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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, 2003
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 (I.R.S. Employer Identification Number)
incorporation 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
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Number of shares outstanding of each of the registrant's classes of preferred
and common shares, as of August 4, 2003.
Series A Convertible Cumulative Preferred Shares, par value $0.01 per share: 10,800,000
Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share: 3,400,000
Common Shares, par value $0.01 per share: 99,247,894
CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002
(audited)............................................................................. 3
Consolidated Statements of Operations for the three and six months ended June
30, 2003 and 2002 (unaudited)......................................................... 4
Consolidated Statement of Shareholders' Equity for the six months ended
June 30, 2003 (unaudited)............................................................. 5
Consolidated Statements of Cash Flows for the six months ended June 30, 2003
and 2002 (unaudited).................................................................. 6
Notes to Consolidated Financial Statements............................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 62
Item 4. Controls and Procedures............................................................... 62
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................. 62
Item 4. Submission of Matters to a Vote of Security Holders................................... 63
Item 6. Exhibits and Reports on Form 8-K...................................................... 63
PART I
ITEM 1. FINANCIAL STATEMENTS
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, DECEMBER 31,
2003 2002
----------- -----------
(UNAUDITED) (AUDITED)
ASSETS:
Investments in real estate:
Land $ 318,404 $ 304,319
Land held for investment or development 441,941 447,778
Building and improvements 2,933,203 2,903,244
Furniture, fixtures and equipment 120,693 115,198
Properties held for disposition, net 40,902 61,469
Less - accumulated depreciation (794,568) (733,172)
----------- -----------
Net investment in real estate $ 3,060,575 $ 3,098,836
Cash and cash equivalents $ 71,933 $ 78,444
Restricted cash and cash equivalents 91,028 105,786
Accounts receivable, net 40,256 42,046
Deferred rent receivable 61,283 60,973
Investments in real estate mortgages and equity of
unconsolidated companies 542,956 562,643
Notes receivable, net 107,556 115,494
Income tax asset-current and deferred, net 50,322 39,709
Other assets, net 182,311 184,468
----------- -----------
Total assets $ 4,208,220 $ 4,288,399
=========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 252,000 $ 164,000
Notes payable 2,212,751 2,218,910
Accounts payable, accrued expenses and other liabilities 335,243 375,902
----------- -----------
Total liabilities $ 2,799,994 $ 2,758,812
----------- -----------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS:
Operating partnership, 8,874,402 and 8,878,342 units, at June 30, 2003
and December 31, 2002, respectively $ 115,270 $ 130,802
Consolidated real estate partnerships 38,822 43,972
----------- -----------
Total minority interests $ 154,092 $ 174,774
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred shares, $0.01 par value, authorized 100,000,000 shares:
Series A Convertible Cumulative Preferred Shares,
liquidation preference of $25.00 per share,
10,800,000 shares issued and outstanding
at June 30, 2003 and December 31, 2002 $ 248,160 $ 248,160
Series B Cumulative Preferred Shares
liquidation preference of $25.00 per share,
3,400,000 shares issued and outstanding
at June 30, 2003 and December 31, 2002 81,923 81,923
Common shares, $0.01 par value, authorized 250,000,000 shares,
124,294,941 and 124,280,867 shares issued and outstanding
at June 30, 2003 and December 31, 2002, respectively 1,236 1,236
Additional paid-in capital 2,243,397 2,243,419
Deferred compensation on restricted shares (5,253) (5,253)
Accumulated deficit (827,874) (728,060)
Accumulated other comprehensive income (27,241) (27,252)
----------- -----------
$ 1,714,348 $ 1,814,173
Less - shares held in treasury, at cost, 25,125,649 and 25,068,759
common shares at June 30, 2003 and December 31, 2002, respectively (460,214) (459,360)
----------- -----------
Total shareholders' equity $ 1,254,134 $ 1,354,813
----------- -----------
Total liabilities and shareholders' equity $ 4,208,220 $ 4,288,399
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
REVENUE:
Office Property $ 127,334 $ 138,378 $ 256,068 $ 277,967
Resort/Hotel Property 51,632 53,523 115,353 92,047
Residential Development Property 54,207 83,480 89,572 126,541
--------- --------- --------- ---------
Total Property revenue 233,173 275,381 460,993 496,555
--------- --------- --------- ---------
EXPENSE:
Office Property real estate taxes 18,475 19,973 36,606 40,461
Office Property operating expenses 43,977 40,978 86,798 84,138
Resort/Hotel Property expense 42,658 42,212 92,399 66,102
Residential Development Property expense 47,831 74,327 80,760 113,678
--------- --------- --------- ---------
Total Property expense 152,941 177,490 296,563 304,379
--------- --------- --------- ---------
Income from Property Operations 80,232 97,891 164,430 192,176
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Income from investment land sales, net 1,627 -- 1,728 --
Interest and other income 1,185 1,843 2,853 4,069
Corporate general and administrative (6,185) (5,333) (12,600) (11,725)
Interest expense (43,073) (46,450) (86,306) (88,722)
Amortization of deferred financing costs (2,544) (2,701) (4,968) (5,021)
Depreciation and amortization (35,958) (34,444) (74,653) (67,084)
