 44 classes (excluding securities sold in resecuritization transactions in 2004, 2003 and 2002) have reached economic maturity either through the collection of principal, liquidation of the trust, or sale. Through resecuritization transactions completed in 2004, 2003 and 2002, we also sold an additional 121 classes of securities and portions of 101 other classes.

During the quarter ended August 31, 2004, we acquired $208.1 million face amount of non-investment grade CMBS for $100.1 million. The following is a summary of the CMBS portfolio we held at August 31, 2004, categorized based on the bonds’ ratings at the time of purchase:


	Face Amount		Weighted Average Interest Rate		Book Value		% of Face Amount		Weighted Average Cash Yield⁽¹⁾		Weighted Average Book Yield⁽²⁾
	*(In thousands, except percentages)*
Fixed-rate:
BB rated or above	$	568,704	6.23	%	$	399,176	70.2	%	8.9	%	11.1	%
B rated		521,691	6.54	%		248,337	47.6	%	12.9	%	12.9	%
Unrated		1,270,272	5.68	%		174,783	13.8	%	34.7	%	22.2	%

Total		2,360,667	6.00	%		822,296	34.8	%	15.6	%	14.0	%

Floating-rate/short-term:
BB rated or above		56,528	7.78	%		39,653	70.1	%	11.1	%	7.6	%
B rated		30,188	7.12	%		28,361	93.9	%	8.2	%	7.6	%
Unrated		52,598	14.58	%		26,496	50.4	%	33.7	%	22.1	%

Total		139,314	10.21	%		94,510	67.8	%	16.5	%	11.7	%

Total amortized cost		2,499,981	6.23	%		916,806	36.7	%	15.7	%	13.7	%
Excess of estimated fair value over amortized cost		—				116,998

Total CMBS portfolio⁽³⁾	$	2,499,981			$	1,033,804

(1)	Cash yield is determined by annualizing the actual cash received during the month of August 2004, and dividing the result by the book value at August 31, 2004.

(2)	Book yield is determined by annualizing the interest income for the month of August 2004, and dividing the result by the book value at August 31, 2004.

(3)	This table excludes CMBS owned through unconsolidated entities.

At August 31, 2004, our overall annualized weighted average cash and book yields were approximately 16% and 14%, respectively, compared with approximately 16% and 15% for cash and book yields, respectively, at August 31, 2003.

Management and servicing fee income was $20.9 million and $42.3 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $11.1 million and $27.2 million for the same respective periods in 2003. The increases were primarily due to the growth of our special servicing activity.

Operating expenses were $7.8 million and $21.3 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $5.2 million and $17.4 million for the same respective periods in the prior year, primarily due to increases in personnel and out-of-pocket expenses directly related to the growth of our CMBS portfolio and increased special servicing activity.

Corporate and Interest Expense

Three and nine months ended August 31, 2004 compared to three and nine months ended August 31, 2003

Corporate costs and expenses, excluding interest expense and loss on early extinguishment of debt, were $11.3 million and $29.4 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $8.2 million and $21.7 million for the same respective periods in 2003. The increase for both the three- and nine-month periods was due to increased staffing levels and the accrual of legal and other costs incurred in the third quarter of 2004 related to the proposed acquisition as discussed in Note 3 to the unaudited consolidated condensed financial statements in Item 1. The increase for the nine-month period was also due to amortization related to restricted stock granted to senior officers in the second quarter of 2003.

On an as reported basis, interest expense was $26.4 million and $77.1 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $25.1 million and $69.2 million for the same respective periods in 2003. On a combined basis, interest expense was $27.8 million and $82.8 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $28.2 million and $80.0 million for the same respective periods in 2003. The decrease on a combined basis for the three-month period ended August 31, 2004, compared to the same period in 2003, was primarily due to lower average interest rates, partially offset by higher average debt balances. The increase on a combined basis for the nine-month period ended August 31, 2004, compared to the same period in 2003, was primarily due to higher average debt balances, partially offset by lower average interest rates. The weighted average interest rate on outstanding debt was 5.9% at August 31, 2004, compared to 6.4% at August 31, 2003.

