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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2001
Commission file number 1-13223
LNR Property Corporation
(Exact name of registrant as specified in its charter)
Delaware 65-0777234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
760 Northwest 107th Avenue, Miami, Florida 33172
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (305) 485-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Common shares outstanding as of the end of the current fiscal quarter:
Common 23,972,776
Class B Common 9,999,480
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
(In thousands, except per share amounts) February 28, November 30,
2001 2000
----------- ----------
Assets
------
Cash and cash equivalents $ 26,545 1,986
Restricted cash 60,213 85,282
Investment securities 790,853 696,402
Mortgage loans, net 240,399 243,987
Operating properties and equipment, net 842,847 818,486
Land held for investment 41,465 52,969
Investments in and advances to partnerships 356,774 353,975
Other assets 116,930 95,769
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Total assets $ 2,476,026 2,348,856
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Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Accounts payable and other liabilities $ 158,450 136,546
Mortgage notes and other debts payable 1,480,255 1,404,374
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Total liabilities 1,638,705 1,540,920
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Minority interests 29,367 29,492
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Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 23,973 and 24,215 shares 2,397 2,422
issued and outstanding in 2001 and 2000, respectively
Class B common stock, $.10 par value, 40,000 shares authorized, 9,999 shares issued 1,000 1,000
and outstanding in 2001 and 2000
Additional paid-in capital 512,505 516,516
Retained earnings 296,713 272,772
Unamortized value of restricted stock grants (12,671) (13,195)
Accumulated other comprehensive earnings (loss) 8,010 (1,071)
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Total stockholders' equity 807,954 778,444
----------- ----------
Total liabilities and stockholders' equity $ 2,476,026 2,348,856
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See accompanying notes to unaudited consolidated condensed financial statements.
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
---------------------------
February 28, February 29,
(In thousands, except per share amounts) 2001 2000
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Revenues
Rental income $ 30,465 28,439
Equity in earnings of partnerships 17,342 25,613
Interest income 46,184 33,794
Gains on sales of real estate 8,479 3,466
Management and servicing fees 9,176 3,759
Other, net (354) 191
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Total revenues 111,292 95,262
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Costs and expenses
Cost of rental operations 15,479 16,153
General and administrative 17,747 13,846
Depreciation 6,825 8,567
Minority interests 843 485
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Total costs and expenses 40,894 39,051
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Operating earnings 70,398 56,211
Interest expense 30,149 26,575
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Earnings before income taxes 40,249 29,636
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Income taxes 14,284 8,091
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Net earnings $ 25,965 21,545
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Weighted average shares outstanding:
Basic 33,097 33,852
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Diluted 34,742 34,716
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Earnings per share:
Basic $ 0.78 0.64
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Diluted $ 0.75 0.62
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See accompanying notes to unaudited consolidated condensed financial statements
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)
Three Months Ended
----------------------------
February 28, February 29,
(In thousands) 2001 2000
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Net earnings $ 25,965 21,545
Other comprehensive earnings (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities, net and other 8,172 (6,124)
Unrealized loss on hedging activities (3,209) --
Transition adjustment related to accounting for derivative financial instruments and
hedging activities 4,118 --
Less: reclassification adjustment for gains included in net earnings -- (19)
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Other comprehensive earnings (loss) 9,081 (6,143)
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Comprehensive earnings $ 35,046 15,402
=========== ===========
See accompanying notes to unaudited consolidated condensed financial statements.
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
----------------------------
February 28, February 29,
(In thousands) 2001 2000
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Cash flows from operating activities:
Net earnings $ 25,965 21,545
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities:
Depreciation 6,825 8,567
Minority interests 843 485
Amortization of discount on CMBS, mortgage loans and other (11,434) (8,119)
Gains on sales of real estate (8,479) (3,466)
Equity in earnings of partnerships (17,342) (25,613)
Losses on hedging activities 361 --
Changes in assets and liabilities:
Decrease in restricted cash 25,069 8,894
Increase in other assets and deferred taxes (19,501) (15,706)
(Increase) decrease in mortgage loans held for sale 8,984 (958)
Increase (decrease) in accounts payable and accrued liabilities 8,579 (2,333)
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Net cash provided by (used in) operating activities 19,870 (16,704)
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Cash flows from investing activities:
Operating properties and equipment
Additions (35,751) (79,626)
Sales -- 11,617
Land held for investment
Additions (2,740) (4,952)
Sales 18,578 6,140
Investments in and advances to partnerships (33,748) (15,427)
Distributions from partnerships 48,177 35,513
Purchase of mortgage loans held for investment -- (1,172)
Proceeds from mortgage loans held for investment 190 245
Purchase of investment securities (52,893) (11,683)
Proceeds from principal collections on investment securities 18,864 36,040
Interest received on CMBS in excess of income recognized 5,957 3,443
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Net cash used in investing activities (33,366) (19,862)
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Cash flows from financing activities:
Proceeds from stock option exercises 235 54
Purchase of treasury stock (6,150) (34,064)
Payment of dividends (414) (407)
Net repayments under repurchase agreements and revolving credit lines (160,371) (745)
Mortgage notes and other debts payable:
