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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended May 31, 2004

 

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

 

For the transition period from             to             

 

Commission file number 1-13223

 

LNR Property Corporation

(Exact name of registrant as specified in its charter)

 

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

 

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

 

(305) 695-5500

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

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

 

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

 

Common

   20,024,436

Class B Common

   9,770,298

 



PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands, except per share amounts)

 

     (Unaudited)  
     May 31,
2004


    November 30,
2003


 

ASSETS

              

Cash and cash equivalents

   $ 35,469     29,667  

Restricted cash

     38,181     23,732  

Investment securities

     952,026     900,334  

Mortgage loans, net

     568,089     462,545  

Operating properties and equipment, net

     796,149     572,186  

Land held for investment

     89,472     58,578  

Investments in unconsolidated entities

     498,245     426,576  

Assets held for sale

     —       69,494  

Other assets

     132,768     89,902  
    


 

Total assets

   $ 3,110,399     2,633,014  
    


 

LIABILITIES AND STOCKHOLDERS' EQUITY

              

Liabilities:

              

Accounts payable

   $ 10,212     10,819  

Accrued expenses and other liabilities

     213,162     180,057  

Liabilities related to assets held for sale

     —       22,625  

Mortgage notes and other debts payable

     1,761,045     1,367,590  
    


 

Total liabilities

     1,984,419     1,581,091  
    


 

Minority interests

     10,653     1,056  
    


 

Commitments and contingent liabilities (Notes 8 and 9)

              

Stockholders' equity:

              

Common stock, $.10 par value, 150,000 shares authorized, 20,024 and 19,941 shares issued and outstanding in 2004 and 2003, respectively

     2,002     1,994  

Class B common stock, $.10 par value, 40,000 shares authorized, 9,770 and 9,775 shares issued and outstanding in 2004 and 2003, respectively

     977     977  

Additional paid-in capital

     465,766     459,378  

Retained earnings

     607,721     538,799  

Unamortized value of restricted stock grants

     (28,029 )   (28,890 )

Deferred compensation plan; 166 common shares at May 31, 2004

     (4,297 )   —    

Deferred compensation liability

     4,297     —    

Accumulated other comprehensive earnings

     66,890     78,609  
    


 

Total stockholders' equity

     1,115,327     1,050,867  
    


 

Total liabilities and stockholders' equity

   $ 3,110,399     2,633,014  
    


 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

2


LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

 

     (Unaudited)     (Unaudited)
     Three Months Ended
May 31,


    Six Months Ended
May 31,


     2004

    2003

    2004

    2003

Revenues

                        

Rental income

   $ 32,980     24,944     59,026     49,718

Management and servicing fees

     13,435     9,076     22,932     18,556
    


 

 

 

Total revenues

     46,415     34,020     81,958     68,274
    


 

 

 

Other operating income

                        

Equity in earnings of unconsolidated entities

     43,738     4,947     46,555     25,810

Interest income

     43,683     41,012     83,253     85,443

Gains on sales of:

                        

Real estate

     3,623     1,757     4,572     9,302

Investment securities

     541     —       17,877     —  

Mortgage loans

     153     —       153     —  

Other, net

     (606 )   359     (800 )   1,694
    


 

 

 

Total other operating income

     91,132     48,075     151,610     122,249
    


 

 

 

Costs and expenses

                        

Cost of rental operations

     20,481     14,528     36,417     28,247

General and administrative

     24,430     21,719     47,750     43,226

Depreciation

     6,378     5,085     11,907     10,134

Minority interests

     12     (29 )   (73 )   208

Interest

     27,715     25,513     53,794     47,537

Loss on early extinguishment of debt

     —       —       3,440     —  
    


 

 

 

Total costs and expenses

     79,016     66,816     153,235     129,352
    


 

 

 

Earnings from continuing operations before income taxes

     58,531     15,279     80,333     61,171

Income taxes

     20,249     3,575     27,204     19,992
    


 

 

 

Earnings from continuing operations

     38,282     11,704     53,129     41,179
    


 

 

 

Discontinued operations:

                        

Earnings from operating properties sold or held for sale, net of tax

     538     962     817     1,940

Gains on sales of operating properties, net of tax

     8,693     12,151     22,080     16,491
    


 

 

 

Earnings from discontinued operations

     9,231     13,113     22,897     18,431
    


 

 

 

Net earnings

   $ 47,513     24,817     76,026     59,610
    


 

 

 

(continued)

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

3


LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS - CONTINUED

(In thousands, except per share amounts)

 

     (Unaudited)    (Unaudited)
     Three Months Ended
May 31,


   Six Months Ended
May 31,


     2004

   2003

   2004

   2003

Weighted average shares outstanding:

                     

Basic

     28,732    28,403    28,625    30,181
    

  
  
  

Diluted

     30,356    29,705    30,332    31,302
    

  
  
  

Earnings per share from continuing operations (1):

                     

Basic

   $ 1.33    0.41    1.86    1.36
    

  
  
  

Diluted

   $ 1.26    0.39    1.75    1.32
    

  
  
  

Earnings per share from discontinued operations (1):

                     

Basic

   $ 0.32    0.46    0.80    0.62
    

  
  
  

Diluted

   $ 0.31    0.45    0.76    0.58
    

  
  
  

Net earnings per share (1):

                     

Basic

   $ 1.65    0.87    2.66    1.98
    

  
  
  

Diluted

   $ 1.57    0.84    2.51    1.90
    

  
  
  

Dividends declared per share:

                     

Common stock

   $ 0.0125    0.0125    0.0250    0.0250
    

  
  
  

Class B common stock

   $ 0.01125    0.01125    0.0225    0.0225
    

  
  
  

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

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

4


LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

 

     (Unaudited)     (Unaudited)  
     Three Months Ended
May 31,


    Six Months Ended
May 31,


 
     2004

    2003

    2004

    2003

 

Net earnings

   $ 47,513     24,817     76,026     59,610  
    


 

 

 

Other comprehensive loss, net of tax:

                          

Unrealized losses on available-for-sale securities arising during the period

     (2,622 )   (7,121 )   (2,481 )   (12,010 )

Less: reclassification adjustment for gains on available-for-sale securities included in net earnings

     (8 )   —       (10,520 )   —    

Unrealized (losses) gains on foreign currency translation

     (4,004 )   5,065     386     9,403  

Unrealized gains on derivative financial instruments

     596     617     896     609  
    


 

 

 

Other comprehensive loss, net of tax

     (6,038 )   (1,439 )   (11,719 )   (1,998 )
    


 

 

 

Comprehensive earnings

   $ 41,475     23,378     64,307     57,612  
    


 

 

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

5


LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

 

     (Unaudited)  
    

Six Months Ended

May 31,


 
     2004

    2003

 

Cash flows from operating activities:

              

Net earnings

   $ 76,026     59,610  

Adjustments to reconcile net earnings to net cash provided by operating activities:

              

Depreciation

     12,316     12,552  

Minority interests

     (73 )   207  

Accretion of discount on investment securities and mortgage loans, net of write-downs

     7,247     (8,735 )

Amortization of deferred costs

     6,089     4,025  

Equity in earnings of unconsolidated entities

     (46,555 )   (25,810 )

Distributions of earnings from unconsolidated entities

     26,307     42,208  

Interest received on investment securities in excess of income recognized

     21,784     17,045  

Loss on early extinguishment of debt

     3,440     —    

Gains on sales of real estate

     (40,768 )   (36,337 )

Gains on sales of investment securities

     (17,877 )   —    

Gains on sales of mortgage loans

     (153 )   —    

Other, net

     1,840     (2,774 )

Changes in assets and liabilities:

              

Increase in other assets

     (33,832 )   (15,444 )

Increase (decrease) in accounts payable and accrued liabilities

     12,814     (29,558 )
    


 

Net cash provided by operating activities

     28,605     16,989  
    


 

Cash flows from investing activities:

              

Operating properties and equipment:

              

Additions

     (215,416 )   (25,137 )

Sales

     179,219     61,845  

Land held for investment:

              

Additions

     (29,480 )   (3,097 )

Sales

     9,959     6,551  

Investments in unconsolidated entities

     (220,074 )   (34,211 )

Proceeds from sales of unconsolidated entity interests

     2,906     —    

Distributions of capital from unconsolidated entities

     54,319     29,621  

Purchase of mortgage loans held for investment

     (120,163 )   (110,985 )

Proceeds from principal collections and sales of mortgage loans held for investment

     97,020     103,802  

Purchase of investment securities

     (147,864 )   (231,340 )

Proceeds from principal collections and sales of investment securities

     79,650     37,800  

Increase in restricted cash

     (14,449 )   (846 )

Proceeds from sales and syndications of interests in affordable housing entities

     26,250     10,524  
    


 

Net cash used in investing activities

     (298,123 )   (155,473 )
    


 

(continued)

 

6


LNR PROPERTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED

(In thousands)

 

     (Unaudited)  
    

Six Months Ended

May 31,


 
     2004

    2003

 

Cash flows from financing activities:

              

Proceeds from stock option exercises and stock purchase plan sales

     4,450     4,185  

Purchase and retirement of treasury stock

     (9,290 )   (144,763 )

Payment of dividends

     (714 )   (731 )

Net distributions to minority partners in consolidated entities

     (617 )   (236 )

Repurchase agreements and revolving credit lines

     92,837     142,595  

Senior subordinated notes:

              

Proceeds from borrowings

     50,250     —    

Principal and prepayment premium payments

     (47,715 )   —    

Mortgage notes and other debts payable:

              

Proceeds from borrowings

     263,594     249,522  

Principal payments

     (77,475 )   (107,692 )
    