Impairment and other charges related
to real estate assets -- (1,000) (1,200) (1,000)
Other expenses (368) -- (495) --
Equity in net income (loss) of unconsolidated companies:
Office Properties 1,864 1,471 3,322 2,781
Resort/Hotel Properties 1,382 -- 2,125 --
Residential Development Properties 1,540 6,179 2,510 18,662
Temperature-Controlled Logistics Properties (406) (417) 1,101 (727)
Other 214 (465) (815) (4,526)
--------- --------- --------- ---------
Total Other Income (Expense) (80,722) (81,317) (167,398) (153,293)
--------- --------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY
INTERESTS AND INCOME TAXES (490) 16,574 (2,968) 38,883
Minority interests (1,846) (4,809) (899) (12,328)
Income tax benefit (provision) 3,090 (874) 5,605 4,008
--------- --------- --------- ---------
INCOME BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 754 10,891 1,738 30,563
Discontinued operations - income (loss) on assets sold and held for sale 649 (588) 624 784
Discontinued operations - (loss) gain on assets sold and held for sale (881) 1,648 (14,595) 3,737
Cumulative effect of a change in accounting principle -- -- -- (9,172)
--------- --------- --------- ---------
NET INCOME (LOSS) 522 11,951 (12,233) 25,912
Series A Preferred Share distributions (4,556) (4,215) (9,112) (7,590)
Series B Preferred Share distributions (2,019) (1,009) (4,038) (1,009)
--------- --------- --------- ---------
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS $ (6,053) $ 6,727 $ (25,383) $ 17,313
========= ========= ========= =========
BASIC EARNINGS PER SHARE DATA:
Net (loss) income before discontinued operations and
cumulative effect of a change in accounting principle $ (0.06) $ 0.06 $ (0.12) $ 0.21
Discontinued operations - income (loss) on assets sold and held for sale 0.01 (0.01) 0.01 0.01
Discontinued operations - (loss) gain on assets sold and held for sale (0.01) 0.02 (0.15) 0.04
Cumulative effect of a change in accounting principle -- -- -- (0.09)
--------- --------- --------- ---------
Net (loss) income - basic $ (0.06) $ 0.07 $ (0.26) $ 0.17
========= ========= ========= =========
DILUTED EARNINGS PER SHARE DATA:
Net (loss) income before discontinued operations and
cumulative effect of a change in accounting principle $ (0.06) $ 0.06 $ (0.12) $ 0.21
Discontinued operations - income (loss) on assets sold and held for sale 0.01 (0.01) 0.01 0.01
Discontinued operations - (loss) gain on assets sold and held for sale (0.01) 0.02 (0.15) 0.04
Cumulative effect of a change in accounting principle -- -- -- (0.09)
--------- --------- --------- ---------
Net (loss) income - diluted $ (0.06) $ 0.07 $ (0.26) $ 0.17
========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(dollars in thousands)
(unaudited)
Series A Series B
Preferred Shares Preferred Shares Treasury Shares
------------------------ ----------------------- ------------------------
Shares Net Value Shares Net Value Shares Net Value
---------- ----------- --------- ----------- ---------- -----------
SHAREHOLDERS' EQUITY, December 31, 2002 10,800,000 $ 248,160 3,400,000 $ 81,923 25,068,759 $ (459,360)
Issuance of Common Shares -- -- -- -- -- --
Accretion of Discount on Employee
Stock Option Notes -- -- -- -- -- --
Issuance of Shares in Exchange for Operating
Partnership Units -- -- -- -- -- --
Share Purchase under Compensation Plan -- -- -- -- 56,890 (854)
Dividends Paid -- -- -- -- -- --
Net (Loss) Income -- -- -- -- -- --
Unrealized and Realized Gain (Loss)
on Marketable Securities -- -- -- -- -- --
Unrealized Net Loss on Cash Flow Hedges -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY, June 30, 2003 10,800,000 $ 248,160 3,400,000 $ 81,923 25,125,649 $ (460,214)
=========== =========== =========== =========== =========== ===========
Deferred
Common Shares Additional Compensation
------------------------- Paid-in on Restricted Accumulated
Shares Par Value Capital Shares (Deficit)
----------- ----------- ----------- ------------- -----------
SHAREHOLDERS' EQUITY, December 31, 2002 124,280,867 $ 1,236 $ 2,243,419 $ (5,253) $ (728,060)
Issuance of Common Shares 6,194 -- 96 -- --
Accretion of Discount on Employee
Stock Option Notes -- -- (126) -- --
Issuance of Shares in Exchange for Operating
Partnership Units 7,880 -- 8 -- --
Share Purchase under Compensation Plan -- -- -- -- --
Dividends Paid -- -- -- -- (74,431)
Net (Loss) Income -- -- -- -- (25,383)
Unrealized and Realized Gain (Loss)
on Marketable Securities -- -- -- -- --
Unrealized Net Loss on Cash Flow Hedges -- -- -- -- --
------------ ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY, June 30, 2003 124,294,941 $ 1,236 $ 2,243,397 $ (5,253) $ (827,874)
============ =========== =========== =========== ===========
Accumulated
Other
Comprehensive
Income Total
------------- -----------
SHAREHOLDERS' EQUITY, December 31, 2002 $ (27,252) $ 1,354,813
Issuance of Common Shares -- 96
Accretion of Discount on Employee
Stock Option Notes -- (126)
Issuance of Shares in Exchange for Operating
Partnership Units -- 8
Share Purchase under Compensation Plan -- (854)
Dividends Paid -- (74,431)
Net (Loss) Income -- (25,383)
Unrealized and Realized Gain (Loss)
on Marketable Securities 383 383
Unrealized Net Loss on Cash Flow Hedges (372) (372)
------------- -----------
SHAREHOLDERS' EQUITY, June 30, 2003 $ (27,241) $ 1,254,134
============= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (12,233) $ 25,912
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 79,621 72,105
Residential Development cost of sales 50,158 94,088
Residential Development capital expenditures (50,196) (49,981)
Discontinued operations 15,089 (401)
Impairment and other charges related to real estate assets 1,200 1,000
Income from investment in land sales, net (1,728) --
Minority interests 899 12,328
Cumulative effect of a change in accounting principle -- 9,172
Non-cash compensation (30) 84