Proceeds from borrowings 225,008 92,594
Principal payments (20,253) (10,929)
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Net cash provided by financing activities 38,055 46,503
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Net increase in cash and cash equivalents 24,559 9,937
Cash and cash equivalents at beginning of period 1,986 8,587
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Cash and cash equivalents at end of period $ 26,545 18,524
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(Continued)
LNR PROPERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
Three Months Ended
----------------------------
February 28, February 29,
(In thousands) 2001 2000
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Supplemental disclosure of non-cash investing and financing activities:
Purchases of investment securities financed by seller $ 28,508 19,998
Purchases of mortgage loans financed by seller $ -- 2,595
Grant of restricted stock $ 268 9,649
Supplemental disclosure of non-cash transfers:
Transfer of land held for investment to operating properties $ 2,203 16,876
Transfer of certain assets and liabilities to investments in partnerships $ -- 10,617
See accompanying notes to unaudited consolidated condensed financial statements
LNR PROPERTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
1. Basis of Presentation and Consolidation
The accompanying unaudited consolidated condensed financial statements include
the accounts of LNR Property Corporation and its wholly-owned subsidiaries (the
"Company"). The assets, liabilities and results of operations of entities (both
corporations and partnerships) in which the Company has a controlling interest
have been consolidated. The ownership interests of noncontrolling owners in such
entities are reflected as minority interests. The Company's investments in
partnerships (and similar entities) in which less than a controlling interest is
held or of which control is shared are accounted for by the equity method (when
significant influence can be exerted by the Company), or the cost method. All
significant intercompany transactions and balances have been eliminated. The
financial statements have been prepared by management without audit by
independent public accountants and should be read in conjunction with the
November 30, 2000 audited financial statements in the Company's Annual Report on
Form 10-K for the year then ended. However, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for fair
presentation of the accompanying unaudited consolidated condensed financial
statements have been made.
2. Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 requires that all derivative instruments be recorded as either an asset or
liability on the balance sheet at their fair value, and that changes in the fair
value be recognized currently in earnings unless specified criteria are met.
This statement was effective for fiscal quarters of fiscal years beginning after
June 15, 1999. SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" extended
the effective date to all fiscal quarters of fiscal years beginning after June
15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133." This statement amends the accounting and reporting standards
of SFAS No. 133 for certain derivative instruments and certain hedging
activities. The Company adopted the provisions of these standards on December 1,
2000. In accordance with these standards, the Company carries all derivative
instruments in the balance sheet at fair value. At February 28, 2001, the
Company has a derivative liability of $16.5 million which is included in
accounts payable and other liabilities in the Consolidated Condensed Balance
Sheet. Periods prior to December 1, 2000 have not been restated. The accounting
for changes in the fair value of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship.
Hedging Objectives and Strategies
With regard to risk management in general, and interest rate risk in particular,
the Company's fundamental philosophy is centered on a desire to tolerate only a
relatively small amount of risk. The Company has an interest rate risk
management policy with the objective of: (1) managing its interest costs and (2)
reducing the impact of unpredictable changes in asset values related to
LNR PROPERTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
movements in interest rates on the Company's available-for-sale securities. To
meet these objectives, the Company employs hedging strategies to limit the
effects of changes in interest rates on its operating income and cash flows and
on the value of its available-for-sale securities.
The Company does not acquire derivative instruments for any purpose other than
cash flow and fair value hedging purposes. That is, the Company does not
speculate using derivative instruments.
The Company believes its interest rate risk management policy is generally
effective. Nonetheless, the Company's profitability may be adversely affected
during particular periods as a result of changing interest rates. In addition,
hedging transactions using derivative instruments involve risks such as
counter-party credit risk and legal enforceability of hedging contracts. The
counter-parties to the Company's arrangements are major financial institutions
with which the Company and its affiliates may also have other financial
relationships. These counter-parties potentially expose the Company to loss in
the event of nonperformance.
Cash Flow Hedging Instruments
The Company's approach to managing interest cost is based primarily on match
funding, with the objective that variable-rate assets be primarily financed by
variable-rate liabilities and fixed-rate assets be primarily financed by
fixed-rate liabilities. Management continually identifies and monitors changes
in interest rate exposures that may adversely impact expected future cash flows
by evaluating hedging opportunities. The Company maintains risk management
control systems to monitor interest rate cash flow risk attributable both to the
Company's outstanding or forecasted debt obligations and to the Company's
offsetting hedge positions. The risk management control systems involve the use
of analytical techniques, including cash flow sensitivity analyses, to estimate
the impact of changes in interest rates on the Company's future cash flows.
The Company periodically enters into derivative financial arrangements,
primarily interest rate swap agreements, to manage fluctuations in cash flows
resulting from interest rate risk. These swap agreements effectively change the
variable-rate cash flows on debt obligations to fixed-rate cash flows. Under the
terms of the interest rate swap agreements, the Company receives variable
interest rate payments and makes fixed interest rate payments, thereby creating
the equivalent of fixed rate debt. At February 28, 2001, the Company had 18 such
interest rate swap agreements with a notional amount of $352.7 million, which
mature through February 2004.
