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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 31, 2002
Commission file number 1-13223
LNR Property Corporation
(Exact name of registrant as specified in its charter)
Delaware 65-0777234
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
760 Northwest 107th Avenue, Miami, Florida 33172
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (305) 485-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [___]
---
Common shares outstanding as of the end of the current fiscal quarter:
Common 23,524,109
Class B Common 9,783,768
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
LNR Property Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited)
(In thousands, except per share amounts) August 31, November 30,
2002 2001
------------ --------------
Assets
------
Cash and cash equivalents $ 8,903 6,578
Restricted cash 3,215 81,955
Investment securities:
Investment securities pledged to creditors which can be repledged or sold by
creditors 445,184 719,605
Other investment securities 611,880 495,516
------------ --------------
Total investment securities 1,057,064 1,215,121
Mortgage loans, net 363,637 331,517
Operating properties and equipment, net 821,776 719,662
Land held for investment 50,876 42,229
Investments in unconsolidated partnerships 411,624 352,142
Other assets 83,086 87,443
------------ --------------
Total assets $ 2,800,181 2,836,647
============ ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Accounts payable $ 9,688 20,914
Accrued expenses and other liabilities 215,748 253,669
Mortgage notes and other debts payable 1,449,715 1,417,207
------------ --------------
Total liabilities 1,675,151 1,691,790
------------ --------------
Minority interests 1,924 25,688
------------ --------------
Commitments and contingent liabilities (Note 3)
Stockholders' equity
Common stock, $.10 par value, 150,000 shares authorized, 23,524 and 24,445
shares issued and outstanding in 2002 and 2001, respectively 2,352 2,444
Class B common stock, $.10 par value, 40,000 shares authorized, 9,784 and
9,949 shares issued and outstanding in 2002 and 2001, respectively 978 995
Additional paid-in capital 494,512 513,977
Retained earnings 487,631 404,611
Unamortized value of restricted stock grants (7,876) (10,273)
Accumulated other comprehensive earnings 145,509 207,415
------------ --------------
Total stockholders' equity 1,123,106 1,119,169
------------ --------------
Total liabilities and stockholders' equity $ 2,800,181 2,836,647
============ ==============
See accompanying notes to unaudited consolidated condensed financial statements.
2
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Earnings
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
(In thousands, except per share amounts) August 31, August 31,
------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues
Rental income $ 29,796 26,201 83,986 86,178
Equity in earnings of unconsolidated partnerships 11,674 17,282 34,024 46,783
Interest income 45,071 44,315 137,868 135,419
Gains on sales of:
Real estate 5,295 13,786 29,439 57,657
Investment securities 45,613 4,842 47,221 4,842
Management and servicing fees 7,326 11,549 25,609 28,989
Other, net (476) (607) (1,136) (1,211)
------------ ------------ ------------ ------------
Total revenues 144,299 117,368 357,011 358,657
------------ ------------ ------------ ------------
Costs and expenses
Cost of rental operations 14,384 13,183 40,450 43,684
General and administrative 19,703 18,245 56,722 54,947
Depreciation 6,202 6,088 18,465 19,462
Minority interests 283 570 1,263 2,262
------------ ------------ ------------ ------------
Total costs and expenses 40,572 38,086 116,900 120,355
------------ ------------ ------------ ------------
Operating earnings 103,727 79,282 240,111 238,302
Interest expense 24,203 26,978 72,003 86,263
------------ ------------ ------------ ------------
Earnings before income taxes 79,524 52,304 168,108 152,039
Income taxes 25,845 17,088 54,635 52,484
------------ ------------ ------------ ------------
Net earnings $ 53,679 35,216 113,473 99,555
============ ============ ============ ============
Weighted average shares outstanding:
Basic 33,780 33,492 33,795 33,320
============ ============ ============ ============
Diluted 34,846 35,077 35,019 34,916
============ ============ ============ ============
Net earnings per share:
Basic $ 1.59 1.05 3.36 2.99
============ ============ ============ ============
Diluted $ 1.54 1.00 3.24 2.85
============ ============ ============ ============
Dividends declared per share:
Common stock $ 0.0125 0.0125 0.0375 0.0375
============ ============ ============ ============
Class B common stock $ 0.01125 0.01125 0.03375 0.03375
============ ============ ============ ============
See accompanying notes to unaudited consolidated condensed financial statements.
3
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Comprehensive Earnings
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
August 31, August 31,
--------------------------- --------------------------
(In thousands) 2002 2001 2002 2001
------------- ------------- ------------ ------------
Net earnings $ 53,679 35,216 113,473 99,555
------------- ------------- ------------ ------------
Other comprehensive earnings (loss), net of tax:
Unrealized (loss) gain on available-for-sale securities, net and other (9,544) 14,822 (30,995) 19,250
Unrealized (loss) gain on derivative financial instruments (98) (70) 129 (3,939)
Transition adjustment related to accounting for derivative financial
instruments and hedging activities - - - 4,118
Reclassification adjustment for gains included in net earnings (29,670) (5,009) (31,040) (5,009)
------------- ------------- ------------ ------------
Other comprehensive earnings (loss), net of tax (39,312) 9,743 (61,906) 14,420
------------- ------------- ------------ ------------
Comprehensive earnings $ 14,367 44,959 51,567 113,975
============= ============= ============ ============
See accompanying notes to unaudited consolidated condensed financial statements.
4
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
(In thousands) August 31,
--------------------------------
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net earnings $ 113,473 99,555
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation 18,465 19,462
Minority interests 1,263 2,262
Accretion of discount on CMBS and mortgage loans (35,554) (31,389)
Amortization of deferred costs 4,628 4,203
Equity in earnings of unconsolidated partnerships (34,024) (46,783)
Gains on sales of real estate (29,439) (57,657)
Gains on sales of investment securities (47,221) (4,842)
Losses on derivative financial instruments 1,192 1,312
Changes in assets and liabilities:
Decrease in restricted cash 78,740 17,651
Increase in other assets (1,843) (7,187)
(Decrease) increase in accounts payable and accrued liabilities (20,567) 13,379
Decrease in minority interests (25,027) (3,835)
--------------- ---------------
Net cash provided by operating activities 24,086 6,131
--------------- ---------------
Cash flows from investing activities:
Operating properties and equipment
Additions (157,570) (123,609)
Sales 109,087 134,559
Land held for investment
Additions (33,592) (4,652)
Sales 32,578 28,122
Investments in unconsolidated partnerships (112,738) (66,153)
Proceeds from sales of unconsolidated partnership interests 4,829 -
Distributions from unconsolidated partnerships 75,225 101,303
Purchase of mortgage loans held for investment (63,760) (37,396)
Proceeds from mortgage loans held for investment 66,499 112,626
Purchase of investment securities (223,113) (247,359)
Proceeds from principal collections on and sales of investment securities 442,687 62,082
Interest received on CMBS in excess of income recognized 15,068 17,572
Proceeds from syndications of affordable housing communities 5,609 41,776
--------------- ---------------
Net cash provided by investing activities 160,809 18,871
--------------- ---------------
Cash flows from financing activities:
Purchase and retirement of treasury stock (51,812) (6,150)
Proceeds from stock option exercises 3,165 1,520
Payment of dividends (1,257) (1,246)
Net payments under repurchase agreements and revolving credit lines (86,750) (225,047)
Mortgage notes and other debts payable:
Proceeds from borrowings 82,391 328,799
Principal payments (128,307) (112,213)
--------------- ---------------
Net cash used in financing activities (182,570) (14,337)
--------------- ---------------
Net increase in cash and cash equivalents 2,325 10,665
Cash and cash equivalents at beginning of period 6,578 1,986
--------------- ---------------
Cash and cash equivalents at end of period $ 8,903 12,651
=============== ===============
(Continued)
5
LNR Property Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows - CONTINUED
(Unaudited)
Nine Months Ended
August 31,
--------------------------
(In thousands) 2002 2001
------------ ------------
Supplemental disclosure of non-cash investing and financing activities:
Purchases of investment securities financed by seller $ 85,382 28,508
Purchases of mortgage loans financed by seller $ 26,625 40,224
Mortgage loan received on sale of operating property $ - 24,440
Supplemental disclosure of non-cash transfers:
Transfer from investment securities to mortgage loans $ 4,310 -
Transfer from other assets to investments in unconsolidated partnerships $ 3,691 -
Transfer from operating properties to land held for investment $ - 5,391
Supplemental disclosure of cash flow information:
Purchase of partnership interests and consolidation of entities previously accounted
for under the equity method:
Operating properties $ 60,504 -
Other assets 4,173 -
Mortgage notes and other debts payable (48,187) -
Investments in unconsolidated partnerships (6,560) -
------------ ------------
Cash paid $ 9,930 -
============ ============
See accompanying notes to unaudited consolidated condensed financial statements.