Included in corporate costs and expenses for the nine-month period ended August 31, 2004 was a pretax loss of $3.4 million recorded in earnings from continuing operations related to the redemption at a premium of $45.3 million principal amount of our 10.5% senior subordinated notes due 2009. Included in corporate costs and expenses for the three- and nine-month periods ended August 31, 2003, was a pretax loss of $10.3 million recorded in earnings from continuing operations related to the redemption at a premium of $200.0 million principal amount of our 9.375% senior subordinated notes due 2008.

Income Tax Expense

Three and nine months ended August 31, 2004 compared to three and nine months ended August 31, 2003

On an as reported basis, income tax expense was $12.3 million and $40.2 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $13.4 million and $34.5 million for the same respective periods in 2003. On a combined basis, income tax expense was $12.4 million and $54.2 million for the three- and nine-month periods ended August 31, 2004, respectively, compared to $15.6 million and $46.3 million for the same respective periods in 2003. On a combined basis, the effective tax rate for the nine-month period ended August 31, 2004 was 35.5% compared to 34.0% for the same period in 2003. The increase in the effective tax rate was primarily due to lower affordable housing tax credits.

2. LIQUIDITY AND FINANCIAL RESOURCES

Our operating activities provided $85.2 million of cash for the nine-month period ended August 31, 2004, compared to $43.1 million for the same period in 2003. The increase in cash provided by operating activities was primarily due to an increase in accounts payable and accrued liabilities in 2004 compared to a decrease in 2003, primarily due to a reduction in our deferred tax liability in 2003 and a greater level of deposits from affordable housing syndications. This increase was partially offset by a greater increase in other assets.

Our investing activities used $280.3 million of cash for the nine-month period ended August 31, 2004, and provided $212.8 million of cash for the same period in 2003. The increase in cash used in investing activities was primarily due to (i) lower proceeds from sales of investment securities primarily because there was a large resecuritization transaction in 2003, (ii) a higher level of investment spending on operating properties and investments in unconsolidated entities, primarily related to the acquisition of Newhall in the first quarter of 2004, (iii) an increase in restricted cash, primarily due to cash held in escrow to be used for future asset purchases, and (iv) a higher level of investment spending on land held for investment. These increases in cash used in investing activities were partially offset by (i) higher proceeds from sales of operating properties, (ii) a lower level of investment spending on investment securities, and (iii) higher distributions of capital from unconsolidated entities, primarily due to a higher level of sales of property assets within unconsolidated entities.

Our financing activities provided $197.1 million of cash for the nine-month period ended August 31, 2004, and used $241.2 million of cash for the same period in 2003. The increase in cash provided by financing activities was primarily due to (i) higher net proceeds under repurchase agreements and revolving credit lines, (ii) a lower level of purchases and retirements of treasury stock, and (iii) higher net proceeds from mortgage notes and other debts payable. These increases were partially offset by lower net proceeds from the issuance of senior subordinated notes.

We continue to diversify our capital structure and to manage our debt position with a combination of short-, medium- and long-term financings with a goal of matching the maturities of our debt with the expected lives of our assets.

At August 31, 2004, we had $1.9 billion of available liquidity, which included just under $1.9 billion of cash and availability under existing credit facilities, and $69.9 million under committed project level term financings.

We have a $400.0 million unsecured revolving credit facility, which is recourse to us and matures in July 2006 assuming a one-year extension option is exercised. At August 31, 2004, this facility had an outstanding balance of $4.6 million, and we had $12.6 million of outstanding letters of credit utilizing this facility. Interest is variable and is based on a range of LIBOR plus 175 – LIBOR plus 325, depending on our leverage. At August 31, 2004, interest was LIBOR plus 200. The facility contains certain financial tests and restrictive covenants, none of which are currently expected to restrict our activities.

We have various secured revolving lines of credit with an aggregate commitment of $446.3 million, all of which is recourse to us. At August 31, 2004, $16.6 million was outstanding under these revolving lines of credit. Interest is variable and is based on a range of LIBOR plus 75 – LIBOR plus 250. These lines are collateralized by CMBS and mortgage loans with maximum maturity through February 2009. The agreements contain certain financial tests and restrictive covenants, none of which are currently expected to restrict our activities.

