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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended November 30, 2002

Commission file number 1-13223

LNR Property Corporation

(Exact name of registrant as specified in its charter)

1601 Washington Avenue, Suite 800, Miami Beach, Florida 33139

(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code) (305) 695-5500

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

As of February 14, 2003, 21,927,435 shares of common stock and 9,783,768 shares of Class B common stock (which can be converted into common stock) were outstanding. Of the total shares outstanding, 20,524,909 shares of common stock and 45,938 shares of Class B common stock, having a combined aggregate market value (assuming the Class B shares were converted) on that date of $684,392,080 were held by non-affiliates of the registrant.

PART I

SOME OF THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K 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 ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD LOOKING STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K 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.

Item 1.    Business.

Overview

LNR Property Corporation and subsidiaries (the “Company”) is a real estate investment, finance and management company, which structures and makes real estate and real estate related investments and, through its expertise in developing and managing properties and working out underperforming and non-performing commercial loans, seeks to enhance the value of those investments.

Our real estate investment activities include:

History

Lennar Corporation (“Lennar”), one of the nation’s largest homebuilders, began developing, owning and managing commercial and multi-family residential real estate in 1969. In June 1997, Lennar formed our Company to separate Lennar’s real estate investment, finance and management business from its homebuilding business. On October 31, 1997, Lennar distributed our stock to Lennar’s stockholders in a tax-free spin-off (the “Spin-off”).

Relationship with Lennar Corporation

In connection with the Spin-off, we agreed that until December 2002, we would not engage in homebuilding or related activities (other than purchasing securities backed by residential mortgages and providing financing to homebuilders or land developers) and Lennar agreed that until December 2002, it would not engage in various activities in which we were engaged at the time of the Spin-off (which is most of the principal activities in which we are currently engaged). The delineation between what we could do and what Lennar could do has helped our two companies work cooperatively in partnerships and other joint endeavors. Since we have no current intention of becoming involved in the types of activities in which Lennar engages (primarily related to homebuilding or related activities) and the delineation has been beneficial, our Board and Lennar’s Board are considering having both companies enter into a new agreement regarding our respective activities similar to the one that expired in December 2002.

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We and Lennar are separate publicly-traded companies and neither of us has any financial interest in the other except for partnerships in which we both have investments. Stuart Miller, the Chairman of our Board of Directors and the President and Chief Executive Officer of Lennar, is the sole director and officer of a family-owned corporation which owns stock that gives it voting control of both companies. A Transaction Review Committee, which is entirely comprised of members of our Board who are not directors, officers or employees of Lennar, approves any significant transactions between us and Lennar or any of its subsidiaries.

For information about our partnerships with Lennar, see “Partnerships with Lennar” in Item 1.

Investment Strategy

Our investment and growth strategy focuses on opportunities both in the United States and Europe in the commercial real estate markets. We adjust our investment focus from time to time to adapt to changes in markets and phases of the real estate cycle, and to take advantage of market inefficiencies. As such, we do not have specific policies as to the type of real estate related assets we will acquire, the percentage of our assets we will invest in particular types of real estate related assets or the percentage of the interests in particular entities we will acquire. Instead, we review, at least monthly, the types of real estate related investment opportunities which may at that time be available, the market factors which may affect various types of real estate related investments (including the likelihood of changes in interest rates or availability of investment capital) and other factors which may affect the attractiveness of particular investment opportunities.

We will typically not make an investment unless we have control or significant influence over the development and implementation of the strategy for managing risk and enhancing the value of the underlying assets. We look to invest where we can utilize our expertise to manage risk and to add value by increasing recurring cash flows and optimizing asset values.

Because our business activities contain elements of market risk, our investment strategy is designed to minimize these risks. We have a unique platform to evaluate, monitor and control risk through our exhaustive due diligence program, our disciplined hands-on approach to managing the underlying assets, and by remaining balance sheet focused.

Due Diligence Process

We perform extensive due diligence before making any investment in order to evaluate investment risks and opportunities and see whether we will be able to use our skills to enhance the value of the investment. Our formalized procedures enable our professionals to efficiently conduct due diligence on a wide array of potential investments and this exhaustive, methodical due diligence process is strictly adhered to across each of our business segments. While the discipline is the same for every asset, the significance of this process is particularly evident when an acquisition involves a large pool of assets. For example, in CMBS, where a transaction often involves over $1 billion of collateral and a pool of several hundred loans secured by real estate properties, we, among other things, (i) visit each underlying property and at least three other comparable properties in the same sub-market; (ii) project anticipated cash flows from the properties based on leases in place, market information and extensive internal knowledge; (iii) arrive at an independent value for each property; (iv) review all loan documents and any third party reports such as appraisals and environmental reports; (v) evaluate the borrower and its likely ability to make all required loan payments; (vi) re-underwrite the loan and the expected cash flows from the loan; (vii) model the resultant anticipated bond class cash flows; (viii) require the sponsor to remove from the pool individual loans which do not meet our investment standards; and (ix) formally present findings to senior management prior to approval of any investment. Due diligence is conducted by trained associates who have expertise in each asset’s specific market or geography and who posses extensive workout skills.

Hands-on Management Process

In the past decade, we have invested in properties, loans and securities with a total underlying real estate value of more than $120 billion. After investments are made, we constantly monitor our investments and oversee the value-enhancement process in an effort to ensure that every asset performs in accordance with our underwriting assumptions and is appropriately accounted for. We undertake a comprehensive asset and market review prior to each asset disposition, which is similar to our acquisition process, and attempt to ensure that each sale is correctly priced and timed to achieve optimal values. Careful, timely dispositions are critical to our value-enhancement strategy and our efforts to keep our assets deployed in areas that offer the greatest opportunities.

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Because of our extensive experience since the early 1990’s in turning around distressed and underperforming assets, we have a reputation as a leading commercial real estate workout specialist. For the past decade, we have applied a disciplined approach to value-enhancement and have improved the cash flows from dozens of portfolios that we and our partners bought at significant discounts to face value. In addition, we have worked out thousands of loans that have gone into default, returning them to performing status, resolving them through payoffs or enhancing the underlying foreclosed properties before sale. A combination of experience, disciplined methodologies, state-of-the-art systems and advanced warning through our proprietary surveillance and shadow servicing programs enable us to seek to reduce risk and ultimately realize the optimal value from our investments. The major rating agencies rate the capabilities of CMBS special servicers and have recognized our abilities by assigning us their highest ratings.

Balance Sheet Focus

We believe that managing a prudent, conservative balance sheet establishes a strong foundation for future growth through all phases of the real estate cycle. We focus on methodically diversifying our investments in terms of property type, geography and position in the capital structure, while recycling operating cash flow and proceeds from the sale of matured assets to enhance our financial position.

We finance our investment and growth strategies with cash flow generated from operations and with borrowings obtained under credit facilities or other financing arrangements. We focus on diversifying our capital structure and financing sources, matching the maturities of our debt with the expected lives of our assets, managing our liabilities in the proper proportion to our stated equity, retaining our earnings, and maintaining adequate levels of liquidity.

Our approach to managing interest rate risk 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. To the extent that we have fixed-rate assets financed with variable-rate debt, we periodically enter into interest rate swaps, to manage our interest costs and hedge against risks associated with changing interest rates. We also periodically enter into interest rate swaps to manage the risk associated with unpredictable changes in asset values related to movements in interest rates on our fixed-rate CMBS.