6
LNR Property Corporation and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
1. Basis of Presentation and Consolidation
The accompanying unaudited consolidated condensed financial statements include
the accounts of LNR 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 non-controlling owners in
such entities are reflected as minority interests. The Company's investments in
partnerships (and similar entities) in which less than a controlling interest is
held or in which control is shared are accounted for by the equity method (when
significant influence can be exerted by the Company), or the cost method. All
significant intercompany transactions and balances have been eliminated. The
financial statements have been prepared by management without audit by
independent public accountants and should be read in conjunction with the
November 30, 2001 audited financial statements in the Company's Annual Report on
Form 10-K for the year then ended. However, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for fair
presentation of the accompanying unaudited consolidated condensed financial
statements have been made.
2. Earnings Per Share
The following reconciles the numerator and denominator of the basic and diluted
earnings per share calculations for the three and nine months ended August 31,
2002 and 2001:
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------ --------------------------
(In thousands, except per share amounts) 2002 2001 2002 2001
---------- ---------- ----------- -----------
Numerator
Numerator for basic and diluted earnings per
share - net earnings $ 53,679 35,216 113,473 99,555
========== ========== =========== ===========
Denominator
Denominator for basic earnings per share -
weighted average shares 33,780 33,492 33,795 33,320
Effect of dilutive securities
Stock options 383 683 502 704
Restricted stock 663 880 701 879
Stock purchase plan and other 20 22 21 13
---------- ---------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 34,846 35,077 35,019 34,916
========== ========== =========== ===========
Basic earnings per share $ 1.59 1.05 3.36 2.99
========== ========== =========== ===========
Diluted earnings per share $ 1.54 1.00 3.24 2.85
========== ========== =========== ===========
3. Commitments and Contingent Liabilities
The Company has provided guarantees under letters of credit and other
agreements, primarily related to the performance of certain development,
construction and other property activities. The
7
Company has also provided repayment and other guarantees of indebtedness for
certain of its unconsolidated subsidiaries. Total outstanding guarantees under
these arrangements totaled approximately $186.5 million at August 31, 2002. The
Company believes that it will not be required to fund under these obligations.
Additionally, at August 31, 2002, the Company had committed to provide $50.0
million of capital contributions to certain of its subsidiaries.
4. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142,
and that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment. SFAS No. 142 is effective for the fiscal year ending
November 2003 and the interim periods within fiscal year 2003. The adoption of
SFAS No. 142 is not expected to have a material effect on the Company's results
of operations or financial position as the Company has no goodwill on its
balance sheet.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets. SFAS
No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made by recording a liability and increasing the
carrying amount of the related long-lived asset. That asset retirement cost is
then subsequently allocated to expense using a systematic and rational method
over its useful life. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. The Company is required and plans to adopt the provisions of SFAS
No. 143 for the quarter ending February 28, 2003. The adoption of SFAS No. 143
is not expected to have a material effect on the Company's results of operations
or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and the accounting and reporting
provisions of Accounting Practices Bulletin Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of a Disposal of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. This Statement also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. SFAS No. 144 is effective for the fiscal year ending November 30,
2003, and the interim periods within fiscal 2003, with early application
encouraged. The provisions of this statement generally are to be applied
prospectively. The Company has determined that adoption of this statement will
not have a material impact on the Company's results of operations. It will,
however, have an impact on the presentation of the financial position and
related operating results of certain Company assets. The Company will be
required to present all operating properties classified as held for sale
separately in the balance sheet, and all properties sold or classified as held
for sale as discontinued operations in the statement of earnings and statement
of cash flows, as well as restate prior periods presented for comparative
purposes.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145, among other items, updates and clarifies existing accounting
pronouncements related to gains and losses from the extinguishment of debt and
certain lease modifications that have economic effects similar to sale-leaseback
transactions. The provisions of SFAS No. 145 were generally effective as of May
15, 2002. The adoption of SFAS No. 145 did not have a material impact on the
Company's results
8
of operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit (including restructuring) or disposal activities at
fair value when the related liability is incurred rather than at the date of a
commitment to an exit or disposal plan under current practice. Costs covered by
the standard include certain contract termination costs, certain employee
termination benefits and other costs to consolidate or close facilities and
relocate employees that are associated with an activity being exited or
long-lived assets being disposed. The new requirements are effective
prospectively for exit or disposal activities initiated after December 31, 2002,
and will be adopted by the Company effective December 1, 2002. The Company does
not expect the adoption of SFAS No. 146 to have a material effect on the
Company's results of operations or financial position.
5. Securitization Transaction
During July 2002, the Company transferred approximately $800 million in face
value of non-investment grade CMBS to a qualified special purpose entity. Those
CMBS were securitized into various classes of non-recourse fixed- and
floating-rate bonds comprised of approximately $416 million face value of
investment grade rated bonds and approximately $94 million face value of
non-investment grade rated bonds, as well as approximately $290 million face
value of preferred shares in the issuing entity. The qualified special purpose
entity sold the investment grade rated bonds to unrelated third parties for net
proceeds of approximately $402 million, which was used to pay the Company for
the CMBS collateral securities. The Company used the proceeds to repay
short-term debt, the majority of which can be re-borrowed. In accordance with
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the Company recognized a pretax gain on the
sale of the CMBS collateral securities of approximately $45.6 million. The
Company has retained the non-investment grade rated bonds and the preferred
equity (the "retained interests"). The aggregate face amount of the retained
interests at the date of transfer was approximately $384 million, the fair value
of which was classified as available-for-sale on the Company's balance sheet.
The amortized cost of the retained interests at the date of transfer was $79.2
million with an estimated fair value of $96.5 million. The Company measures its
retained interests at their estimated fair value based on the present value of
the expected future cash flows. The difference between the amortized cost of the
retained interests and their fair values is recorded, net of tax, in other
comprehensive earnings.
6. Reclassifications
Certain reclassifications have been made to the prior year consolidated
condensed financial statements to conform to the current year presentation.