We have financed some of our purchases of CMBS and B-notes under reverse repurchase obligation facilities (“repos”), which are in effect borrowings secured by the CMBS and B-notes. The repo agreements contain provisions that may require us to repay amounts or post additional collateral prior to the scheduled maturity dates under certain circumstances. If the market value of the CMBS which collateralize the financings falls significantly, we could be required either to use cash flow we need to operate and grow our business, or to sell assets at a time when it may not be most appropriate for us to do so, to generate cash needed to repay amounts due under the terms of those repo obligations.

At August 31, 2004, we had eight repos through which we financed selected CMBS and B-notes. Our repos are summarized as follows:

Commitment

Amount

Outstanding
Amount

Collateral
Type

Interest Rate

Maturity Date

Recourse

(In thousands)

100,000

51,304

CMBS

LIBOR + 150-250

April 2007

Non-recourse

150,000

49,088

CMBS

LIBOR + 125-225

April 2005

Non-recourse

3,687

CMBS

LIBOR + 125

September 2004

Non-recourse

430,000

18,626

CMBS

LIBOR + 150-300

January 2008

Limited recourse⁽¹⁾

120,000

4,385

CMBS

LIBOR + 150-190

January 2005

Recourse

75,000

—

B-notes

LIBOR + 150-225

February 2006

Non-recourse

100,000

—

B-notes

LIBOR + 150-225

February 2007

Recourse

100,000

—

B-notes

LIBOR + 175-275

November 2007

Recourse

1,078,687

127,090

(1)	$18.6 million of the commitment is recourse.

We have seller financing in the form of a term loan for one mortgage loan investment, which we have guaranteed. This facility had an outstanding balance of $8.1 million at August 31, 2004, and matures in July 2005, which matches the maturity date of the mortgage loan securing the facility. Interest on this term loan is variable at LIBOR plus 125.

At August 31, 2004, we had $985.2 million of long-term unsecured senior subordinated notes outstanding. $235.0 million of these notes bear interest at 5.5%, are due in March 2023, and can be converted into our common stock if the market price of our common stock exceeds 120% of the conversion price of $45.28 during certain periods or in other specified instances, as discussed in Note 2 to our unaudited consolidated condensed financials statements in Item 1. We expect these conditions to be met and the notes to be convertible during the fourth quarter of 2004. $350.0 million of these notes bear interest at 7.625% and are due in July 2013. $400.2 million of these notes bear interest at 7.25% and are due in October 2013.

Approximately 35% of our existing indebtedness bears interest at variable rates. However, most of our investments generate interest or rental income at essentially fixed rates. We have entered into derivative financial instruments, primarily interest rate swaps, to manage our interest costs and hedge against risks associated with changing interest rates on our debt portfolio. We believe our interest rate risk management policy is generally effective. Nonetheless, our profitability may be adversely affected during particular periods as a result of changing interest rates. Additionally, hedging transactions using derivative instruments involve risks such as counterparty credit risk. The counterparties to our arrangements are major financial institutions, rated A- or better, with which we and our affiliates may also have other financial relationships.

We continue our efforts to maintain a highly match-funded balance sheet. In order to minimize the effects of interest rate risk, we seek to match fixed-rate assets with fixed-rate debt, and floating-rate assets with floating-rate debt. As of August 31, 2004, we estimate that a 100 basis point increase in LIBOR would increase our net earnings by $0.2 million, or $0.01 per share diluted. At August 31, 2004, our weighted average debt maturity was 6.7 years, which we believe matches well with our expected asset holding periods.

During the quarter ended August 31, 2004, we did not purchase any shares of our common stock under our stock repurchase program or our Employee Share Repurchase Plan. As of August 31, 2004, there were 3.4 million shares remaining that we were authorized to buy back under our stock repurchase program. However, additional share repurchases could adversely affect our credit ratings.