At November 30, 2002 our total assets by business segment consist of the following (dollars in millions):

Total Assets—$2.8 billion⁽¹⁾

Real Estate Properties

We engage in the acquisition, development, repositioning, management and sale of commercial and residential multi-family rental real estate throughout the United States and Europe.

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The management process for every real estate property we own or operate is carried out in accordance with a five-year strategic business plan, comprehensive annual budgets, weekly asset manager meetings and monthly focus reports. In most instances, we leverage our management team by employing local experts to perform on-site management, leasing, maintenance and development activities. Over the years, we have established relationships with a large network of these experts across the country. We often partner with developers to direct the development and repositioning of the properties. In these instances, our associates closely supervise the operation of the properties and the activities of the outside management companies and developers.

Market-rate Properties

At November 30, 2002, our domestic real estate market-rate property portfolio, which includes stabilized properties and properties in various stages of development, repositioning and/or lease-up, included:

Apartment Communities

Our three apartment communities range in size from 430 to 536 units. Two are located in Texas and one is located in Georgia.

Office Buildings

Our 21 office buildings range from one to 36 stories and have an aggregate of 4.8 million square feet of office space. Nine of the office buildings are in California, three are in Florida, two each are in Georgia, Louisiana, and North Carolina, and one is in each of Texas, Utah and Virginia.

Industrial/Warehouse Facilities

Our three industrial/warehouse facilities range from 203,000 square feet to 747,000 square feet of floor space. These industrial facilities are all located in California.

Hotels

Our nine hotels have or will have a total of 2,100 rooms. Six of the hotels, representing 1,200 rooms, are stabilized and carry the name of a national chain. The other three hotels have not yet reached stabilized occupancy, are under development or are being repositioned.

Retail Centers

The retail centers in our portfolio include: (i) two small neighborhood retail centers (sometimes referred to as “strip centers”), with 30,000 square feet and 70,000 square feet of store space, as well as parking areas and public areas, (ii) four larger regional retail centers, with 60,000 square feet to 970,000 square feet of store space and (iii) one single-tenant property with 14,000 square feet. One of the small retail centers and the single-tenant property are located in Florida. The other small retail center is located in Indiana. Of the regional retail centers, three are in California, and one is in Louisiana.

Land

In addition to our operating properties, we own commercially zoned land, 1.6 million square feet of which is leased to others under long-term ground leases and 530 acres of which will be used for specific development opportunities or sold.

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We maintain a program of liability, property loss and damage and other insurance which covers all of our properties and which we believe is adequate to protect us against all reasonably foreseeable material insurable risks.

Affordable Housing Communities

During 1998, we entered the business of owning, developing and syndicating multi-family and senior housing residential communities which qualify for Low-Income Housing Tax Credits (“affordable housing communities”). We did this by acquiring a group of entities, or partnership interests in entities, known as the Affordable Housing Group (“AHG”). Initially, our strategy was to retain the tax credits generated through owning the majority of the interests in the affordable housing communities and using those credits to reduce our overall effective tax rate. However, the demand for credits has since increased significantly and we found we could generate higher returns on our investments by selling the credits instead of holding them. Accordingly, we have shifted our strategy away from owning the majority of the interests in the affordable housing communities toward syndicating such interests. After a syndication, we continue to hold a small interest (typically ranging from less than 1% to 10%) in the partnerships that were syndicated and continue to manage the communities, for which we earn management fees. As a result of the shift in strategy, we expect our total investment in affordable housing communities, as well as the amount of tax credits we hold and utilize to reduce our tax rate, to decline in future years.

As of November 30, 2002, we had direct or indirect ownership interests through partnership arrangements in approximately 9,700 affordable housing apartment units, ranging in size from 20 to 436 units in 82 communities. The apartment communities are located across the U.S. Approximately 90% of the affordable housing communities were constructed by AHG or under its supervision. AHG acquired the other affordable housing communities after they were completed.

Europe

In 2002, we entered the European commercial real estate market through the formation of a strategic partnership with CDC Ixis Capital Markets (ICM). ICM is a subsidiary of Caisse des Depots et Consignations of France, a AAA-rated global financial institution that is one of the largest investors in Europe. Our initial investment together was in a partnership which owns over 400 stabilized commercial real estate properties located throughout France. Our total investment in Europe, including our investment in one CMBS transaction, was $81.2 million at November 30, 2002.

Partnerships With Lennar

Lennar Land Partners

Before the Spin-off, we, along with Lennar, transferred to a general partnership, which is 50% owned by us and 50% owned by Lennar, parcels of land or interests in land and other assets which had a total book value on Lennar’s books at October 31, 1997 of approximately $372.4 million. Although we, and Lennar, each have our own management teams and our own public shareholders, Stuart Miller, who is the President and Chief Executive Officer of Lennar and our Chairman of the Board (but not our Chief Executive Officer), has voting control of both us and Lennar. In 1999, certain assets and liabilities of this land partnership were contributed at net book value to a second general partnership and we, along with Lennar, received 50% general partnership interests in the second partnership. The two partnerships are collectively referred to as Lennar Land Partners (“LLP”). The land was originally acquired by Lennar primarily to be used for residential home development. The parcels of land or interests in land we contributed had been contributed to us by Lennar so we could contribute them to LLP and receive a 50% interest in LLP. Today, LLP is engaged in the acquisition, development and sale of land and the development and sale of homes. From November 1, 1997 through November 30, 2002, LLP had land sale revenues of $1,007.2 million, of which $502.7 million was from sales to Lennar and $12.4 million was from sales to us. During that period, LLP acquired 9,760 additional home sites, primarily through partnership arrangements. At November 30, 2002, LLP’s land consisted of 7,772 potential home sites in 14 communities, of which 9 communities with 3,984 potential home sites are in Florida, 2 communities with 519 potential home sites are in Texas and 3 communities with 3,269 potential home sites are in California. Approximately 5% of the land was developed and ready to be built upon, 36% of the land was in various stages of development and 59% of the land was totally undeveloped. LLP recently began to develop and sell homes, and recorded $27.6 million of revenue from the sale of homes in 2002 to third party homebuyers.

When Lennar contributed land to us and to LLP in 1997, Lennar retained options to purchase up to approximately 22% of the contributed land at pre-established prices. Through November 1999, almost all the options relative to the originally contributed land had either been exercised or terminated. On November 30,

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1999, Lennar obtained options from LLP to purchase an additional 6,300 home sites at prices we agreed to. The agreement also provided for additional options to Lennar as additional home sites were developed by LLP. Since then, additional home sites became available and Lennar obtained options relating to an additional 3,200 home sites. At November 30, 2002, Lennar still had options to purchase 2,600 home sites. The remaining land is available for sale to independent homebuilders or to Lennar at prices determined from time to time, which, as is discussed below, we must approve.

LLP has an agreement with Lennar under which Lennar, for a fee, administers all day-to-day activities of LLP, including overseeing planning and development of properties and overseeing sales of land to Lennar and other builders. In addition, LLP has an agreement with Lennar under which Lennar is the general contractor for homes built and sold by LLP and receives a fee for the general contractor services.