9
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 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, BUT ARE NOT LIMITED TO (I) CHANGES IN DEMAND FOR COMMERCIAL
REAL ESTATE NATIONALLY, IN AREAS IN WHICH THE COMPANY OWNS PROPERTIES, OR IN
AREAS IN WHICH PROPERTIES SECURING MORTGAGES DIRECTLY OR INDIRECTLY OWNED BY THE
COMPANY ARE LOCATED, (II) INTERNATIONAL, NATIONAL OR REGIONAL BUSINESS
CONDITIONS WHICH AFFECT THE ABILITY OF MORTGAGE OBLIGORS TO PAY PRINCIPAL OR
INTEREST WHEN IT IS DUE, (III) THE CYCLICAL NATURE OF THE COMMERCIAL REAL ESTATE
BUSINESS, (IV) CHANGES IN INTEREST RATES, (V) CHANGES IN THE MARKET FOR VARIOUS
TYPES OF REAL ESTATE BASED SECURITIES, (VI) CHANGES IN AVAILABILITY OF CAPITAL
OR THE TERMS ON WHICH IT IS AVAILABLE, (VII) CHANGES IN AVAILABILITY OF
QUALIFIED PERSONNEL AND (VIII) CHANGES IN GOVERNMENT REGULATIONS, INCLUDING,
WITHOUT LIMITATION, ENVIRONMENTAL REGULATIONS. SEE THE COMPANY'S ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED NOVEMBER 30, 2001, FOR A FURTHER DISCUSSION OF
RISKS AND UNCERTAINTIES APPLICABLE TO THE COMPANY'S BUSINESS.
OVERVIEW
LNR Property Corporation (together with its subsidiaries, the "Company") is a
real estate investment, finance and management company. The Company engages
primarily in (i) acquiring, developing, managing and repositioning commercial
and multi-family residential real estate properties, (ii) investing in high
yielding real estate loans and purchasing at a discount portfolios of loans
backed by real estate and (iii) investing in unrated and non-investment grade
rated commercial mortgage-backed securities ("CMBS") as to which the Company has
the right to be special servicer (i.e., to oversee workouts of under-performing
and non-performing loans). For the following discussion, these businesses are
grouped as follows: (a) real estate properties, (b) real estate loans and (c)
real estate securities.
10
1. RESULTS OF OPERATIONS
The following discussion and analysis presents the significant changes in
results of operations of the Company for the three months and nine months ended
August 31, 2002 and 2001 after allocating among the core business segments
certain non-corporate general and administrative expenses. The following
discussion should be read in conjunction with the unaudited consolidated
condensed financial statements and notes thereto.
Three Months Ended Nine Months Ended
August 31, August 31,
-------------------------- ---------------------------
(In thousands) 2002 2001 2002 2001
----------- ----------- ----------- ------------
Revenues
Real estate properties $ 44,765 51,532 137,597 164,152
Real estate loans 10,939 10,531 32,537 40,868
Real estate securities 88,595 55,305 186,877 153,637
----------- ----------- ----------- ------------
Total revenues 144,299 117,368 357,011 358,657
----------- ----------- ----------- ------------
Operating expenses
Real estate properties 26,961 26,125 79,353 85,885
Real estate loans 1,319 1,706 4,446 5,394
Real estate securities 5,550 3,527 14,631 11,134
Corporate and other 6,742 6,728 18,470 17,942
----------- ----------- ----------- ------------
Total operating expenses 40,572 38,086 116,900 120,355
----------- ----------- ----------- ------------
Operating earnings
Real estate properties 17,804 25,407 58,244 78,267
Real estate loans 9,620 8,825 28,091 35,474
Real estate securities 83,045 51,778 172,246 142,503
Corporate and other (6,742) (6,728) (18,470) (17,942)
----------- ----------- ----------- ------------
Total operating earnings 103,727 79,282 240,111 238,302
Interest expense 24,203 26,978 72,003 86,263
Income tax expense 25,845 17,088 54,635 52,484
----------- ----------- ----------- ------------
Net earnings $ 53,679 35,216 113,473 99,555
=========== =========== =========== ============
Three months and nine months ended August 31, 2002 compared to three months and
nine months ended August 31, 2001
The Company reported net earnings of $53.7 million and $113.5 million for the
three- and nine-month periods ended August 31, 2002, respectively, compared to
$35.2 million and $99.6 million for the same periods in 2001.
The quarter-over-quarter and year-over-year improvement in net earnings was
primarily attributable to (i) a higher level of gains on asset sales primarily
due to the $45.6 million gain recognized on the sale of non-investment grade
CMBS through a securitization transaction, (ii) an increase in equity in
earnings of unconsolidated real estate properties partnerships, (iii) a decrease
in interest expense primarily due to lower interest rates, and (iv) an increase
in CMBS interest income. These increases were offset somewhat by (i) a decrease
in equity in earnings of unconsolidated real estate securities partnerships,
(ii) a decrease in management and servicing fee income, and (iii) an increase in
income tax expense.
The Company's total revenues were up $26.9 million or 23% for the quarter and
relatively flat for the year-to-date period, compared to the respective periods
for the prior year. The increase in total revenues for the quarter was primarily
related to a higher level of gains on asset sales, in particular the $45.6
million gain on the sale of non-investment grade CMBS through a securitization
transaction. Asset sales fluctuate from quarter to quarter and come from a
variety of sources including wholly-owned
11
real estate properties and securities, real estate assets owned in
unconsolidated partnerships and the syndication of tax credits through the sale
of affordable housing partnership interests. Excluding gains from sales of
wholly owned assets in both periods, revenues would have decreased by
approximately 5% for both the quarter and the year-to-date period. These
decreases were primarily due to lower interest income on floating-rate assets,
the loss of recurring revenue that had been generated by the assets that were
sold, and a reduction in earnings from the Company's real estate securities
partnerships. While lower interest rates on floating-rate assets impact
revenues, these assets are match-funded with floating-rate debt, and therefore
the lower interest rates have only a minor impact on bottom-line earnings. In
addition, as new assets have come on line to replace those that have been sold,
on average, they have been purchased at higher yields than the capitalization
rates at which the assets were sold. Lower earnings from real estate securities
partnerships reflected less income from Madison Square Company LLC ("Madison"),
primarily due to lower interest income resulting from lower principal balances
due to asset paydowns, and the timing and amount of expected principal
collections related to short-term floating-rate securities owned by the venture.
Real estate properties
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------------- -------------------------------
(In thousands) 2002 2001 2002 2001
------------- ------------- ------------- -------------
Rental income $ 29,796 26,201 83,986 86,178
Equity in earnings of unconsolidated
partnerships 9,149 6,477 19,122 12,078
Interest income 116 619 1,533 1,655
Gains on sales of real estate 5,295 13,786 29,439 57,657
Management fees 409 4,449 3,512 6,584
Other, net - - 5 -
------------- ------------- ------------- -------------
Total revenues 44,765 51,532 137,597 164,152
------------- ------------- ------------- -------------
Cost of rental operations 14,384 13,183 40,450 43,684
Other operating expenses /(1)/ 6,333 6,602 20,300 22,455
Depreciation 6,202 6,088 18,465 19,462
Minority interests 42 252 138 284
------------- ------------- ------------- -------------
Total operating expenses /(1)/ 26,961 26,125 79,353 85,885
------------- ------------- ------------- -------------
Operating earnings $ 17,804 25,407 58,244 78,267
============= ============= ============= =============
Balance sheet data:
Operating properties and equipment,
net $ 821,776 756,625 821,776 756,625
Land held for investment 50,876 43,117 50,876 43,117
Investments in unconsolidated
partnerships 297,989 243,048 297,989 243,048
Other assets 44,162 53,208 44,162 53,208
------------- ------------- ------------- -------------
Total segment assets $ 1,214,803 1,095,998 1,214,803 1,095,998
============= ============= ============= =============
(1) Operating expenses do not include interest expense.