Distributions received in excess of earnings from unconsolidated companies:
Office Properties 3,012 --
Other 1,217 --
Equity in (earnings) loss net of distributions received from unconsolidated companies:
Office Properties -- (373)
Resort/Hotel Properties (2,125) --
Residential Development Properties (2,463) (5,866)
Temperature-Controlled Logistics Properties (1,101) 727
Other -- 5,522
Change in assets and liabilities, net of effects of DBL
consolidation/COPI transaction:
Restricted cash and cash equivalents 17,487 13,992
Accounts receivable 4,464 11,391
Deferred rent receivable (310) (1,124)
Income tax asset - current and deferred (7,049) (15,887)
Other assets 4,154 10,681
Accounts payable, accrued expenses and other liabilities (61,576) (69,770)
--------- ---------
Net cash provided by operating activities 38,490 113,600
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of DBL consolidation/COPI transaction 11,374 38,226
Proceeds from property sales 6,428 20,381
Acquisition of rental properties (2,000) (8,410)
Development of investment properties (1,158) (1,178)
Property improvements - Office Properties (7,908) (7,757)
Property improvements - Resort/Hotel Properties (3,360) (10,230)
Tenant improvement and leasing costs - Office Properties (28,555) (18,028)
Residential Development Properties Investments (15,218) (7,269)
(Increase) decrease in restricted cash and cash equivalents (2,729) 8,931
Return of investment in unconsolidated companies:
Office Properties 2,344 256
Residential Development Properties -- 8,082
Temperature-Controlled Logistics Properties 3,201 --
Other 5,409 --
Investment in unconsolidated companies:
Office Properties (83) --
Residential Development Properties (1,691) (24,478)
Temperature-Controlled Logistics Properties (834) (128)
Other (750) (446)
Decrease (increase) in notes receivable 20,513 (6,840)
--------- ---------
Net cash used in investing activities (15,017) (8,888)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs (1,932) (10,057)
Borrowings under Credit Facility 187,000 110,000
Payments under Credit Facility (99,000) (256,500)
Notes payable proceeds 92,435 375,000
Notes payable payments (92,416) (66,186)
Residential Development Properties notes payable borrowings 41,316 32,087
Residential Development Properties notes payable payments (47,808) (65,221)
Purchase of GMAC preferred interest -- (187,000)
Capital distributions - joint venture partner (7,831) (3,805)
Capital distributions - joint venture preferred equity -- (6,437)
Proceeds from exercise of share options -- 412
Treasury shares purchase under compensation plan (854) --
Common share repurchases held in Treasury -- (28,510)
Issuance of preferred shares - Series A -- 48,160
Issuance of preferred shares - Series B -- 81,923
Series A Preferred Share distributions (9,112) (7,590)
Series B Preferred Share distributions (4,038) (1,009)
Dividends and unitholder distributions (87,744) (88,680)
--------- ---------
Net cash used in financing activities (29,984) (73,413)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,511) 31,299
CASH AND CASH EQUIVALENTS,
Beginning of period 78,444 36,285
--------- ---------
CASH AND CASH EQUIVALENTS,
End of Period $ 71,933 $ 67,584
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
6
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
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 real estate investment trust, and all of its direct
and indirect subsidiaries.
The direct and indirect subsidiaries of Crescent Equities at June 30,
2003 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 an interest in real estate assets and the real estate assets
that each subsidiary owned or had an interest in as of June 30, 2003.
Operating Partnership Wholly-owned assets - The Avallon IV, Chancellor Park, Datran Center (two office
properties), Houston Center (three office properties and the Houston Center Shops)(1).
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) (four office properties). These five
properties are included in the Company's Office Segment.
Sonoma Mission Inn & Spa (80.1% interest), included in the Company's Resort/Hotel
Segment.
Equity Investments, unconsolidated - Bank One Center (50% interest), Bank One Tower (20%
interest), Three Westlake Park (20% interest), Four Westlake Park (20% interest), Miami
Center (40% interest), 5 Houston Center (25% interest) and Five Post Oak Park (30%
interest). These properties are included in the Company's Office Segment. Ritz Carlton
Palm Beach (50% interest), included in the Company's Resort/Hotel Segment. The
temperature-controlled logistics properties (40% interest in 88 properties). These
properties are included in the Company's Temperature-Controlled Logistics Segment.
Crescent Real Estate Wholly-owned assets - The Aberdeen, The Avallon I, II & III, Carter Burgess Plaza, The
Funding I, L.P. Citadel, The Crescent Atrium, The Crescent Office Towers, Regency Plaza One, Waterside
("Funding I") 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, Barton Oaks Plaza One, Briargate Office and
Funding II, L.P. Research Center, Las Colinas Plaza, Liberty Plaza I & II, MacArthur Center I & II,
("Funding II") Ptarmigan Place, Stanford Corporate Centre, Two Renaissance Square and 12404 Park
Central. These properties are included in the Company's Office Segment. The Hyatt
Regency Albuquerque and the Park Hyatt Beaver Creek Resort & Spa. These properties are
included in the Company's Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Greenway Plaza Office Properties (ten office properties). These
Funding III, IV and V, properties are included in the Company's Office Segment. Renaissance Houston Hotel is
L.P. ("Funding III, IV included in the Company's Resort/Hotel Segment.
and V")(2)
Crescent Real Estate Wholly-owned asset - Canyon Ranch - Lenox, included in the Company's Resort/Hotel
Funding VI, L.P. Segment.