LLP is governed by an Executive Committee consisting of both our and Lennar’s representatives, with Lennar’s representatives and our representatives each having in total one vote. This, in effect, gives us and Lennar each a veto with regard to matters presented to LLP’s Executive Committee. Our by-laws require that all significant decisions relating to LLP be approved by a Transaction Review Committee, which is entirely comprised of members of our Board who are not directors, officers or employees of Lennar.

Lennar may, but is under no obligation to, offer additional properties to LLP. Lennar is free to acquire properties for itself without any consideration of whether those properties might have been appropriate for LLP. We are, in effect, able to veto any proposals that LLP acquire properties proposed by Lennar. Arrangements with regard to particular properties might include, (i) options to Lennar to purchase all or portions of properties, (ii) rights of first refusal for Lennar to acquire lots if other builders propose to acquire them, or (iii) buy/sell arrangements under which, if Lennar wanted to purchase lots on which it did not have an option, it would propose a purchase price and we would have the option to approve the sale to Lennar at that price or to purchase the lots for that price (probably in order to resell them to someone who would be willing to pay a higher price).

We have acquired and may continue to seek to acquire commercial portions of properties owned or acquired by LLP or options relating to them. Lennar can, if it wants to do so, veto acquisitions by us.

Our unconsolidated investment in LLP, accounted for by the equity method, was $46.1 million at November 30, 2002. LLP’s total assets and liabilities on a combined 100% basis were $234.2 million and $142.0 million, respectively, as of November 30, 2002.

The debt of LLP is non-recourse to us, with the exception of one $1.9 million guarantee. However, one of our subsidiaries, which holds our general partner interests in LLP, could be liable as a general partner for LLP’s debt. That subsidiary has essentially no assets other than the general partner interests in LLP. Along with Lennar, we provide limited maintenance guarantees on $35.3 million of LLP’s debt. These limited guarantees only apply if the fair value of the collateral (generally land and improvements thereto) is less than a specified multiple of the loan balance and LLP does not have the ability to paydown the loan balance to the appropriate level. We have also provided debt service guarantees which only apply if the partnership defaults on its loan arrangements. If we are required to make a payment under these guarantees, the payment would be accounted for as a capital contribution to the partnership and increase our share of capital distributed upon the dissolution of the partnership.

Other Partnerships

We have joint ventured with Lennar in a number of other projects which require both residential and commercial expertise. Our by-laws require that all significant decisions relating to these ventures be approved by a Transaction Review Committee, which is entirely comprised of members of our Board who are not directors, officers or employees of Lennar. These unconsolidated investments, which are accounted for by the equity method, include:

The debt in these partnerships is non-recourse to us, except for $7.3 million of guarantees.

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Our total investment in partnerships with Lennar (including LLP) at November 30, 2002 was $81.6 million. Total assets and liabilities of the partnerships were $345.0 million and $186.7 million, respectively, at November 30, 2002. The debt in these partnerships is non-recourse to us, except for the guarantees discussed above.

Real Estate Loans

High Yielding Real Estate Loans

At November 30, 2002, our real estate loan portfolio consisted of:

B-notes

We invest in structured junior loan participations in institutional quality short- to medium-term variable-rate real estate loans (“B-notes”). We work with leading financial institutions in underwriting and structuring these loans. The senior participations are securitized in many cases by the financial institutions. We are designated as the special servicer for both the securitizations and the junior loan participations, which allows us to provide asset management and resolution services with respect to these loans. As special servicer, we have the authority to deal directly with any borrower that fails to perform under certain terms of its mortgage loan, including the failure to make payments, and to manage any loan workouts and foreclosures. To date, we have not experienced any delinquencies in our B-note portfolio. We had $380.4 million of outstanding principal amount of these investments at November 30, 2002, of which $307.7 million represented participations in first mortgage loans and $72.7 million represented participations in mezzanine loans.

Other First Mortgage Loans

We invest in fixed- and variable-rate first mortgage loans secured by commercial and multi-family residential real estate properties. Some of these loans represent short-term seller financing provided by us upon the sale of our operating properties.

Mezzanine Loans

Our mezzanine loans are typically made to developers or builders of residential communities and owners of stabilized operating properties. These loans are usually subordinate to construction loans or other first mortgage loans and often provide us, in addition to interest income, participations in profits after the developers, builders or owners have achieved specified financial targets.

The types of real estate loans and collateral held by us at November 30, 2002, follows:

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The states in which the properties securing our real estate loans were located, follows:

Discounted Portfolios of Commercial Mortgage Loans

In the early 1990’s, we acquired in partnership with financial institutions or real estate funds, portfolios of non-performing commercial mortgage loans and related pools of owned real estate assets in the United States. Through these partnerships we purchased and handled the workout activities relating to over $5 billion face amount of these distressed commercial assets.

In each of the partnerships, one of our subsidiaries acts as the managing general partner and conducts the business of the partnership. We earn management fees and asset disposition fees from the partnerships and have carried interests in cash flow and sales proceeds once the partners have recovered their capital and achieved specified returns. Our original investments ranged from 15% to 50% of the partnerships’ capital and totaled $165 million, out of a total of $684 million invested in the partnerships. By November 30, 2002, the partnerships had distributed a total of $1.4 billion to the partners, of which $418.5 million had been distributed to us. We also received management and asset disposition fees totaling approximately $66.0 million. As the domestic real estate markets strengthened in the mid to late 1990’s, substantially fewer large real estate portfolios became available at what we viewed as attractive prices. We have not, since August 1996, participated in a partnership which acquired a portfolio of non-performing real estate assets in the United States. Today, most of the assets from these domestic portfolios have been liquidated.

Beginning in late 1997, we entered into several partnerships to acquire portfolios of non-performing commercial mortgage loans in Japan. In April 2000, we sold our interests in these Japanese real estate loan portfolios and realized a pre-tax gain on sale of $20.3 million.

Our principal activity with respect to distressed portfolios is to manage the workout of non-performing loans, including negotiating new or modified financing terms and foreclosing on defaulted loans. The assets generally are held only as long as required to enhance their value and prepare them for sale. We believe our workout and property rehabilitation skills are the principal reasons financial institutions have sought us as a partner in acquiring portfolios of distressed assets and have given us workout rights for assets held by the partnerships.

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Debt financing for partnerships’ acquisitions of real estate related asset portfolios has usually been on a non-recourse basis and with no guarantees by us or any other of the partners. In some cases, the lender must be repaid in full before a partnership can make cash distributions to us and our partners.

Real Estate Securities

Investments in CMBS

As a further use of our loan and real estate workout capabilities, we acquire unrated and non-investment grade rated subordinated CMBS and provide “special servicing” (see below) for the mortgage pools to which they relate. CMBS are securities backed by loans on commercial and multi-family residential real estate properties and possess many of the characteristics of large portfolios of performing loans. Default risk is spread over large, diverse portfolios of assets so that no single default has a significant effect on the overall performance of the portfolio. Furthermore, results can be influenced by the success of the special servicer, who attempts to ensure that all principal and interest payments are collected. However, securities representing interests in a CMBS pool are usually issued in series with varying levels of seniority, and generally provide that no principal may be paid with regard to a series until all senior series have been paid in full. Because of that, different series representing interests in the same pool typically will have different credit ratings. We invest only in the most junior, or nearly the most junior series, which generally do not receive principal payments until much of the mortgage debt underlying the CMBS has been paid and disbursed to holders of more senior series.