Real estate properties include rental apartment communities (market-rate and
affordable housing communities, substantially all of which qualify for
Low-Income Housing Tax Credits under Section 42 of the Internal Revenue Code),
office buildings, industrial/warehouse facilities, hotels, retail centers and
land that the Company acquires and develops, redevelops or repositions. These
properties may be wholly-owned or owned through partnerships that are either
consolidated or accounted for by the equity method, and therefore reflected on
the Company's balance sheet only as an investment in unconsolidated
partnerships. Real estate properties also include the Company's 50% interest in
Lennar Land Partners ("LLP"), an unconsolidated partnership accounted for under
the equity method, which is engaged in the acquisition, development and sale of
land. Total
12
revenues from real estate properties include rental income from consolidated
operating properties, equity in earnings of unconsolidated partnerships that own
and operate real estate properties, gains on sales of properties or interests in
those unconsolidated partnerships and fees earned from managing partnerships.
Operating expenses include the direct costs of operating the real estate
properties, the related depreciation and the overhead associated with managing
the properties and partnerships.
For the past two years, based on its overall view of the comparative returns in
the U.S. property markets, the Company has been selling stabilized operating
properties into a strong market and has limited its new property acquisitions in
favor of adding value to its existing property portfolio through development,
repositioning and leasing. While continuing to maintain this strategy, the
Company began to invest during the second quarter of 2002 in real estate
property in Europe. At August 31, 2002, the Company's investment in
unconsolidated partnerships in Europe totaled $71.5 million.
Three months and nine months ended August 31, 2002 compared to three months and
nine months ended August 31, 2001
Overall operating earnings from real estate properties were $17.8 million and
$58.2 million for the three- and nine-month periods ended August 31, 2002,
respectively, compared to $25.4 million and $78.3 million for the same periods
in 2001. These decreases were primarily due to lower gains on sales of real
estate properties and lower management fees, partially offset by an increase in
property net operating income ("NOI") and equity in earnings of unconsolidated
partnerships.
Gains on sales of real estate decreased $8.5 million and $28.2 million for the
three- and nine-month periods ending August 31, 2002, respectively, compared to
the same periods in 2001, reflecting a decrease in real estate property sales
activity in 2002. Gains on sales of real estate fluctuate from quarter to
quarter due to the timing of asset sales.
Property NOI (rental income less cost of rental operations) increased 18% or
$2.4 million for the three-month period ended August 31, 2002 and increased 2%
or $1.0 million for the nine-month period ended August 31, 2002, compared to the
same periods in 2001. Over the past several quarters, many of the properties in
the Company's development or repositioning portfolio have become stabilized and
are now contributing to NOI. At the end of the quarter, approximately 52% of the
Company's operating property portfolio was still undergoing development or
repositioning. A significant portion of this portfolio is pre-leased, so the
Company anticipates continued growth in NOI during the balance of the year as
these properties come on line and tenants begin to pay rent.
Equity in earnings of unconsolidated partnerships increased to $9.1 million and
$19.1 million for the three- and nine-month periods ended August 31, 2002,
respectively, from $6.5 million and $12.1 million for the same periods in 2001.
For the quarter, this increase was primarily due to $2.0 million of earnings
from the Company's European investments and higher gains on sales of assets held
by the Company's domestic partnerships. These increases were partially offset by
$1.8 million of lower earnings from LLP. For the year-to-date period, the
increase was primarily due to $2.0 million of earnings from the Company's
European investments, higher gains on sales of assets held by the Company's
domestic partnerships, and higher earnings from LLP. Equity in earnings from LLP
may vary from period to period depending upon the timing of housing starts.
Management fees decreased by $4.0 million and $3.1 million for the three- and
nine-month periods ended August 31, 2002, respectively, compared to the same
periods in 2001. The decrease for both the quarter and the year-to-date periods
were primarily due to developer fees and other fees the Company received during
the third quarter of 2001. These fees vary based on the timing of asset sales.
13
The net book value of operating properties and equipment at August 31, 2002 and
the annualized net operating income for the nine-month period ended on that date
with regard to various types of property owned by the Company were as follows:
Annualized Annualized
Net NOI as a %
Operating of Net
Net Book Occupancy Income Book
(In thousands, except percentages) Value Rate/(1)/ (NOI)/(2)/ Value
-------------------------------------------------------
Market-rate operating properties
Stabilized operating properties
Office $ 251,233 94% $ 32,676 13%
Retail 14,286 91% 2,006 14%
Industrial / warehouse 52,958 100% 7,315 14%
Ground leases 11,088 100% 2,134 19%
------------------------- --------------------------
Commercial 329,565 97% 44,131 13%
Hotel 15,364 48% 565 4%
------------- --------------------------
344,929 44,696 13%
------------- --------------------------
Under development or repositioning
Office 197,434 9,298
Retail 63,436 4,224
------------- -------------
Commercial 260,870 13,522
Multi-family 74,827 2,994
Hotel 56,192 900
------------- -------------
391,889 17,416
------------- -------------
Total market-rate operating properties 736,818 62,112
------------- -------------
Affordable housing communities
Stabilized 44,059 92% 4,494
Under development 29,486 -
------------- -------------
Total affordable housing communities 73,545 4,494
------------- -------------
Furniture, fixtures and equipment 11,413 -
------------- -------------
Total $ 821,776 $ 66,606
============= =============
(1) Occupancy rate at August 31, 2002.
(2) Annualized NOI for purposes of this schedule is rental income less cost of
rental operations before commissions and non-operating expenses.
At August 31, 2002, approximately 47% of the Company's market-rate operating
properties, based on net book value, had reached stabilized occupancy levels and
were yielding in total 13% on net book 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 are generally
lower than for market-rate rentals. However, the Company receives its desired
yield from these investments after adding in (i) the impact of lower income
taxes as a result of the tax credits and other related tax deductions and (ii)
profits from sales of tax credits to others.
14
The net investment in the Company's affordable housing communities at August 31,
2002 is as follows:
(In thousands)
Operating properties, net $ 73,545
Investments in unconsolidated partnerships 79,524
Debt and other (62,421)
-----------
Net investment in affordable housing communities $ 90,648
===========
As of August 31, 2002, the Company had been awarded and held rights to $127.2
million in tax credits, with approximately 55% relating to apartment communities
that have not yet reached stabilized occupancy levels.
At the time of the acquisition of the Affordable Housing Group ("AHG") in 1998,
the Company's strategy was to retain the tax credits generated through owning
the majority of the partnership interests in the affordable housing communities
and then using those credits to reduce the Company's overall effective tax rate.
However, the demand for credits subsequently increased significantly and the
Company found it could generate higher returns on its investment by selling the
credits than by using them. The Company has shifted its strategy away from
owning the majority of the partnership interests in the affordable housing
communities toward syndicating those interests. After such syndications, the
Company continues to hold small interests (typically ranging from 1% to 10%) in
these partnerships and continues to manage the communities for which it earns
management fees. The Company expects to generate fee income and gains in future
years from such syndications. As a result, the Company expects its investment in
affordable housing communities, as well as the amount of tax credits it holds
and utilizes to reduce its tax rate, to decline in future quarters.