("Funding VI")
Crescent Real Estate Wholly-owned assets - Five behavioral healthcare properties.
Funding VII, L.P.
("Funding VII")
7
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crescent Real Estate Wholly-owned assets - The Addison, Addison Tower, Austin Centre, The Avallon V, Frost
Funding VIII, L.P. Bank Plaza, Greenway I and IA (two office properties), Greenway II, Johns Manville
("Funding VIII") Plaza, Palisades Central I, Palisades Central II, Stemmons Place, Trammell Crow
Center(3), 3333 Lee Parkway, 1800 West Loop South, 5050 Quorum, 44 Cook and 55
Madison. These properties are included in the Company's Office Segment. The Canyon
Ranch - Tucson, Omni Austin Hotel, and Ventana Inn & Spa, all of which are included in
the Company's Resort/Hotel Segment.
Crescent 707 17th Wholly-owned assets - 707 17th Street, included in the Company's Office Segment, and
Street, L.L.C. The Denver Marriott City Center, included in the Company's Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Fountain Place and Post Oak Central (three office properties),
Funding X, L.P. all of which are included in the Company's Office Segment.
("Funding X")
Crescent Spectrum Wholly-owned asset - Spectrum Center, included in the Company's Office Segment.
Center, L.P.(4)
Mira Vista Development Equity Investments, consolidated - Mira Vista (98% interest), included in the Company's
Corp. ("MVDC") Residential Development Segment.
Houston Area Development Equity Investments, consolidated - Falcon Point (98% interest), Falcon Landing (98%
Corp. ("HADC") interest) and Spring Lakes (98% interest). These properties are included in the
Company's Residential Development Segment.
Desert Mountain Equity Investments, consolidated - Desert Mountain (93% interest), included in the
Development Corporation Company's Residential Development Segment.
("DMDC")
The Woodlands Land Equity Investments, unconsolidated - The Woodlands (42.5% interest)(5), included in the
Company ("TWLC") Company's Residential Development Segment.
Crescent Resort Equity Investments, consolidated - Eagle Ranch (60% interest), Main Street Junction
Development Inc. ("CRDI") (30% interest), Main Street Station (30% interest), Main Street Station Vacation Club
(30% interest), Riverbend (60% interest), Park Place at Riverfront (64% interest), Park
Tower at Riverfront (64% interest), Promenade Lofts at Riverfront (64% interest),
Creekside at Riverfront (64% interest), Cresta (60% interest), Snow Cloud (64%
interest), Horizon Pass Lodge (64% interest), One Vendue Range (62% interest), Old
Greenwood (71.2% interest), Tahoe Mountain Resorts (57% - 71.2% interest). These
properties are included in the Company's Residential Development Segment.
Equity Investment, unconsolidated - Blue River Land Company, L.L.C. - Three Peaks (30%
interest), included in the Company's Residential Development Segment.
Crescent TRS Holdings Equity Investments, unconsolidated - two quarries (56% interest). These properties are
Corp. included in the Company's Temperature-Controlled Logistics Segment.
- ---------
(1) During the second quarter of 2003, The Park Shops was renamed the
Houston Center Shops.
(2) 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.
(3) The Company owns the principal economic interest in Trammell Crow
Center through its ownership of fee simple title to the property
(subject to a ground lease and a leasehold estate regarding the
building) and two mortgage notes encumbering the leasehold interests in
the land and the building.
(4) In May 2003, Crescent Spectrum Center, L.P. exercised its option to
acquire the Spectrum Center property in exchange for the mortgage on
the property.
(5) Distributions are made to partners based on specified payout
percentages. During the six months ended June 30, 2003, the Company's
payout percentage and economic interest were 52.5%.
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 joint ventures and equity investments as of June 30,
2003.
See Note 8, "Notes Payable and Borrowings Under Credit 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.
8
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENTS
The assets and operations of the Company were divided into four
investment segments at June 30, 2003, as follows:
o Office Segment;
o Resort/Hotel Segment;
o Residential Development Segment; and
o Temperature-Controlled Logistics Segment.
Within these segments, the Company owned in whole or in part the
following real estate assets (the "Properties") as of June 30, 2003:
o OFFICE SEGMENT consisted of 73 office properties, including
three retail properties (collectively referred to as the
"Office Properties"), located in 25 metropolitan submarkets in
six states, with an aggregate of approximately 29.5 million
net rentable square feet. 61 of the Office Properties are
wholly-owned and 12 are owned through joint ventures, five of
which are consolidated and seven of which are unconsolidated.
o RESORT/HOTEL SEGMENT consisted of six luxury and destination
fitness resorts and spas with a total of 1,306 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"). Eight of the Resort/Hotel
Properties are wholly-owned, one is owned through a joint
venture that is consolidated, and one is owned through a joint
venture that is unconsolidated.
o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and voting and non-voting
common stock representing interests of 98% to 100% in five
residential development corporations (collectively referred to
as the "Residential Development Corporations"), which in turn,
through partnership arrangements, owned in whole or in part 23
upscale residential development properties, 21 of which are
consolidated and two of which are unconsolidated (collectively
referred to as the "Residential Development Properties").
o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in Vornado Crescent Portland
Partnership (the "Temperature-Controlled Logistics
Partnership") and a 56% interest in the Vornado Crescent
Carthage and KC Quarry L.L.C. The Temperature-Controlled
Logistics Partnership owns all of the common stock,
representing substantially all of the economic interest, of
AmeriCold Corporation (the "Temperature-Controlled Logistics
Corporation"), a REIT. As of June 30, 2003, the
Temperature-Controlled Logistics Corporation directly or
indirectly owned 88 temperature-controlled logistics
properties (collectively referred to as the
"Temperature-Controlled Logistics Properties") with an
aggregate of approximately 441.5 million cubic feet (17.5
million square feet) of warehouse space. As of June 30, 2003,
the Vornado Crescent Carthage and KC Quarry, L.L.C. owned two
quarries and the related land. The Company accounts for its
interests in the Temperature-Controlled Logistics Partnership
and in the Vornado Crescent Carthage and KC Quarry L.L.C. as
unconsolidated equity investments.