CMBS differ from other asset-backed securities in that CMBS investors have the ability to perform detailed due diligence on each individual component of the underlying collateral (to determine its ability to pay off the CMBS bonds) and the holders of the most junior series have the right to select the special servicer responsible for ensuring that the loans perform properly. We only invest when we can perform detailed due diligence on the properties securing the mortgages in the pool being securitized and can select ourself as the special servicer. Special servicing is the business of managing and working out the problem assets in a pool of commercial mortgage loans or other assets. For example, when a mortgage loan in a securitized pool goes into default, the special servicer negotiates with the borrower on behalf of the pool to resolve the situation. We use, as special servicer, essentially the same workout skills we apply with regard to distressed asset portfolios.

Because the holders of the unrated CMBS receive everything that is collected after the more senior levels of CMBS have been paid in full, we and other holders of unrated CMBS are the principal beneficiaries of increased collections, particularly since these bonds are purchased at significant discounts. Therefore, ownership of the unrated CMBS gives us an opportunity to profit from our special servicing activities in addition to receiving fees for being the special servicer.

In addition to purchasing the unrated bonds, we also purchase non-investment grade rated securities, but again only when we are the special servicer. Rated bonds also provide an excellent risk-adjusted return as we receive a yield on these securities based on the stated interest and accretion of the purchase discount. As an added benefit of our work as special servicer, ratings are sometimes upgraded by the rating agencies if the performance of the pool exceeds initial expectations. This increases their market values and gives us an opportunity to achieve gains on the sale of the securities, as well as receiving the stated interest while we hold them. Therefore, purchases of non-investment grade rated subordinated securities, like purchases of unrated securities, are a means for us to profit from our workout skills.

Fitch IBCA, Inc. and Standard and Poor’s, which rate special servicers of CMBS on the basis of management team, organizational structure, operating history, workout and asset disposition experience and strategies, information systems, investor reporting capabilities and financial resources, have given us their highest servicer ratings. In addition, many in the industry recognize us as the premier special servicer based on our strong track record and experience.

Competition in purchasing unrated and non-investment grade rated subordinated CMBS during the past four years has been limited and, as a result, our purchasing power has been significant. We attribute this limited competition to the need for a significant infrastructure and real estate expertise to properly and efficiently complete the detailed due diligence required to purchase less than investment grade CMBS. In addition, the lower rated bonds are not actively traded. Therefore, they are only suitable for those who can afford to hold them for relatively long periods. The limited competition for unrated and non-investment grade rated subordinated CMBS has given us significant bargaining power with sponsors of CMBS, including the ability to convince sponsors to remove loans from CMBS pools which we believe are too risky.

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At November 30, 2002, we have investments in or were entitled to be the special servicer with regard to 103 securitized commercial mortgage pools represented by over 13,600 underlying loans in all 50 states. We have investments in subordinated CMBS related to 86 of these pools. At November 30, 2002, the total face amount of our directly owned portfolio was approximately $2.1 billion with an amortized cost of approximately $0.9 billion, or approximately $1.2 billion of discount. Our fixed-rate portfolio is generating a current cash return of 15% (28% on the unrated bonds).

Particularly in periods of falling interest rates, there often are prepayments of mortgages underlying CMBS; however, most fixed-rate transactions have call protections that make prepayments expensive and difficult. Because we usually purchase CMBS at significant discounts from their face amounts, prepayments, which do occur, increase our yield on invested capital.

Our CMBS investments are collateralized by pools of mortgage loans on commercial and multi-family residential real estate assets located across the country. Concentrations of credit risk with respect to these securities are limited due to the diversity of the underlying loans across geographical areas and diversity among property types.

In 2002, we entered into our first CMBS transaction in Europe, purchasing $8.4 million face value of BB-rated bonds backed by collateral located in the United Kingdom for $5.7 million.

Resecuritizations

We have resecuritized and may continue to resecuritize our non-investment grade CMBS investments in order to realize the value we add to these bonds and to better match our assets and liabilities, reduce our interest rate and refinancing risk, improve our liquidity position and strengthen our financial condition. Over the past several years, we have been acquiring non-investment grade CMBS, and have been able to remove what we consider to be the riskiest assets before the underlying securitizations take place. Utilizing our due diligence expertise to remove risky assets, by re-underwriting each and every property that backs each loan in a transaction, we have been able to add substantial value to the non-investment grade bonds that we buy. In addition, our workout and hands-on real estate expertise as special servicer for each transaction, has enabled these investments to perform exceptionally well. Taking into account the diversification, the quality of the collateral and our involvement in the transaction, rating agencies have rated a significant portion of the face amount of the non-investment grade bonds we resecuritized as investment grade. We can then sell the investment grade bonds to unrelated third parties to realize the added value and to recycle the proceeds to further strengthen our balance sheet.

Madison Square Company LLC

In March 1999, we entered into a venture, Madison Square Company LLC (“Madison”), to acquire approximately $2.2 billion of high yielding real estate related assets (primarily CMBS). The members include an affiliate of Credit Suisse First Boston (“CSFB”), a company controlled by real estate investor Peter Bren and Sun America Life Insurance Co. The members have total equity commitments of $490 million, $125 million of which we provided.

CSFB provided a credit facility to fund up to $1.76 billion of financing to the venture, which is non-recourse to the members.

At November 30, 2002, our investment in the venture was approximately $95.8 million, representing a 25.8% ownership interest. We maintain a significant ongoing role in the venture, for which we earn fees, both as the special servicer for the purchased CMBS transactions and as the provider of management services. We also have an effective veto on Madison’s investment decisions.

Competition

In virtually all aspects of our activities, we compete with a variety of public and private real estate development companies, real estate investment trusts, investment firms, investment funds, financial institutions and others. The principal area of competition is for the purchase of real estate assets and securities at prices which we believe will enable us to achieve our desired risk-adjusted returns.

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We believe that our access to investment opportunities through our relationships and presence in markets across the country and Europe, our access to capital for real estate assets, our ability to quickly underwrite and evaluate those opportunities and our expertise in real estate workout and management help us to compete effectively in the purchase of those types of assets. In addition, our experience in adding value to real estate assets and our top rating as a special servicer to CMBS transactions often attract firms which have access to appealing investment opportunities but who do not have our expertise.

We believe it is an opportune time for us to expand our franchise into Europe as there is little competition there with the specific value-add real estate and asset management expertise that we have. We see opportunity there in the private to public migration of real estate, and there is an emerging CMBS and B-note business in the European financial markets.

Competitive conditions relating to office buildings, apartment communities, industrial/warehouse facilities, hotels and retail centers owned or operated by us vary depending on the locations of particular properties. Most often these facilities compete for tenants or other occupants based on their locations, the facilities provided and the pricing of the leases or room rates. Although general economic conditions continued to weaken in 2002, occupancies remained stable in many of our markets, which helped to reduce the effects of competition on existing properties.

We are not a significant national competitor with regard to any of the properties we own. We are a significant national participant in the market for unrated and non-investment grade rated subordinated CMBS.

