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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 2002
COMMISSION FILE NO. 1-13038
CRESCENT REAL ESTATE EQUITIES COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 52-1862813
- --------------------------------------------- ---------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (817) 321-2100
Number of shares outstanding of each of the registrant's classes of preferred
and common shares, as of August 7, 2002.
Series A Preferred Shares, par value $.01 per share: 10,800,000
Series B Preferred Shares, par value $.01 per share: 3,400,000
Common Shares, par value $.01 per share: 103,787,698
- --------------------------------------------------------------------------------
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 twelve (12) months (or for such shorter period that the registrant
was required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
--- ---
CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001
(audited)............................................................................. 2
Consolidated Statements of Operations for the three and six months ended June
30, 2002 and 2001 (unaudited)......................................................... 3
Consolidated Statement of Shareholders' Equity for the six months ended
June 30, 2002 (unaudited)............................................................. 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2002
and 2001 (unaudited).................................................................. 5
Notes to Financial Statements......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 40
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 95
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 95
Item 2. Changes in Securities................................................................. 95
Item 3. Defaults Upon Senior Securities....................................................... 95
Item 4. Submission of Matters to a Vote of Security Holders................................... 96
Item 5. Other Information..................................................................... 96
Item 6. Exhibits and Reports on Form 8-K...................................................... 96
1
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED) (AUDITED)
ASSETS:
Investments in real estate:
Land $ 312,337 $ 249,266
Land held for investment or development 473,138 92,951
Building and improvements 3,051,494 2,938,669
Furniture, fixtures and equipment 108,580 72,247
Properties held for disposition, net 47,470 64,694
Less - accumulated depreciation (720,350) (637,904)
------------- -------------
Net investment in real estate 3,272,669 2,779,923
Cash and cash equivalents 67,584 36,285
Restricted cash and cash equivalents 96,576 115,531
Accounts receivable, net 40,601 28,654
Deferred rent receivable 66,482 66,362
Investments in real estate mortgages and equity
of unconsolidated companies 532,976 838,317
Notes receivable, net 109,090 132,065
Income tax asset-current and deferred, net 37,671 --
Other assets, net 199,131 145,012
------------- -------------
Total assets $ 4,422,780 $ 4,142,149
============= =============
LIABILITIES:
Borrowings under Credit Facility $ 136,500 $ 283,000
Notes payable 2,335,931 1,931,094
Accounts payable, accrued expenses and other liabilities 339,655 220,068
------------- -------------
Total liabilities 2,812,086 2,434,162
------------- -------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS:
Operating partnership, 6,591,234 and 6,594,521 units,
respectively 63,352 69,910
Consolidated real estate partnerships 95,894 232,137
------------- -------------
Total minority interests 159,246 302,047
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred shares, $.01 par value, authorized 100,000,000 shares:
6 3/4% Series A Convertible Cumulative Preferred Shares,
liquidation preference $25.00 per share,
10,800,000 and 8,000,000 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively 248,160 200,000
9 1/2% Series B Cumulative Preferred Shares,
liquidation preference of $25.00 per share,
3,400,000 shares issued and outstanding at June 30, 2002 81,923 --
Common shares, $.01 par value, authorized 250,000,000 shares,
123,975,115 and 123,396,017 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively 1,233 1,227
Additional paid-in capital 2,240,125 2,234,360
Deferred compensation on restricted shares (5,253) --
Accumulated deficit (699,915) (638,435)
Accumulated other comprehensive income (26,587) (31,484)
------------- -------------
1,839,686 1,765,668
Less - shares held in treasury, at cost, 20,270,953 and 18,770,418
common shares at June 30, 2002 and December 31, 2001, respectively (388,238) (359,728)
------------- -------------
Total shareholders' equity 1,451,448 1,405,940
------------- -------------
Total liabilities and shareholders' equity $ 4,422,780 $ 4,142,149
============= =============
The accompanying notes are an integral part of these financial statements.
2
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
REVENUE:
Office property $ 141,540 $ 155,426 $ 285,011 $ 308,229
Resort/Hotel property 53,523 16,125 92,047 32,074
Residential Development property 84,985 -- 133,050 --
Interest and other income 1,843 17,634 4,069 26,637
--------- --------- --------- ---------
Total revenue 281,891 189,185 514,177 366,940
--------- --------- --------- ---------
EXPENSE:
Office property real estate taxes 20,651 22,059 41,923 44,747
Office property operating expenses 42,130 44,690 86,685 88,249
Resort/Hotel property expense 42,212 -- 66,102 --
Residential Development property expense 76,994 -- 119,209 --
Corporate general and administrative 5,333 6,889 11,725 12,153
Interest expense 46,450 46,833 88,722 94,281
Amortization of deferred financing costs 2,701 2,307 5,021 4,732
Depreciation and amortization 35,329 30,446 69,151 60,459
Impairment and other charges related
to real estate assets -- 13,174 -- 15,324
--------- --------- --------- ---------
Total expense 271,800 166,398 488,538 319,945
--------- --------- --------- ---------
Operating income 10,091 22,787 25,639 46,995
--------- --------- --------- ---------
OTHER INCOME AND EXPENSE:
Equity in net income (loss) of unconsolidated companies:
Office properties 1,471 1,228 2,781 2,321
Residential development properties 6,179 9,732 18,662 20,440
Temperature-controlled logistics properties (417) 1,632 (727) 4,351
Other (465) (636) (4,526) 1,210
--------- --------- --------- ---------
Total equity in net income of unconsolidated companies 6,768 11,956 16,190 28,322
--------- --------- --------- ---------
Loss on property sales, net -- (702) -- (372)
--------- --------- --------- ---------
Total other income and expense 6,768 11,254 16,190 27,950
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS,
DISCONTINUED OPERATIONS, EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 16,859 34,041 41,829 74,945
Minority interests (5,059) (8,337) (13,102) (18,089)
Income tax (expense) benefit (418) -- 3,865 --
--------- --------- --------- ---------
INCOME BEFORE DISCONTINUED OPERATIONS, EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 11,382 25,704 32,592 56,856
Discontinued operations - income and gain on assets sold and held for sale 569 60 3,785 156
Extraordinary item - extinguishment of debt -- (10,802) -- (10,802)
Cumulative effect of a change in accounting principle -- -- (10,465) --
--------- --------- --------- ---------
NET INCOME 11,951 14,962 25,912 46,210
6 3/4% Series A Preferred Share distributions (4,215) (3,375) (7,590) (6,750)
9 1/2% Series B Preferred Share distributions (1,009) -- (1,009) --
--------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 6,727 $ 11,587 $ 17,313 $ 39,460
========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE DATA:
Net income before discontinued operations, extraordinary item and
cumulative effect of a change in accounting principle $ 0.06 $ 0.21 $ 0.23 $ 0.47
Discontinued operations - income and gain on assets sold and held for sale 0.01 -- 0.04 --
Extraordinary item - extinguishment of debt -- (0.10) -- (0.10)
Cumulative effect of a change in accounting principle -- -- (0.10) --
--------- --------- --------- ---------
Net income - basic $ 0.07 $ 0.11 $ 0.17 $ 0.37
========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE DATA:
Net income before discontinued operations, extraordinary item and
cumulative effect of a change in accounting principle $ 0.06 $ 0.20 $ 0.23 $ 0.46
Discontinued operations - income and gain on assets sold and held for sale 0.01 -- 0.04 --
Extraordinary item - extinguishment of debt -- (0.10) -- (0.10)