See Note 3, "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, 2003 and 2002, and total assets, consolidated property
level financing, consolidated other liabilities, and minority interests for each
of these investment segments at June 30, 2003 and December 31, 2002.
For purposes of segment reporting as defined in Statement of Financial
Accounting Standards ("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."
9
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles in the United States
("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 for the year ended December 31, 2002.
Certain amounts in prior period financial statements have been
reclassified to conform to current period presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This section should be read in conjunction with the more detailed
information regarding the Company's significant accounting policies contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002.
ADOPTION OF NEW ACCOUNTING STANDARDS
SFAS NO. 145. In April 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 145, "Rescission of FASB Statements 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
requires the reporting of gains and losses from early extinguishment of debt be
included in the determination of net income unless criteria in Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations," which
allows for extraordinary item classification, are met. The provisions of this
Statement related to the rescission of Statement No. 4 are to be applied in
fiscal years beginning after May 15, 2002. The Company adopted this Statement
for fiscal 2003 and expects no impact in 2003 beyond the classification of costs
related to early extinguishments of debt, which were shown in the Company's 2001
Consolidated Statements of Operations as an extraordinary item.
SFAS NOS. 148 AND 123. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," effective
for fiscal years ending after December 15, 2002, to amend the transition and
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." In addition to the prospective transition method of accounting
for Stock-Based Employee Compensation using the fair value method provided in
SFAS No. 123, SFAS No. 148 permits two additional transition methods, both of
which avoid the ramp-up effect arising from prospective application of the fair
value method. The Retroactive Restatement Method requires companies to restate
all periods presented to reflect the Stock-Based Employee Compensation under the
fair value method for all employee awards granted, modified, or settled in
fiscal years beginning after December 15, 1994. The Modified Prospective Method
requires companies to recognize Stock-Based Employee Compensation from the
beginning of the fiscal year in which the recognition provisions are first
applied as if the fair value method in SFAS No. 123 had been used to account for
employee awards granted, modified, or settled in fiscal years beginning after
December 15, 1994. Also, in the absence of a single accounting method for
Stock-Based Employee Compensation, SFAS No. 148 expands disclosure requirements
from those existing in SFAS No. 123, and requires disclosure of whether, when,
and how an entity adopted the preferable, fair value method of accounting.
Effective January 1, 2003, the Company adopted the fair value expense
recognition provisions of SFAS No. 123 on a prospective basis as permitted,
which requires that the value of stock options at the date of grant be amortized
ratably into expense over the appropriate vesting period. During the six months
ended June 30, 2003, the Company granted stock options and recognized
compensation expense that was not significant to its results of operations. With
respect to the Company's stock options which were granted prior to 2003, the
Company accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations ("APB No. 25"). Under APB No.
25, compensation cost is measured as the excess, if any, of the quoted market
price of the Company's common shares at the date of grant over the exercise
price of the option granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period. During the six months ended June 30,
2003, no compensation cost was recognized for grants of stock options made prior
to 2003 under the Company stock option plans because the Company's policy is to
grant stock options with an exercise price equal to the quoted closing market
price of the Company's common shares on the grant date. Had compensation cost
for the Plans been determined based on the
10
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair value at the grant dates for awards under the Plans consistent with SFAS
No. 123, the Company's net (loss) income and (loss) earnings per share would
have been reduced to the following pro forma amounts:
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
- ---------------------------------------- ------------- ------------- ---------- -----------
Net (loss) income available to common
shareholders, as reported $ (6,053) $ 6,727 $ (25,383) $ 17,313
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards (765) (1,093) (1,602) (2,073)
------------- ------------- ---------- -----------
Pro forma net (loss) income $ (6,818) $ 5,634 $ (26,985) $ 15,240
(Loss) earnings per share:
Basic - as reported $ (0.06) $ 0.07 $ (0.26) $ 0.17
Basic - pro forma $ (0.07) $ 0.05 $ (0.27) $ 0.15
Diluted - as reported $ (0.06) $ 0.07 $ (0.26) $ 0.17
Diluted - pro forma $ (0.07) $ 0.05 $ (0.27) $ 0.14
SFAS NO. 149. In April 2003, the FASB issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In general, SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of this
statement is not expected to have a material impact, if any, on the Company's
financial condition or its results of operations.
SFAS NO. 150. In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer should classify
and measure certain financial instruments that have both liability and equity
characteristics. The provisions of this Statement are to be applied to financial
instruments entered into or modified after May 31, 2003 and to existing
instruments as of the beginning of the first interim financial reporting period
after June 15, 2003. The adoption of this statement is not expected to have a
material impact, if any, on the Company's financial condition or its results of
operations.