Investment Company Act

We intend to conduct our business at all times so as not to become regulated as an investment company under the Investment Company Act of 1940. Accordingly, we do not expect to be subject to the restrictive provisions of the Investment Company Act. Under the Investment Company Act, an investment company is subject to extensive, restrictive and potentially adverse regulation relating to, among other things, operating methods, management, capital structure, dividends, and transactions with affiliates. The Investment Company Act exempts, among others, entities that are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” (“Qualifying Interests”). Under the current interpretation of the staff of the Securities and Exchange Commission, to qualify for this exemption, the entity must maintain at least 55% of its assets in Qualifying Interests, and maintain an additional 25% in Qualifying Interests or other real estate related assets. Our investments in real estate and mortgage loans generally constitute Qualifying Interests and we believe our investments in subordinated CMBS constitute Qualifying Interests when we have the right, as special servicer, to foreclose upon properties which secure loans that back the CMBS and to take the other actions a special servicer may take in connection with defaulted loans. Analysis of our assets at November 30, 2002 indicated that (i) more than 55% of our assets were Qualifying Interests and (ii) more than 80% of our assets were Qualifying Interests and other real estate related assets. Therefore, we qualify for this exemption. If, however, due to a change in our assets, or a change in the value of particular assets, we were to become an investment company which is not exempt from the Investment Company Act, either we would have to restructure our assets so we would not be subject to the Investment Company Act, or we would have to change materially the way we conduct our activities. Either of these changes could require us to sell substantial portions of our assets at a time we might not otherwise want to do so, and we could incur significant losses as a result. Further, in order to avoid becoming subject to the requirements of the Investment Company Act, we may be required at times to forego investments we would like to make or otherwise to act in a manner other than that which we believe would maximize our earnings.

Regulation

Commercial properties we own or partnerships in which we participate must comply with a variety of state and local regulations relating to, among other things, zoning, treatment of waste, construction materials which must be used and some aspects of building design.

In our loan workout activities, we sometimes are required to comply with federal and state laws designed to protect debtors against overbearing loan collection techniques. However, most laws of this type apply to consumer level loans (including home mortgages), but do not apply to commercial loans.

Our hotels have to be licensed to conduct various aspects of their businesses, including sales of alcoholic beverages.

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Employees

At November 30, 2002, we had 514 full time and 4 part time employees, of whom 10 were senior management, 83 were corporate staff, 316 were engaged in asset acquisitions, loan workouts and rehabilitation and disposition of properties, and 109 were hotel personnel.

None of our employees are represented by a union. We believe our relationships with our employees are good.

Some Things Which Could Adversely Affect Us

Virtually all of our assets are interests in real estate properties or in financial instruments which are directly or indirectly secured by real estate properties. Because of that, there are some market-driven factors which can significantly affect us, our results of operations and the value of our assets.

We could be affected by changes in real estate markets.

Prices of real estate, and in particular commercial real estate, tend to fluctuate significantly over time. To some extent this is due to changes in interest rates. However, it can also result from changes in economic conditions, either internationally, nationally or regionally, which affect demand for commercial space, excess capacity created by over-building, changes in tax laws or environmental laws and a variety of other factors. Historically, we have looked upon weak real estate markets as opportunities to acquire at low cost properties which we can enhance and sell when real estate markets strengthen. However, as our portfolio of real estate properties and real estate related securities has increased, we have become increasingly vulnerable to the negative effect weak real estate markets could have on the values of assets we already hold.

Weak real estate markets also increase the likelihood of defaults on mortgages, and make it more difficult to sell foreclosed properties for at least the amounts owed on the mortgages they secure. An increase in the rate of mortgage defaults could affect amounts we can realize on the mortgage loans and CMBS we hold.

Beginning in mid-2002, there has been a substantial increase in vacant commercial space (including office and retail space) and vacant multi-family residential apartments in a number of cities, including several in which we own properties or in which we have properties securing mortgage loans or CMBS in which we own interests. Weakness in commercial properties and apartment rentals (i) can reduce our operating income from properties we own, (ii) can adversely affect mortgagees’ abilities to make required payments with regard to mortgages underlying B-notes or CMBS in which we own interests, and (iii) could reduce the price at which properties we own can be sold. To date, the sale value of commercial and multi-family residential properties does not appear to have been significantly affected by the weakened rental markets, in part because of low interest rates, which have reduced expenses of operating properties and have reduced the yields potential purchasers of properties are seeking. However, prolonged weakness in the rental markets could have a significant negative impact on us.

We are sensitive to changes in interest rates.

Most financial instruments we own bear interest at fixed rates, or derive their value from mortgages or other instruments which bear interest at fixed rates. The values of fixed-rate financial instruments are affected significantly by changes in market interest rates (generally falling when market interest rates are high and increasing when market interest rates are low). Further, the value of real estate itself tends to be significantly affected by changes in interest rates, generally increasing when interest rates are low and declining when interest rates are high. Because we invest in financial instruments with an intention to hold some of them at least for most of their lives, and invest in real estate properties with the intention of holding them long enough to enhance their value by developing or repositioning them, our ability to achieve our investment goals is not substantially affected by short-term changes in interest rates. Further, we try to prevent short-term changes in interest rates from materially affecting our financial statements by purchasing derivatives, such as interest rate swaps, to hedge against interest rate changes. However, relatively long lasting changes in interest rates could significantly affect the value of our assets.

We borrow substantial portions of the funds we invest in our assets. Most of the borrowings bear interest at variable rates, and therefore our actual interest costs are affected by increases or decreases in market interest rates. We minimize exposure to these changes by acquiring interest rate swaps which have the effect of converting our variable-rate obligations into fixed-rate obligations. However, we continue to be exposed to risks of interest rate changes to the extent that our hedges do not cover all of our borrowings or to the extent counterparties to interest rate swaps might become unable to meet their obligations to us.

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We may have difficulty obtaining financing.

Weak real estate markets not only affect the prices for which real estate properties can be purchased or sold, but they also affect the availability of financing for real estate investments. During weak real estate markets, lenders are reluctant to make or to renew loans secured by real estate or real estate related securities. Therefore, even if we would like to be purchasing properties or real estate related securities during weak markets, we may have difficulty obtaining the funds with which to do this.

We may have difficulty disposing of assets when we have to do so.

Our basic investment strategy is to hold real estate assets until we believe it is an optimal time to sell them. Normally, this will be during relatively strong real estate markets. However, factors beyond our control could make it necessary for us to dispose of real estate properties or real estate related securities in a weaker economic environment. For example, we finance many of our CMBS purchases with reverse repurchase obligations which often require that, if the market value of the CMBS falls below specified percentages of the outstanding indebtedness, we must provide additional collateral, reduce the loan balance or liquidate the CMBS position. Therefore, in a period when the market value of our CMBS falls significantly, we could be required (i) to pay down debt with cash flow we need for our business, (ii) to provide additional collateral for the reverse repurchase obligations, or (iii) to sell CMBS at a time when it may be very inopportune for us to do so. Further, markets for many types of real estate related assets are not highly liquid, which can make it particularly difficult to realize acceptable prices when disposing of large quantities of assets during weak markets.