The Company records the fair value of interest rate swap agreements designated
as hedging instruments for variable-rate debt obligations as a derivative asset
or liability. Changes in the fair value of the interest rate swap agreements are
reported as unrealized gains or losses in stockholders' equity as a component of
accumulated other comprehensive earnings. If a derivative instrument is not
designated as a hedge, the gain or loss resulting from a change in fair value is
recognized in earnings in the period of change. If a derivative instrument is
designated as a hedge but the derivative instrument is not fully effective in
hedging the designated risk, the ineffective portion of the gain or loss is
reported in earnings immediately.
LNR PROPERTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
Interest expense for the quarter ended February 28, 2001 includes no net gains
or losses representing cash flow hedge ineffectiveness arising from differences
between the critical terms of interest rate swap agreements and the hedged debt
obligations, since the terms of the Company's swap agreements and debt
obligations are matched.
Fair Value Hedging Instruments
To manage the risk associated with unpredictable changes in asset values related
to the effect of movements in interest rates on the Company's fixed-rate
available-for-sale securities, the Company periodically uses derivative
financial instruments, primarily interest rate swap agreements. Under the terms
of these swap agreements, the Company receives variable interest rate payments
and makes fixed interest rate payments. At February 28, 2001, the Company had
three such interest rate swap agreements with a notional amount of $189.0
million, which mature through December 2011.
The Company has designated these interest rate swap agreements as hedges of
interest rates on certain available-for-sale securities and records the fair
value of the agreements as derivative assets or liabilities. Changes in the fair
value of the interest rate swap agreements are recorded in earnings, as are the
changes in the fair value of the hedged available-for-sale securities resulting
from changes in interest rates.
The Company recorded a loss of $0.4 million for hedge ineffectiveness during the
three-month period ended February 28, 2001. This amount is included in other
revenue, net in the Consolidated Condensed Statement of Earnings.
Transition
Upon the adoption of SFAS No. 133, the Company recognized $4.1 million, net of
tax benefit, of deferred hedging losses on derivative instruments. This amount
was offset by $4.1 million, net of tax expense, of realized gains related to the
hedged available-for-sale securities. Both of these amounts were previously
recorded in stockholders' equity as a component of accumulated other
comprehensive earnings. Also upon adoption of SFAS No. 133, the Company
transferred $102.8 million of securities which were previously classified as
held-to-maturity to available-for-sale. Upon this reclassification, the Company
recorded a transition adjustment of $4.1 million, net of tax expense, which was
the difference in the market value and book value of the securities on December
1, 2000, the date the Company adopted SFAS No. 133. This adjustment is reported
in stockholders' equity as a component of accumulated other comprehensive
income.
3. New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101 is applicable to the Company
beginning no later than the fourth quarter of the year ending November 30, 2001.
The adoption of this standard is not expected to have a material impact on the
Company's results of operations or financial position.
LNR PROPERTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued in September 2000, and replaces SFAS
No. 125. It revises the standards for accounting for securitizations and other
transfers of financial assets and requires certain disclosures. SFAS No. 140 is
effective for the fiscal year ended November 30, 2001, with restatement required
for previous periods which are presented for comparative purposes. The adoption
of this standard is not expected to have a material impact on the Company's
results of operations or financial position.
4. Reclassifications
Certain reclassifications have been made to the prior year consolidated
condensed financial statements to conform to the current year presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINS INFORMATION WHICH CONSTITUTES FORWARD LOOKING STATEMENTS.
FORWARD LOOKING STATEMENTS INHERENTLY INVOLVE RISKS AND UNCERTAINTIES. THE
FACTORS, AMONG OTHERS, THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD LOOKING STATEMENTS IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS INCLUDE (i) CHANGES IN DEMAND FOR COMMERCIAL REAL ESTATE NATIONALLY,
IN AREAS IN WHICH THE COMPANY OWNS PROPERTIES, OR IN AREAS IN WHICH PROPERTIES
SECURING MORTGAGES DIRECTLY OR INDIRECTLY OWNED BY THE COMPANY ARE LOCATED, (ii)
INTERNATIONAL, NATIONAL OR REGIONAL BUSINESS CONDITIONS WHICH AFFECT THE ABILITY
OF MORTGAGE OBLIGORS TO PAY PRINCIPAL OR INTEREST WHEN IT IS DUE, (iii) THE
CYCLICAL NATURE OF THE COMMERCIAL REAL ESTATE BUSINESS, (iv) CHANGES IN INTEREST
RATES, AND (v) CHANGES IN THE MARKET FOR VARIOUS TYPES OF REAL ESTATE BASED
SECURITIES. SEE THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
NOVEMBER 30, 2000, FOR A FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES
APPLICABLE TO THE COMPANY'S BUSINESS.