OFF-BALANCE SHEET ARRANGEMENTS

From time to time in the normal course of our business, we enter into various types of transactions and arrangements that are not reflected on our balance sheet. These off-balance sheet arrangements include certain commitments and contingent obligations, retained interests in assets transferred to unconsolidated entities, and investments in certain unconsolidated entities.

Commitments and Contingent Obligations

We are obligated, under various types of agreements, to provide guarantees. In accordance with SFAS No. 5, “Accounting for Contingencies,” we have recorded $11.7 million of liabilities related to obligations under certain guarantees, where payments are considered to be both probable and reasonably estimable. In addition, in accordance with SFAS No. 66, “Accounting for Sales of Real Estate,” we have recorded $3.5 million of liabilities representing our maximum liability under non-operating guarantees and operating guarantees of an extended duration which we provided at the time of sale of certain interests in affordable housing community entities, even though we do not expect to be required to perform under these guarantees. Except for the amounts described above, our guarantees and similar commitments are not reflected in our financial statements. At August 31, 2004, they include:


			Amount of Commitment Expiration Per Period
	Outstanding Commitments		Less Than 1 Year	1 - 3 Years	4 - 5 Years	After 5 Years
	*(In millions)*
Standby letters of credit	$	12.7	8.7	4.0	—	—
Guarantees of debt⁽¹⁾		27.5	7.1	13.0	6.0	1.4
Limited maintenance guarantees		237.6	37.6	—	—	200.0
Committed capital contributions		34.1	31.5	2.6	—	—
Performance/surety bonds		44.4	13.2	—	1.0	30.2
Affordable housing communities - other		35.6	17.0	12.7	5.7	0.2

Total commitments	$	391.9	115.1	32.3	12.7	231.8

(1)	See “Investments in Unconsolidated Entities” section below for further discussion.

Retained Interests in Assets Transferred to Unconsolidated Entities

In the first quarter of 2004, we sold $50.4 million face amount of a non-investment grade CMBS bond to a qualified special purpose entity (“QSPE”). This CMBS bond was resecuritized into various classes of non-recourse fixed-rate bonds comprised of $28.7 million face amount of investment grade rated bonds and $21.7 million face amount of non-investment grade rated bonds. The QSPE sold the investment grade rated bonds to unrelated third parties for net proceeds of $30.3 million. We recognized a $17.3 million gain on the sale. We retained the non-investment grade rated bonds, which had an aggregate face amount and amortized cost of $21.7 million and $7.5 million, respectively, at the time of the resecuritization.

Although we successfully completed CMBS resecuritization transactions in 2004, 2003 and 2002, which generated significant proceeds and gains, we are not dependent upon the completion of such transactions as a means of generating liquidity or providing cash for us to fund operations or future

investments. Although we have the financial ability to hold our CMBS investments to their stated maturities, it may be advantageous for us to sell these investments through such resecuritization transactions, depending upon market conditions. Our ability to effectively complete CMBS resecuritization transactions depends to a great extent on market demand for resecuritized securities, the pricing and interest rate environment, and the portfolio of securities we may own which would be suitable for resecuritization.

Investments in Unconsolidated Entities

We frequently make investments jointly with others, through partnerships and joint ventures. This (i) helps us to diversify our investment portfolio, spreading risk over a wider range of investments, (ii) provides access to transactions which are brought to us by other participants, (iii) provides access to capital, and (iv) enables us to participate in investments which are larger than we are willing to make on our own.

Typically, we either invest on a non-recourse basis, such as by acquiring a limited partnership interest or an interest in a limited liability company, or we acquire a general partner interest, but hold that interest in a subsidiary which has few, if any, other assets. In those instances, our exposure to partnership or limited liability company liabilities is essentially limited to the amounts we invest in the entities. However, in some instances we are required to give limited guarantees of debt incurred or other obligations undertaken by the partnerships or limited liability companies. For certain entities, typically those involving real estate property development, we may commit to invest certain amounts in the future based on the entities’ business plans.