We have controlling stockholders

We have two classes of stock: common stock, which is entitled to one vote per share, and Class B common stock, which is entitled to ten votes per share. Trusts for the benefit of the family of the late Leonard Miller, which includes Stuart Miller, the Chairman of our Board, indirectly own most of the Class B common stock, and Stuart Miller owns almost all the rest of the Class B common stock. Stuart Miller has the power to direct the voting of the Class B common stock owned by the Miller family trusts, and therefore has the power to cast approximately 81.6% of the combined votes that can be cast by the holders of the common stock and the Class B common stock. That gives Mr. Miller the power to elect all our directors and to approve most matters that are presented to our stockholders, even if no other stockholders vote in favor of them. The Miller family’s ownership might discourage someone from making a significant equity investment in us, even if we needed the investment to meet our obligations or to operate our business.

Access to Company Information

We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the Securities and Exchange Commission (the “SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

We make available, free of charge, through our website, and by responding to requests addressed to our investor relations department, the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website address is: http://www.lnrproperty.com. The information contained on our website is not part of this document.

Item 2.    Properties.

For information about properties we own for use in our commercial activities, see Item 1.

We maintain our principal executive offices and our Miami operations at 1601 Washington Avenue, Suite 800, Miami Beach, Florida, in a building that we own. We have additional office space for the rest of our operations in various other office buildings we own (1 office) and lease (6 offices).

Item 3.    Legal Proceedings.

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

Item 4.    Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002.

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PART II

Item 5.    Market for the Registrant’s Common Stock and Related Security Holder Matters.

Our common stock currently is listed on the New York Stock Exchange under the symbol LNR. The following table sets forth the range of the high and low closing prices reported on the New York Stock Exchange composite tape for each fiscal period indicated.

At February 14, 2003, there were approximately 6,300 holders of record of our common stock. During each of the four quarters in 2002 and 2001, we declared and paid cash dividends of $.0125 per common share and $.01125 per Class B common share.

Item 6.    Selected Financial Data.

The following table contains selected consolidated financial information about us. The selected financial data should be read in conjunction with the consolidated financial statements, the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

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We consider EBITDA a supplemental measure for making decisions and believe it provides relevant information about our operations and our ability to service debt, to make investments and to fund other items as needed and, along with net earnings, is useful in understanding our operating results. Because of the nature of our business, we believe net earnings is the measure of financial performance, calculated in accordance with generally accepted accounting principles, that is most nearly comparable to EBITDA. EBITDA should not be interpreted as an alternative measure of net earnings or cash flows from operating activities, both as determined in accordance with generally accepted accounting principles. Additionally, EBITDA is not necessarily indicative of cash available to fund cash needs. Trends or changes in items excluded from EBITDA (including income tax expense, interest expense, depreciation expense and amortization expense) are not captured in EBITDA. These excluded items must also be considered when assessing or understanding our financial performance. EBITDA as calculated by us may not be comparable to similarly titled measures employed by other companies.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SOME OF THE STATEMENTS CONTAINED IN THE FOLLOWING MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE “FORWARD LOOKING STATEMENTS” AS THAT TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. GENERALLY, THE WORDS “BELIEVE,” “EXPECT,” “INTEND,” “ANTICIPATE,” “WILL,” “MAY” AND SIMILAR EXPRESSIONS IDENTIFY FORWARD LOOKING STATEMENTS. FORWARD LOOKING STATEMENTS INHERENTLY INVOLVE RISKS AND UNCERTAINTIES. THE FACTORS, AMONG OTHERS, THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD LOOKING STATEMENTS IN THIS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDE, BUT ARE NOT LIMITED TO (I) CHANGES IN DEMAND FOR COMMERCIAL REAL ESTATE NATIONALLY, IN AREAS IN WHICH WE OWN PROPERTIES, OR IN AREAS IN WHICH PROPERTIES SECURING MORTGAGES DIRECTLY OR INDIRECTLY OWNED BY US 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.

OVERVIEW

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

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The following is a summary of our results of operations for the years ended November 30, 2002, 2001 and 2000 after allocating among the core business segments certain non-corporate general and administrative expenses:

RESULTS OF OPERATIONS

Year ended November 30, 2002 compared to year ended November 30, 2001

Net earnings for the year ended November 30, 2002 were $143.9 million, a 7% increase over prior year net earnings of $135.1 million. Diluted earnings per share for the year ended November 30, 2002 were $4.15, a 7% increase over prior year diluted earnings per share of $3.87. The increase in earnings was primarily due to (i) a higher level of gains on asset sales primarily due to a $45.6 million pre-tax gain recognized on the sale of non-investment grade CMBS through a resecuritization transaction, (ii) a decrease in interest expense primarily due to lower interest rates, and (iii) an increase in net rents (rental income less cost of rental operations), reflecting the contribution to net rents from our development and repositioned properties which are now stabilized or completed and have tenants that are starting to pay rent. These increases were partially offset by (i) a decrease in equity in earnings of unconsolidated partnerships, primarily due to lower earnings from Madison Square Company LLC (“Madison”) (see Real Estate Securities segment below) and (ii) a decrease in management and servicing fees.

Overall, total revenues remained relatively flat, decreasing 1% in 2002, compared to 2001. This was primarily due to a decrease in equity in earnings of unconsolidated partnerships as discussed above, offset in part by higher gains on sales of assets.

Operating earnings were generated from our three main business segments in the following proportions: 27% from real estate properties, 12% from real estate loans and 61% from real estate securities. This compares with 29%, 13% and 58%, respectively, for the prior year. The shift in the percentage related to real estate properties from 2001 to 2002 was primarily the result of lower gains on sales of real estate property assets, offset in part by higher net rents and an increase in equity in earnings of unconsolidated partnerships. The increase in the percentage related to real estate securities from 2001 to 2002 was primarily due to higher gains on sales of CMBS and interest income, offset in part by lower equity in earnings of unconsolidated partnership investments and higher operating expenses.

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Year ended November 30, 2001 compared to year ended November 30, 2000

Net earnings for the year ended November 30, 2001 were $135.1 million, a 17% increase over prior year net earnings of $115.9 million. Diluted earnings per share for the year ended November 30, 2001 were $3.87, a 17% increase over prior year diluted earnings per share of $3.32. The increase in earnings was primarily due to (i) an increase in interest income and servicing fees derived from our growing CMBS portfolio, (ii) an increase in interest income from our mortgage loan portfolio, (iii) a decrease in depreciation expense primarily due to the timing of stabilized property sales relative to new stabilized properties coming on line in 2001 and (iv) a decrease in interest expense due primarily to lower interest rates. These increases were partially offset by (i) a decrease in equity in earnings of unconsolidated partnerships from both our domestic and Japanese discount loan portfolio businesses, (ii) a decrease in net rents, primarily due to the timing of stabilized property sales relative to new properties coming on line in 2001 and (iii) an increase in general and administrative expenses from our growing business segments.

Overall, total revenues remained relatively flat, increasing 1% in 2001, compared to 2000. This was primarily due to the timing of asset sales, reduced interest income on variable-rate assets and a shift in the mix of our investments. Lower interest income is related to transactions that are match-funded with variable-rate debt, and therefore had minimal impact on net earnings. The shift in the mix of investments relates primarily to moving investment dollars to asset classes that are currently yielding higher margins such as loans and securities.

Operating earnings were generated from our three main business segments in the following proportions: 29% from real estate properties, 13% from real estate loans and 58% from real estate securities. This compares with 25%, 23% and 52%, respectively, for the prior year. The shift in these percentages from 2000 to 2001 was primarily the result of higher gains from the sales of real estate in 2001, the gain on sale of our interests in Japanese real estate loan portfolios in 2000 and higher earnings in 2001 from our growing CMBS portfolio.