 

Net cash provided by financing activities

     275,320     142,880  
    


 

Net increase in cash and cash equivalents

     5,802     4,396  

Cash and cash equivalents at beginning of period

     29,667     5,711  
    


 

Cash and cash equivalents at end of period

   $ 35,469     10,107  
    


 

Supplemental disclosure of cash flow information:

              

Cash paid for interest, net of amounts capitalized

   $ 50,131     45,859  

Cash paid for taxes

   $ 28,100     47,540  

Supplemental disclosure of non-cash investing and financing activities:

              

Mortgage note on acquired operating property

   $ 15,703     —    

Purchases of investment securities financed by seller

   $ 23,960     20,873  

Mortgage loans received on sales of operating properties

   $ —       92,770  

Purchases of mortgage loans financed by seller

   $ —       18,255  

Supplemental disclosure of non-cash transfers:

              

Distribution of mortgage loans and operating property from CMBS trust

   $ 29,126     —    

Distribution of investment securities from unconsolidated entity

   $ 21,956     —    

Transfer from operating properties to land held for investment

   $ 14,495     —    

Transfer from land held for investment to operating properties

   $ 9,319     4,565  

Consolidation of entities previously accounted for as unconsolidated entities:

              

Cash and cash equivalents

   $ 2,123     —    

Mortgage loans, net

   $ 57,353     —    

Operating properties and equipment, net

   $ 84,053     —    

Investments in unconsolidated entities

   $ (68,143 )   —    

Other assets

   $ 2,451     —    

Other liabilities

   $ (14,380 )   —    

Mortgage notes and other debts payable

   $ (53,170 )   —    

Minority interests

   $ (10,287 )   —    

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

7


LNR PROPERTY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Consolidated Condensed Financial Statements

 

1. Summary of Significant Accounting Policies

 

Basis of Presentation and Consolidation

 

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

 

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

 

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

 

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

 

8


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

 

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

 

All significant intercompany transactions and balances among consolidated entities and intercompany profits and/or losses with unconsolidated entities have been eliminated. The financial statements have been prepared by management without audit by independent public accountants and should be read in conjunction with the November 30, 2003 audited financial statements in our Annual Report on Form 10-K for the year then ended. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying unaudited consolidated condensed financial statements have been made.

 

9


Stock-Based Compensation

 

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

 

    

Three Months Ended

May 31,


    Six Months Ended
May 31,


 
     2004

    2003

    2004

    2003

 
     (In thousands, except per share amounts)  

Net earnings, as reported

   $ 47,513     24,817     76,026     59,610  

Add:         Total stock-based employee compensation expense included in
             reported net earnings, net of related tax effects

     1,566     1,063     3,072     1,602  

Deduct:    Total stock-based employee compensation expense determined
             under fair value based method for all awards, net of related tax effects

     (2,362 )   (1,700 )   (4,616 )   (2,836 )
    


 

 

 

Pro forma net earnings

   $ 46,717     24,180     74,482     58,376  
    


 

 

 

Net earnings per share(1):

                          

Basic - as reported

   $ 1.65     0.87     2.66     1.98  
    


 

 

 

Basic - pro forma

   $ 1.63     0.85     2.60     1.93  
    


 

 

 

Diluted - as reported

   $ 1.57     0.84     2.51     1.90  
    


 

 

 

Diluted - pro forma

   $ 1.54     0.81     2.46     1.86  
    


 

 

 


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

 

New Accounting Pronouncements

 

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” which was subsequently revised in December 2003. The revisions to FIN No. 46 issued in December 2003 did not significantly affect the conclusions reached in the adoption of FIN No. 46 for entities with which we became involved after January 31, 2003, and accordingly the revisions to FIN No. 46 did not have a material effect on our results of operations or financial position. On May 31, 2004, we adopted the provisions of FIN No. 46, as revised, for entities created before February 1, 2003, and we consolidated thirteen real estate entities that were deemed VIEs and of which we were determined to be the primary beneficiary. As of May 31, 2004, assets and liabilities of these entities were $163.3 million and $67.6 million, respectively, including mortgage notes and other debts payable of $53.2 million. See Note 10 for further discussion on variable interest entities.

 

10


In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities purchased subsequent to origination if those differences are attributable, at least in part, to credit quality. SOP No. 03-3 requires that we recognize the excess of all cash flows expected over our initial investment as interest income on a level yield basis over the life of the investment. SOP No. 03-3 is effective for loans or debt securities we acquire subsequent to origination after November 30, 2005 and may be adopted early. We do not believe the adoption of SOP No. 03-3 will have a material effect on our results of operations or financial position.

 

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

 

In March 2004, the EITF reached a consensus on the “recognition” provisions of EITF No. 03-1. EITF No. 03-1 requires that a loss be recognized for an impairment that is other-than-temporary. A three-step impairment model should be applied to debt securities subject to SFAS No. 115, including those debt securities for which no impairment loss was required under EITF No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,” and whose fair value is below its carrying amount. We are required and plan to adopt the recognition provisions of EITF No. 03-1 prospectively to all current and future investments during the quarter ending November 30, 2004. We are currently evaluating whether the adoption of the recognition provisions of EITF No. 03-1 will have a material effect on our results of operations or financial position.

 

Reclassifications

 

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

 

11


2. Earnings Per Share

 

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

 

     Three Months Ended
May 31,


  

Six Months Ended

May 31,


     2004

   2003

   2004

   2003

     (In thousands)

Numerator

                     

Numerator for basic and diluted earnings per share:

                     

Earnings from continuing operations

   $ 38,282    11,704    53,129    41,179

Earnings from discontinued operations

     9,231    13,113    22,897    18,431
    

  
  
  

Net earnings

   $ 47,513    24,817    76,026    59,610
    

  
  
  

Denominator

                     

Denominator for basic earnings per share - weighted average shares

     28,732    28,403    28,625    30,181

Effect of dilutive securities:

                     

Stock options

     535    376    531    362

Restricted stock

     1,037    901    1,121    734

Other

     52    25    55    25
    

  
  
  

Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions

     30,356    29,705    30,332    31,302
    

  
  
  

 

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

 

3. Newhall Acquisition

 

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

 

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

 

12


In order to enable NWHL to pay the acquisition price of Newhall, we and Lennar each contributed approximately $200 million, and NWHL and LandSource jointly obtained $600 million of bank financing commitments, of which $400 million was used by NWHL to pay part of the acquisition price of Newhall. The remainder of the acquisition price was paid with proceeds from the sale of income producing commercial properties from Newhall to us for $217 million. We are not obligated with regard to the borrowings of NWHL and LandSource, except that we and Lennar have committed to complete any property development commitments on which NWHL and LandSource default and have guaranteed that, in the event of fraud or similar unlawful activities by the borrowers, or distributions by the borrowers that are not permitted by the loan documents, we will pay the lenders the amount of any resulting damages they suffer and we will pay anything that is required to reduce the loan balances to specified percentages of the appraised values of the properties that secure the borrowings.

 

4. Investment Securities and Mortgage Loans, Net

 

Included in our balances of investment securities and of mortgage loans, net were $278.6 million and $60.1 million, respectively, at May 31, 2004, and $373.0 million and $46.2 million, respectively, at November 30, 2003, of assets which were pledged to creditors which can be repledged or sold by creditors under reverse repurchase agreements.

 

5. Securitization Transaction

 

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

 

6. Deferred Compensation Plan

 

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

 

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

 

13


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

 

7. Loss on Early Extinguishment of Debt

 

In the first quarter of 2004, we issued $50.0 million principal amount of 7.25% senior subordinated notes due in 2013. Proceeds from the sale were primarily used to redeem $45.3 million principal amount of our 10.5% senior subordinated notes due in 2009 at a redemption price equal to 105.375% of principal plus interest accrued to the redemption date. The redemption of the 10.5% notes at a premium resulted in a pretax loss of $3.4 million to earnings from continuing operations during the first quarter of 2004, which was included in the “Corporate and Interest” segment.

 

8. Commitments and Contingencies

 

We are obligated, under various types of agreements, to provide guarantees and other commitments, which totaled $393.8 million at May 31, 2004, none of which is reflected in our financial statements. Included in this amount are $35.1 million of commitments to fund capital contributions to unconsolidated entities required by agreements or pursuant to approved annual business plans. Also included are guarantees of $358.7 million at May 31, 2004, which are discussed in Note 9.

 

9. Guarantees

 

In the ordinary course of business, we provide various guarantees which are included under the recognition, measurement, and disclosure provisions of FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others,” including: (i) standby letters of credit, generally to enhance credit or guarantee our performance under contractual obligations; (ii) guarantees of debt, generally in order for unconsolidated entities in which we own interests to obtain financing for the acquisition and development of their properties; (iii) limited maintenance guarantees, generally to certain of our unconsolidated entities’ lenders, which may require us to provide funds to these entities to maintain a required loan-to-value ratio or upon default by the borrower; (iv) surety bond reimbursement guarantees, generally related to our affordable housing syndications or to support our development obligations under development agreements with municipalities, and (v) guarantees in connection with our syndication of affordable housing tax credits, generally to provide additional funding to cover operating cash flow deficiencies, maintain specified debt service coverage ratios and cover financing shortfalls to projects upon completion if the projects’ permanent financing is insufficient to repay the projects’ construction loans. These guarantees have varying expiration dates ranging from less than one year to 17 years, and total $358.7 million at May 31, 2004. The fair value of these types of guarantees issued after December 31, 2002, was not material. In accordance with SFAS No. 5, “Accounting for Contingencies,” we have recorded $6.9 million of liabilities related to obligations under certain guarantees, where payments are considered both probable and reasonably estimable.