At August 31, 2004, we had investments in unconsolidated entities of $494.0 million. Summarized financial information on a combined 100% basis related to our investments in unconsolidated entities accounted for by the equity method at August 31, 2004 (based upon information provided by these entities), follows:


	LNR Investment		LNR Financial Interest⁽¹⁾	Total Entity Assets			Total Entity Liabilities
	*(In thousands, except percentages)*
Properties:
Single-asset entities	$	46,602	50% - 75%	$	220,672		127,020	⁽²⁾
Investments with Lennar:
LandSource		102,514	50%		345,831		140,602	⁽³⁾
Newhall		196,963	50%		1,002,340		608,413
Other		41,084	13% - 50%		179,413		87,702	⁽⁴⁾
Affordable housing communities		18,868	<1% - 49%		479,576		341,630	⁽⁵⁾

		406,031			2,227,832		1,305,367
International		44,036	37% - 50%		166,663	⁽⁷⁾	91,836

		450,067			2,394,495		1,397,203

Loans:
Discounted portfolios of commercial mortgage loans		3,782	15% - 50%		28,470		20,282

Securities:
Madison		37,429	26%		668,789		520,615
Other		2,729	50% - 70%		36,870		32,596

		40,158			705,659		553,211

Total	$	494,007		$	3,128,624		1,970,696	⁽⁶⁾

(1)

Although we may own a majority financial interest in certain entities, we do not consolidate those non-VIE entities in which control is shared or in which less than a controlling interest is held. See further discussion under the heading of “Basis of Presentation and Consolidation” within Note 1 to our unaudited consolidated condensed financial statements.

(2)	Only $7.9 million is recourse to us.

(3)	Only $6.0 million is recourse to us.

(4)	Only $13.0 million is recourse to us.

(5)	Only $0.6 million is recourse to us.

(6)	Debt is non-recourse to us except for the $27.5 million noted in footnotes 2, 3, 4, and 5 above and in the Commitments and Contingent Obligations table above.

(7)	Total partnership assets include an investment in an unconsolidated partnership which in turn has investments in properties with a net book value of $2.2 billion.

3. CRITICAL ACCOUNTING POLICIES

In the preparation of our financial statements, we follow accounting principles generally accepted in the United States of America. The application of some of these generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying results. The accounting policies that include significant estimates and assumptions are in the areas of investment securities, derivative financial instruments, long-lived assets, income taxes and allowance for loan losses. Management periodically reviews the application and disclosure of these critical accounting policies with our Audit Committee.

Management believes there have been no significant changes during the nine-month period ended August 31, 2004 to the items that we have disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended November 30, 2003.

4. NEW ACCOUNTING PRONOUCEMENTS

Information about new accounting pronouncements appears in Note 1 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 quantitative or qualitative market risk since November 30, 2003. See our Annual Report on Form 10-K for the year ended November 30, 2003 for further discussion.

Item 4. Controls and Procedures.

For many years we have had procedures in place for gathering the information that is needed to enable us to file required quarterly and annual reports with the Securities and Exchange Commission (“SEC”). However, because of additional disclosure requirements imposed by the SEC in August 2002, many of which were required by the Sarbanes-Oxley Act of 2002, we formed a committee consisting of the people who are primarily responsible for the preparation of those reports, including our General Counsel and our Principal Accounting Officer, to review and formalize our procedures, and to have ongoing responsibility for designing and implementing our disclosure controls and procedures (i.e., the controls and procedures by which we ensure that information we are required to disclose in the annual and quarterly reports we file with the SEC is processed, summarized and reported within the required time periods). On September 24, 2004, our Chief Executive Officer and Chief Financial Officer participated in an evaluation by that committee of our disclosure controls and procedures. Based upon their participation in that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of August 31, 2004, our disclosure controls and procedures were adequately designed to ensure that all the required information was disclosed on a timely basis in our reports filed under the Securities Exchange Act.