Real Estate Properties

Real estate properties include office buildings, rental apartment communities (market-rate and affordable housing communities, substantially all of which qualify for Low-Income Housing Tax Credits under Section 42 of the Internal Revenue Code), industrial/warehouse facilities, hotels, retail centers and land that we acquire and

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develop, redevelop or reposition. 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 our balance sheet only as an investment in unconsolidated partnerships. Real estate properties also include our 50% interest in Lennar Land Partners (“LLP”), a non-consolidated partnership accounted for under the equity method which is engaged in the acquisition, development and sale of land, and our interest in an unconsolidated partnership that has investments in properties in Europe. Total revenues from real estate properties include rental income from operating properties, equity in earnings of unconsolidated partnerships that own and operate real estate properties, gains on sales of properties or those unconsolidated partnership interests, 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 managing some of the partnerships.

We continued to take advantage of the strong investor demand for high quality properties, selling a number of matured assets during 2002. Despite those sales, net rents have continued to grow as properties that were previously under development or repositioning are now stabilized or completed and tenants have started paying rent. For the past two years, we have initiated very few new development or repositioning projects, focusing instead on completing and leasing up our existing portfolio. As of November 30, 2002, approximately 49% of our remaining property portfolio is still undergoing development or repositioning, the majority of which has already been pre-leased.

We also entered the European commercial real estate market by investing in a portfolio of real estate properties in the second quarter of 2002 through an unconsolidated partnership with CDC Ixis Capital Markets.

Year ended November 30, 2002 compared to year ended November 30, 2001

Overall, operating earnings from real estate properties were $91.3 million for the year ended November 30, 2002, compared to $97.1 million in 2001. This decrease was primarily due to lower gains on sales of real estate property assets, offset in part by higher net rents and an increase in equity in earnings of unconsolidated partnerships.

Total rental income increased to $115.4 million in 2002 from $111.7 million in 2001. The increase in rental income was primarily due to the contribution from development and repositioning properties that are now stabilized or completed and have some tenants that are starting to pay rent. In 2002 and 2001, respectively, rental income consisted of $84.9 million and $82.5 million from commercial properties (office, industrial/warehouse and retail), $5.8 million and $2.0 million from market-rate rental apartment communities, $10.3 million and $12.5 million from affordable housing communities, and $14.4 million and $14.7 million from hotels and other properties. Cost of rental operations were $58.8 million for the year ended November 30, 2002, relatively flat compared to 2001.

Equity in earnings of unconsolidated partnerships increased to $29.4 million in 2002 from $25.8 million in 2001, primarily due to higher earnings from LLP and earnings from our European investment. LLP primarily sells land to homebuilders, including Lennar, our former parent company and our partner in LLP. Equity in earnings from LLP may vary from period to period depending on the timing of housing starts. These increases in earnings, relating to LLP and our European investment, were partially offset by lower gains from sales of assets held by our domestic partnerships and a decrease in equity in earnings associated with our investments in affordable housing partnerships.

Gains on sales of real estate and unconsolidated partnership interests decreased to $51.5 million in 2002 from $64.3 million in 2001. Gains on sales of real estate in 2002 include $39.4 million from sales of stabilized market-rate operating properties, $8.1 million from sales of land, $3.4 million from the sale of interests in unconsolidated partnerships and $0.6 million from syndications of affordable housing communities, as compared to $51.5 million, $8.8 million, $0.8 million and $3.2 million, respectively, in 2001. Gains on sales of real estate fluctuate from period to period based on the timing of asset sales.

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The net book value of operating properties and equipment with regard to various types of properties we own at November 30, 2002, together with the yield and the occupancy for the stabilized operating properties follows:

As of November 30, 2002, approximately 50% of our market-rate operating properties, based on net book value, had reached stabilized occupancy levels and were yielding in total 13% on net book value.

Occupancy levels for our stabilized commercial real estate properties remained at 97% at the end of 2002 and at the end of 2001.

Approximately 50% of our market-rate properties are in various stages of development or redevelopment. Our investment in these properties decreased to $338.8 million at November 30, 2002, from $398.5 million at November 30, 2001, primarily reflecting the stabilization of several development/repositioning properties in 2002. These properties were yielding 4.2% on net book value at November 30, 2002, compared to 2.5% at November 30, 2001. The increased yield reflects a larger number of properties in this portfolio which have been completed and where some tenants are paying rent. These properties were over 50% pre-leased at November 30, 2002.

We entered the business of owning, developing and syndicating affordable housing communities in 1998. In this business, we create or enter into partnerships that hold interests in multi-family real estate properties that are eligible for affordable housing tax credits granted under Section 42 of the Internal Revenue Code. Initially our 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 our overall effective tax rate. However, the demand for credits has since increased significantly and we found we could generate higher returns on our investment by selling the credits instead of using them. We therefore have shifted our strategy away from owning the majority of the partnership interests in the affordable housing communities toward syndicating those interests. After such syndications, we continue to hold a small interest (typically ranging from less than 1% to 10%) in these partnerships and provide certain limited guarantees to the investors. We may also continue to manage the communities and/or provide tax compliance and other services on behalf of the investors, for which we receive fees. As a result of the shift in strategy, our total investment in affordable housing communities, as well as the amount of tax credits we hold and utilize to reduce our tax rate, declined further in 2002. Pre-tax

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operating margins for the affordable housing communities are generally lower than for market-rate rentals. However, we receive our 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.

We follow the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate,” when accounting for syndications of partnership interests related to affordable housing communities. Interests in these partnerships are sold either while the property is in development, or after it is fully developed and leased. The total proceeds from the sale of partnership interests related to fully developed properties are received at the time of sale, and therefore profit is recognized at that time to the extent that proceeds exceed our basis in the partnership interests sold plus any required reserves for guarantees. Proceeds from the sale of partnership interests related to properties in development may be subject to minor modification after the date of sale, because proceeds to be received generally depend on the amount of tax credits granted, which is only determined once the property is fully developed. Since the total proceeds to be received by us for these partnership interests are not definite at the date of sale, we apply the cost recovery method in accounting for these sales. Gains are recognized to the extent that cash receipts exceed our basis in the partnership interests sold plus any required reserves for guarantees.

We provide certain limited guarantees to the purchasers of these partnership interests. In accordance with Paragraph 25 of SFAS No. 66, we recognize profit as outlined above because our loss of profit from guarantees is limited by the terms of the sales contracts. In those instances where we provide operating guarantees that are of limited duration, the profit we recognize on sale is reduced by our expected exposure to loss, calculated in accordance with SFAS No. 66. In those instances where we provide non-operating guarantees, or provide operating guarantees for an extended duration, the profit we recognize on sale is reduced by our maximum exposure to loss as specified in the agreements, regardless of the likelihood that we will have to perform under these guarantees.

The net investment in our affordable housing communities at November 30, 2002 follows:

As of November 30, 2002, we had been awarded and held rights to approximately $90 million in gross tax credits, compared with $140 million at November 30, 2001. The decrease in tax credits primarily reflects the syndication of partnership interests, as well as the utilization of tax credits in 2002. Our net investment in affordable housing communities decreased by $10.8 million in 2002, which is not fully reflective of the value of the partnership interests sold. For syndications of affordable housing communities under development, we receive a substantial portion of the proceeds after the syndication occurs as the properties are completed and leased up. Our net investment is expected to decrease further as the properties in the syndicated partnerships are completed and leased up.