OVERVIEW
LNR Property Corporation and its subsidiaries (collectively, the "Company") is a
real estate investment, finance and management company. The Company engages
primarily in (i) acquiring, developing, managing and repositioning commercial
and multi-family residential real estate properties, (ii) investing in high
yielding real estate loans and purchasing at a discount portfolios of loans
backed by real estate, and (iii) investing in unrated and non-investment grade
rated commercial mortgage-backed securities ("CMBS") as to which the Company has
the right to be special servicer (i.e., to oversee workouts of underperforming
and non-performing loans).
1. RESULTS OF OPERATIONS
The following discussion and analysis presents the significant changes in
results of operations of the Company for the three months ended February 28,
2001 and February 29, 2000 after allocating among the core business segments
certain non-corporate general and administrative expenses. The following
discussion should be read in conjunction with the unaudited consolidated
condensed financial statements and notes thereto.
Three Months Ended
-----------------------------
February 28, February 29,
(In thousands) 2001 2000
------------- -------------
Revenues
Real estate properties $ 44,165 41,318
Real estate loans 19,792 15,315
Real estate securities 47,335 38,629
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Total revenues 111,292 95,262
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Operating expenses
Real estate properties 29,944 29,373
Real estate loans 1,771 2,099
Real estate securities 3,573 2,604
Corporate and other 5,606 4,975
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Total operating expenses 40,894 39,051
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Operating earnings
Real estate properties 14,221 11,945
Real estate loans 18,021 13,216
Real estate securities 43,762 36,025
Corporate and other (5,606) (4,975)
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Total operating earnings 70,398 56,211
Interest expense 30,149 26,575
Income tax expense 14,284 8,091
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Net earnings $ 25,965 21,545
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Three months ended February 28, 2001 compared to three months ended February 29,
2000
Net earnings for the quarter ended February 28, 2001 were $26.0 million compared
to $21.5 million for the same period in 2000. The quarter-over-quarter
improvement in net earnings is attributable to (i) an increase in interest
income from a growing portfolio of high-yielding loans, (ii) an increase in
interest income and servicing fees derived from the Company's growing CMBS
portfolio, (iii) higher management fees, (iv) an increase in gains on sales of
real estate and (v) increased net operating income from rental properties
(rental income less cost of rental operations), reflecting the operating
performance from the Company's growing stabilized real estate property
portfolio. These increases were offset somewhat by (i) a decrease in equity in
earnings of partnerships due primarily to the sale of the Company's interests in
Japanese discount loan portfolios in 2000 and lower earnings from the Company's
real estate property partnerships, (ii) an increase in interest expense due
primarily to higher interest rates and (iii) an increase in general and
administrative expenses from the Company's growing business segments.
Real estate properties
Three Months Ended
-----------------------------
February 28, February 29,
(In thousands) 2001 2000
------------- -------------
Rental income $ 30,465 28,439
Equity in earnings of partnerships 4,123 9,074
Gains on sales of real estate 8,479 3,466
Management fees 1,098 339
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Total revenues 44,165 41,318
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Cost of rental operations 15,479 16,153
Other operating expenses (1) 7,633 4,949
Minority interests 7 (296)
Depreciation 6,825 8,567
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Total operating expenses (1) 29,944 29,373
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Operating earnings $ 14,221 11,945
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Balance Sheet data:
Operating properties and equipment, net $ 842,847 1,041,500
Land held for investment 41,465 107,120
Investments in and advances to partnerships 238,352 163,707
------------- -------------
Total segment assets $ 1,122,664 1,312,327
============= =============
(1) Operating expenses do not include interest expense.
Real estate properties include rental apartment communities (market-rate and
affordable housing communities), office buildings, industrial/warehouse
facilities, hotels, retail centers and land that the Company acquires and
develops, redevelops or repositions. It also includes the Company's 50% interest
in Lennar Land Partners ("LLP"), a partnership engaged in the acquisition,
development and sale of land. Total revenues from real estate properties include
rental income from operating properties, gains on sales of those properties,
equity in earnings of partnerships that own and operate real estate properties
and fees earned from managing those partnerships. Operating expenses include the
direct costs of operating the real estate properties, the related depreciation
and the overhead associated with managing the properties and partnerships.
Three months ended February 28, 2001 compared to three months ended February 29,
2000
Overall, operating earnings from real estate properties were $14.2 million for
the quarter ended February 28, 2001 compared to $11.9 million for the same
period in 2000. Gains on sales of real estate increased by 145% or $5.0 million
and net operating income from the Company's real estate properties increased by
22% or $2.7 million. These increases were somewhat offset by a decrease in
equity in earnings of partnerships and an increase in other operating expenses.
Total rental income increased to $30.5 million for the quarter ended February
28, 2001 from $28.4 million for the same period in 2000, reflecting the
operating performance from the Company's growing stabilized real estate property
portfolio. Cost of rental operations decreased slightly to $15.5 million for the
quarter ended February 28, 2001 from $16.2 million for the same period in 2000.
Equity in earnings of partnerships decreased to $4.1 million for the quarter
ended February 28, 2001 from $9.1 million for the same period in 2000. This
decrease is partly due to lower earnings from LLP. Equity in earnings from LLP
may vary from period to period depending on the timing of land sales. The
decrease in equity in earnings is also due to an increase in the Company's
affordable housing partnership investments. These partnerships typically
generate pre-tax operating losses which are more than offset by the tax credits
and benefits which directly reduce the Company's overall income taxes.