 

In addition, in accordance with SFAS No. 66, “Accounting for Sales of Real Estate,” we have recorded $3.6 million of liabilities representing our maximum exposure to loss under non-operating guarantees and operating guarantees of an extended duration which we provided at the time of sale of interests in certain affordable housing community entities, even though we do not expect to be required to perform under these guarantees.

 

14


10. Variable Interest Entities

 

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

 

Commercial Mortgage Backed Securities

 

CMBS are securities backed by loans on commercial and multi-family residential real estate properties and possess many of the characteristics of large portfolios of performing loans. Generally, the interests we own in CMBS are with qualifying special-purpose entities (“QSPE”), which are exempted from consolidation under the provisions of FIN No. 46, providing that we do not have the ability to unilaterally dissolve them. Only one of the CMBS structures in which we have an interest did not meet the requirements to be a QSPE, and was determined to be a VIE due to insufficient equity. We, however, were not deemed to be the primary beneficiary of this entity and therefore we were not required to consolidate it. As of May 31, 2004, assets and liabilities of this entity were $266.1 million and $265.1 million, respectively, and our maximum exposure to loss in this entity was limited to our recorded investment of approximately $9.9 million.

 

Investments In Certain Real Estate Entities

 

Affordable Housing Communities

 

During 1998, we entered into the business of owning, developing and syndicating affordable housing communities. Our ownership interests in these communities typically approximate 99% of the entities we have not yet syndicated. We continue to hold a small interest (typically ranging from less than 1% to 10%) in the communities we have syndicated, and we continue to manage those communities, for which we earn management fees. All sixty of our affordable housing unconsolidated entity interests which have been syndicated and twelve of our affordable housing unconsolidated (prior to FIN No. 46) entity interests which have not yet been syndicated are VIEs due to disproportionate voting and economic rights. We were deemed to be the primary beneficiary on the twelve entities not yet syndicated, and accordingly we consolidated these entities into our financial statements on May 31, 2004. As of May 31, 2004, these entities had assets and liabilities of $88.0 million and $67.1 million, respectively, including mortgage notes and other debts payable of approximately $53.2 million. The remaining sixty unconsolidated entities had assets and liabilities of $490.6 million and $339.9 million, respectively, as of May 31, 2004. Our maximum exposure to loss in these entities was limited to our recorded investment of approximately $20.5 million and guarantees of $66.0 million as of May 31, 2004.

 

International Entities

 

We have an investment in a European unconsolidated (prior to FIN No. 46) entity, which owns a pool of commercial real estate properties located throughout France. This entity, which had assets and liabilities of $75.3 million and $0.5 million, respectively, as of May 31, 2004, is a VIE due to disproportionate voting and economic rights. We were deemed to be the primary beneficiary, and accordingly consolidated this entity into our financial statements on May 31, 2004.

 

Madison Square Company LLC

 

Formed in March 1999, Madison Square Company LLC (“Madison”) invests in real estate securities, primarily CMBS. Madison is a VIE; however, we were not deemed to be the primary beneficiary of Madison, and accordingly we did not consolidate the entity. As of May 31, 2004, assets and liabilities of this entity were $706.9 million and $538.8 million, respectively. The debt of the entity is in the form of securitized notes which are non-recourse to us, although we own $61.1 million face amount of those notes at a discount. At May 31, 2004, our maximum exposure to loss was limited to the amount of our recorded investment of $42.7 million (representing our 25.8% ownership interest), as well as our $35.7 million investment in the securitized notes issued by Madison.

 

15


Single-Asset Entities

 

We have investments in single-asset unconsolidated entities that were established to acquire, develop, reposition, manage and sell real estate assets. One of these entities, in which we purchased an interest in the second quarter of 2004, owns and operates a commercial office building and was deemed to be a VIE due to disproportionate voting and economic rights; however, we were not deemed to be the primary beneficiary of this entity, and therefore we were not required to consolidate it. As of May 31, 2004, assets and liabilities of this partnership were $17.0 million and $0.9 million, respectively, and our maximum exposure to loss in this entity was limited to our recorded investment of approximately $2.2 million.

 

11. Assets Held for Sale

 

In the normal course of our business, we acquire, develop, redevelop, or reposition real estate properties, and then dispose of those properties when we believe they have reached optimal values. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we reflect the historical operating results of properties sold or held for sale as well as our gain or loss on sale from these properties as discontinued operations in our consolidated statements of earnings and their assets and liabilities as held for sale in our consolidated balance sheets for periods prior to their sale. During the period from our adoption of SFAS No. 144 (December 1, 2002) through May 31, 2004, we sold several such properties and have reflected these properties’ assets and liabilities as held for sale in our consolidated condensed balance sheets prior to their sale date, and their historical operating results for periods prior to their sale, as well as the gain or loss on sale, as results of discontinued operations in our consolidated statements of earnings. At May 31, 2004, none of our real estate operating properties were considered held for sale as defined by SFAS No. 144.

 

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

 

          May 31,     
2004


   November 30,
2003


     (In thousands)

Assets

           

Operating properties and equipment, net

   $ —      68,756

Other assets

     —      738
    

  

Total assets

   $ —      69,494
    

  

Liabilities

           

Accounts payable

   $ —      430

Accrued expenses and other liabilities

     —      6,999

Mortgage notes and other debts payable

     —      15,196
    

  

Total liabilities

   $ —      22,625
    

  

 

16


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

 

     Three Months Ended
May 31,


    Six Months Ended
May 31,


 
     2004

   2003

    2004

   2003

 
     (In thousands)  

Rental income

   $ 1,857    6,436     3,273    13,413  

Management and servicing fees

     408    —       804    (4 )

Interest income

     1    14     98    27  

Gains on sales of real estate

     14,250    19,919     36,196    27,035  

Other, net

     —      (1 )   —      (1 )
    

  

 
  

Total revenues and other operating income

     16,516    26,368     40,371    40,470  
    

  

 
  

Cost of rental operations

     551    2,294     1,203    4,674  

Depreciation

     196    1,066     409    2,418  

Minority interests

     —      —       —      (1 )

Interest

     636    1,912     1,222    4,232  
    

  

 
  

Total costs and expenses

     1,383    5,272     2,834    11,323  
    

  

 
  

Earnings before income taxes

     15,133    21,096     37,537    29,147  

Income taxes

     5,902    7,983     14,640    10,716  
    

  

 
  

Net earnings

   $ 9,231    13,113     22,897    18,431  
    

  

 
  

 

17


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

 

SOME OF THE STATEMENTS CONTAINED IN THE FOLLOWING MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE “FORWARD-LOOKING STATEMENTS” AS THAT TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. GENERALLY, THE WORDS “BELIEVE,” “EXPECT,” “INTEND,” “ANTICIPATE,” “WILL,” “MAY” AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INHERENTLY INVOLVE RISKS AND UNCERTAINTIES. THE FACTORS, AMONG OTHERS, THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING STATEMENTS IN THIS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDE, BUT ARE NOT LIMITED TO, (I) CHANGES IN DEMAND FOR COMMERCIAL REAL ESTATE NATIONALLY AND INTERNATIONALLY, IN AREAS IN WHICH WE OWN PROPERTIES, OR IN AREAS (INCLUDING AREAS OUTSIDE THE UNITED STATES) IN WHICH PROPERTIES SECURING MORTGAGES DIRECTLY OR INDIRECTLY OWNED BY US ARE LOCATED, (II) CHANGES IN INTERNATIONAL, NATIONAL OR REGIONAL BUSINESS CONDITIONS WHICH AFFECT THE ABILITY OF MORTGAGE OBLIGORS TO PAY PRINCIPAL OR INTEREST WHEN IT IS DUE, (III) THE CYCLICAL NATURE OF THE COMMERCIAL REAL ESTATE BUSINESS, (IV) CHANGES IN INTEREST RATES, (V) CHANGES IN THE MARKET FOR VARIOUS TYPES OF REAL ESTATE BASED SECURITIES, (VI) CHANGES IN OUR CAPITAL STRUCTURE, DUE TO THE AVAILABILITY OF CAPITAL OR THE TERMS ON WHICH IT IS AVAILABLE OR OTHERWISE, (VII) CHANGES IN AVAILABILITY OF QUALIFIED PERSONNEL AND (VIII) CHANGES IN GOVERNMENT REGULATIONS, INCLUDING, WITHOUT LIMITATION, ENVIRONMENTAL REGULATIONS. SEE OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED NOVEMBER 30, 2003, FOR A FURTHER DISCUSSION OF RISKS AND UNCERTAINTIES APPLICABLE TO OUR BUSINESS.

 

OVERVIEW

 

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

 

1. RESULTS OF OPERATIONS

 

Adoption of SFAS No. 144

 

On December 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires that whenever we sell or hold for sale a commercial real estate property that has its own operations and cash flows, which is a frequent occurrence since selling properties is a regular part of our business, we must reclassify the revenues and expenses of that property, both with regard to the current period and with regard to the past, and classify the gain or loss on sale of that property, as results of discontinued operations. Primarily because of this, 19% of our net earnings during the second quarter and 30% of our net earnings during the first six months of 2004 were characterized as earnings from discontinued operations. Because selling properties is a regular part of our business, our expectation is that each year we will report a significant portion of our earnings as discontinued

 

18


operations, and we will be required to restate prior years for comparability. Accordingly, we believe that reclassifying our operating income from properties we sell or hold for sale and treating our gain or loss from sale of those properties as results of discontinued operations, makes it difficult to determine and evaluate from our statements of earnings the performance of our real estate properties business. Because of that, in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and particularly in the section regarding Real Estate Properties, we provide information that combines revenues, expenses and gains on sales with regard to properties we have sold or hold for sale, which are reflected on our statements of earnings as discontinued operations, with the operating income from commercial properties we continue to own which are not classified as held for sale. Our management uses this combined information in evaluating the performance of the real estate properties business, and believes investors may find the information helpful for this purpose as well.