Cumulative effect of a change in accounting principle -- -- (0.10) --
--------- --------- --------- ---------
Net income - diluted $ 0.07 $ 0.10 $ 0.17 $ 0.36
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
3
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENT
OF SHAREHOLDERS' EQUITY
(dollars in thousands)
(unaudited)
Series A Series B
Preferred Shares Preferred Shares Treasury Shares Common Shares
--------------------- --------------------- ---------------------- -------------
Shares Net Value Shares Net Value Shares Net Value Shares
---------- ---------- ---------- --------- ---------- --------- -----------
SHAREHOLDERS' EQUITY,
December 31, 2001 8,000,000 $ 200,000 -- $ -- 18,770,418 $(359,728) 123,396,017
Issuance of Preferred Shares 2,800,000 48,160 3,400,000 81,923 -- -- --
Issuance of Common Shares -- -- -- -- -- -- 4,424
Exercise of Common Share Options -- -- -- -- -- -- 268,100
Deferred Compensation -- -- -- -- -- -- 300,000
Issuance of Shares in Exchange for Operating
Partnership Units -- -- -- -- -- -- 6,574
Share Repurchases -- -- -- -- 1,500,535 (28,510) --
Dividends Paid -- -- -- -- -- -- --
Net Income -- -- -- -- -- -- --
Unrealized Loss on Marketable Securities -- -- -- -- -- -- --
Unrealized Net Gain on Cash Flow Hedges -- -- -- -- -- -- --
---------- ---------- ---------- ------- ---------- --------- -----------
SHAREHOLDERS' EQUITY, June 30, 2002 10,800,000 $ 248,160 3,400,000 $81,923 20,270,953 $(388,238) 123,975,115
========== ========== ========== ======= ========== ========= ===========
Deferred Accumulated
Additional Compensation Other
Common Shares Paid-in on Restricted Accumulated Comprehensive
Par Value Capital Shares Deficit Income Total
------------- ----------- ------------- ----------- ------------- -----------
SHAREHOLDERS' EQUITY,
December 31, 2001 $ 1,227 $ 2,234,360 $ -- $ (638,435) $ (31,484) $ 1,405,940
Issuance of Preferred Shares -- -- -- -- -- 130,083
Issuance of Common Shares -- 84 -- -- -- 84
Exercise of Common Share Options 3 409 -- -- -- 412
Deferred Compensation 3 5,250 (5,253) -- -- --
Issuance of Shares in Exchange for Operating
Partnership Units -- 22 -- -- -- 22
Share Repurchases -- -- -- -- -- (28,510)
Dividends Paid -- -- -- (78,793) -- (78,793)
Net Income -- -- -- 17,313 -- 17,313
Unrealized Loss on Marketable Securities -- -- -- -- (1,149) (1,149)
Unrealized Net Gain on Cash Flow Hedges -- -- -- -- 6,046 6,046
----------- ----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY, June 30, 2002 $ 1,233 $ 2,240,125 $ (5,253) $ (699,915) $ (26,587) $ 1,451,448
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------------
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,912 $ 46,210
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 74,172 65,907
Amortization of capitalized residential development costs 94,088 --
Expenditures for capitalized residential development costs (57,250) --
Extraordinary item - extinguishment of debt -- 10,802
Impairment and other charges related to
real estate assets -- 15,324
(Gain) loss on property sales, net (4,499) 372
Minority interests 13,102 18,089
Cumulative effect of a change in accounting principle 10,465 --
Non-cash compensation 84 78
Distributions received in excess of earnings from
unconsolidated companies:
Office properties -- 391
Temperature-controlled logistics -- 2,067
Other -- 1,796
Equity in (earnings) loss net of distributions received from
unconsolidated companies:
Office properties (373) --
Residential development properties (5,866) (8,710)
Temperature-controlled logistics 727 --
Other 5,522 --
Change in assets and liabilities, net of effects of COPI transaction:
Restricted cash and cash equivalents 13,992 11,980
Accounts receivable 11,391 (12,649)
Deferred rent receivable (1,124) (1,651)
Income tax asset-current and deferred (15,887) --
Other assets 9,042 17,634
Accounts payable, accrued expenses and other liabilities (69,770) (49,837)
------------- -------------
Net cash provided by operating activities 103,728 117,803
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of COPI transaction 38,226 --
Proceeds from property sales 20,381 17,633
Proceeds from joint venture partner -- 16,285
Acquisition of rental properties (8,410) --
Development of investment properties (1,178) (21,669)
Capital expenditures - office properties (7,757) (7,397)
Capital expenditures - hotel properties (10,230) (11,014)
Tenant improvement and leasing costs - office properties (18,028) (22,285)
Decrease in restricted cash and cash equivalents 8,931 3,109
Return of investment in unconsolidated companies:
Office properties 256 4,612
Residential development properties 8,082 11,151
Other -- 11,975
Investment in unconsolidated companies:
Office -- (260)
Residential development properties (24,478) (50,824)
Temperature-controlled logistics (128) (5,589)
Other (446) (785)
Increase in notes receivable (6,840) (13,693)
------------- -------------
Net cash used in investing activities (1,619) (68,751)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (10,057) (14,754)
Borrowings under UBS Facility -- 105,000
Payments under UBS Facility -- (658,452)
Borrowings under Fleet Facility 110,000 400,000
Payments under Fleet Facility (256,500) (30,000)
Notes Payable proceeds 375,000 381,240
Notes Payable payments (99,320) (99,668)
Purchase of GMAC preferred interest (187,000) --
Capital distributions - joint venture preferred equity (6,437) (11,167)
Capital distributions - joint venture partner (1,202) (1,456)
Proceeds from exercise of share options 412 5,086
Common share repurchases held in Treasury (28,510) --
Issuance of preferred shares-Series A 48,160 --
Issuance of preferred shares-Series B 81,923 --
6 3/4% Series A Preferred Share distributions (7,590) (6,750)
9 1/2% Series B Preferred Share distributions (1,009) --
Dividends and unitholder distributions (88,680) (133,583)
------------- -------------
Net cash used in financing activities (70,810) (64,504)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 31,299 (15,452)
CASH AND CASH EQUIVALENTS,
Beginning of period 36,285 38,966
------------- -------------
CASH AND CASH EQUIVALENTS,
End of period $ 67,584 $ 23,514
============= =============
The accompanying notes are an integral part of these financial statements.
5
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Crescent Real Estate Equities Company ("Crescent Equities") operates as
a real estate investment trust for federal income tax purposes (a "REIT") and,
together with its subsidiaries, provides management, leasing and development
services for some of its properties.
The term "Company" includes, unless the context otherwise indicates,
Crescent Equities, a Texas REIT, and all of its direct and indirect
subsidiaries.
The direct and indirect subsidiaries of Crescent Equities at June 30,
2002 included:
o CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
The "Operating Partnership."
o CRESCENT REAL ESTATE EQUITIES, LTD.
The "General Partner" of the Operating Partnership.
o SUBSIDIARIES OF THE OPERATING PARTNERSHIP AND THE
GENERAL PARTNER
Crescent Equities conducts all of its business through the Operating
Partnership and its other subsidiaries.
The Company is structured to facilitate and maintain the qualification
of Crescent Equities as a REIT. The following table shows the consolidated
subsidiaries of the Company that owned or had interest in real estate assets
(the "Properties") and the properties that each subsidiary owned or had an
interest in as of June 30, 2002.
Operating Partnership Wholly-owned assets - The Avallon IV, Datran
Center (two office properties), Houston
Center (three office properties) and The
Park Shops at Houston Center. These
Properties are included in the Company's
Office Segment.
Joint Venture assets, consolidated - 301
Congress Avenue (50% interest) and The
Woodlands Office Properties (85.6% interest)
(six office properties). These Properties
are included in the Company's Office
Segment.
Joint Venture assets, unconsolidated - Bank
One Center (50% interest), Bank One Tower
(20% interest) and Four Westlake Park (20%
interest). These Properties are included in
the Company's Office Segment. Currently
under construction is the 5 Houston Center
office property (25% interest), which will
be included in the Company's Office Segment
when construction is complete.
Equity Investments - Mira Vista (94%
interest), The Highlands (11.6% interest),
Falcon Point (94% interest), Falcon Landing
(94% interest) and Spring Lakes (94%
interest). These Properties are included in
the Company's Residential Development
Segment.