Real estate loans
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------------- -------------------------------
(In thousands) 2002 2001 2002 2001
------------- ------------- ------------- -------------
Interest income $ 9,765 9,255 29,166 35,580
Equity in earnings of unconsolidated
partnerships 1,056 463 2,282 1,651
Management fees 110 760 1,038 3,536
Other, net 8 53 51 101
------------- ------------- ------------- -------------
Total revenues 10,939 10,531 32,537 40,868
------------- ------------- ------------- -------------
Operating expenses /(1)/ 1,078 1,184 3,336 3,640
Minority interests 241 522 1,110 1,754
------------- ------------- ------------- -------------
Total operating expenses /(1)/ 1,319 1,706 4,446 5,394
------------- ------------- ------------- -------------
Operating earnings $ 9,620 8,825 28,091 35,474
============= ============= ============= =============
Balance sheet data:
Mortgage loans, net $ 363,637 240,263 363,637 240,263
Other investments - 52,361 - 52,361
Investments in unconsolidated
partnerships 8,175 9,593 8,175 9,593
Other assets 1,881 2,852 1,881 2,852
------------- ------------- ------------- -------------
Total segment assets $ 373,693 305,069 373,693 305,069
============= ============= ============= =============
(1) Operating expenses do not include interest expense.
15
Real estate loans include the Company's direct investments in high yielding
loans, as well as its discount loan portfolio investments, owned primarily
through unconsolidated partnerships, and related loan workout operations. Other
investments included short-term investment securities which were collateral for
a letter of credit that provided credit enhancement to $277.3 million of
tax-exempt bonds. The letter of credit was released in the third quarter of
2002. Total revenues include interest income, equity in earnings of
unconsolidated partnerships and management fees earned from those partnerships.
Operating expenses include the overhead associated with servicing the loans and
managing the partnerships.
Three months and nine months ended August 31, 2002 compared to three months and
nine months ended August 31, 2001
Operating earnings from real estate loans were $9.6 million and $28.1 million
for the three- and nine-month periods ended August 31, 2002, respectively,
compared to $8.8 million and $35.5 million for the same periods in 2001.
Interest income was $9.8 million and $29.2 for the three- and nine-month periods
ended August 31, 2002, respectively, compared to $9.3 million and $35.6 million
for the same periods in 2001. The increase for the three month period compared
to the same period in 2001 was due to a higher level of loan investments, offset
in part by lower interest rates on floating-rate loans that are match-funded
with floating-rate debt. The decrease for the nine month period compared to the
same period in 2001 reflects $4.2 million of interest income recognized in the
first quarter of 2001 resulting from the payoff of two loan investments, which
had been acquired at a discount, and the impact during the 2002 period of lower
interest rates on the Company's floating-rate loans, offset in part by a higher
level of loan investment. The majority of the Company's interest income from its
real estate loan segment is earned on investments in structured junior
participations in high-quality short- to medium-term variable-rate real estate
loans ("B-Notes"). Because these floating-rate loans are match-funded with
floating-rate debt, the reduction in interest income due to declining interest
rates has virtually no impact on net earnings. To date, the Company has not
experienced any delinquencies in its B-Note portfolio.
During the third quarter of 2002, the Company funded one additional B-Note
investment for approximately $17.5 million, bringing the total portfolio of
B-Note investments to $306.5 million at August 31, 2002.
Management fees decreased to $0.1 million and $1.0 million for the three- and
nine-month periods ended August 31, 2002, respectively, from $0.8 million and
$3.5 million for the same periods in 2001. These decreases were primarily due to
lower fees earned from dispositions of assets in the Company's domestic discount
loan portfolios.
16
Real estate securities
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------------- -------------------------------
(In thousands) 2002 2001 2002 2001
------------- ------------- ------------- -------------
Interest income $ 35,190 34,441 107,169 98,184
Equity in earnings of unconsolidated
partnerships 1,469 10,342 12,620 33,054
Gains on sales of securities 45,613 4,842 47,221 4,842
Management and servicing fees 6,807 6,340 21,059 18,869
Other, net (484) (660) (1,192) (1,312)
------------- ------------- ------------- -------------
Total revenues 88,595 55,305 186,877 153,637
------------- ------------- ------------- -------------
Operating expenses /(1)/ 5,550 3,731 14,616 10,910
Minority interests - (204) 15 224
------------- ------------- ------------- -------------
Total operating expenses /(1)/ 5,550 3,527 14,631 11,134
------------- ------------- ------------- -------------
Operating earnings $ 83,045 51,778 172,246 142,503
============= ============= ============= =============
Balance sheet data:
Investment securities $ 1,057,064 952,470 1,057,064 952,470
Investments in unconsolidated
partnerships 105,460 102,807 105,460 102,807
Other assets 26,365 40,290 26,365 40,290
------------- ------------- ------------- -------------
Total segment assets $ 1,188,889 1,095,567 1,188,889 1,095,567
============= ============= ============= =============
(1) Operating expenses do not include interest expense.
Real estate securities include unrated and non-investment grade rated
subordinated CMBS, which are collateralized by pools of mortgage loans on
commercial and multi-family residential real estate properties. It also includes
the Company's investment in Madison Square Company LLC ("Madison"), a limited
liability company that invests primarily in CMBS, as well as investments in
entities in related businesses. Total revenues from real estate securities
include interest income, equity in the earnings of Madison, gains on sales of
investment 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.
During July 2002, the Company transferred approximately $800 million in face
value of non-investment grade CMBS to a qualified special purpose entity. Those
CMBS were securitized into various classes of non-recourse fixed- and
floating-rate bonds comprised of approximately $416 million face value of
investment grade rated bonds and approximately $94 million face value of
non-investment grade rated bonds, as well as approximately $290 million face
value of preferred shares in the issuing entity. The qualified special purpose
entity sold the investment grade rated bonds to unrelated third parties for net
proceeds of approximately $402 million, which was used to pay the Company for
the CMBS collateral securities. The Company used the proceeds to repay
short-term debt, the majority of which can be re-borrowed. In accordance with
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the Company recognized a pretax gain on the
sale of the CMBS collateral securities of approximately $45.6 million. The
Company has retained the non-investment grade rated bonds and the preferred
equity (the "retained interests"). The aggregate face amount of the retained
interests at the date of transfer was approximately $384 million, the fair value
of which was classified as available-for-sale on the Company's balance sheet.
This transaction provided the Company with significant new liquidity for the
purchase of new investments, for other general corporate purposes or for the
repurchase of stock under the Company's ongoing share repurchase program.
17
Three months and nine months ended August 31, 2002 compared to three months and
nine months ended August 31, 2001
Overall operating earnings from real estate securities increased to $83.0
million and $172.2 million for the three- and nine-month periods ended August
31, 2002, respectively, from $51.8 million and $142.5 million for the same
periods in 2001. Earnings were higher for both periods primarily due to the
$45.6 million pre-tax gain recognized on the securitization transaction
(described above), higher interest income and higher management and servicing
fees, offset in part by lower equity in earnings from unconsolidated
partnerships and increased operating expenses.
Interest income increased to $35.2 million and $107.2 million for the three- and
nine-month periods ended August 31, 2002, respectively, from $34.4 million and
$98.2 million for the same periods in 2001. These increases were primarily due
to growth in the Company's CMBS portfolio, as well as greater recognition of
earnings as actual CMBS performance continued to exceed original expectations,
partially offset by lower interest rates on floating-rate CMBS that are
match-funded with floating-rate debt.