 

19


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

 

    

Three Months Ended

May 31, 2004


   

Three Months Ended

May 31, 2003


 
    
  

As

Reported


   

Discontinued

Operations


   

Combined(1)


   

As

Reported


   

Discontinued

Operations


   

Combined(1)


 
            
     (In thousands)  

Revenues

                                      

Rental income

   $ 32,980     1,857     34,837     24,944     6,436     31,380  

Management and servicing fees

     13,435     408     13,843     9,076     —       9,076  
    


 

 

 

 

 

Total revenues

     46,415     2,265     48,680     34,020     6,436     40,456  
    


 

 

 

 

 

Other operating income

                                      

Equity in earnings of unconsolidated entities

     43,738     —       43,738     4,947     —       4,947  

Interest income

     43,683     1     43,684     41,012     14     41,026  

Gains on sales of:

                                      

Real estate

     3,623     14,250     17,873     1,757     19,919     21,676  

Investment securities

     541     —       541     —       —       —    

Mortgage loans

     153     —       153     —       —       —    

Other, net

     (606 )   —       (606 )   359     (1 )   358  
    


 

 

 

 

 

Total other operating income

     91,132     14,251     105,383     48,075     19,932     68,007  
    


 

 

 

 

 

Costs and expenses

                                      

Cost of rental operations

     20,481     551     21,032     14,528     2,294     16,822  

General and administrative

     24,430     —       24,430     21,719     —       21,719  

Depreciation

     6,378     196     6,574     5,085     1,066     6,151  

Minority interests

     12     —       12     (29 )   —       (29 )

Interest

     27,715     636     28,351     25,513     1,912     27,425  
    


 

 

 

 

 

Total costs and expenses

     79,016     1,383     80,399     66,816     5,272     72,088  
    


 

 

 

 

 

Earnings before income taxes

     58,531     15,133     73,664     15,279     21,096     36,375  

Income taxes

     20,249     5,902     26,151     3,575     7,983     11,558  
    


 

 

 

 

 

Earnings from continuing operations

     38,282     9,231     47,513     11,704     13,113     24,817  
    


 

 

 

 

 

Discontinued operations:

                                      

Earnings from operating properties sold or held for sale, net of tax

     538     (538 )   —       962     (962 )   —    

Gains on sales of operating properties, net of tax

     8,693     (8,693 )   —       12,151     (12,151 )   —    
    


 

 

 

 

 

Earnings from discontinued operations

     9,231     (9,231 )   —       13,113     (13,113 )   —    
    


 

 

 

 

 

Net earnings

   $ 47,513     —       47,513     24,817     —       24,817  
    


 

 

 

 

 


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

 

20


    

Six Months Ended

May 31, 2004


   

Six Months Ended

May 31, 2003


    

As

Reported


   

Discontinued

Operations


    Combined(1)

   

As

Reported


  

Discontinued

Operations


    Combined(1)

               
     (In thousands)

Revenues

                                   

Rental income

   $ 59,026     3,273     62,299     49,718    13,413     63,131

Management and servicing fees

     22,932     804     23,736     18,556    (4 )   18,552
    


 

 

 
  

 

Total revenues

     81,958     4,077     86,035     68,274    13,409     81,683
    


 

 

 
  

 

Other operating income

                                   

Equity in earnings of unconsolidated entities

     46,555     —       46,555     25,810    —       25,810

Interest income

     83,253     98     83,351     85,443    27     85,470

Gains on sales of:

                                   

Real estate

     4,572     36,196     40,768     9,302    27,035     36,337

Investment securities

     17,877     —       17,877     —      —       —  

Mortgage loans

     153     —       153     —      —       —  

Other, net

     (800 )   —       (800 )   1,694    (1 )   1,693
    


 

 

 
  

 

Total other operating income

     151,610     36,294     187,904     122,249    27,061     149,310
    


 

 

 
  

 

Costs and expenses

                                   

Cost of rental operations

     36,417     1,203     37,620     28,247    4,674     32,921

General and administrative

     47,750     —       47,750     43,226    —       43,226

Depreciation

     11,907     409     12,316     10,134    2,418     12,552

Minority interests

     (73 )   —       (73 )   208    (1 )   207

Interest

     53,794     1,222     55,016     47,537    4,232     51,769

Loss on early extinguishment of debt

     3,440     —       3,440     —      —       —  
    


 

 

 
  

 

Total costs and expenses

     153,235     2,834     156,069     129,352    11,323     140,675
    


 

 

 
  

 

Earnings before income taxes

     80,333     37,537     117,870     61,171    29,147     90,318

Income taxes

     27,204     14,640     41,844     19,992    10,716     30,708
    


 

 

 
  

 

Earnings from continuing operations

     53,129     22,897     76,026     41,179    18,431     59,610
    


 

 

 
  

 

Discontinued operations:

                                   

Earnings from operating properties sold or held for sale, net of tax

     817     (817 )   —       1,940    (1,940 )   —  

Gains on sales of operating properties, net of tax

     22,080     (22,080 )   —       16,491    (16,491 )   —  
    


 

 

 
  

 

Earnings from discontinued operations

     22,897     (22,897 )   —       18,431    (18,431 )   —  
    


 

 

 
  

 

Net earnings

   $ 76,026     —       76,026     59,610    —       59,610
    


 

 

 
  

 

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

 

21


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

 

    

Three Months Ended

May 31, 2004


   

Three Months Ended

May 31, 2003


 
    

As

Reported


   

Discontinued

Operations


   

Combined(1)


   

As

Reported


   

Discontinued

Operations


   

Combined(1)


 
              
     (In thousands)  

Revenues and other operating income

                                      

Real estate properties

   $ 84,617     16,516     101,133     34,545     26,368     60,913  

Real estate loans

     15,081     —       15,081     10,564     —       10,564  

Real estate securities

     37,849     —       37,849     36,986     —       36,986  
    


 

 

 

 

 

Total revenues and other operating income

     137,547     16,516     154,063     82,095     26,368     108,463  
    


 

 

 

 

 

Costs and expenses

                                      

Real estate properties

     33,948     747     34,695     27,075     3,360     30,435  

Real estate loans

     1,164     —       1,164     1,100     —       1,100  

Real estate securities

     7,087     —       7,087     5,860     —       5,860  

Corporate and interest

     36,817     636     37,453     32,781     1,912     34,693  
    


 

 

 

 

 

Total costs and expenses

     79,016     1,383     80,399     66,816     5,272     72,088  
    


 

 

 

 

 

Earnings from continuing operations before income taxes

                                      

Real estate properties

     50,669     15,769     66,438     7,470     23,008     30,478  

Real estate loans

     13,917     —       13,917     9,464     —       9,464  

Real estate securities

     30,762     —       30,762     31,126     —       31,126  

Corporate and interest

     (36,817 )   (636 )   (37,453 )   (32,781 )   (1,912 )   (34,693 )
    


 

 

 

 

 

Earnings before income taxes

     58,531     15,133     73,664     15,279     21,096     36,375  

Income taxes

     20,249     5,902     26,151     3,575     7,983     11,558  
    


 

 

 

 

 

Earnings from continuing operations

     38,282     9,231     47,513     11,704     13,113     24,817  
    


 

 

 

 

 

Discontinued operations:

                                      

Earnings from operating properties sold or held for sale, net of tax

     538     (538 )   —       962     (962 )   —    

Gains on sales of operating properties, net of tax

     8,693     (8,693 )   —       12,151     (12,151 )   —    
    


 

 

 

 

 

Earnings from discontinued operations

     9,231     (9,231 )   —       13,113     (13,113 )   —    
    


 

 

 

 

 

Net earnings

   $ 47,513     —       47,513     24,817     —       24,817  
    


 

 

 

 

 


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

 

22


    

Six Months Ended

May 31, 2004


   

Six Months Ended

May 31, 2003


 
    

As

Reported


   

Discontinued

Operations


   

Combined(1)


   

As

Reported


   

Discontinued

Operations


   

Combined(1)


 
              
     (In thousands)  

Revenues and other operating income

                                      

Real estate properties

   $ 115,698     40,371     156,069     88,002     40,470     128,472  

Real estate loans

     28,078     —       28,078     23,174     —       23,174  

Real estate securities

     89,792     —       89,792     79,347     —       79,347  
    


 

 

 

 

 

Total revenues and other operating income

     233,568     40,371     273,939     190,523     40,470     230,993  
    


 

 

 

 

 

Costs and expenses

                                      

Real estate properties

     62,237     1,612     63,849     53,832     7,091     60,923  

Real estate loans

     2,209     —       2,209     2,184     —       2,184  

Real estate securities

     13,518     —       13,518     12,249     —       12,249  

Corporate and interest

     75,271     1,222     76,493     61,087     4,232     65,319  
    


 

 

 

 

 

Total costs and expenses

     153,235     2,834     156,069     129,352     11,323     140,675  
    


 

 

 

 

 

Earnings before income taxes

                                      

Real estate properties

     53,461     38,759     92,220     34,170     33,379     67,549  

Real estate loans

     25,869     —       25,869     20,990     —       20,990  

Real estate securities

     76,274     —       76,274     67,098     —       67,098  

Corporate and interest

     (75,271 )   (1,222 )   (76,493 )   (61,087 )   (4,232 )   (65,319 )
    


 

 

 

 

 