Other operating expenses, which represent an allocation of salary, professional
and other administrative expenses, increased to $7.6 million for the quarter
ended February 28, 2001 from $4.9 million for the same period in 2000. These
increases were due to additional personnel and administrative costs necessary to
support the growth in the overall real estate portfolio managed by the Company.
The net book value of market-rate operating properties and equipment, excluding
affordable housing communities, at February 28, 2001 and the annualized net
operating income for the three-month period ended on that date with regard to
various types of property owned by the Company were as follows:
Annualized Annualized
Net Operating NOI as a %
Net Book Occupancy Income of Net Book
(In thousands, except percentages) Value Rate (NOI) (1) Value
--------------- ------------- -- ---------------- -------------
Stabilized operating properties
Commercial $ 401,168 93% $ 54,963 14%
Multi-family 2,494 98% 425 17%
Hotel 15,666 62% 2,161 14%
--------------- ---------------- -------------
419,328 57,549 14%
Under development or repositioning
Commercial 211,867 7,844
Multi-family 65,172 -
Hotel 29,739 1,124
--------------- ----------------
306,778 8,968
--------------- ----------------
Furniture, fixtures and equipment 7,339 -
--------------- ----------------
Total (2) $ 733,445 $ 66,517
=============== ================
--------------------
(1) Annualized NOI for purposes of this schedule is rental income less cost of rental operations before
commissions and non-operating expenses during the quarter, multiplied by four.
(2) Total market-rate operating properties and equipment, net, excluding affordable housing communities.
As of February 28, 2001, approximately 58% of the Company's market-rate
operating properties, based on net book value, had reached stabilized occupancy
levels and were yielding in total 14% on net book cost. The anticipated
improvements in the earnings of the not yet stabilized market-rate operating
properties are not expected to be recognized until future periods.
Pre-tax operating margins for the affordable housing communities, which qualify
for Low-Income Housing Tax Credits, are generally lower than for market-rate
rentals. However, the Company receives its desired yield from these investments
after adding in (1) the impact of lower income
taxes as a result of the tax credits and other related tax deductions and (2)
profits from sales of tax credits to others.
The net investment in the Company's affordable housing communities at February
28, 2001 and the annualized yield on the stabilized affordable housing
communities for the three-month period then ended, were as follows:
(In thousands, except percentages)
Net book value of apartment communities $ 71,635
Investments in partnerships 45,413
Debt and other (45,585)
-----------
Net investment in stabilized apartment communities 71,463
Net investment in apartment communities under development 40,356
-----------
Net investment in affordable housing communities $ 111,819
===========
Stabilized apartment communities:
Annualized NOI as a % of net book value 9%
Annualized adjusted NOI as a % of net book value (1) 15%
-------------
(1) Annualized adjusted NOI includes the annualized effect of tax credits and
other related tax deductions.
As of February 28, 2001, the Company had been awarded and held rights to over
$209 million in gross tax credits, with approximately 64% relating to apartment
communities that have not yet reached stabilized occupancy levels.
At the time of the acquisition of the Affordable Housing Group ("AHG") in 1998,
the Company's strategy was to retain the tax credits generated through owning
the partnership interests in the affordable housing communities and then use
those credits to reduce the Company's overall effective tax rate. However, the
demand for credits has since increased significantly and the Company found it
could generate higher returns on its investment by selling the credits than by
using them. The Company began to shift its strategy away from owning the
partnership interests in the affordable housing communities toward syndicating
such interests. The Company expects to generate fee income and gains in future
years from such syndications. As a result, the Company expects its investment in
affordable housing communities, as well as the amount of tax credits it holds
and utilizes to reduce its tax rate, to decline during 2001.
Real estate loans
Three Months Ended
---------------------------
February 28, February 29,
(In thousands) 2001 2000
------------ ------------
Interest income $ 15,993 7,929
Equity in earnings of partnerships 1,373 6,974
Management fees 2,419 221
Other income 7 191
------------ ------------
Total revenues 19,792 15,315
------------ ------------
Operating expenses (1) 1,131 1,526
Minority interests 640 573
------------ ------------
Total operating expenses (1) 1,771 2,099
------------ ------------
Operating earnings $ 18,021 13,216
============ ============
Balance sheet data:
Mortgage loans, net $ 240,399 157,581
Investments in and advances to partnerships 15,372 68,002
Other investments 52,413 50,040
------------ ------------
Total segment assets $ 308,184 275,623
============ ============
(1) Operating expenses do not include interest expense.
Real estate loans include the Company's direct investments in high yielding
loans, as well as its domestic and foreign discount loan portfolio investments,
owned primarily through partnerships, and related loan workout operations. Total
revenues include interest income, equity in earnings of partnerships and
management fees earned from those partnerships. Operating expenses include the
overhead associated with servicing the loans and managing the partnerships.
Three months ended February 28, 2001 compared to three months ended February 29,
2000
Operating earnings from real estate loans increased to $18.0 million for the
quarter ended February 28, 2001 from $13.2 million for the same period in 2000.