6
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Crescent TRS Holding Equity Investments - Desert Mountain
Corp. (93% interest) and The Woodlands (42.5%
interest). These Properties are included in
the Company's Residential Development Segment.
COPI Colorado, L.P. Equity Investments - Bear Paw Lodge (60%
interest), Eagle Ranch (60% interest), Main
Street Junction (30% interest), Main Street
Station (30% interest), Main Street Station
Vacation Club (30% interest), Riverbend (60%
interest), Three Peaks (Eagle's Nest) (30%
interest), Park Place at Riverfront (64%
interest), Park Tower at Riverfront (64%
interest), Promenade Lofts at Riverfront
(64% interest), Cresta (60% interest), Snow
Cloud (64% interest), One Vendue Range (62%
interest), Old Greenwood (71.2% interest)
and Northstar Mountain Properties (57%
interest). These Properties are included in
the Company's Residential Development
Segment.
Crescent Real Estate Wholly-owned assets - The Aberdeen, The
Funding I, L.P. Avallon I, II & III, Carter Burgess Plaza,
("Funding I") The Citadel, The Crescent Atrium, The
Crescent Office Towers, Regency Plaza One,
Waterside Commons and 125 E. John Carpenter
Freeway. These Properties are included in
the Company's Office Segment.
Crescent Real Estate Wholly owned assets - Albuquerque Plaza,
Funding II, L.P. Barton Oaks Plaza, Briargate Office and
("Funding II") Research Center, Las Colinas Plaza, Liberty
Plaza I & II, MacArthur Center I & II,
Ptarmigan Place, Stanford Corporate Center,
Two Renaissance Square and 12404 Park
Central. These Properties are included in
the Company's Office Segment. Also, the
Hyatt Regency Albuquerque and the Park Hyatt
Beaver Creek Resort & Spa, both of which are
included in the Company's Resort/Hotel
Segment
Crescent Real Estate Wholly-owned assets - Greenway Plaza Office
Funding III, IV and V, Properties (ten office properties), included
L.P. ("Funding III, IV in the Company's Office Segment, and
and V")(1) Renaissance Houston Hotel, included in the
Company's Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Canyon Ranch - Lenox,
Funding VI, L.P. included in the Company's Resort/Hotel Segment.
("Funding VI")
Crescent Real Estate Wholly-owned assets - nine behavioral healthcare
Funding VII, L.P. properties, all of which are classified as Properties
("Funding VII") Held for Disposition.
Crescent Real Estate Wholly-owned assets - The Addison, Addison Tower,
Funding VIII, L.P. Austin Centre, The Avallon V, Frost Bank Plaza,
("Funding VIII") Greenway I & IA (two office properties),
Greenway II, Palisades Central I,
Palisades Central II, Stemmons Place, Three
Westlake Park, Trammell Crow Center, 3333
Lee Parkway, 1800 West Loop South and 5050
Quorum. These Properties are included in the
Company's Office Segment. Also, Canyon Ranch
- Tucson, Omni Austin Hotel, Sonoma Mission
Inn & Spa and Ventana Inn & Spa, which are
included in the Company's Resort/Hotel
Segment.
Crescent Real Estate Wholly-owned assets - Chancellor Park, MCI Tower,
Funding IX, L.P. Miami Center, Reverchon Plaza, 44 Cook Street,
("Funding IX")(2) 55 Madison and 6225 N. 24th Street (3). These
Properties are included in the Company's Office
Segment. Also, the Denver Marriott City Center,
which is included in the Company's Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Fountain Place and
Funding X, L.P. Post Oak Central (three Office Properties), all of
("Funding X") which are included in the Company's Office Segment.
Crescent Spectrum Wholly-owned assets - Spectrum Center, included
Center, L.P.(4) in the Company's Office Segment.
- ----------
(1) Funding III owns nine of the ten office properties in the Greenway
Plaza office portfolio and the Renaissance Houston Hotel; Funding IV
owns the central heated and chilled water plant building located at
Greenway Plaza; and Funding V owns 9 Greenway, the remaining office
property in the Greenway Plaza office portfolio.
(2) Funding IX holds its interests in Chancellor Park and Miami Center
through its 100% membership interests in the owners of the Properties,
Crescent Chancellor Park, LLC and Crescent Miami Center, LLC.
(3) This Office Property was sold subsequent to June 30, 2002.
(4) Crescent Spectrum Center, L.P. holds its interest in Spectrum Center
through its ownership of the underlying land and notes and a mortgage
on the Property.
7
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
See "Note 7. "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" for a table that lists the Company's ownership in
significant unconsolidated subsidiaries, including joint ventures and equity
investments as of June 30, 2002.
See "Note 8. Notes Payable and Borrowings under Fleet Facility" for a
list of certain other subsidiaries of the Company, all of which are consolidated
in the Company's financial statements and were formed primarily for the purpose
of obtaining secured debt or joint venture financing.
On February 14, 2002, the Company executed an agreement with Crescent
Operating, Inc. ("COPI"), pursuant to which COPI transferred to the Company, in
lieu of foreclosure, COPI's lessee interests in the eight Resort/Hotel
Properties leased to subsidiaries of COPI and substantially all of COPI's voting
common stock in three of the Company's Residential Development Corporations. See
"Note 16. COPI" for additional information related to the Company's agreement
with COPI.
As of June 30, 2002, Crescent SH IX, Inc. ("SH IX"), a subsidiary of
the General Partner, owned 14,468,623 common shares of beneficial interest in
Crescent Equities. See "Note 14. Shareholders' Equity - Share Repurchase
Program."
SEGMENTS
The assets and operations of the Company were divided among
four investment segments at June 30, 2002;
o the Office Segment;
o the Resort/Hotel Segment;
o the Residential Development Segment; and
o the Temperature-Controlled Logistics Segment.
The assets owned in whole or in part by the Company as of June
30, 2002 are classified within these investment segments as follows:
o OFFICE SEGMENT consisted of 64 wholly-owned office properties
(including three retail properties) and 10 office properties,
seven of which are consolidated and three of which are
unconsolidated, in which the Company has a joint venture
interest (collectively referred to as the "Office Properties")
located in 26 metropolitan submarkets in six states, with an
aggregate of approximately 28.3 million net rentable square
feet. Additionally, the Company is developing an office
property in Houston, Texas through an unconsolidated entity
that will be included in the Office Segment upon completion.
o RESORT/HOTEL SEGMENT consisted of five luxury and destination
fitness resorts and spas with a total of 1,036 rooms/guest
nights and four upscale business-class hotel properties with a
total of 1,771 rooms (collectively referred to as the
"Resort/Hotel Properties").
o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and voting and non-voting
common stock representing interests of 94% to 100% in five
residential development corporations (collectively referred to
as the "Residential Development Corporations"), which in turn,
through joint venture or partnership arrangements, owned in
whole or in part 22 upscale residential development properties
(collectively referred to as the "Residential Development
Properties").
o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in a general partnership (the
"Temperature-Controlled Logistics Partnership"), which owns
all of the common stock, representing substantially all of the
economic interest, of AmeriCold Corporation (the
"Temperature-Controlled Logistics Corporation"), a real estate
investment trust, which, as of June 30, 2002, directly or
indirectly owned 89 temperature-controlled logistics
properties (collectively referred to as the
8
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
"Temperature-Controlled Logistics Properties") with an
aggregate of approximately 445.2 million cubic feet (17.7
million square feet) of warehouse space.
See "Note 6. Segment Reporting" for a table showing total revenues,
operating expenses, equity in net income (loss) of unconsolidated companies and
funds from operations for each of these investment segments for the three and
six months ended June 30, 2002 and 2001, and identifiable assets for each of
these investment segments at June 30, 2002 and December 31, 2001.