Earnings before income taxes

     80,333     37,537     117,870     61,171     29,147     90,318  

Income taxes

     27,204     14,640     41,844     19,992     10,716     30,708  
    


 

 

 

 

 

Earnings from continuing operations

     53,129     22,897     76,026     41,179     18,431     59,610  
    


 

 

 

 

 

Discontinued operations:

                                      

Earnings from operating properties sold or held for sale, net of tax

     817     (817 )   —       1,940     (1,940 )   —    

Gains on sales of operating properties, net of tax

     22,080     (22,080 )   —       16,491     (16,491 )   —    
    


 

 

 

 

 

Earnings from discontinued operations

     22,897     (22,897 )   —       18,431     (18,431 )   —    
    


 

 

 

 

 

Net earnings

   $ 76,026     —       76,026     59,610     —       59,610  
    


 

 

 

 

 


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

 

23


Three and six months ended May 31, 2004 compared to three and six months ended May 31, 2003

 

Net earnings for the three-month period ended May 31, 2004 were $47.5 million compared to $24.8 million for the same period in 2003. The increase was primarily due to (i) $39.5 million of higher gains on sales of real estate property assets, including sales of property assets within unconsolidated entities and gains on sales of property assets characterized as earnings from discontinued operations, (ii) higher management and servicing fee income from increased activity in our specially serviced portfolio and (iii) higher interest income primarily due to a higher average level of loan investments. These increases were partially offset by (i) higher general and administrative expenses and (ii) higher income tax expense primarily due to higher pretax earnings and a higher effective tax rate. Net earnings for the six-month period ended May 31, 2004 were $76.0 million compared to $59.6 million for the same period in 2003. The increase was primarily due to (i) $30.0 million of higher gains on sales of real estate property assets, including sales of property assets within unconsolidated entities and gains on sales of property assets characterized as earnings from discontinued operations, (ii) higher gains on sales of investment securities and (iii) higher management and servicing fee income. These increases were partially offset by (i) lower net rents (rental income less cost of rental operations, including net rents characterized as earnings from discontinued operations), primarily reflecting a smaller stabilized property portfolio for most of the first quarter of 2004, (ii) higher general and administrative expenses, (iii) a pretax loss of $3.4 million related to the redemption at a premium of $45.3 million principal amount of our 10.5% senior subordinated notes due 2009 and (iv) higher income tax expense.

 

On an as reported basis, revenues and other operating income for the three- and six-month periods ended May 31, 2004 were $137.5 million and $233.6 million, respectively, compared to $82.1 million and $190.5 million for the same respective periods in 2003. On a combined basis (i.e., including revenues and gains on sales of properties classified as discontinued operations), revenues and other operating income for the three- and six-month periods ended May 31, 2004 were $154.1 million and $273.9 million, respectively, compared to $108.5 million and $231.0 million for the same respective periods in 2003. The increase in revenues and other operating income on a combined basis for the three-month period was primarily due to (i) $39.5 million of higher gains on sales of real estate property assets, including sales of property assets within unconsolidated entities, (ii) higher management and servicing fee income, (iii) higher rental income primarily due to the acquisition of a portfolio of income producing properties in the first quarter of 2004, and (iv) higher interest income. The increase in revenues and other operating income on a combined basis for the six-month period was primarily due to (i) $30.0 million of higher gains on sales of real estate property assets, including sales of property assets within unconsolidated entities, (ii) higher gains on sales of investment securities and (iii) higher management and servicing fee income.

 

24


Real Estate Properties

 

    

Three Months Ended

May 31, 2004


   

Three Months Ended

May 31, 2003


 
    

As

Reported


   

Discontinued

Operations


  

Combined(1)


   

As

Reported


   

Discontinued

Operations


   

Combined(1)


 
               
     (In thousands)  

Revenues

                                     

Rental income

   $ 32,980     1,857    34,837     24,944     6,436     31,380  

Management fees

     319     408    727     1,082     —       1,082  

Other operating income

                                     

Equity in earnings of unconsolidated entities

     47,538     —      47,538     6,557     —       6,557  

Interest income

     268     1    269     195     14     209  

Gains on sales of real estate

     3,623     14,250    17,873     1,757     19,919     21,676  

Other, net

     (111 )   —      (111 )   10     (1 )   9  
    


 
  

 

 

 

Total revenues and other operating income

     84,617     16,516    101,133     34,545     26,368     60,913  
    


 
  

 

 

 

Costs and expenses

                                     

Cost of rental operations

     20,481     551    21,032     14,528     2,294     16,822  

General and administrative

     7,077     —      7,077     7,490     —       7,490  

Depreciation

     6,378     196    6,574     5,085     1,066     6,151  

Minority interests

     12     —      12     (28 )   —       (28 )
    


 
  

 

 

 

Total costs and expenses(2)

     33,948     747    34,695     27,075     3,360     30,435  
    


 
  

 

 

 

Earnings before income taxes

   $ 50,669     15,769    66,438     7,470     23,008     30,478  
    


 
  

 

 

 


(1) See discussion entitled, “Adoption of SFAS No. 144.”
(2) Costs and expenses do not include interest expense.

 

25


    

Six Months Ended

May 31, 2004


   

Six Months Ended

May 31, 2003


    

As

Reported


    Discontinued
Operations


   Combined(1)

    As
Reported


   Discontinued
Operations


    Combined(1)

    

(In thousands)

Revenues

                                  

Rental income

   $ 59,026     3,273    62,299     49,718    13,413     63,131

Management fees

     999     804    1,803     1,769    (4 )   1,765

Other operating income

                                  

Equity in earnings of unconsolidated entities

     51,005     —      51,005     26,953    —       26,953

Interest income

     342     98    440     250    27     277

Gains on sales of real estate

     4,572     36,196    40,768     9,302    27,035     36,337

Other, net

     (246 )   —      (246 )   10    (1 )   9
    


 
  

 
  

 

Total revenues and other operating income

     115,698     40,371    156,069     88,002    40,470     128,472
    


 
  

 
  

 

Costs and expenses

                                  

Cost of rental operations

     36,417     1,203    37,620     28,247    4,674     32,921

General and administrative

     13,993     —      13,993     15,250    —       15,250

Depreciation

     11,907     409    12,316     10,134    2,418     12,552

Minority interests

     (80 )   —      (80 )   201    (1 )   200
    


 
  

 
  

 

Total costs and expenses(2)

     62,237     1,612    63,849     53,832    7,091     60,923
    


 
  

 
  

 

Earnings before income taxes

   $ 53,461     38,759    92,220     34,170    33,379     67,549
    


 
  

 
  

 

Balance sheet data:

                                  

Operating properties and equipment, net

   $ 796,149     —      796,149     579,010    86,369     665,379

Assets held for sale

     —       —      —       89,393    (89,393 )   —  

Land held for investment

     89,472     —      89,472     53,152    —       53,152

Investments in unconsolidated entities

     445,299     —      445,299     257,377    —       257,377

Other assets

     32,561     —      32,561     44,307    3,024     47,331
    


 
  

 
  

 

Total segment assets

   $ 1,363,481     —      1,363,481     1,023,239    —       1,023,239
    


 
  

 
  

 

(1) See discussion entitled, “Adoption of SFAS No. 144.”
(2) Costs and expenses do not include interest expense.

 

Real estate properties include office buildings, rental apartment communities (market-rate and affordable housing communities, substantially all of which qualify for Low-Income Housing Tax Credits under Section 42 of the Internal Revenue Code), industrial/warehouse facilities, hotels, retail centers and land that we acquire, develop, reposition, manage and sell. These properties may be wholly owned or owned through partnerships or other entities that are either consolidated or accounted for by the equity method, and therefore reflected on our balance sheets only as investments in unconsolidated entities. Total revenues and other operating income from real estate properties include rental income from consolidated operating properties, equity in earnings of unconsolidated entities that own and operate real estate properties, gains on sales of properties or interests in those unconsolidated entities, and fees earned from managing those entities. Costs and expenses include the direct costs of operating the real estate properties, the related depreciation and the overhead associated with managing the properties and some of the entities.

 

26


Three and six months ended May 31, 2004 compared to three and six months ended May 31, 2003

 

Earnings before income taxes from real estate properties on an as reported basis for the three- and six-month periods ended May 31, 2004 were $50.7 million and $53.5 million, respectively, compared to $7.5 million and $34.2 million for the same respective periods in 2003. These increases were primarily due to higher gains on sales of real estate property assets, including sales of property assets within unconsolidated entities, and higher net rents. Earnings before income taxes on a combined basis for the three- and six-month periods ended May 31, 2004 were $66.4 million and $92.2 million, respectively, compared to $30.5 million and $67.5 million for the same respective periods in 2003. These increases were primarily due to higher gains on sales of real estate property assets, including sales of property assets within unconsolidated entities, partially offset by lower net rents.

 

Gains on sales of assets fluctuate from quarter to quarter primarily due to the timing of assets sales. Gains on sales of real estate property asset within unconsolidated entities were $41.3 million and $41.3 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $0.8 million and $18.5 million for the same respective periods in 2003. On an as reported basis, gains on sales of consolidated real estate property assets were $3.6 million and $4.6 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $1.8 million and $9.3 million for the same respective periods in 2003. On a combined basis, gains on sales of consolidated real estate property assets were $17.9 million and $40.8 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $21.7 million and $36.3 million for the same respective periods in 2003.