FASB INTERPRETATION 45. In November 2002, the FASB issued
Interpretation 45, "Guarantors' Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued, and liability-recognition requirements for a guarantor of certain
types of debt. The new guidance requires a guarantor to recognize a liability at
the inception of a guarantee which is covered by the new requirements whether or
not payment is probable, creating the new concept of a "stand-ready" obligation.
Initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. See
Note 10, "Commitments and Contingencies," for disclosure of the Company's
guarantees at June 30, 2003. The Company adopted FIN 45 effective January 1,
2003.
FASB INTERPRETATION 46. On January 15, 2003, the FASB approved the
issuance of Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." Under FIN 46, consolidation requirements
are effective immediately for new Variable Interest Entities ("VIEs") created
after January 31, 2003. The consolidation requirements apply to existing VIEs in
the first fiscal year or interim period beginning after June 15, 2003. VIEs are
generally a legal structure used for business enterprises that either do not
have equity investors with voting rights, or have equity investors that do not
provide sufficient financial resources for the entity to support its activities.
The objective of the new guidance is to improve reporting by addressing when a
company should include in its financial statements the assets, liabilities and
activities of another entity such as a VIE. FIN 46 requires a VIE to be
consolidated by a company if the company is subject to a majority of the risk of
loss from the VIE's activities or entitled to receive a majority of the entity's
residual returns or both. FIN 46 also requires disclosures about VIEs that the
company is not required to consolidate but in which it has a significant
variable interest. Certain of the
11
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the VIE was established. These disclosure
requirements are as follows: (a) the nature, purpose, size, and activities of
the variable interest entity; and, (b) the enterprise's maximum exposure to loss
as a result of its involvement with the VIE. FIN 46 may be applied prospectively
with a cumulative effect adjustment as of the date on which it is first applied
or by restating previously issued financial statements for one or more years
with a cumulative effect adjustment as of the beginning of the first year
restated. The Company is assessing the impact of this Interpretation, if any, on
its existing entities and does not believe the impact will be significant on its
liquidity, financial position, and results of operations. The Company did not
create any VIEs subsequent to January 31, 2003.
SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," ("EPS")
specifies the computation, presentation and disclosure requirements for earnings
per share.
Basic EPS is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, where such exercise or conversion would result in a lower EPS
amount. The Company presents both basic and diluted earnings per share.
The following tables present reconciliations for the three and six
months ended June 30, 2003 and 2002 of basic and diluted earnings per share from
"Income before discontinued operations and cumulative effect of a change in
accounting principle" to "Net (loss) income available to common shareholders."
The table also includes weighted average shares on a basic and diluted basis.
FOR THE THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
2003 2002
----------------------------------- ---------------------------------
Income Wtd. Avg. Per Share Income Wtd. Avg. Per Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------- -------- -------- --------- -------- --------- ---------
BASIC EPS -
Income before discontinued operations $ 754 99,170 $ 10,891 104,888
Series A Preferred Share distributions (4,556) (4,215)
Series B Preferred Share distributions (2,019) (1,009)
-------- -------- ------- -------- ------- -------
Net (loss) income available to common shareholders
before discontinued operations $ (5,821) 99,170 (0.06) $ 5,667 104,888 $ 0.06
Discontinued operations - income (loss) on assets
sold and held for sale 649 0.01 (588) (0.01)
Discontinued operations- (loss) gain on assets sold
and held for sale (881) (0.01) 1,648 0.02
-------- -------- ------- -------- ------- -------
Net (loss) income available to common shareholders $ (6,053) 99,170 (0.06) $ 6,727 104,888 $ 0.07
======== ======== ======= ======== ======= =======
FOR THE THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
2003 2002
----------------------------------- ---------------------------------
Income Wtd. Avg. Per Share Income Wtd. Avg. Per Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------- -------- -------- --------- -------- --------- ---------
DILUTED EPS -
Income before discontinued operations $ 754 99,170 $ 10,891 104,888
Series A Preferred Share distributions (4,556) (4,215)
Series B Preferred Share distributions (2,019) (1,009)
-------- -------- ------- -------- ------- -------
Effect of dilutive securities
Additional common shares relating to
share and unit options 13 1,225
Net (loss) income available to common shareholders
before discontinued operations $ (5,821) 99,183 (0.06) $ 5,667 106,113 $ 0.06
Discontinued operations - income (loss) on assets
sold and held for sale 649 0.01 (588) (0.01)
Discontinued operations - (loss) gain on assets sold
and held for sale (881) (0.01) 1,648 0.02
-------- -------- ------- -------- ------- -------
Net (loss) income available to common shareholders $ (6,053) 99,183 (0.06) $ 6,727 106,113 $ 0.07
======== ======== ======= ======== ======= =======
12
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
2003 2002
----------------------------------- ---------------------------------
Income Wtd. Avg. Per Share Income Wtd. Avg. Per Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------- -------- -------- --------- -------- --------- ---------
BASIC EPS -
Income before discontinued operations
and cumulative effect of a change in accounting
principle $ 1,738 99,194 $ 30,563 104,913
Series A Preferred Share distributions (9,112) (7,590)
Series B Preferred Share distributions (4,038) (1,009)
-------- -------- ------- -------- ------- -------
Net (loss) income available to common shareholders
before discontinued operations and cumulative
effect of a change in accounting principle $(11,412) 99,194 (0.12) $ 21,964 104,913 $ 0.21
Discontinued operations - income on assets sold and
held for sale 624 0.01 784 0.01
Discontinued operations - (loss) gain on assets sold
and held for sale (14,595) (0.15) 3,737 0.04
Cumulative effect of a change in accounting principle -- -- (9,172) (0.09)
-------- -------- ------- -------- ------- -------
Net (loss) income available to common shareholders $(25,383) 99,194 (0.26) $ 17,313 104,913 $ 0.17
======== ======== ======= ======== ======= =======
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
2003 2002
----------------------------------- ---------------------------------
Income Wtd. Avg. Per Share Income Wtd. Avg. Per Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------- -------- -------- --------- -------- --------- ---------
DILUTED EPS -
Income before discontinued operations
and cumulative effect of a change in accounting
principle $ 1,738 99,194 $ 30,563 104,913
Series A Preferred Share distributions (9,112) (7,590)
Series B Preferred Share distributions (4,038) (1,009)
-------- -------- ------- -------- ------- -------
Effect of dilutive securities
Additional common shares relating to
share and unit options 7 838
Net (loss) income available to common shareholders
before discontinued operations and cumulative
effect of a change in accounting principle $(11,412) 99,201 (0.12) $ 21,964 105,751 $ 0.21
Discontinued operations - income on assets sold and
held for sale 624 0.01 784 0.01
Discontinued operations - (loss) gain on assets sold
and held for sale (14,595) (0.15) 3,737 0.04
Cumulative effect of a change in accounting principle -- -- (9,172) (0.09)
-------- -------- ------- -------- ------- -------
Net (loss) income available to common shareholders $(25,383) 99,201 (0.26) $ 17,313 105,751 $ 0.17
======== ======== ======= ======== ======= =======
13
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This table presents supplemental cash flows disclosures for the six
months ended June 30, 2003 and 2002.