For purposes of segment reporting as defined in Statement of Financial
Accounting Standard ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information" and this Quarterly Report on Form 10-Q, the
Resort/Hotel Properties, the Residential Development Properties and the
Temperature-Controlled Logistics Properties are considered three separate
reportable segments, as described above. However, for purposes of investor
communications, the Company classifies its luxury and destination fitness
resorts and spas and Residential Development Properties as a single group
referred to as the "Resort and Residential Development Sector" due to the
similar characteristics of targeted customers. This group does not contain the
four business-class hotel properties. Instead, for investor communications, the
four business-class hotel properties are classified with the
Temperature-Controlled Logistics Properties as the Company's "Investment
Sector."
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") for interim
financial information, as well as in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, the information and
footnotes required by GAAP for complete financial statements are not included.
In management's opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the unaudited
interim financial statements are included. Operating results for interim periods
reflected do not necessarily indicate the results that may be expected for a
full fiscal year. You should read these financial statements in conjunction with
the financial statements and the accompanying notes included in the Company's
form 10-K, as amended, for the year ended December 31, 2001.
Certain amounts in prior period financial statements have been
reclassified to conform with current period presentation.
9
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
2. ADOPTION OF NEW ACCOUNTING STANDARDS:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets" (effective January 1,
2002). SFAS No. 142 specifies that goodwill and certain other types of
intangible assets may no longer be amortized, but instead are subject to
periodic impairment testing. If an impairment charge is required, the charge is
reported as a change in accounting principle and is included in operating
results as a Cumulative Effect of a Change in Accounting Principle. SFAS No. 142
provides for a transitional period of up to 12 months. Any need for impairment
must be assessed within the first six months and the amount of impairment must
be determined within the next six months. Any additional impairment taken in
subsequent interim periods during 2002 related to the initial adoption of this
statement will require the first quarter financial statements to be restated.
During the three months ended March 31, 2002 the Company recognized a goodwill
impairment charge of approximately $9,200 due to the initial application of this
statement. This charge was due to an impairment (net of minority interests) of
the goodwill at the Temperature-Controlled Logistics Corporation. This charge
was reported as a change in accounting principle and was included in the
Company's consolidated statements of operations as a "Cumulative Effect of a
Change in Accounting Principle" for the three months ended March 31, 2002.
Subsequent to March 31, 2002 the Company determined that an additional
impairment charge of $1,300, net of minority interest and taxes, was required
for the goodwill at one of the Residential Development Corporations, bringing
the total impairment charge to be recognized for the six months ended June 30,
2002 to $10,500. In accordance with SFAS No. 142, the financial statements for
the quarter ended March 31, 2002 have been restated to include the additional
impairment charge of $1,300. Accordingly, the entire $10,500 impairment charge
against the goodwill of the Temperature-Controlled Logistics Corporation and one
of the Residential Development Corporations has been included in the Company's
consolidated statements of operations as a "Cumulative Effect of a Change in
Accounting Principle" for the six months ended June 30, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of this statement did not materially affect the Company's
interim or annual financial statements; however, for the three and six months
ended June 30, 2002, financial statement presentation was modified to report the
results of operations, including any gains or losses recognized in accordance
with this statement, and the financial position of the Company's real estate
assets sold or classified as held for sale, as discontinued operations. As a
result, the Company has reclassified certain amounts in prior period financial
statements to conform with the new presentation requirements.
3. DISCONTINUED OPERATIONS:
On January 1, 2002, the Company adopted SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets." Accordingly, the results of
operations, including any gains or losses recognized in accordance with this
statement, are disclosed separately on the Company's consolidated statements of
operations for the three and six months ended June 30, 2002 and 2001 as
"Discontinued Operations - Income and Gain on Assets Sold and Held for Sale."
Similarly, the financial position of the Company's assets held for sale are
disclosed separately as "Properties Held for Disposition, Net" on the Company's
consolidated balance sheets at June 30, 2002, and December 31, 2001.
Accordingly, the 2001 financial statements have been restated to reflect the
adoption of SFAS No. 144.
OFFICE SEGMENT
On January 18, 2002, the Company completed the sale of the Cedar
Springs Plaza Office Property in Dallas, Texas. The sale generated net proceeds
of approximately $12,000 and a net gain of approximately $4,500. The proceeds
from the sale of the Cedar Springs Plaza Office Property were used primarily to
pay down the Company's line of credit. This Property was wholly-owned by the
Company and was included in the Company's Office Segment.
On May 29, 2002, the Woodlands Office Equities - '95 Limited ("WOE"),
owned by the Company and the Woodlands Commercial Properties Company, L.P. (the
"Woodlands CPC"), sold two Office Properties located within The Woodlands,
Texas. The sale generated net proceeds of approximately $3,600, of which the
Company's portion was approximately $3,200, and generated a net gain of
approximately $1,900, of which the Company's portion was
10
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
approximately $1,700. The proceeds received by the Company were used primarily
to pay down variable-rate debt. These two Properties were consolidated, joint
venture properties and were included in the Company's Office Segment.
As of June 30, 2002, the 6225 North 24th Street Office Property located
in Phoenix, Arizona was classified as held for sale. The carrying value of the
86,000 square foot Class A Office Property in the Camelback Corridor submarket
was approximately $7,457 at June 30, 2002. The Property was wholly-owned by the
Company and was included in the Company's Office Segment. See "Note 17.
Subsequent Events" for information regarding the subsequent sale of this
Property.
Also classified as held for sale as of June 30, 2002 was the Washington
Harbour Phase II Land located in the Georgetown submarket of Washington, D.C.
The 1.4 acre tract of land had previously been classified as Land Held for
Investment or Development. During the six months ended June 30, 2002, the
Company recognized an impairment charge of approximately $1,000 on this land.
After recognition of this impairment, the carrying value of the land at June 30,
2002, was approximately $14,975. The land is wholly-owned by the Company and is
included in the Company's Office Segment.
The following table indicates the revenue, rental operating expenses,
depreciation and amortization and net income (loss) for the six months ended
June 30, 2002 and 2001 and net carrying value at June 30, 2002 and 2001 of the
Office Properties sold during the six months ended June 30, 2002 and held for
sale as of June 30, 2002.
OFFICE SEGMENT
DEPRECIATION NET
RENTABLE RENTAL OPERATING AND NET INCOME CARRYING
TYPE SQUARE FEET REVENUE EXPENSES AMORTIZATION (LOSS) VALUE
--------- ------------- ------------- ------------- ------------- ------------- -------------
JUNE 30, 2002
Office 296,588 $ 865 $ 529 $ 488 $ (152) $ 7,457
Land -- -- 86 -- (86) 14,975
------------- ------------- ------------- ------------- ------------- -------------
Total 296,588 $ 865 $ 615 $ 488 $ (238) $ 22,432
============= ============= ============= ============= ============= =============
JUNE 30, 2001
Office 296,588 $ 2,122 $ 1,188 $ 717 $ 217 $ 21,134
Land -- -- 61 -- (61) 15,974
------------- ------------- ------------- ------------- ------------- -------------
Total 296,588 $ 2,122 $ 1,249 $ 717 $ 156 $ 37,108
============= ============= ============= ============= ============= =============
11
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OTHER
As of June 30, 2002, the Company owned nine behavioral healthcare
properties, all of which were classified in the Company's financial statements
as "Properties Held for Disposition, Net." During the six months ended June 30,
2002, the Company recognized an impairment charge of approximately $600 on one
of the behavioral healthcare properties held for sale. This charge was
recognized in the Company's consolidated statements of operations as
"Discontinued Operations - Income and Gain on Assets Sold and Held for Sale."
The charge represents the difference between the carrying value of the property
and the estimated sales price less costs of sale. After recognition of this
impairment, the carrying value of the behavioral healthcare properties at June
30, 2002 was approximately $25,038. Depreciation expense has not been recognized
since the dates the behavioral healthcare properties were classified as held for
sale. The Company has entered into contracts or letters of intent to sell three
behavioral healthcare properties and is actively marketing for sale the
remaining six behavioral healthcare properties. The sales of these behavioral
healthcare properties are expected to close within the next year.