This increase is primarily due to increased interest income and management fees
partially offset by a decrease in equity in earnings of partnerships.
Interest income increased to $16.0 million for the quarter ended February 28,
2001 from $7.9 million for the same period in 2000. This increase was primarily
due to additional investments in structured junior participations in
high-quality short- to medium-term variable rate first mortgage real estate
loans. These investments contributed approximately $7.0 million and $2.7 million
to interest income in the quarters ended February 28, 2001 and February 29,
2000, respectively.
Equity in earnings of partnerships decreased to $1.4 million for the quarter
ended February 28, 2001 from $7.0 million for the same period in 2000. This
decrease is primarily due to the sale of the Company's interests in its Japanese
discount loan portfolios in April 2000 and a decrease in earnings from the
Company's domestic discount loan portfolios, as expected, due to the liquidation
of most of the assets in the portfolios.
Management fees increased to $2.4 million for the quarter ended February 28,
2001 from $0.2 million for the same period in 2000, primarily due to fees earned
from the disposition of assets in one of the domestic discount loan portfolios.
Operating expenses decreased to $1.1 million for the quarter ended February 28,
2001 from $1.5 million for the same period in 2000, primarily due to the sale of
the Company's interests in its Japanese discount loan portfolios in April 2000,
partially offset by increased general and administrative expenses to support the
growth in the Company's mortgage loan portfolio.
Real estate securities
Three Months Ended
------------------------------------
February 28, February 29,
(In thousands) 2001 2000
---------------- ---------------
Interest income $ 30,191 25,865
Equity in earnings of partnerships 11,846 9,565
Management and servicing fees 5,659 3,199
Other, net (361) -
---------------- ---------------
Total revenues 47,335 38,629
---------------- ---------------
Operating expenses (1) 3,377 2,396
Minority interests 196 208
---------------- ---------------
Total operating expenses (1) 3,573 2,604
---------------- ---------------
Operating earnings $ 43,762 36,025
================ ===============
Balance sheet data:
Investment securities $ 790,853 505,929
Investments in and advances to partnerships 103,050 96,968
Other investments 8,000 23,745
---------------- ---------------
Total segment assets $ 901,903 626,642
================ ===============
(1) Operating expenses do not include interest expense.
Real estate securities include unrated and non-investment grade rated
subordinated CMBS which are collateralized by pools of mortgage loans on
commercial and multi-family residential real estate properties. It also includes
the Company's investment in Madison Square Company LLC ("Madison"), a limited
liability company that invests in CMBS, as well as investments in entities in
related businesses. Total revenues from real estate securities include interest
income, equity in the earnings of Madison, gains on sales of securities,
servicing fees from acting as special servicer for CMBS transactions and fees
earned from managing Madison. Operating expenses include the overhead associated
with managing the investments and Madison, and costs of the special servicing
responsibilities.
Three months ended February 28, 2001 compared to three months ended February 29,
2000
Overall, operating earnings from real estate securities increased to $43.8
million for the quarter ended February 28, 2001 from $36.0 million for the same
period in 2000. Earnings were higher primarily due to (i) increased interest
income associated with the growth of the Company's CMBS portfolio, (ii) greater
recognition of earnings due to actual CMBS performance continuing to exceed
original expectations, (iii) increased equity in earnings from the Company's
participation in Madison and (iv) an increase in servicing fees due to the
growth of the Company's CMBS portfolio.
In recording CMBS interest income, the Company recognizes interest received plus
the amortization of the difference between the carrying value and the face
amount of the securities to achieve a level yield. To date, this has resulted in
less recognition of interest income than interest received. The excess interest
received is applied to reduce the Company's CMBS investment. The Company's
initial and ongoing estimates of its returns on CMBS investments are based on a
number of assumptions that are subject to certain business and economic
conditions, the most significant of which is the timing and magnitude of credit
losses on the underlying mortgages.
The Company has already begun to receive principal payments from some of its
securities, and some have matured entirely. Actual loss experience to date,
particularly for older transactions (3 to 7 years in age), is significantly
lower than originally underwritten by the Company. Therefore, changes to
original estimated yields have resulted, and the Company believes they should
continue to result, in improved earnings from these transactions. The Company
believes these improvements resulted from its success in managing and working
out the underlying loans and strong real estate fundamentals. However, the
positive experience on these older transactions will not necessarily translate
into yield improvements on newer investments.