 

On an as reported basis, net rents were $12.5 million and $22.6 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $10.4 million and $21.5 million for the same respective periods in 2003. On a combined basis, net rents were $13.8 million and $24.7 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $14.6 million and $30.2 million for the same respective periods in 2003. The increase in net rents on an as reported basis for the three- and six-month periods ended May 31, 2004 compared to the same respective periods in the 2003 primarily resulted from a larger stabilized property portfolio, mostly due to several income producing properties acquired from The Newhall Land and Farming Company (“Newhall”) late in the first quarter of 2004, partially offset by the loss of a tenant in the third quarter of 2003 that had leased 100% of one of our office buildings and which made a $24 million payment last year to cancel its lease. On a combined basis, the reduction in net rents for the three- and six-month periods ended May 31, 2004 is due primarily to properties which were sold over the past twelve months.

 

27


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

 

     Net Book
Value


   Occupancy
Rate(1)


   Yield on Net
Book Value (2)


     (In thousands, except percentages)

Market-rate operating properties

                

Stabilized operating properties:

                

Office

   $ 118,826    88%    14%

Retail

     121,565    89%    12%

Industrial / warehouse

     33,063    100%    15%

Ground leases

     5,768    100%    13%
    

  
  

Commercial

     279,222    92%    13%

Hotel

     69,108    74%    6%
    

       
       348,330         12%
    

         

Under development or repositioning:

                

Office

     226,552          

Retail

     47,984          

Industrial / warehouse

     6,778          

Ground leases

     368          
    

         

Commercial

     281,682          

Hotel

     28,171          
    

         
       309,853          
    

         

Total market-rate operating properties

     658,183          

Affordable housing communities

     126,522          
    

         

Total operating properties

     784,705          

Furniture, fixtures and equipment

     11,444          
    

         

Total operating properties and equipment

   $ 796,149          
    

         

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

 

As of May 31, 2004 and 2003, our market-rate stabilized operating property portfolio, including assets held for sale, was yielding in total 12% and 13%, respectively, on net book value. The decrease in yield on our stabilized operating properties was primarily due to the loss of one large tenant in 2003 that occupied 100% of one of our office buildings, as discussed previously, and the acquisition of Newhall’s income producing properties during the first quarter of 2004, which were acquired at a price that results in a lower yield than our overall portfolio of stabilized properties. As of May 31, 2004 and 2003, our market-rate development or repositioning portfolio, including assets held for sale, was yielding in total 3% and 4%, respectively, on net book value.

 

Occupancy levels for our market-rate stabilized commercial real estate property portfolio, including assets held for sale, increased slightly to 92% at May 31, 2004, compared to 91% at May 31, 2003.

 

28


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

 

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

 

     May 31, 2004

 
     (In thousands)  

Operating properties

   $ 126,522  

Investments in unconsolidated entities

     20,482  

Debt and other

     (132,716 )
    


Net investment in affordable housing communities

   $ 14,288  
    


 

As of May 31, 2004, we had been awarded and held rights to $18.8 million in gross tax credits, compared with $86.5 million in gross tax credits at May 31, 2003. Our net investment in affordable housing communities at May 31, 2004 was $14.3 million, compared to $63.4 million at May 31, 2003. The decrease in tax credits and in our investment in affordable housing communities primarily reflects the sale and syndication of interests in affordable housing community entities. For certain syndicated affordable housing communities under development, we have recorded the receipt of syndication proceeds as liabilities under the deposit method of accounting. We expect to record the sale of these properties upon completion and lease up, which will reduce the balance of operating properties and debt related to affordable housing communities.

 

29


Real Estate Loans

 

    

Three Months Ended

May 31,


   

Six Months Ended

May 31,


 
     2004

   2003

    2004

   2003

 
     (In thousands)  

Revenues

                        

Management fees

   $ 236    175     532    686  

Other operating income

                        

Interest income

     13,976    10,507     26,916    22,251  

Equity in earnings (losses) of unconsolidated entities

     715    (103 )   476    251  

Gain on sales of mortgage loans

     153    —       153    —    

Other, net

     1    (15 )   1    (14 )
    

  

 
  

Total revenues and other operating income

     15,081    10,564     28,078    23,174  
    

  

 
  

Costs and expenses

                        

General and administrative

     1,164    1,100     2,209    2,184  
    

  

 
  

Total costs and expenses(1)

     1,164    1,100     2,209    2,184  
    

  

 
  

Earnings before income taxes

   $ 13,917    9,464     25,869    20,990  
    

  

 
  

Balance sheet data:

                        

Mortgage loans, net

   $ 568,089    548,271     568,089    548,271  

Investments in unconsolidated entities

     4,620    1,288     4,620    1,288  

Other assets

     7,836    2,579     7,836    2,579  
    

  

 
  

Total segment assets

   $ 580,545    552,138     580,545    552,138  
    

  

 
  


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

 

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

 

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

 

30


Three and six months ended May 31, 2004 compared to three and six months ended May 31, 2003

 

Earnings before income taxes from real estate loans for the three- and six-month periods ended May 31, 2004 were $13.9 million and $25.9 million, respectively, compared to $9.5 million and $21.0 million for the same respective periods in 2003. These increases were primarily attributable to higher interest income.

 

Interest income from real estate loans for the three- and six-month periods ended May 31, 2004 was $14.0 million and $26.9 million, respectively, compared to $10.5 million and $22.3 million for the same respective periods in 2003. These increases primarily reflect a higher average level of loan investments during 2004. The increase in the six-month period ended May 31, 2004 was partially offset by income in the first quarter of 2003 realized from the payoff of several loan investments we had acquired at a discount.

 

During the quarter ended May 31, 2004, we did not fund any new B-note investments and we received $28.0 million from the payment in full of two B-note investments, reducing the total B-note principal balance to $492.8 million at May 31, 2004.

 

31


Real Estate Securities

 

    

Three Months Ended

May 31,


   

Six Months Ended

May 31,


 
     2004

    2003

    2004

    2003

 
     (In thousands)  

Revenues

                          

Management and servicing fees

   $ 12,880     7,819     21,401     16,101  

Other operating income

                          

Interest income

     29,439     30,310     55,995     62,942  

Equity in losses of unconsolidated entities

     (4,515 )   (1,507 )   (4,926 )   (1,394 )

Gains on sales of investment securities

     541     —       17,877     —    

Other, net

     (496 )   364     (555 )   1,698  
    


 

 

 

Total revenues and other operating income

     37,849     36,986     89,792     79,347  
    


 

 

 

Costs and expenses

                          

General and administrative

     7,087     5,860     13,511     12,242  

Minority interests

     —       —       7     7  
    


 

 

 

Total costs and expenses(1)

     7,087     5,860     13,518     12,249  
    


 

 

 

Earnings before income taxes

   $ 30,762     31,126     76,274     67,098  
    


 

 

 

Balance sheet data:

                          

Investment securities

   $ 952,026     1,333,011     952,026     1,333,011  

Investments in unconsolidated entities

     48,325     102,478     48,325     102,478  

Other assets

     38,567     19,522     38,567     19,522  
    


 

 

 

Total segment assets

   $ 1,038,918     1,455,011     1,038,918     1,455,011  
    


 

 

 


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

 

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

 

Three and six months ended May 31, 2004 compared to three and six months ended May 31, 2003

 

Earnings before income taxes from real estate securities for the three- and six-month periods ended May 31, 2004 were $30.8 million and $76.3 million, respectively, compared to $31.1 million and $67.1 million for the same respective periods in 2003. For the three-month period ended May 31, 2004, the slight decrease reflects higher equity in losses of unconsolidated entities, higher operating

 

32


expenses and slightly lower interest income, mostly offset by higher management and servicing fee income. The increase for the six-month period reflects higher gains on sales of investment securities and higher management and servicing fee income, partially offset by lower interest income, higher equity in losses of unconsolidated entities, and higher operating expenses.

 

Equity in losses of unconsolidated entities were $4.5 million and $4.9 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $1.5 million and $1.4 million for the same respective periods in 2003. The decline in earnings was primarily due to reduced income from Madison because of lower interest income resulting from the timing and amount of expected principal collections related to short-term floating-rate securities owned by the venture and higher interest expense due to a refinancing within the venture. Madison refinanced its debt in the second quarter of 2004 through a resecuritization of most of its CMBS portfolio (the “CDO”). Approximately $1.1 billion face amount of non-investment grade CMBS was resecuritized into various classes of non-recourse bonds comprised of $524 million face amount of investment grade rated notes, $120 million face amount of non-investment grade rated notes, and $412 million of unrated notes. The investment grade notes were sold to one of the partners, generating sufficient proceeds to repay Madison’s existing debt. The non-investment grade notes were distributed pro rata to the Madison partners, and Madison retained the unrated notes. The CDO, which effectively match-term finances Madison’s assets with its liabilities, is being accounted for as a financing. At the end of the second quarter of 2004, our investment in Madison was $42.7 million. Since inception, we have received $179.6 million in cash distributions and fees from Madison on an original investment of $90.1 million.

 

Interest income was $29.4 million and $56.0 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $30.3 million and $62.9 million for the same respective periods in 2003. These decreases resulted from a lower average level of CMBS investments during the 2004 periods and a higher level of write-downs on certain bonds due to cash flow projections where we utilized the highest level of loss severity among possible outcomes, partially offset by the collection of purchase discounts due to the early payoff of several seasoned investments during the second quarter of 2004.

 

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

 

Since we invest in subordinated classes of CMBS, we generally do not receive principal payments until the principal of the senior classes of an issue is paid in full. However, we are currently receiving principal payments from 18 classes of our CMBS securities, and 41 classes (excluding securities sold in resecuritization transactions in 2004, 2003 and 2002) have reached economic maturity either through the collection of principal, liquidation of the trust, or sale. Through resecuritization transactions completed in 2004, 2003 and 2002, we also sold an additional 121 classes of securities and portions of 101 other classes.