12
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
4. EARNINGS PER SHARE:
SFAS No. 128 "Earnings Per Share" ("EPS") specifies the computation,
presentation and disclosure requirements for earnings per share. Basic EPS
excludes all dilution while Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common shares were
exercised or converted into common shares.
FOR THE THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------
2002 2001
----------------------------------- -------------------------------------
Wtd. Avg. Per Share Wtd. Avg. Per Share
Income Shares Amount Income Shares Amount
--------- --------- ---------- --------- --------- -----------
BASIC EPS -
Income before discontinued operations, extraordinary
item and cumulative effect of a change in
accounting principle $ 11,382 104,888 $ 25,704 108,370
6 3/4% Series A Preferred Share distributions (4,215) -- (3,375) --
9 1/2% Series B Preferred Share distributions (1,009) -- -- --
--------- --------- ---------- --------- --------- -----------
Income available to common
shareholders before discontinued operations,
extraordinary item and cumulative effect of a
change in accounting principle $ 6,158 104,888 $ 0.06 $ 22,329 108,370 $ 0.21
Discontinued operations 569 -- 0.01 60 -- --
Extraordinary item - extinguishment of debt -- -- -- (10,802) -- $ (0.10)
Net income available to common
shareholders $ 6,727 104,888 $ 0.07 $ 11,587 108,370 $ 0.11
========= ========= ========== ========= ========= ===========
DILUTED EPS -
Income available to common
shareholders before discontinued operations,
extraordinary item and cumulative effect of
a change in accounting principle $ 6,158 104,888 $ 22,329 108,370
Effect of dilutive securities:
Share and unit options -- 1,225 -- 2,112
--------- --------- ---------- --------- --------- -----------
Income available to common
shareholders before discontinued operations,
extraordinary item and cumulative effect of a
change in accounting principle $ 6,158 106,113 $ 0.06 $ 22,329 110,482 $ 0.20
Discontinued operations 569 -- 0.01 60 -- --
Extraordinary item - extinguishment of debt -- -- -- (10,802) -- (0.10)
--------- --------- ---------- --------- --------- -----------
Net income available to common
shareholders $ 6,727 106,113 $ 0.07 $ 11,587 110,482 $ 0.10
========= ========= ========== ========= ========= ===========
13
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------ -------------------------------------
Wtd. Avg. Per Share Wtd. Avg. Per Share
Income Shares Amount Income Shares Amount
--------- --------- ----------- --------- --------- -----------
BASIC EPS -
Income before discontinued operations,
extraordinary item and cumulative
effect of a change in accounting principle $ 32,592 104,913 $ 56,856 107,876
6 3/4% Series A Preferred Share distributions (7,590) -- (6,750) --
9 1/2% Series B Preferred Share distributions (1,009) -- -- --
--------- --------- ----------- --------- --------- -----------
Income available to common
shareholders before discontinued operations,
extraordinary item and cumulative effect of a
change in accounting principle $ 23,993 104,913 $ 0.23 $ 50,106 107,876 $ 0.47
Discontinued operations 3,785 -- 0.04 156 -- --
Extraordinary item - extinguishment of debt -- -- -- (10,802) -- $ (0.10)
Cumulative effect of a change in
accounting principle (10,465) -- (0.10) -- -- --
--------- --------- ----------- --------- --------- -----------
Net income available to common
shareholders $ 17,313 104,913 $ 0.17 $ 39,460 107,876 $ 0.37
========= ========= =========== ========= ========= ===========
DILUTED EPS -
Income available to common
shareholders before discontinued operations,
extraordinary item and cumulative effect of a
change in accounting principle $ 23,993 104,913 $ 50,106 107,876
Effect of dilutive securities:
Share and unit options -- 838 -- 1,866
--------- --------- ----------- --------- --------- -----------
Income available to common
shareholders before discontinued operations,
extraordinary item and cumulative effect of
a change in accounting principle $ 23,993 105,751 $ 0.23 $ 50,106 109,742 $ 0.46
Discontinued operations 3,785 -- 0.04 156 -- --
Extraordinary item - extinguishment of debt -- -- -- (10,802) -- (0.10)
Cumulative effect of a change in
accounting principle (10,465) -- (0.10) -- -- --
--------- --------- ----------- --------- --------- -----------
Net income available to common
shareholders $ 17,313 105,751 $ 0.17 $ 39,460 109,742 $ 0.36
========= ========= =========== ========= ========= ===========
The effect of the conversion of the Series A Convertible Cumulative
Preferred Shares is not included in the computation of Diluted EPS for the three
and six months ended June 30, 2002 or 2001, since the effect of their conversion
would be antidilutive.
14
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
5. SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS:
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------
2002 2001
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid on debt .............................................................. $ 71,320 $ 93,556
Interest capitalized - Office ...................................................... 247 1,022
Interest capitalized - Residential Development ..................................... 5,303 --
Additional interest paid resulting from cash flow hedge agreements ................. 12,012 3,452
---------- ----------
Total interest paid ................................................................ $ 88,882 $ 98,030
========== ==========
Interest expensed .................................................................. $ 88,722 $ 94,281
========== ==========
Cash paid for income taxes ......................................................... $ 11,000 $ --
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Operating Partnership units to common shares with resulting
reduction in minority interest and increases in common shares and
additional paid-in capital ...................................................... $ 22 $ 2,759
Unrealized net loss on available-for-sale securities ............................... (1,149) (4,141)
Adjustment of cash flow hedges to fair value ....................................... 6,046 (8,206)
Impairment related to real estate assets held for sale ............................. 1,600 --
SUPPLEMENTAL SCHEDULE OF TRANSFER OF ASSETS AND ASSUMPTIONS OF LIABILITIES
PURSUANT TO THE FEBRUARY 14, 2002 AGREEMENT WITH COPI:
Net investment in real estate ..................................................... $ 570,175 $ --
Restricted cash and cash equivalents .............................................. 3,968 --
Accounts receivable, net .......................................................... 23,338 --
Investments in real estate mortgages and equity of unconsolidated companies ....... (309,103) --
Notes receivable - net ............................................................ (29,816) --
Income tax asset - current and deferred, net ...................................... 21,784 --
Other assets, net ................................................................. 63,263 --
Notes payable ..................................................................... (129,157) --
Accounts payable - accrued expenses and other liabilities ......................... (201,159) --
Minority Interest - Consolidated real estate partnerships ......................... (51,519) --
---------- ----------
Increase in cash resulting from the COPI agreement ............................. $ (38,226) $ --
========== ==========
15
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
6. SEGMENT REPORTING:
For purposes of segment reporting as defined in SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," the
Company currently has four major investment segments based on property type: the
Office Segment; the Resort/Hotel Segment; the Residential Development Segment;
and the Temperature-Controlled Logistics Segment. Management utilizes this
segment structure for making operating decisions and assessing performance.
The Company uses funds from operations ("FFO") as the measure of
segment profit or loss. FFO, as used in this document, means:
o Net Income (Loss) - determined in conformity with GAAP;
o excluding gains (or losses) from sales of depreciable
operating property;
o excluding extraordinary items (as defined by GAAP);
o plus depreciation and amortization of real estate assets;
and
o after adjustments for unconsolidated partnerships and joint
ventures.
The National Association of Real Estate Investment Trusts ("NAREIT")
developed FFO as a relative measure of performance and liquidity of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Company considers FFO an
appropriate measure of performance for an equity REIT and for its investment
segments. However FFO:
o does not represent cash generated from operating activities
determined in accordance with GAAP (which, unlike FFO,
generally reflects all cash effects of transactions and
other events that enter into the determination of net
income);
o is not necessarily indicative of cash flow available to fund
cash needs;
o should not be considered as an alternative to net income
determined in accordance with GAAP as an indication of the
Company's operating performance, or to cash flow from
operating activities determined in accordance with GAAP as a
measure of either liquidity or the company's ability to make
distributions; and
o the Company's measure of FFO may not be comparable to
similarly titled measures of other REITs because these REITs
may apply the definition of FFO in a different manner than
the Company.