In recording CMBS interest income, the Company recognizes the amount by which
cash flows over the life of a security are expected to exceed the Company's
initial investment as interest income to achieve a level yield over the life of
the security. To date, this has resulted in less recognition of interest income
than the amount of interest actually received. The excess interest received is
applied to reduce the Company's CMBS investment. The Company's initial and
ongoing estimates of cash flows from CMBS investments are based on a number of
assumptions that are subject to business and economic factors, the most
significant of which is the magnitude and timing of credit losses on the
underlying mortgages. Changes in cash flow estimates could materially affect the
interest income that is recognized in future periods.
The Company invests in subordinated classes of CMBS, and generally does not
receive principal payments until the principal of the senior classes of that
issue is paid in full. The Company is currently receiving principal payments
from 11 classes of its CMBS securities, and an additional 21 classes (excluding
securities sold in the securitization transaction described above) have reached
economic maturity either through the collection of principal, liquidation of the
trust, or sale. Through the securitization transaction described above, an
additional 18 classes of securities and portions of 116 other classes were also
sold. Actual loss experience to date, particularly for older transactions (3 to
8 years in age), is significantly lower than originally underwritten by the
Company. Therefore, changes to original estimated yields have resulted in
improved earnings from these transactions. The Company believes these
improvements resulted primarily from its conservative due diligence, its success
in managing and working out the underlying loans, as well as stable real estate
fundamentals. However, the positive experience on these older transactions does
not necessarily mean there will be similar yield improvements on newer
investments.
18
During the quarter ended August 31, 2002, the Company acquired $180.3 million
face amount of fixed-rate CMBS for $106.7 million. The following is a summary of
the CMBS portfolio held by the Company at August 31, 2002:
Weighted Weighted Weighted
Average % of Average Average
Face Coupon Book Face Cash Book
Amount Rate Value Amount Yield/(1)/ Yield/(2)/
--------------------------------------------------------------------------------
(In thousands, except percentages)
Fixed-rate
BB rated or above $ 337,249 6.53% $ 243,758 72.3% 7.9% 10.2%
B rated 379,665 6.48% 193,466 51.0% 11.2% 13.5%
Unrated 1,118,796 6.96% 236,711 21.2% 28.1% 27.1%
------------------------- ---------------------------------------------------
Total 1,835,710 6.78% 673,935 36.7% 15.9% 17.1%
Floating-rate/
short-term
BB rated or above 12,789 3.12% 11,689 91.4% 3.4% 7.5%
B rated 25,748 8.67% 24,694 95.9% 9.0% 11.6%
Unrated 130,784 14.04% 106,414 81.4% 17.1% 19.1%
------------------------- ---------------------------------------------------
Total 169,321 12.35% 142,797 84.3% 14.5% 16.8%
Total amortized
cost 2,005,031 7.22% 816,732 40.7% 15.7% 17.0%
Excess of fair
value over
amortized cost - 240,332
------------- --------------
Total CMBS
portfolio/(3)/ $ 2,005,031 $ 1,057,064
============= ==============
(1) Cash yield is determined by annualizing the actual cash received during
the month of August 2002, and dividing the result by the book value at August
31, 2002.
(2) Book yield is determined by annualizing the interest income for the
month of August 2002, and dividing the result by the book value at August 31,
2002.
(3) This table excludes CMBS owned through unconsolidated partnerships.
Equity in earnings of unconsolidated partnerships primarily represents the
Company's participation in Madison, which was formed in March 1999. The venture
owns approximately $1.7 billion face value of CMBS at August 31, 2002. The
Company's investment in the venture at August 31, 2002 was $99.5 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
$1.8 million and $13.3 million of equity in earnings of unconsolidated
partnerships to the real estate securities line of business for the three- and
nine-month periods ended August 31, 2002, respectively, compared to $10.3
million and $33.1 million for the same periods in 2001. The decline in Madison
earnings reflects lower interest income resulting from lower principal balances
due to asset paydowns, and the timing and amount of expected principal
collections related to short-term floating-rate securities owned by the venture.
Management and servicing fees increased to $6.8 million and $21.1 million for
the three- and nine-month periods ended August 31, 2002, respectively, from $6.3
million and $18.9 million for the same periods in 2001. These increases were
primarily attributable to an increase in the number of CMBS mortgage pools (99
at August 31, 2002 versus 81 at August 31, 2001) for which the Company acts as
special servicer.
19
Operating expenses increased to $5.6 million and $14.6 million for the three-
and nine-month periods ended August 31, 2002, respectively, from $3.7 million
and $10.9 million for the same periods in 2001. This increase was primarily due
to increased personnel and out-of-pocket expenses directly related to the growth
of the Company's CMBS portfolio.
Corporate and Other, Interest and Income Tax Expenses
Three months and nine months ended August 31, 2002 compared to three months and
nine months ended August 31, 2001
Corporate and other operating expenses were $6.7 million and $18.5 million for
the three- and nine-month periods ended August 31, 2002, respectively, compared
to $6.7 million and $17.9 million for the same periods in 2001.
Interest expense decreased to $24.2 million and $72.0 million for the three- and
nine-month periods ended August 31, 2002, respectively, from $27.0 million and
$86.3 million for the same periods in 2001. These decreases were primarily due
to a decline in interest rates. The weighted average interest rate on
outstanding debt was 6.3% at August 31, 2002, compared to 7.6% at August 31,
2001.
Income tax expense increased to $25.8 million and $54.6 million for the three-
and nine-month periods ended August 31, 2002, respectively, from $17.1 million
and $52.5 million for the same periods in 2001, primarily due to an increase in
pre-tax earnings.
2. LIQUIDITY AND FINANCIAL RESOURCES
The Company's operating activities provided $24.1 million of cash during the
nine months ended August 31, 2002, compared with $6.1 million of cash during the
same period in 2001. This increase in cash provided by operating activities is
primarily due to (i) a decrease in restricted cash, net of the related decrease
in minority interests resulting from the release of a cash collateralized letter
of credit, (ii) a lower increase in other assets, and (iii) higher net earnings,
after adjusting for the effects of non-cash items, whose contributions to cash
flow are reflected in cash from investing activities below. These increases in
cash provided by operating activities were partly offset by a decrease in
accounts payable and accrued liabilities.
The Company's investing activities provided $160.8 million of cash during the
nine months ended August 31, 2002, compared with $18.9 million of cash during
the same period in 2001. This increase in cash provided by investing activities
is primarily due to (i) net proceeds received on the sale of non-investment
grade CMBS through the securitization transaction completed during the third
quarter of 2002, as previously discussed, and (ii) a lower level of cash
purchases of investment securities. These increases in cash provided by
investing activities were partially offset by (i) a higher level of purchases of
operating properties, land held for investment and mortgage loans, (ii) a higher
level of investments in unconsolidated partnership interests, primarily related
to the Company's investment in European properties, (iii) lower proceeds from
the sale of operating properties and the syndication of affordable housing
partnership interests, (iv) lower proceeds from collections on mortgage loans,
and (v) less distributions from unconsolidated partnerships.
The Company's financing activities used $182.6 million of cash during the nine
months ended August 31, 2002, compared with $14.3 million of cash during the
same period in 2001. This increase in cash used in financing activities is
primarily due to (i) lower borrowings and more principal payments made under the
Company's mortgage notes and other debts payable, and (ii) more purchases of
treasury stock under the Company's stock buy-back program. These increases in
cash used were partially offset by lower net payments made under the Company's
repurchase agreements and revolving credit lines.