 

33


During the quarter ended May 31, 2004, we acquired $155.0 million face amount of non-investment grade fixed-rate CMBS for $78.9 million. The following is a summary of the CMBS portfolio we held at May 31, 2004, categorized based on the bonds’ ratings at the time of purchase:

 

    

Face

Amount


   Weighted
Average
Interest
Rate


   Book
Value


   % of
Face
Amount


   Weighted
Average
Cash
Yield(1)


   Weighted
Average
Book
Yield(2)


     (In thousands, except percentages)

Fixed-rate:

                                 

BB rated or above

   $ 517,292    6.35%    $ 358,920    69.4%    9.0%    11.6%

B rated

     471,846    6.69%      222,633    47.2%    12.4%    13.4%

Unrated

     1,258,875    5.31%      186,551    14.8%    31.4%    22.2%
    

  
  

  
  
  

Total

     2,248,013    5.84%      768,104    34.2%    15.4%    14.7%

Floating-rate/short-term:

                                 

BB rated or above

     53,259    7.09%      35,741    67.1%    10.6%    7.5%

B rated

     31,918    7.61%      30,071    94.2%    8.0%    8.3%

Unrated

     57,333    12.64%      30,246    52.8%    24.5%    15.7%
    

  
  

  
  
  

Total

     142,510    9.44%      96,058    67.4%    14.1%    10.3%

Total amortized cost

     2,390,523    6.05%      864,162    36.1%    15.3%    14.2%

Excess of estimated fair value over amortized cost

     —             87,864               
    

       

              

Total CMBS portfolio(3)

   $ 2,390,523         $ 952,026               
    

       

              

(1) Cash yield is determined by annualizing the actual cash received during the month of May 2004, and dividing the result by the book value at May 31, 2004.
(2) Book yield is determined by annualizing the interest income for the month of May 2004, and dividing the result by the book value at May 31, 2004.
(3) This table excludes CMBS owned through unconsolidated entities.

 

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

 

Management and servicing fee income was $12.9 million and $21.4 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $7.8 million and $16.1 million for the same respective periods in 2003. The increases were primarily due to the growth of our specially serviced portfolio.

 

Gains on sales of securities were $17.9 million for the six months ended May 31, 2004, compared to $0.0 million for the same period in 2003. During the current year, gains on sales of securities were primarily due to the sale in the first quarter of 2004 of $28.7 million face amount of investment grade CMBS through a resecuritization of a non-investment grade rated CMBS bond with a face amount of $50.4 million. The $28.7 million face amount of investment grade bonds were sold to unrelated third parties for total cash proceeds of $30.3 million, resulting in a pretax gain of $17.3 million. We retained the remaining $21.7 million face amount of non-investment grade rated bonds. The amortized cost of the retained interest at May 31, 2004 was $7.5 million.

 

34


Operating expenses were $7.1 million and $13.5 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $5.9 million and $12.2 million for the same respective periods in the prior year, primarily due to increases in personnel and out-of-pocket expenses directly related to the growth of our CMBS portfolio and increased special servicing activity.

 

Corporate and Interest Expense

 

Three and six months ended May 31, 2004 compared to three and six months ended May 31, 2003

 

Corporate costs and expenses, excluding interest expense and loss on early extinguishment of debt, were $9.1 million and $18.0 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $7.3 million and $13.6 million for the same respective periods in 2003. The increases for both the three- and six-month periods were primarily due to increased staffing levels and amortization related to restricted stock granted to senior officers in the second quarter of 2003.

 

On an as reported basis, interest expense was $27.7 million and $53.8 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $25.5 million and $47.5 million for the same respective periods in 2003. On a combined basis, interest expense was $28.4 million and $55.0 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $27.4 million and $51.8 million for the same respective periods in 2003. The increase for the three-month period ended May 31, 2004 compared to the same period in 2003 was primarily due to higher average debt balances. The increase for the six-month period ended May 31, 2004 compared to the same period in 2003 was primarily due to higher average debt balances and slightly higher interest rates. The weighted average interest rate on outstanding debt was 5.7% at May 31, 2004, compared to 5.6% at May 31, 2003.

 

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

 

Income Tax Expense

 

Three and six months ended May 31, 2004 compared to three and six months ended May 31, 2003

 

On an as reported basis, income tax expense was $20.2 million and $27.2 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $3.6 million and $20.0 million for the same respective periods in 2003. On a combined basis, income tax expense was $26.2 million and $41.8 million for the three- and six-month periods ended May 31, 2004, respectively, compared to $11.6 million and $30.7 million for the same periods in 2003. On a combined basis, the effective tax rate for the six-month period was 35.5% in 2004 and 34.0% in 2003. The increase in the effective tax rate was primarily due to lower affordable housing tax credits.

 

2. LIQUIDITY AND FINANCIAL RESOURCES

 

Our operating activities provided $28.6 million of cash for the six-month period ended May 31, 2004, compared to $17.0 million for the same period in 2003. The increase in cash provided by operating activities was primarily due to a greater increase in accounts payable and accrued liabilities, primarily due to less of a reduction in our deferred tax liability and a greater level of deposits from affordable housing syndications. This increase was partially offset by an increase in other assets and lower net earnings after adjusting for the effects of non-cash items whose contributions to cash flow are reflected in cash from investing activities below.

 

35


Our investing activities used $298.1 million of cash for the six-month period ended May 31, 2004, compared to $155.5 million for the same period in 2003. The increase in cash used in investing activities was primarily due to (i) a higher level of investment spending on operating properties and investments in unconsolidated entities, primarily related to the acquisition of Newhall in the first quarter of 2004, and (ii) a higher level of investment spending on land held for investment. These increases in cash used in investing activities were partially offset by (i) higher proceeds from sales of operating properties, (ii) a lower level of investment spending on investment securities, (iii) higher proceeds from sales of investment securities, primarily related to the resecuritization transaction in the first quarter of 2004, and (iv) higher distributions of capital from unconsolidated entities, primarily due to a higher level of sales of property assets within unconsolidated entities.

 

Our financing activities provided $275.3 million of cash for the six-month period ended May 31, 2004, compared to $142.9 million for the same period in 2003. This increase in cash provided by financing activities was primarily due to a lower level of purchases and retirements of treasury stock and higher net proceeds from mortgage notes and other debt payable, partially offset by lower net proceeds under repurchase agreements and revolving credit lines.

 

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

 

At May 31, 2004, we had $1.8 billion of available liquidity, which included just under $1.8 billion of cash and availability under existing credit facilities, and $42.6 million under committed project level term financings.

 

We have a $400.0 million unsecured revolving credit facility, which is recourse to us and matures in July 2006 assuming a one-year extension option is exercised. At May 31, 2004, this facility had an outstanding balance of $3.2 million, and we had $12.3 million of outstanding letters of credit utilizing this facility. Interest is variable and is based on a range of LIBOR plus 175 – LIBOR plus 325, depending on our leverage. At May 31, 2004, interest was LIBOR plus 200. The facility contains certain financial tests and restrictive covenants, none of which are currently expected to restrict our activities.

 

We have various secured revolving lines of credit with an aggregate commitment of $446.3 million, all of which is recourse to us. At May 31, 2004, $58.3 million was outstanding under these revolving lines of credit. Interest is variable and is based on a range of LIBOR plus 75 – LIBOR plus 250. These lines are collateralized by CMBS and mortgage loans with maximum maturity through February 2009. The agreements contain certain financial tests and restrictive covenants, none of which are currently expected to restrict our activities.

 

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

 

36


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

 

Commitment

Amount


   Outstanding
Amount


  

Collateral Type


  

Interest Rate


  

Maturity Date


  

Recourse


(In thousands)                    
$   100,000    $ 51,304    CMBS    LIBOR + 150-250    April 2007    Non-recourse
150,000      52,816    CMBS    LIBOR + 125-225    April 2005    Non-recourse
3,687      3,687    CMBS    LIBOR + 125    June 2004    Non-recourse
430,000      18,626    CMBS    LIBOR + 150-300    January 2008    Limited recourse(1)
120,000      4,385    CMBS    LIBOR + 150-190    January 2005    Recourse
75,000      —      B-notes    LIBOR + 150-225    February 2006    Non-recourse
100,000      23,289    B-notes    LIBOR + 150-225    February 2007    Recourse
100,000      —      B-notes    LIBOR + 175-275    November 2007    Recourse

  

                   
$1,078,687    $ 154,107                    

  

                   

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

 

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

 

At May 31, 2004, we had $985.2 million of long-term unsecured senior subordinated notes outstanding. $235.0 million of these notes bear interest at 5.5%, are due in March 2023, and can be converted into our common stock at a conversion price of $45.28 under certain circumstances. $350.0 million of these notes bear interest at 7.625% and are due in July 2013. $400.2 million of these notes bear interest at 7.25% and are due in October 2013.

 

Approximately 37% of our existing indebtedness bears interest at variable rates. However, most of our investments generate interest or rental income at essentially fixed rates. We have entered into derivative financial instruments, primarily interest rate swaps, to manage our interest costs and hedge against risks associated with changing interest rates on our debt portfolio. We believe our interest rate risk management policy is generally effective. Nonetheless, our profitability may be adversely affected during particular periods as a result of changing interest rates. Additionally, hedging transactions using derivative instruments involve risks such as counterparty credit risk. The counterparties to our arrangements are major financial institutions, rated A- or better, with which we and our affiliates may also have other financial relationships.