16
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Selected financial information related to each segment for the three
and six months ended June 30, 2002 and 2001, and identifiable assets for each of
the segments at June 30, 2002 and December 31, 2001 are presented below.
SELECTED FINANCIAL INFORMATION:
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
FOR THE THREE MONTHS ENDED JUNE 30, 2002 SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER(1) TOTAL
- ---------------------------------------- ---------- ------------ ----------- ------------ ------------ ----------
Property revenues $ 141,540 $ 53,523 $ 84,985 $ -- $ -- $ 280,048
Other income -- -- -- -- 1,843 1,843
---------- ---------- ---------- ---------- ---------- ----------
Total revenue $ 141,540 $ 53,523 $ 84,985 $ -- $ 1,843 $ 281,891
========== ========== ========== ========== ========== ==========
Property operating expenses $ 62,781 $ 42,212 $ 76,994 $ -- $ -- $ 181,987
Other operating expenses -- -- -- -- 89,813 89,813
---------- ---------- ---------- ---------- ---------- ----------
Total expenses $ 62,781 $ 42,212 $ 76,994 $ -- $ 89,813 $ 271,800
========== ========== ========== ========== ========== ==========
Equity in net income (loss) of
unconsolidated companies $ 1,471 $ -- $ 6,179 $ (417) $ (465) $ 6,768
========== ========== ========== ========== ========== ==========
Funds from operations $ 80,502 $ 12,637 $ 12,474 $ 5,374 $ (57,782)(2) $ 53,205(3)
========== ========== ========== ========== ========== ==========
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
FOR THE THREE MONTHS ENDED JUNE 30, 2001 SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER(1) TOTAL
- ---------------------------------------- ---------- ------------ ----------- ------------ ------------ ----------
Property revenues $ 155,426 $ 16,125 $ -- $ -- $ -- $ 171,551
Other income -- -- -- -- 17,634 17,634
---------- ---------- ---------- ---------- ---------- ----------
Total revenue $ 155,426 $ 16,125 $ -- $ -- $ 17,634 $ 189,185
========== ========== ========== ========== ========== ==========
Property operating expenses $ 66,749 $ -- $ -- $ -- $ -- $ 66,749
Other operating expenses -- -- -- -- 99,649 99,649
---------- ---------- ---------- ---------- ---------- ----------
Total expenses $ 66,749 $ -- $ -- $ -- $ 99,649 $ 166,398
========== ========== ========== ========== ========== ==========
Equity in net income (loss) of
unconsolidated companies $ 1,228 $ -- $ 9,732 $ 1,632 $ (636) $ 11,956
========== ========== ========== ========== ========== ==========
Funds from operations $ 91,744 $ 16,016 $ 13,582 $ 7,139 $ (47,107)(2) $ 81,374(3)
========== ========== ========== ========== ========== ==========
- ----------
Footnotes start on page 18.
17
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
SELECTED FINANCIAL INFORMATION:
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
FOR THE SIX MONTHS ENDED JUNE 30, 2002 SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER(1) TOTAL
- -------------------------------------- ---------- ------------ ----------- ------------ ------------ ----------
Property revenues $ 285,011 $ 92,047 $ 133,050 $ -- $ -- $ 510,108
Other income -- -- -- -- 4,069 4,069
---------- ---------- ---------- ---------- ---------- ----------
Total revenues $ 285,011 $ 92,047 $ 133,050 $ -- $ 4,069 $ 514,177
========== ========== ========== ========== ========== ==========
Property operating expenses $ 128,608 $ 66,102 $ 119,209 $ -- $ -- $ 313,919
Other operating expenses -- -- -- -- 174,619 174,619
---------- ---------- ---------- ---------- ---------- ----------
Total expenses $ 128,608 $ 66,102 $ 119,209 $ -- $ 174,619 $ 488,538
========== ========== ========== ========== ========== ==========
Equity in net income (loss) of
unconsolidated companies $ 2,781 $ -- $ 18,662 $ (727) $ (4,526) $ 16,190
========== ========== ========== ========== ========== ==========
Funds from operations $ 161,074 $ 33,547 $ 28,035 $ 10,775 $ (116,099)(2) $ 117,332(3)
========== ========== ========== ========== ========== ==========
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
FOR THE SIX MONTHS ENDED JUNE 30, 2001 SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER(1) TOTAL
- -------------------------------------- ---------- ------------ ----------- ------------ ------------ ----------
Property revenues $ 308,229 $ 32,074 $ -- $ -- $ -- $ 340,303
Other income -- -- -- -- 26,637 26,637
---------- ---------- ---------- ---------- ---------- ----------
Total revenues $ 308,229 $ 32,074 $ -- $ -- $ 26,637 $ 366,940
========== ========== ========== ========== ========== ==========
Property operating expenses $ 132,996 $ -- $ -- $ -- $ -- $ 132,996
Other operating expenses -- -- -- -- 186,949 186,949
---------- ---------- ---------- ---------- ---------- ----------
Total expenses $ 132,996 $ -- $ -- $ -- $ 186,949 $ 319,945
========== ========== ========== ========== ========== ==========
Equity in net income (loss) of
unconsolidated companies $ 2,321 $ -- $ 20,440 $ 4,351 $ 1,210 $ 28,322
========== ========== ========== ========== ========== ==========
Funds from operations $ 181,897 $ 31,768 $ 26,648 $ 15,464 $ (102,142)(2) $ 153,635(3)
========== ========== ========== ========== ========== ==========
IDENTIFIABLE ASSETS:
Balance at June 30, 2002 $2,648,500 $ 500,316 $ 753,839 $ 297,502 $ 222,613 $4,422,770
========== ========== ========== ========== ========== ==========
Balance at December 31, 2001 $2,739,727 $ 444,887 $ 372,539 $ 308,427 $ 276,569 $4,142,149
========== ========== ========== ========== ========== ==========
- ----------
(1) For purposes of this Note, the behavioral healthcare properties' financial
information has been included in this column.
(2) Includes interest and other income, behavioral healthcare property income,
preferred return paid to GMAC Commercial Mortgage Corporation ("GMACCM"),
other unconsolidated companies, less depreciation and amortization of
non-real estate assets and amortization of deferred financing costs.
18
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(3) Reconciliation of Funds From Operations to Net Income
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Consolidated funds from operations $ 53,205 $ 81,374 $ 117,332 $ 153,635
Adjustments to reconcile Funds from Operations
to Net Income:
Depreciation and amortization of real estate assets (33,530) (29,524) (65,669) (59,019)
Gain (Loss) on property sales, net 1,425 (792) 5,189 (462)
Impairment and other adjustments related to real
estate assets -- (14,174) (600) (15,324)
Extraordinary Item - extinguishment of debt -- (10,802) --
(10,802)
Cumulative effect of change in accounting principle -- -- (10,465) --
Adjustment for investments in real estate
mortgages and equity of unconsolidated companies:
Office Properties (1,889) (2,015) (4,051) (4,055)
Residential Development Properties (2,051) (3,851) (2,954) (6,209)
Temperature-Controlled Logistics Properties (5,790) (5,507) (11,501) (11,113)
Other (3,130)(a) -- (5,776)(a) --
Unitholder minority interest (1,513) (3,122) (4,192) (7,191)
Preferred Unit distributions 5,224 3,375 8,599 6,750
------------ ------------ ------------ ------------
Net Income $ 11,951 $ 14,962 $ 25,912 $ 46,210
============ ============ ============ ============
- ----------
(a) These amounts primarily represent impairment of the Company's investment in
DBL Holdings, Inc., related to the Class C-1 Notes issued by Juniper CBO
1999-1 Ltd., a privately placed equity interest of a collateralized bond
obligation. (See "Note 7. Investments in Real Estate Mortgages and Equity
of Unconsolidated Companies" for further discussion).