20
The Company continues to diversify its capital structure and to manage its debt
position with a combination of short-, medium- and long-term financings, with a
goal of properly matching the maturities of its debt with the expected lives of
its assets.
At August 31, 2002, the Company had approximately $1.08 billion of available
liquidity, which included approximately $1.01 billion of cash and availability
under credit facilities, and approximately $72 million of committed project
level term financing.
The Company has a $350.0 million unsecured revolving credit facility, which
matures in July 2004 assuming a one-year extension option is exercised. At
August 31, 2002, $85.5 million was outstanding under this facility, and the
Company had issued and outstanding $39.0 million of standby letters of credit
utilizing the facility.
The Company has various secured revolving lines of credit with an aggregate
commitment of $355.0 million, of which $228.5 million was outstanding at August
31, 2002. These lines are collateralized by CMBS and mortgage loans and mature
through April 2007.
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. Therefore, if the market value of the
Company's CMBS falls significantly, the Company could be required to either use
cash flow the Company needs to operate and grow the business or to sell assets
at a time when it may not be most appropriate for the Company to do so, to
generate cash needed to repay amounts under repo obligations.
At August 31, 2002, the Company had four repo facilities through which it
financed selected CMBS. The first facility had a commitment and outstanding
balance at August 31, 2002 of $37.9 million and is required to be paid in full
by June 2004. The second facility had a commitment of $50.0 million with no
outstanding balance at August 31, 2002, and matures in June 2003. The third
facility is a $150 million non-recourse facility, which matures in April 2005,
and had an outstanding balance of $61.0 million at August 31, 2002. The fourth
facility is a $100 million non-recourse facility, which matures in April 2007,
and had an outstanding balance of $29.0 million at August 31, 2002.
The Company also has a $430 million financing structured as a repo line with a
leading financial institution to finance the acquisition of securities and
loans. At August 31, 2002, there was no balance outstanding under this facility.
This facility has limited recourse to the Company and matures in January 2006,
including a one-year extension option.
Additionally, the Company has received seller financing in the form of term
repos for three specific CMBS transactions. These agreements had an aggregate
commitment and outstanding balance of $25.2 million at August 31, 2002 and
expire through August 2004. The Company has seller financing in the form of one
term loan for three specific CMBS transactions which is non-recourse to the
Company but which contains similar provisions to a repo. The loan had an
outstanding balance of $28.7 million at August 31, 2002 and matures in September
2003.
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.
At August 31, 2002, the Company had scheduled maturities on existing debt of
$56.0 million through August 31, 2003, assuming the Company takes advantage of
extensions, which are exercisable at the Company's option. The Company's ability
to make scheduled payments of
21
principal or interest on or to refinance this indebtedness depends on its future
performance, which to a certain extent, is subject to general economic,
financial, competitive and other factors beyond the Company's control. The
Company believes its borrowing availability under existing credit facilities,
its operating cash flow and unencumbered asset values, and its ability to obtain
new borrowings and/or raise new capital, should provide the funds necessary to
meet its working capital requirements, debt service and maturities and short-
and long-term needs based upon currently anticipated levels of growth. However,
limitations on access to financing constrain the Company's ability to take
advantage of opportunities which might lead to more significant growth.
Approximately 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 August
31, 2002, 22% of the Company's variable-rate debt had been swapped to fixed
rates and 47% was match-funded against variable-rate assets. After considering
the variable-rate debt that had been swapped or was match-funded, 19% of the
Company's debt remained variable-rate and 81% of the debt was fixed-rate or
match-funded. As of August 31, 2002, the Company estimates that a 100 basis
point change in LIBOR would impact net earnings by $0.9 million or by
approximately $0.025 per share.
During the quarter, the Company purchased over 1.3 million shares of its common
stock at an average price of $34.07 per share, bringing the total purchases to
date under the Company's stock buy-back program to 4.6 million shares.
Subsequent to the end of the quarter, the Board of Directors authorized the
Company to repurchase an additional 4.0 million shares of its common stock.
Including this authorization, there were approximately 4.9 million shares
remaining that the Company was authorized to buy back under its ongoing stock
buy-back program as of the end of the quarter. Total purchases from inception
through August 31, 2002, represented over 12% of the Company's total stock
outstanding when the buy-back program began in 1998.
The Company has provided guarantees under letters of credit and other
agreements, primarily related to the performance of certain development,
construction and other property activities. The Company has also provided
repayment and other guarantees of indebtedness for certain of its unconsolidated
subsidiaries. Total outstanding guarantees under these arrangements totaled
approximately $186.5 million at August 31, 2002. The Company believes that it
will not be required to fund under these obligations. Additionally, at August
31, 2002, the Company had committed to provide $50.0 million of capital
contributions to certain of its subsidiaries. These arrangements at August 31,
2002 were as follows:
Amount Expiring Per Period
------------------------------------------------
Outstanding Commitments Less Than 1 - 3 4 - 5 Over 5
(In millions) and Contingencies 1 Year Years Years Years
--------------------------------------------------------------------------
Standby letters of credit $ 45.5 44.5 1.0 - -
Guarantees of debt /(1)/ 34.1 16.1 5.2 2.1 10.7
Limited maintenance guarantees 44.3 10.0 34.3 - -
Committed capital contributions 50.0 44.3 5.7 - -
Performance bonds 41.8 25.3 0.3 - 16.2
Affordable housing
communities - other 20.8 8.3 2.8 9.0 0.7
--------------------------------------------------------------------------
Total commercial commitments and
contingencies $236.5 148.5 49.3 11.1 27.6
==========================================================================
(1) See "Unconsolidated Investments" section for further discussion.
22
UNCONSOLIDATED INVESTMENTS
The Company frequently makes investments jointly with others, through
partnerships and joint ventures. This (i) allows LNR to further diversify its
investment portfolio, spreading risk over a wider range of investments, (ii)
provides access to transactions which are brought to the Company by other
participants, (iii) provides access to capital and (iv) enables the Company to
participate in investments which are larger than the Company is willing to make
on its own. In many instances, the Company has a less than controlling interest
in the partnership or venture or control is shared, and therefore, the Company
accounts for its interest by the equity method, rather than consolidating the
assets and liabilities of the partnership or venture on its balance sheet.
Several of the partnerships are 50% owned by the Company and 50% owned by Lennar
Corporation, which has the same controlling stockholder as the Company.
Typically, the Company either invests on a non-recourse basis, such as by
acquiring a limited partnership interest or an interest in a limited liability
company, or the Company acquires a general partner interest, but holds that
interest in a subsidiary which has few, if any, other assets. In those
instances, the Company's exposure to partnership liabilities is essentially
limited to the amounts the Company invests in the partnerships. However, in some
instances the Company is required to give limited guarantees of debt incurred or
other obligations undertaken by the partnerships or ventures. For certain
partnerships, typically those involving real estate property development, the
Company may commit to invest certain amounts in the future based on the
partnership's business plan.