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 2003 2002
--------- ---------
(in thousands)
--------------
Interest paid on debt $ 76,240 $ 71,064
Interest capitalized - Office Properties -- 248
Interest capitalized - Residential Development Properties 8,297 5,558
Additional interest paid in conjunction with cash flow hedges 10,114 12,012
--------- ---------
Total interest paid $ 94,651 $ 88,882
========= =========
Cash paid for income taxes $ 1,640 $ 11,000
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH 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 $ 8 $ 22
Unrealized and realized gain (loss) on marketable securities 383 (1,149)
Impairment and other charges related to real estate assets 18,018 3,048
Adjustment of cash flow hedge to fair value (487) 6,046
SUPPLEMENTAL SCHEDULE OF 2003 CONSOLIDATION OF DBL, MVDC AND
HADC AND THE 2002 TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES
PURSUANT TO THE FEBRUARY 14, 2002 AGREEMENT WITH COPI:
Net investment in real estate $ (9,692) $(570,175)
Restricted cash and cash equivalents -- (3,968)
Accounts receivable, net (3,057) (23,338)
Investments in real estate mortgages and equity of
unconsolidated companies 13,552 309,103
Notes receivable, net (25) 29,816
Income tax asset - current and deferred, net (3,564) (21,784)
Other assets, net (820) (63,263)
Notes payable 312 129,157
Accounts payable, accrued expenses and other liabilities 12,696 201,159
Minority interest - consolidated real estate partnerships 1,972 51,519
--------- ---------
Increase in cash $ 11,374 $ 38,226
========= =========
3. 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, is based on the
definition adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT") and means:
o Net Income (Loss) - determined in conformity with GAAP;
o excluding gains (losses) from sales of depreciable operating
property;
o excluding extraordinary items (as defined by GAAP);
o including depreciation and amortization of real estate assets;
and
o after adjusting for unconsolidated partnerships and joint
ventures.
NAREIT developed FFO as a relative measure of performance 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 should not be considered as an alternative to net income
determined in accordance with GAAP as an indication of the Company's operating
performance.
14
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's measure of FFO may not be comparable to similarly titled
measures of other REITs if those REITs apply the definition of FFO in a
different manner than the Company.
Selected financial information related to each segment for the three
and six months ended June 30, 2003 and 2002, and total assets, consolidated
property level financing, consolidated other liabilities, and minority interests
for each of the segments at June 30, 2003 and December 31, 2002, are presented
below:
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- -------------- --------- ------------ ----------- ------------ --------- ---------
Property revenues $127,334(1) $ 51,632 $ 54,207 $ -- $ -- $233,173
Other income -- -- -- -- 2,812 2,812
-------- -------- -------- ------- -------- --------
Total revenue $127,334 $ 51,632 $ 54,207 $ -- $ 2,812(2) $235,985
======== ======== ======== ======= ======== ========
Property operating expenses $ 62,452 $ 42,658 $ 47,831 $ -- $ -- $152,941
Other operating expenses -- -- -- -- 88,128 88,128
-------- -------- -------- ------- -------- --------
Total expenses $ 62,452 $ 42,658 $ 47,831 $ -- $ 88,128(2) $241,069
======== ======== ======== ======= ======== ========
Equity in net income (loss) of
unconsolidated companies $ 1,864 $ 1,382 $ 1,540 $ (406) $ 214 $ 4,594
======== ======== ======== ======= ======== ========
Funds from operations $ 70,011 $ 12,356 $ 5,705 $ 5,079 $(56,710) $ 36,441 (5)
======== ======== ======== ======= ======== ========
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED JUNE 30, 2002
-----------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- -------------- --------- ------------ ----------- ------------ --------- ---------
Property revenues $138,378(1) $ 53,523 $ 83,480 $ -- $ -- $275,381
Other income -- -- -- -- 1,843 1,843
-------- -------- -------- ------ -------- --------
Total revenue $138,378 $ 53,523 $ 83,480 $ -- $ 1,843(2) $277,224
======== ======== ======== ====== ======== ========
Property operating expenses $ 60,951 $ 42,212 $ 74,327 $ -- $ -- $177,490
Other operating expenses -- -- -- -- 89,928 89,928
-------- -------- -------- ------ -------- --------
Total expenses $ 60,951 $ 42,212 $ 74,327 $ -- $ 89,928(2) $267,418
======== ======== ======== ====== ======== ========
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) $ 53,205 (5)
======== ======== ======== ====== ======== ========
SELECTED FINANCIAL INFORMATION: FOR THE SIX MONTHS ENDED JUNE 30, 2003