SIGNIFICANT LESSEES
See "Note 7. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies - Temperature-Controlled Logistics Properties" for a
description of the sole lessee of the Temperature-Controlled Logistics
Properties.
19
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
7. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES:
The Company has investments of 20% to 50% in three unconsolidated joint
ventures that own three Office Properties. Additionally, the Company has an
investment of 25% in an unconsolidated joint venture that is constructing the 5
Houston Center Office Property. The Company does not have control of these
partnerships, and therefore, these investments are accounted for using the
equity method of accounting.
The Company has other unconsolidated equity investments with interests
ranging from 24% to 97.4%. The Company does not have control of these entities
due to ownership interests of 50% or less or the ownership of non-voting
interests only, and therefore, these investments are also accounted for using
the equity method of accounting.
Investments in which the Company does not have a controlling interest
are accounted for under the equity method. The following is a summary of the
Company's ownership in significant joint ventures and equity investments.
COMPANY'S OWNERSHIP
ENTITY CLASSIFICATION AS OF JUNE 30, 2002
------ -------------- -------------------
Joint Ventures
Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0% (1)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0% (2)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower-Austin) 20.0% (3)
Houston PT Four Westlake Office Limited Partnership Office (Four Westlake Park-Houston) 20.0% (3)
Equity Investments
Mira Vista Development Corp. Residential Development Corporation 94.0% (4)
Houston Area Development Corp. Residential Development Corporation 94.0% (5)
The Woodlands Land Development
Company, L.P. (6) Residential Development Corporation 42.5% (7)(8)
Desert Mountain Commercial, L.L.C. (6) Residential Development Corporation 46.5% (9)
East West Resorts Development II, L.P., L.L.L.P. (6) Residential Development Corporation 38.5% (10)
Blue River Land Company, L.L.C. (6) Residential Development Corporation 31.8% (11)
Iron Horse Investments, L.L.C. (6) Residential Development Corporation 27.1% (12)
Manalapan Hotel Partners (6) Residential Development Corporation 24.0% (13)
GDW, L.L.C. (6) Residential Development Corporation 66.7% (14)
Temperature-Controlled Logistics Partnership Temperature-Controlled Logistics 40.0% (15)
The Woodlands Commercial Properties Company, L.P. Office 42.5% (7)(8)
DBL Holdings, Inc. Other 97.4% (16)
CR License, L.L.C. Other 30.0% (17)
Woodlands Operating Company, L.P. Other 42.5% (7)(8)
Canyon Ranch Las Vegas Other 65.0% (18)
SunTX Fulcrum Fund, L.P. Other 33.0% (19)
- ----------
(1) The remaining 50.0% interest in Main Street Partners, L.P. is owned by
Trizec Properties, Inc.
(2) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by a
pension fund advised by JP Morgan Investment Management, Inc. The Company
recorded $611 in development, and leasing fees, related to this investment
during the six months ended June 30, 2002. The 5 Houston Center Office
Property is currently under construction.
(3) The remaining 80% interest in Austin PT BK One Tower Office Limited
Partnership and Houston PT Four Westlake Office Limited Partnership is
owned by an affiliate of General Electric Pension Fund. The Company
recorded $321 in management and leasing fees for these Office Properties
during the six months ended June 30, 2002.
(4) The remaining 6.0% interest in Mira Vista Development, Corp. ("MVDC"),
which represents 100% of the voting stock, is owned 4.0% by DBL Holdings,
Inc. ("DBL") and 2.0% by third parties.
20
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
(5) The remaining 6.0% interest in Houston Area Development Corp. ("HADC"),
which represents 100% of the voting stock, is owned 4.0% by DBL and 2.0% by
a third party.
(6) On February 14, 2002, the Company executed an agreement with COPI, pursuant
to which COPI transferred to subsidiaries of the Company, in lieu of
foreclosure, COPI's interests in substantially all of the voting stock in
three of the Company's Residential Development Corporations (Desert
Mountain Development Corporation ("DMDC"), The Woodlands Land Company, Inc.
("TWLC") and Crescent Resort Development, Inc. ("CRDI")), and in CRL
Investments, Inc. ("CRLI"). COPI transferred its 60% general partner
interest in COPI Colorado, L.P. which owns 10% of the voting stock in CRDI,
which increased the Company's ownership interest in CRDI from 90% to 96%.
As a result, the Company fully consolidated the operations of these
entities beginning on the date of the asset transfers. The Woodlands Land
Development Company, L.P. is an unconsolidated equity investment of TWLC.
Desert Mountain Commercial, L.L.C. and GDW, L.L.C. are unconsolidated
equity investments of DMDC (collectively, the "DM Subsidiaries"). East West
Resorts Development II, L.P., L.L.L.P., Blue River Land Company, L.L.C.,
Iron Horse Investments, L.L.C. and Manalapan Hotel Partners (collectively,
the "CRD Subsidiaries") are unconsolidated equity investments of CRDI.
(7) The remaining 57.5% interest in The Woodlands Land Development Company,
L.P., The Woodlands Commercial Properties Company (the "Woodlands CPC") and
The Woodlands Operating Company, L.P. are owned by an affiliate of
Morgan Stanley.
(8) Distributions are made to partners based on specified payout percentages.
During the six months ended June 30, 2002, the payout percentage to the
Company was 52.5%.
(9) The remaining 53.5% interest in Desert Mountain Commercial, L.L.C. is owned
by parties unrelated to the Company.
(10) Of the remaining 61.5% interest in East West Resorts Development II, L.P.,
L.L.L.P., 0.8% is indirectly owned by John Goff, Vice-Chairman of the Board
of Trust Managers and Chief Executive Officer of the Company, through his
20% ownership of COPI Colorado, L.P. and 60.7% is owned by parties
unrelated to the Company.
(11) Of the remaining 68.2% interest in Blue River Land Company, L.L.C., 0.7% is
indirectly owned by John Goff, Vice-Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, through his 20% ownership of
COPI Colorado, L.P. and 67.5% is owned by parties unrelated to the Company.
(12) Of the remaining 72.9% interest in Iron Horse Investments, L.L.C., 0.6% is
indirectly owned by John Goff, Vice-Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, through his 20% ownership of
COPI Colorado, L.P. and 72.3% is owned by parties unrelated to the Company.
(13) Of the remaining 76.0% interest in Manalapan Hotel Partners, 0.5% is
indirectly owned by John Goff, Vice-Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, through his 20% ownership of
COPI Colorado, L.P. and 75.5% is owned by parties unrelated to the Company.
(14) The remaining 33.3% interest in GDW, L.L.C. is owned by a group of
individuals unrelated to the Company.
(15) The remaining 60.0% interest in the Temperature-Controlled Logistics
Partnership is owned by Vornado Realty Trust, L.P.
(16) John Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company, obtained the remaining 2.6% economic interest in
DBL (including 100% of the voting interest in DBL) in exchange for his
voting interests in MVDC and HADC, originally valued at approximately $380,
and approximately $63 in cash, or total consideration valued at
approximately $443. At June 30, 2002, Mr. Goff's book value in DBL was
approximately $402.
(17) The remaining 70% interest in CR License, L.L.C. is owned by a group of
individuals unrelated to the Company.
(18) The remaining 35% interest in Canyon Ranch Las Vegas is owned by a group of
individuals unrelated to the Company.
(19) The SunTX Fulcrum Fund, L.P. (the "Fund") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial capital
appreciation. The remaining 67% of the Fund is owned by a group of
individuals unrelated to the Company. If the Fund is able to raise the
maximum amount of proceeds from its current offerings, the Company's
ownership percentage will decline by the closing date of the Fund as
capital commitments from third parties are secured. If the Fund is able to
raise the maximum amount of proceeds from its current offerings, the
Company's projected ownership interest will be approximately 7.5% based on
the Fund Manager's expectations for the final Fund capitalization. The
Company accounts for its investment in the Fund under the cost method. The
current investment is $7,800.