Our Chief Executive Officer and Chief Financial Officer also participated in an evaluation on September 24, 2004, by our management of any changes in our internal control over financial reporting that occurred during the quarter ended August 31, 2004. That evaluation did not identify any changes that have materially affected, or are likely to materially affect, our internal controls over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

In September 2004, three persons (Eastside Investors, LLP, Aaron L. Brody and George Caton) who asserted that they were our stockholders filed purported class action lawsuits against us and the members of our Board of Directors in the Court of Chancery of the State of Delaware in and for New Castle County. These cases have been consolidated under the name In Re LNR Property Corp. Shareholder Litigation (Consolidated C.A. No. 674-N). In addition, one person (Carol Heyman) who asserted that she was our stockholder filed a purported class action lawsuit against us and the members of our Board of Directors in the 11^th Judicial Circuit in and for Miami-Dade County, Florida.

Each of these lawsuits alleges, among other things, that the terms of the sale transaction discussed in Note 3 to the unaudited consolidated condensed financial statements in Item 1 are unfair to our stockholders, that the consideration to be paid to our stockholders is inadequate, and that our Board of Directors breached its fiduciary duties to our stockholders. Each of them states that the allegedly unfair terms and inadequate consideration were intended to benefit the Miller family through their investment in Riley Property Holdings. Some of the lawsuits allege that the transaction benefits certain members of management to the detriment of our shareholders due to management’s ownership of 4.6% of the acquiring company, certain of our officers continuing as officers of the acquiring company and the receipt by certain officers of change-in-control payments. Each of these lawsuits seeks declaratory and injunctive relief and monetary damages, including, but not limited to: (i) a declaration that the lawsuit is properly maintainable as a class action; (ii) a grant of preliminary and permanent injunctive relief against consummation of the merger; or (iii) in the event the merger is consummated, a rescission of the merger or an award of rescissory damages to the shareholders. We believe that each of these actions is without merit and intend to defend each of them vigorously.

We are not subject to any other legal proceedings other than suits in the ordinary course of our business, most of which are covered by insurance. We believe these suits will not, in the aggregate, have a material adverse effect upon us.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.


Month	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs⁽²⁾
December 2003	—		—	—	3,390,375
January 2004	90,000	$	49.445	90,000	3,390,375
February 2004	—		—	—	3,390,375
March 2004	—		—	—	3,390,375
April 2004	40,000	$	53.650	40,000	3,390,375
May 2004	—		—	—	3,390,375
June 2004	—		—	—	3,390,375
July 2004	—		—	—	3,390,375
August 2004	—		—	—	3,390,375

(1)

Our Board of Directors approved a stock repurchase program authorizing us to buy back up to 12.5 million shares of our common stock. This repurchase program was first authorized in 1998. In January 2001, our Board of Directors approved the Employee Share Repurchase Plan. Under the Employee Share Repurchase Plan, employees can request that we consider purchasing shares of common stock that the employees acquired through the exercise of stock options or whose common stock became non-forfeitable on a restricted stock vesting date. If the purchase is approved by the Board of Directors or a committee designated by the Board of Directors, we will purchase the shares at the market price on the applicable stock purchase date. 90,000 and 40,000 shares were purchased by us during the months of January 2004 and April 2004, respectively, under the Employee Share Repurchase Plan.

(2)	Excludes the Employee Share Repurchase Plan, as each purchase requires approval by the Board of Directors or a committee designated by the Board of Directors.

Item 3-5. Not applicable.

Item 6. Exhibits.

See Exhibit Index following the signature page, which is incorporated herein by reference.

The Exhibits listed in the accompanying Exhibit Index are filed as part of this report.

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:


Date: October 15, 2004		/s/ Shelly Rubin
		Shelly Rubin
		Vice President and Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Description

31		Rule 13a-14(a) Certifications.

32		Section 1350 Certifications.

99.1*		Agreement and Plan of Merger among the Company, Riley Property Holdings LLC and Riley Acquisition Sub Corp., dated August 29, 2004.

99.2*		Voting Agreement among Riley Property Holdings, LLC, Stuart Miller, The LM Stuart Miller Irrevocable Trust U/A 10/6/94, MFA Limited Partnership, The Miller Charitable Fund, L.P. and the Company, dated August 29, 2004.

*	Incorporated herein by reference to our Form 8-K dated August 29, 2004.