Year ended November 30, 2001 compared to year ended November 30, 2000

Overall, operating earnings from real estate properties were $97.1 million for the year ended November 30, 2001, compared to $78.5 million in 2000. This increase was primarily due to higher gains on sales of real estate, higher management fees and lower depreciation expense. These increases were partially offset by a decline in net rents, lower equity in earnings of unconsolidated partnerships, and higher other operating expenses.

Total rental income decreased to $111.7 million in 2001 from $139.3 million in 2000. In 2001 and 2000, respectively, rental income consisted of $82.5 million and $75.8 million from commercial properties (office, industrial/warehouse and retail), $2.0 million and $15.6 million from market-rate rental apartment communities, $12.5 million and $20.2 million from affordable housing communities, and $14.7 million and $27.7 million from hotels and other properties. Cost of rental operations decreased to $58.6 million for the year ended November 30, 2001 from $78.7 million in 2000. The decreases in rental income and cost of rental operations were primarily due to the timing of stabilized property sales relative to new stabilized properties coming on line in 2001.

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Equity in earnings of unconsolidated partnerships decreased to $25.8 million in 2001 from $30.8 million in 2000, primarily due to lower earnings from LLP and a decrease in partnership earnings from our stabilized affordable housing partnerships, partially offset by partnership earnings from the sale of the properties held by two unconsolidated single-asset partnerships.

Gains on sales of real estate and unconsolidated partnership interests increased to $64.3 million in 2001 from $41.9 million in 2000. Gains on sales of real estate in 2001 included $51.5 million from sales of stabilized market-rate operating properties, $3.2 million from syndications of affordable housing communities, $8.8 million from sales of land and $0.8 million from the sale of investments in unconsolidated partnerships. Gains on sales of real estate fluctuate from period to period based on the timing of asset sales.

Management fees increased to $7.5 million in 2001 from $2.8 million in 2000. This increase was primarily due to developer and other fees we received for managing the properties for our partners.

Other operating expenses increased to $30.0 million in 2001 from $22.1 million in 2000. This increase was due to additional personnel and administrative costs necessary to support the growth in the overall real estate portfolio we manage, including wholly-owned real estate and real estate owned by unconsolidated partnerships.

Depreciation expense decreased to $25.3 million in 2001 from $36.1 million in 2000. Since we have not been replacing stabilized properties as quickly as they have been sold, this has resulted in a lower investment in stabilized operating properties and a corresponding lower depreciation expense.

The net book value of operating properties and equipment with regard to various types of properties we own at November 30, 2001, together with the yield and the occupancy for the stabilized operating properties follows:

As of November 30, 2001, approximately 40% of our market-rate operating properties, based on net book value, had reached stabilized occupancy levels and were yielding in total 14% on net book value.

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Hotel occupancy decreased from 59% at November 30, 2000 to 40% at November 30, 2001 on our two wholly-owned operating hotels primarily due to the tragic events of September 11, 2001 and general economic conditions. Both of these factors resulted in lower levels of occupancy in 2001 by a major customer at one of the wholly-owned operating hotels.

Our investment in market-rate properties under development or repositioning was $398.5 million at November 30, 2001, compared with $340.3 million at November 30, 2000. The increase primarily reflects continued expenditures on projects already under development at the beginning of 2001. These properties were yielding 2.5% on net book value at November 30, 2001, slightly higher than at November 30, 2000. These properties were over 50% pre-leased at November 30, 2001.

The net investment in our affordable housing communities at November 30, 2001 follows:

As of November 30, 2001, we had been awarded and held rights to approximately $140 million in gross tax credits, with approximately 60% relating to apartment communities that have not yet reached stabilized occupancy levels.

Real Estate Loans

Real estate loans include our direct investments in high yielding loans, as well as our domestic and foreign discount loan portfolio investments, owned primarily through unconsolidated partnerships, and related loan workout operations. Total revenues include interest income, equity in earnings of unconsolidated partnerships and management fees earned from those partnerships. Operating expenses include the overhead associated with servicing the loans and managing the partnerships.

Over the past three years, the majority of investing activity within the real estate loan segment has been in structured junior participations in short- to medium-term variable-rate real estate loans (“B-notes”), most of which represent participations in first mortgage loans. Most of our B-note investments are match-funded with variable-rate debt of similar term. To-date, we have not experienced any delinquencies in our B-note portfolio.

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Year ended November 30, 2002 compared to year ended November 30, 2001

Operating earnings from real estate loans were $39.2 million for the year ended November 30, 2002, compared to $44.8 million in 2001. This decrease was primarily due to lower interest income and management fees.

Interest income decreased to $39.6 million for the year ended November 30, 2002 from $43.7 million in 2001. This decrease was partially due to $4.2 million of interest income realized in 2001 from the early payoff of a discounted mortgage loan and the impact during 2002 of lower interest rates on our variable-rate loans. These decreases were offset in part by a higher level of loan investments during 2002 compared with 2001.

During the year ended November 30, 2002, we funded ten new B-note investments for $142.5 million. Our B-note investments at November 30, 2002 totaled $378.4 million, net and had a face amount of $380.4 million. These investments contributed $26.3 million to interest income in 2002, compared to $24.8 million in 2001.

Management fees decreased to $1.3 million for the year ended November 30, 2002 from $3.7 million in 2001. This decrease was primarily due to fees earned in the first quarter of 2001 from the disposition of certain assets in one of our domestic discount loan portfolios.

Year ended November 30, 2001 compared to year ended November 30, 2000

Operating earnings from real estate loans were $44.8 million for the year ended November 30, 2001, compared to $71.4 million in 2000. This decrease was primarily due to the sale of our investment interests in our Japanese discount loan portfolios in 2000 and lower earnings from our domestic discount loan portfolio business. These decreases were partly offset by an increase in interest income.

Interest income increased to $43.7 million for the year ended November 30, 2001 from $35.7 million in 2000. Interest income primarily includes interest earned on B-notes. During the year ended November 30, 2001, we funded seven new B-note investments for $124.9 million. Our B-note investments at November 30, 2001 had a face amount of $244.0 million. These investments contributed $24.8 million to interest income in 2001, compared to $22.2 million in 2000. Interest income in 2001 also included $4.2 million from the early payoff of a discounted mortgage loan. These increases in interest income were partially offset by lower variable interest rates.

For the year ended November 30, 2001, equity in earnings of unconsolidated partnerships decreased to $4.6 million from $19.4 million in 2000. This decrease was due to a decline in earnings from our Japanese discount loan portfolios, which were sold in April 2000, and a decline in earnings from our domestic discount loan portfolios, as expected, due to the liquidation of most of the assets in these portfolios in prior periods.

Gains on sales of unconsolidated partnership interests in 2000 reflect the sale of our investment interests in our Japanese discount loan portfolios.

Operating expenses decreased to $5.2 million for the year ended November 30, 2001 from $6.7 million in 2000, primarily due to the sale of our Japanese discount loan portfolios in April 2000, partially offset by increased general and administrative expenses to support the growth in our mortgage loan portfolio.

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Real Estate Securities