SUMMARY FINANCIAL INFORMATION
The Company reports its share of income and losses based on its
ownership interest in its respective equity investments, adjusted for any
preference payments. As a result of the Company's transaction with COPI on
February 14, 2002, certain entities that were reported as unconsolidated
entities as of December 31, 2001 and for the six months ended June 30, 2001 are
consolidated in the June 30, 2002 financial statements. Additionally, certain
unconsolidated subsidiaries of the newly consolidated entities are now shown
separately as unconsolidated entities of the Company. The unconsolidated
entities that are included under the headings on the following tables are
summarized below.
Balance Sheets as of June 30, 2002:
o Other Residential Development Corporations - This includes DM
Subsidiaries, CRD Subsidiaries, MVDC and HADC. DM Subsidiaries
and CRD Subsidiaries are unconsolidated investments of DMDC and
CRDI, respectively;
o The Woodlands Land Development Company, L.P. ("TWLDC") - This is
an unconsolidated investment of TWLC;
o Temperature-Controlled Logistics ("TCL"); and
21
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
o Office - This includes Main Street Partners, L.P., Houston PT
Four Westlake Office Limited Partnership, Austin PT BK One Tower
Office Limited Partnership, Crescent 5 Houston Center, L.P., and
Woodlands CPC.
22
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
Balance Sheets as of December 31, 2001:
o Crescent Resort Development, Inc.- This entity was consolidated
beginning February 14, 2002 as a result of the COPI transaction.
Its unconsolidated investments, CRD Subsidiaries, are included
under "Other Residential Development Corporations" in the
following Balance Sheets as of June 30, 2002;
o The Woodlands Land Company, Inc. - This entity was consolidated
beginning February 14, 2002 as a result of the COPI transaction.
Its unconsolidated subsidiary is included under "The Woodlands
Land Development Company, L.P." in the following Balance Sheets
as of June 30, 2002;
o Other Residential Development Corporations - This includes DMDC,
MVDC and HADC. DMDC was consolidated beginning February 14, 2002
as a result of the COPI transaction;
o Temperature-Controlled Logistics; and
o Office - This includes Main Street Partners, L.P., Houston PT
Four Westlake Office Limited Partnership, Austin PT BK One Tower
Office Limited Partnership, Crescent 5 Houston Center, L.P. and
Woodlands CPC.
Summary Statement of Operations for the six months ended June 30, 2002:
o Other Residential Development Corporations - This includes the
operating results of DMDC and CRDI for the period January 1
through February 14, 2002; the operating results of CRD
Subsidiaries and DM Subsidiaries for the period February 15
through June 30, 2002; and the operating results of MVDC, HADC
for the six months ended June 30, 2002.
o The Woodlands Land Development Company, L.P. - This includes
TWLDC's operating results for the period February 15 through June
30, 2002 and TWLC's operating results for the period January 1
through February 14, 2002. TWLDC is an unconsolidated subsidiary
of TWLC;
o Temperature-Controlled Logistics - This includes the operating
results for TCL for the six months ended June 30, 2002; and
o Office - This includes the operating results for Main Street
Partners, L.P., Houston PT Four Westlake Office Limited
Partnership, Austin PT BK One Tower Office Limited Partnership,
Crescent 5 Houston Center, L.P. and Woodlands CPC for the six
months ended June 30, 2002.
Summary Statement of Operations for the six months ended June 30, 2001:
o Crescent Resort Development, Inc.- This includes the operating
results of CRDI for the six months ended June 30, 2001;
o The Woodlands Land Company, LP - This includes the operating
results of TWLC and TWLDC for the six months ended June 30, 2001;
o Other Residential Development Corporations - This includes the
operating results of DMDC, MVDC and HADC for the six months ended
June 30, 2001;
o Temperature-Controlled Logistics - This includes the operating
results for TCL for the six months ended June 30, 2001; and
o Office - This includes the operating results for Main Street
Partners and Woodlands CPC, for the six months ended June 30,
2001.
23
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
BALANCE SHEETS:
AS OF JUNE 30, 2002
----------------------------------------------------------------------------
THE
WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT CONTROLLED
COMPANY, L.P. CORPORATIONS LOGISTICS OFFICE OTHER
------------- ------------ ------------ ----------- -----------
Real estate, net $ 380,009 $ 128,924 $ 1,236,058 $ 507,411
Cash 4,758 10,704 21,208 71,026
Other assets 40,611 10,022 90,381 32,401
----------- ----------- ----------- -----------
Total assets $ 425,378 $ 149,650 $ 1,347,647 $ 610,838
=========== =========== =========== ===========
Notes payable $ 261,659 $ 69,913 $ 544,816 $ 331,416
Notes payable to the Company 10,625 -- -- --
Other liabilities 55,871 42,552 55,035 24,539
Equity 97,223 37,185 747,796 254,883
----------- ----------- ----------- -----------
Total liabilities and equity $ 425,378 $ 149,650 $ 1,347,647 $ 610,838
=========== =========== =========== ===========
Company's share of unconsolidated debt $ 111,206 $ 17,097 $ 217,926 $ 124,609
=========== =========== =========== ===========
Company's investments in real estate
mortgages and equity of uncon-
solidated companies $ 41,311 $ 54,861 $ 297,503 $ 101,783 $ 37,518
=========== =========== =========== =========== ===========
AS OF DECEMBER 31, 2001
----------------------------------------------------------------------------------------
CRESCENT THE OTHER
RESORT WOODLANDS RESIDENTIAL TEMPERATURE-
DEVELOPMENT LAND DEVELOPMENT CONTROLLED
INC. COMPANY, INC. CORPORATIONS LOGISTICS OFFICE OTHER
----------- ------------- ------------ ------------ ----------- -----------
Real estate, net $ 393,784 $ 365,636 $ 173,991 $ 1,272,784 $ 553,147
Cash 17,570 2,688 7,973 23,412 28,224
Other assets 31,749 32,244 94,392 82,967 31,654
----------- ----------- ----------- ----------- -----------
Total assets $ 443,103 $ 400,568 $ 276,356 $ 1,379,163 $ 613,025
=========== =========== =========== =========== ===========
Notes payable $ -- $ 225,263 $ -- $ 558,949 $ 324,718
Notes payable to the Company 180,827 -- 60,000 4,833 --
Other liabilities 232,767 74,271 168,671 46,395 29,394
Equity 29,509 101,034 47,685 768,986 258,913
----------- ----------- ----------- ----------- -----------
Total liabilities and equity $ 443,103 $ 400,568 $ 276,356 $ 1,379,163 $ 613,025
=========== =========== =========== =========== ===========
Company's share of unconsolidated debt $ -- $ 90,949 $ -- $ 223,580 $ 126,580
=========== =========== =========== =========== ===========
Company's investments in real estate
mortgages and equity of uncon-
solidated companies $ 222,082 $ 29,046 $ 120,407 $ 308,427 $ 121,423 $ 36,932
=========== =========== =========== =========== =========== ===========
- ----------
24
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
SUMMARY STATEMENT OF OPERATIONS:
FOR THE SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------------------------------
THE
WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT CONTROLLED
COMPANY, LP. CORPORATIONS LOGISTICS OFFICE OTHER
------------ ------------ ------------ ----------- -----------
Total revenue $ 68,465 $ 102,812 $ 59,619 $ 46,461
Expense:
Operating expense 36,373 92,788 8,075(1) 21,843
Interest expense 2,152 1,610 21,873 9,040
Depreciation and amortization 1,827 2,971 29,686 11,172
Tax (benefit) expense 406 (4) -- --
Other (income) expense -- (27)