23
At August 31, 2002, the Company had investments in unconsolidated partnerships
of $411.6 million. Summarized financial information on a combined 100% basis
related to the Company's investments in unconsolidated partnerships accounted
for by the equity method at August 31, 2002 follows:
LNR Total Total
LNR Ownership Partnership Partnership
(In millions, except percentages) Investment Interest /(1)/ Assets Liabilities
------------------------------------------------------------
Properties:
Single-asset partnerships $ 37,227 33% - 94% $ 246,040 $ 182,541 /(2)/
Partnerships with Lennar
LLP 66,273 50% 265,966 133,421 /(3)(6)/
Other 38,248 50% 79,030 2,333
Affordable housing communities 79,524 1% - 99% 610,815 425,032 /(4)/
Other 3,590 5% - 99% 16,700 12,063
-------------- -----------------------------
Domestic 224,862 1,218,551 755,390
International 73,127 37.5% - 50% 199,991 8,056 /(5)/
-------------- -----------------------------
297,989 1,418,542 763,446
Loans:
Domestic non-performing
loan pools 8,175 15% - 50% 45,426 21,156
Securities:
Madison 99,468 25.8% 1,246,128 856,898 /(6)/
Other 5,992 69.5% 47,351 38,551
-------------- -----------------------------
105,460 1,293,479 895,449
-------------- -----------------------------
Total $ 411,624 $2,757,447 $ 1,680,051 /(7)/
============== =============================
(1) Although LNR may hold a majority financial interest in certain
partnerships, it does not consolidate those partnerships in which
control is shared or in which less than a controlling interest is held.
(2) Only $9.7 million is recourse to the Company.
(3) Only $2.1 million is recourse to the Company.
(4) Only $22.3 million is recourse to the Company.
(5) Total partnership assets include an investment in an unconsolidated
partnership which in turn has investments in properties with a net book
value of approximately $2.7 billion and non-recourse debt of
approximately $2.1 billion.
(6) See the Company's Annual Report on Form 10-K for the year ended November
30, 2001 for audited financial statements of the partnership.
(7) Debt is non-recourse to the Company except for $34.1 million noted in
footnotes 2, 3, and 4 above and in the commitments and contingencies
table under "Liquidity and Financial Resources" above.
3. ACCOUNTING POLICIES
There has been no material change in the Company's accounting policies since
November 30, 2001. See the Company's Annual Report on Form 10-K for the year
ended November 30, 2001 for further discussion.
24
4. NEW ACCOUNTING PRONOUCEMENTS
Information about new accounting pronouncements appears in Note 4 to the
unaudited consolidated condensed financial statements in Item 1.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has been no material change in the quantitative or qualitative market risk
since November 30, 2001. See the Company's Annual Report on Form 10-K for the
year ended November 30, 2001 for further discussion.
Item 4. Controls and Procedures
For many years the Company has had procedures in place for gathering the
information that is needed to enable it 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, as
required by the Sarbanes-Oxley Act of 2002, the Company formed a committee
consisting of the people who are primarily responsible for preparation of those
reports, including the Company's General Counsel and its Principal Accounting
Officer, to review and formalize the Company's procedures, and to have ongoing
responsibility for designing and implementing the Company's disclosure controls
and procedures (i.e., the controls and procedures by which the Company ensures
that information it is required to disclose in the annual and quarterly reports
it files with the SEC is processed, summarized and reported within the required
time periods). On October 10, 2002, the Company's Chief Executive Officer,
President and Chief Financial Officer met with that committee to evaluate the
disclosure controls and procedures in place and the steps that are being taken
to formalize those procedures and to introduce some additional steps to the
information-gathering process. Based upon that evaluation, the Company's Chief
Executive Officer, President and Chief Financial Officer concluded that, while
the procedures in place appear to have provided all the information needed to
date, the committee should proceed to formalize and supplement the Company's
disclosure controls and procedures in order to ensure that all the information
required to be disclosed in the Company's reports is accumulated and
communicated to the people responsible for preparing those reports, and to its
principal executive and financial officers, at times and in a manner that will
allow timely decisions regarding required disclosures.
The Company constantly reviews the internal controls in place to ensure that all
transactions in which the Company is involved are properly recorded and to
safeguard the Company's assets. This includes reviews and evaluations by the
Company's accounting department, discussions with the Company's outside auditors
and discussions with members of the Company's internal audit group. While the
Company is constantly taking steps to improve its internal controls and to apply
its internal controls to new types of transactions or situations in which it is
involved, the Company has not since October 10, 2002 (the day on which its Chief
Executive Officer, President and Chief Financial Officer met with the committee
that has on-going responsibility for designing and implementing disclosure
controls and procedures) or at any other time during the ninety days before the
date on which this report is being filed, made any significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls, including taking any corrective actions with regard to
significant deficiencies or material weaknesses. This has been confirmed by the
Company's Chief Executive Officer, President and Chief Financial Officer.
25
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not subject to any legal proceedings other than suits in the
ordinary course of its business, most of which are covered by insurance. The
Company believes these suits will not, in the aggregate, have a material adverse
effect upon the Company.
Items 2-5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
4.1 Indenture dated July 9, 2002, Collaterized Debt
Obligations among LNR CDO 2002-1 Ltd., issuer and LNR CDO
2002-1 Corporation, co-issuer and LaSalle Bank National
Association, trustee.
10.1 Seller Transfer Agreement dated July 9, 2002, among
Delaware Securities Holdings, Inc., as sponsor, Delaware
Bonds Holdings, Inc., as seller and Debi Equity, Inc., as
depositor.
(b) Reports on Form 8-K:
During the third quarter of 2002, the Company filed a
report on Form 8-K on June 3, 2002 to disclose under Item 9
its proposal to securitize commercial mortgage-backed
securities with a current principal amount of approximately
$800 million, of which approximately $416 million of these
securities would be offered for sale as collateralized debt
obligations.
Also during the third quarter of 2002, the Company filed a
report on Form 8-K on July 28, 2002 to disclose under Item
1 changes in control of the Company resulting from the
death of Leonard Miller, the Company's controlling
shareholder.
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 October 15, 2002
---------------------------
Shelly Rubin
Vice President; Chief Financial Officer
(Principal Financial Officer)
26
CERTIFICATIONS:
I, Steven J. Saiontz, Chief Executive Officer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of LNR Property
Corporation for the period ending August 31, 2002;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Securities Exchange Act Rule 13a-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 15, 2002
/s/ Steven J. Saiontz
--------------------------
Steven J. Saiontz
Chief Executive Officer
27
CERTIFICATIONS:
I, Jeffrey P. Krasnoff, President; certify that:
1) I have reviewed this quarterly report on Form 10-Q of LNR Property
Corporation for the period ending August 31, 2002;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Securities Exchange Act Rule 13a-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 15, 2002
/s/ Jeffrey P. Krasnoff
--------------------------
Jeffrey P. Krasnoff
President
28
CERTIFICATIONS:
I, Shelly Rubin, Vice President; Chief Financial Officer (Principal Financial
Officer), certify that:
1) I have reviewed this quarterly report on Form 10-Q of LNR Property
Corporation for the period ending August 31, 2002;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Securities Exchange Act Rule 13a-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 15, 2002
/s/ Shelly Rubin
--------------------------
Shelly Rubin
Vice President; Chief Financial Officer
(Principal Financial Officer)
29
Exhibit Index
Ex # Exhibit Description
4.1 Indenture dated July 9, 2002, Collaterized Debt Obligations among
LNR CDO 2002-1 Ltd., issuer and LNR CDO 2002-1 Corporation, co-issuer and
LaSalle Bank National Association, trustee.
10.1 Seller Transfer Agreement dated July 9, 2002, among Delaware Securities
Holdings, Inc., as sponsor, Delaware Bonds Holdings, Inc., as seller and
Debi Equity, Inc., as depositor.