During the quarter ended February 28, 2001, the Company acquired $144.2 million
face amount of CMBS for $81.4 million. The following is a summary of the CMBS
portfolio held by the Company at February 28, 2001:
Weighted Weighted Weighted
Average Average Average
Face Amount Interest Book Value % of Face Cash Book
Rate Amount Yield (1) Yield (2)
------------------------------------------------------------------------------
(In thousands, except percentages)
Fixed-rate
BB rated or above $ 327,114 7.09% $ 235,426 72.0% 9.9% 13.2%
B rated 474,918 6.61% 256,557 54.0% 12.2% 12.8%
Unrated 828,829 7.18% 190,141 22.9% 30.3% 28.4%
------------------------- -------------------------------------------------
Total 1,630,861 7.00% 682,124 41.8% 16.5% 17.3%
Floating-rate/short-term
BB rated or above $ 12,789 7.16% $ 10,893 85.2% 8.4% 8.5%
B rated 10,880 8.87% 9,247 85.0% 10.4% 10.3%
Unrated 64,285 14.73% 52,403 81.5% 18.0% 9.7%
------------------------- -------------------------------------------------
Total 87,954 12.80% 72,543 82.5% 16.3% 9.6%
Unrealized gains
on securities - 36,186
------------ ------------
Total
CMBS $ 1,718,815 7.28% $ 790,853 46.0% 16.5% 16.6%
portfolio (3)
============ ============
----------------------
(1) Cash yield is determined by annualizing the actual cash received during the
month of February 2001, and dividing the result by the book value at February
28, 2001.
(2) Book yield is determined by annualizing the interest income for the month of
February 2001, and dividing the result by the book value at February 28, 2001.
(3) This table excludes CMBS owned through non-consolidated partnerships.
Equity in earnings of partnerships primarily represents the Company's
participation in Madison, which was formed in April 1999. The venture owns
approximately $1.5 billion of real estate related securities. The Company's
investment in the venture at February 28, 2001 was $103.1 million, representing
a 25.8% ownership interest. In addition to its investment in the venture, the
Company maintains a significant ongoing role in the venture, for which it earns
fees, both as the special servicer for the purchased CMBS transactions and as
the provider of management services. Madison contributed $11.8 million of equity
in earnings of partnerships to the real estate securities line of business for
the quarter ended February 28, 2001 compared to $9.6 million for the same period
in 2000.
Management and servicing fees increased to $5.7 million for the quarter ended
February 28, 2001 from $3.2 million for the same period in 2000. This increase
was primarily attributable to an
increase in the number of CMBS mortgage pools (72 at February 28, 2001 versus 57
at February 29, 2000) for which the Company acts as special servicer.
Operating expenses increased to $3.4 million during the quarter ended February
28, 2001 compared to $2.4 million for the same period in 2000. This increase is
primarily due to increased personnel and out-of-pocket expenses directly related
to the growth of the Company's CMBS portfolio.
Corporate, Other, Interest and Income Tax Expenses
Three months ended February 28, 2001 compared to three months ended February 29,
2000
Corporate and other operating expenses increased to $5.6 million for the quarter
ended February 28, 2001 from $5.0 million for the same period in 2000, primarily
due to overall Company growth.
Interest expense increased to $30.1 million for the quarter ended February 28,
2001 from $26.6 million for the same period in 2000. This increase is primarily
due to an increase in interest rates and to a lesser extent, a decrease in
capitalized interest as a result of more operating properties leasing up.
Income tax expense increased to $14.3 million for the quarter ended February 28,
2001 from $8.1 million for the same period in 2000, primarily due to an increase
in pre-tax earnings, and to a lesser extent, a lower level of Low Income Housing
Tax Credits utilized. The Company's effective tax rate was 35% for the quarter
ended February 28, 2001 compared to 27% for the same period in 2000.
2. LIQUIDITY AND FINANCIAL RESOURCES
Operating activities provided $19.9 million of cash for the quarter ended
February 28, 2001 compared to cash used of $16.7 million for the same period in
2000. The increase in cash flow provided by operating activities was primarily
due to a higher decrease in restricted cash of $16.2 million, an increase in
accounts payable and accrued liabilities of $10.9 million and a decrease in
mortgage loans held for sale of $9.9 million.
The Company used $33.4 million of cash for investing activities during the
quarter ended February 28, 2001, compared to $19.9 million for the same period
in 2000. The increase in net cash used was primarily due to more spending on
CMBS of $41.2 million, more investments in and advances made to partnerships of
$18.3 million and fewer proceeds received from principal collections of CMBS of
$17.2 million. These increases were partially offset by less spending on
operating properties of $43.9 million and more distributions from partnerships
of $12.7 million.
Financing activities provided $38.1 million of cash during the quarter ended
February 28, 2001 compared to $46.5 million for the same period in 2000. The
overall decrease in cash provided by financing activities was primarily due to
$159.6 million more of net repayments under the Company's repurchase agreements
and revolving credit lines, offset by $123.1 million more of net borrowing
activity under the Company's mortgage notes and other debts payable and $27.9
million less in purchases of treasury stock.
The Company continues to diversify its capital structure and to manage its debt
position with a combination of short-, medium- and long-term financings with a
goal of properly matching the maturities of its debt with the expected lives of
its assets.
At February 28, 2001, the Company had over $800 million of available liquidity,
which included approximately $650 million under credit facilities and cash, and
approximately $150 million of committed project level term financing.
The Company has a $350 million unsecured revolving credit facility, which
matures in July 2004 assuming a one-year extension option is exercised. At
February 28, 2001, $0 was outstanding under this facility, although the Company
had issued and outstanding $34.9 million of standby letters of credit utilizing
the facility.