 

We continue our efforts to maintain a highly match-funded balance sheet. In order to minimize the effects of interest rate risk, we seek to match fixed-rate assets with fixed-rate debt, and floating-rate assets with floating-rate debt. As of May 31, 2004, we estimate that a 100 basis point change in LIBOR would impact our net earnings by $0.5 million, or $0.02 per share diluted. At May 31, 2004, our weighted average debt maturity was 6.6 years, which we believe matches well with our expected asset holdings.

 

During the quarter ended May 31, 2004, we did not purchase any shares of our common stock under our stock repurchase program. As of May 31, 2004, there were 3.4 million shares remaining that we were authorized to buy back under our stock repurchase program. During the quarter ended May 31, 2004, we purchased 40,000 shares of our common stock under our Employee Share Repurchase Plan.

 

37


OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

Commitments and Contingent Obligations

 

We are obligated, under various types of agreements, to provide guarantees. In accordance with SFAS No. 5, “Accounting for Contingencies,” we have recorded $6.9 million of liabilities related to obligations under certain guarantees, where payments are considered to be both probable and reasonably estimable. In addition, in accordance with SFAS No. 66, “Accounting for Sales of Real Estate,” we have recorded $3.6 million of liabilities representing our maximum exposure to loss under non-operating guarantees and operating guarantees of an extended duration which we provided at the time of sale of certain interests in affordable housing community entities, even though we do not expect to be required to perform under these guarantees. Except for the amounts described above, our guarantees and similar commitments are not reflected in our financial statements. At May 31, 2004, they include:

 

          Amount of Commitment Expiration Per Period

     Outstanding
Commitments


   Less Than
1 Year


   1 - 3
Years


   4 - 5
Years


   After 5
Years


     (In millions)

Standby letters of credit

   $ 13.4    13.4    —      —      —  

Guarantees of debt(1)

     35.5    14.8    14.1    6.0    0.6

Limited maintenance guarantees

     238.3    20.0    18.3    —      200.0

Committed capital contributions

     35.1    32.5    2.6    —      —  

Performance/surety bonds

     36.5    10.1    —      1.0    25.4

Affordable housing communities - other

     35.0    16.8    12.0    6.0    0.2
    

  
  
  
  

Total commitments

   $ 393.8    107.6    47.0    13.0    226.2
    

  
  
  
  

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

 

Retained Interests in Assets Transferred to Unconsolidated Entities

 

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

 

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

 

38


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

 

Investments in Unconsolidated Entities

 

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

 

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

 

39


At May 31, 2004, we had investments in unconsolidated entities of $498.2 million. Summarized financial information on a combined 100% basis related to our investments in unconsolidated entities accounted for by the equity method at May 31, 2004 (based upon information provided by these entities), follows:

 

     LNR
Investment


   LNR
Financial
Interest(1)


 

Total

Entity

Assets


   Total
Entity
Liabilities


 
     (In thousands, except percentages)  

Properties:

                        

Single-asset entities

   $ 63,799    50% - 80%   $ 276,465    170,481 (2)

Investments with Lennar:

                        

LandSource

     97,779    50%     322,083    126,324 (3)

Newhall

     193,985    50%     988,365    600,397  

Other

     39,730    13% - 50%     189,613    104,371 (4)

Affordable housing communities

     20,482    <1% - 50%     490,633    339,922 (5)
    

      

  

       415,775          2,267,159    1,341,495  

International

     29,525    37% - 50%     188,212    104,117  
    

      

  

       445,300          2,455,371    1,445,612  

Loans:

                        

Discounted portfolios of commercial mortgage loans

     4,620    15% - 50%     36,080    26,260  

Securities:

                        

Madison

     42,654    26%     706,881    538,756  

Other

     5,671    50% - 70%     47,810    33,025  
    

      

  

       48,325          754,691    571,781  
    

      

  

Total

   $ 498,245        $ 3,246,142    2,043,653 (6)
    

      

  


(1) Although we may own a majority financial interest in certain entities, we do not consolidate those non-VIE entities in which control is shared or in which less than a controlling interest is held. See further discussion under the heading of “Basis of Presentation and Consolidation” within Note 1 to our unaudited consolidated condensed financial statements.
(2) Only $8.6 million is recourse to us.
(3) Only $7.1 million is recourse to us.
(4) Only $13.0 million is recourse to us.
(5) Only $6.8 million is recourse to us.
(6) Debt is non-recourse to us except for the $35.5 million noted in footnotes 2, 3, 4, and 5 above and in the Commitments and Contingent Obligations table above.

 

3. CRITICAL ACCOUNTING POLICIES

 

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

 

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

 

40


4. NEW ACCOUNTING PRONOUCEMENTS

 

Information about new accounting pronouncements appears in Note 1 to the unaudited consolidated condensed financial statements in Item 1.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There has been no material change in quantitative or qualitative market risk since November 30, 2003. See our Annual Report on Form 10-K for the year ended November 30, 2003 for further discussion.

 

Item 4. Controls and Procedures.

 

For many years we have had procedures in place for gathering the information that is needed to enable us to file required quarterly and annual reports with the Securities and Exchange Commission (“SEC”). However, because of additional disclosure requirements imposed by the SEC in August 2002, many of which were required by the Sarbanes-Oxley Act of 2002, we formed a committee consisting of the people who are primarily responsible for the preparation of those reports, including our General Counsel and our Principal Accounting Officer, to review and formalize our procedures, and to have ongoing responsibility for designing and implementing our disclosure controls and procedures (i.e., the controls and procedures by which we ensure that information we are required to disclose in the annual and quarterly reports we file with the SEC is processed, summarized and reported within the required time periods). On June 15, 2004, our Chief Executive Officer and Chief Financial Officer participated in an evaluation by that committee of our disclosure controls and procedures. Based upon their participation in that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of May 31, 2004, our disclosure controls and procedures were adequately designed to ensure that all the required information was disclosed on a timely basis in our reports filed under the Securities Exchange Act.

 

Our Chief Executive Officer and Chief Financial Officer also participated in an evaluation on June 15, 2004, by our management of any changes in our internal control over financial reporting that occurred during the quarter ended May 31, 2004. That evaluation did not identify any changes that have materially affected, or are likely to materially affect, our internal controls over financial reporting.

 

41


Part II. OTHER INFORMATION

 

Item 1. 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, in the aggregate, have a material adverse effect upon us.

 

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

 

(e) Issuer Purchases of Equity Securities

 

Month


  

Total
Number of
Shares

Purchased(1)


   Average
Price Paid
per Share


   Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs(1)


  

Maximum

Number of
Shares that May

Yet Be
Purchased
Under the Plans
or Programs(2)


December 2003

   —        —      —      3,390,375

January 2004

   90,000    $ 49.445    90,000    3,390,375

February 2004

   —        —      —      3,390,375

March 2004

   —        —      —      3,390,375

April 2004

   40,000    $ 53.650    40,000    3,390,375

May 2004

   —        —      —      3,390,375

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

 

Item 3. Not applicable.

 

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

 

The following matters were resolved by vote at our Annual Meeting of Stockholders held on April 21, 2004:

 

  1) All Board of Director nominees were re-elected/elected to hold office until 2007. The results of the vote were as follows:

 

Common Stock:

 

     Votes For

   Votes Withheld

Brian L. Bilzin (re-elected)

   11,476,624    5,485,715

Connie Mack (re-elected)

   16,536,542    425,797

James M. Carr (elected)

   16,556,089    406,250

 

Class B Common Stock:

 

     Votes For

   Votes Withheld

Brian L. Bilzin (re-elected)

   96,613,570    —  

Connie Mack (re-elected)

   96,613,570    —  

James M. Carr (elected)

   96,613,570    —  

 

  2) The stockholders approved the LNR Property Corporation 2003 Incentive Compensation Plan. The results of the vote were as follows:

 

     Votes For

   Votes
Against


   Votes
Abstaining


Common Stock

   16,254,717    692,991    14,631

Class B Common Stock

   96,542,070    71,500    —  

 

  3) The stockholders approved the LNR Property Corporation 2003 Non-Qualified Deferred Compensation Plan. The results of the vote were as follows:

 

     Votes For

   Votes
Against


   Votes
Abstaining


  

Broker

Non-Votes


Common Stock

   12,198,482    1,209,324    106,157    3,448,376

Class B Common Stock

   96,449,130    71,500    —      92,940

 

Item 5. Not applicable.

 

Item 6. Exhibits and Reports on Form 8-K.

 

 
(a)    Exhibits:
     See Exhibit Index following the signature page, which is incorporated herein by reference.
     The Exhibits listed in the accompanying Exhibit Index are filed as part of this report.
(b)    Reports on Form 8-K:
     On March 24, 2004, we filed a report on Form 8-K that reported information under Items 7 and 12.

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

 

Date: July 15, 2004

 

/s/ Shelly Rubin


   

Shelly Rubin

   

Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit Number

 

Description


        10.1   Change in Control Agreement dated April 22, 2004, by and between LNR Property Corporation and Stuart A. Miller.
        10.2   Change in Control Agreement dated April 22, 2004, by and between LNR Property Corporation and Jeffrey P. Krasnoff.
        10.3   Change in Control Agreement dated April 22, 2004, by and between LNR Property Corporation and Ronald E. Schrager.
        10.4   Change in Control Agreement dated April 22, 2004, by and between LNR Property Corporation and Robert B. Cherry.
        10.5   Change in Control Agreement dated April 22, 2004, by and between LNR Property Corporation and Shelly Rubin.
        10.6   Change in Control Agreement dated April 22, 2004, by and between LNR Property Corporation and Mark A. Griffith.
        10.7   Change in Control Agreement dated April 22, 2004, by and between LNR Property Corporation and David O. Team.
        31   Rule 13a-14(a) Certifications.
        32   Section 1350 Certifications.

 

45