The Company has various secured revolving lines of credit with an aggregate
commitment of $345.0 million, of which $162.3 million was outstanding at
February 28, 2001. These lines are collateralized by CMBS and mortgage loans and
mature through September 2005.
The Company has financed some of its purchases of CMBS under reverse repurchase
obligation facilities ("repos"). The repo agreements contain provisions which
may require the Company to repay amounts or post additional collateral prior to
the scheduled maturity dates if the market values of the bonds which
collateralize them significantly decline. At February 28, 2001, the Company had
three repo lines through which it financed selected CMBS. The first facility had
a commitment of $80.4 million, of which $49.9 million was outstanding, and is
required to be paid in full by June 2004. The second facility had a commitment
of $50.0 million of which $0 was outstanding. This facility matures in June
2002. The third facility is a $150 million non-recourse facility, which matures
in March 2003, and had an outstanding balance of $107.9 million at February 28,
2001. Additionally, the Company has received seller financing in the form of
term repos for six specific CMBS transactions. These agreements had an
outstanding balance of $110.6 million at February 28, 2001 and expire through
August 2004.
Because the Company borrows significant sums in connection with its activities,
the Company could be adversely affected by reluctance of lenders to make loans
to companies in real estate related businesses. Difficulty obtaining financing
can reduce the Company's ability to take advantage of investment opportunities.
In February 2001, the Company issued $150 million of long-term unsecured senior
subordinated notes, bringing the Company's total long-term unsecured senior
subordinated notes to $450 million. The $150 million of notes bear interest at
10.5% and are due in January 2009. The Company used the proceeds from the
issuance to pay down debt, primarily secured credit facilities, and for general
corporate purposes.
At February 28, 2001, the Company had scheduled maturities on existing debt of
$74.6 million through February 28, 2002, assuming the Company takes advantage of
extensions which are exercisable at the Company's option. The Company's ability
to make scheduled payments of principal or interest on or to refinance this
indebtedness depends on its future performance, which to a certain extent, is
subject to general economic, financial, competitive and other factors beyond the
Company's control. The Company believes its availability under existing credit
facilities, operating cash flow, unencumbered assets, and its ability to obtain
new borrowings and/or raise new capital, should provide the funds necessary to
meet its working capital requirements, debt service and maturities and short-
and long-term needs based upon currently anticipated levels of growth.
Approximately 62% of the Company's existing indebtedness bears interest at
variable rates. However, most of the Company's investments generate interest or
rental income at essentially fixed rates. The Company has entered into
derivative financial instruments to manage its interest costs and hedge against
risks associated with changing interest rates on its debt portfolio. At February
28, 2001, 38% of the Company's variable rate debt had been swapped to fixed
rates and
41% was match-funded against floating rate assets. After considering the
variable-rate debt that had been swapped or was match-funded, 13% of the
Company's debt remained variable-rate and 87% of the debt was fixed-rate or
match-funded. Therefore, a 100 basis point change in LIBOR would impact earnings
per share by approximately 1.5% of the Company's 2001 earnings per share goal of
$3.70 to $3.85.
The weighted average interest rate on outstanding debt, after giving
consideration to the interest rate swap agreements mentioned above, at February
28, 2001 and February 29, 2000 was 8.2% and 7.9%, respectively.
In December 2000, the Company purchased 300,000 shares of its common stock,
bringing the total purchases to date under the Company's buy-back program to
3,244,100 shares. This represents 59% of the Company's repurchase authorization
and over 9% of the Company's total stock outstanding when the purchase program
began. At the end of the quarter, the Company had 2,255,900 shares remaining
under its repurchase program.
3. NEW ACCOUNTING PRONOUCEMENTS
The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138, on December 1,
2000.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101 is applicable to the Company
beginning no later than the fourth quarter of the year ending November 30, 2001.
The adoption of this standard is not expected to have a material impact on the
Company's results of operations or financial position.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued in September 2000, and replaces SFAS
No. 125. It revises the standards for accounting for securitizations and other
transfers of financial assets and requires certain disclosures. SFAS No. 140 is
effective for the fiscal year ended November 30, 2001, with restatement required
for previous periods which are presented for comparative purposes. The adoption
of this standard is not expected to have a material impact on the Company's
results of operations or financial position.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not subject to any legal proceedings other than suits in the
ordinary course of its business, most of which are covered by insurance. The
Company believes these suits will not, in the aggregate, have a material adverse
effect upon the Company.
Items 2-5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K:
Reports on Form 8-K, dated February 6, 2001 and
February 7, 2001, were filed by the registrant with
respect to selected data furnished in accordance with
Regulation FD under Item 9.
A report on Form 8-K, dated February 6, 2001, was
filed by the registrant under Item 5 with respect to
the issuance of a press release containing financial
information as of November 30, 2000.
Reports on Form 8-K, dated February 15, 2001 and
February 23, 2001, were filed by the registrant under
Item 7 with respect to certain documents filed
relating to the issuance of long-term unsecured
senior subordinated notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
Signature and Title Date
------------------- ----
/s/ Shelly Rubin April 16, 2001
----------------------------------
Shelly Rubin
Chief Financial Officer (Principal
Financial Officer)