----------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- -------------- --------- ------------ ----------- ------------ --------- ---------
Property revenues $ 256,068(1) $ 115,353 $ 89,572 $ -- $ -- $ 460,993
Other income -- -- -- -- 4,581 4,581
--------- --------- --------- ------- --------- ---------
Total revenue $ 256,068 $ 115,353 $ 89,572 $ -- $ 4,581(2) $ 465,574
========= ========= ========= ======= ========= =========
Property operating expenses $ 123,404 $ 92,399 $ 80,760 $ -- $ -- $ 296,563
Other operating expenses -- -- -- -- 180,222 180,222
--------- --------- --------- ------- --------- ---------
Total expenses $ 123,404 $ 92,399 $ 80,760 $ -- $ 180,222(2) $ 476,785
========= ========= ========= ======= ========= =========
Equity in net income (loss) of
unconsolidated companies $ 3,322 $ 2,125 $ 2,510 $ 1,101 $ (815) $ 8,243
========= ========= ========= ======= ========= =========
Funds from operations $ 142,271 $ 27,987 $ 10,993 $12,096 $(115,489) $ 77,858 (5)
========= ========= ========= ======= ========= =========
15
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION: FOR THE SIX MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- -------------- --------- ------------ ----------- ------------ --------- ---------
Property revenues $ 277,967(1) $ 92,047 $ 126,541 $ -- $ -- $ 496,555
Other income -- -- -- -- 4,069 4,069
--------- --------- --------- ------- --------- ---------
Total revenue $ 277,967 $ 92,047 $ 126,541 $ -- $ 4,069(2) $ 500,624
========= ========= ========= ======= ========= =========
Property operating expenses $ 124,599 $ 66,102 $ 113,678 $ -- $ -- $ 304,379
Other operating expenses -- -- -- -- 173,552 173,552
--------- --------- --------- ------- --------- ---------
Total expenses $ 124,599 $ 66,102 $ 113,678 $ -- $ 173,552(2) $ 477,931
========= ========= ========= ======= ========= =========
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) $ 117,332(5)
========= ========= ========= ======= ========= =========
- ----------
See footnotes to the following table.
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in millions) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- ------------- -------- ------------ ----------- ------------ --------- -------
TOTAL ASSETS BY SEGMENT:(3)
Balance at June 30, 2003 $ 2,529 $ 499 $ 748 $ 303 $ 129 $ 4,208
Balance at December 31, 2002 2,626 502 723 304 133 4,288
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at June 30, 2003 $(1,368) $ (133) $ (87) $ -- $ (877)(4) $(2,465)
Balance at December 31, 2002 (1,371) (130) (93) -- (789)(4) (2,383)
CONSOLIDATED OTHER LIABILITIES:
Balance at June 30, 2003 $ (92) $ (40) $ (136) $ -- $ (67) $ (335)
Balance at December 31, 2002 (135) (44) (125) -- (72) (376)
MINORITY INTERESTS:
Balance at June 30, 2003 $ (8) $ (7) $ (24) $ -- $ (115) $ (154)
Balance at December 31, 2002 (11) (8) (25) -- (131) (175)
- ----------
(1) Includes lease termination fees (net of the write-off of deferred rent
receivables) of approximately $0.9 million and $0.6 million for the
three months ended June 30, 2003 and 2002, respectively and $2.9
million and $1.7 million for the six months ended June 30, 2003 and
2002, respectively.
(2) For purposes of this Note, Corporate and Other include income from
investment land sales, net, corporate interest and other income,
general and administrative, interest expense, depreciation and
amortization, amortization of deferred financing costs, preferred
return paid to GMAC Commercial Mortgage Corporation ("GMACCM") for
2002, preferred dividends, other unconsolidated companies, impairment
and other charges and other expenses.
(3) Total assets by segment is inclusive of investments in real estate
mortgages and equity of unconsolidated companies, net of unconsolidated
debt.
(4) Inclusive of Corporate bonds and credit facility.
(5) The following table presents a reconciliation of Consolidated Funds
from Operations to Net Income (Loss).
16
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECONCILIATION OF CONSOLIDATED FUNDS FROM OPERATIONS
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
(in thousands) 2003 2002 2003 2002
- -------------- --------- --------- --------- ---------
Consolidated Funds from Operations $ 36,441 $ 53,205 $ 77,858 $ 117,332
Adjustments to reconcile Consolidated Funds from
Operations to Net Income (Loss):
Depreciation and amortization of real estate assets (33,099) (33,530) (69,400) (65,669)
(Loss) gain on property sales, net (62) 1,420 (288) 5,665
Impairment and other adjustments related to real
estate assets and assets held for sale (990) -- (18,018) (2,048)
Cumulative effect of a change in accounting principle -- -- -- (9,172)
Adjustment for investments in real estate
mortgages and equity of unconsolidated companies:
Office Properties (3,013) (1,889) (5,835) (4,051)
Resort/Hotel Properties (355) -- (749) --
Residential Development Properties 512 (2,051) (227) (2,954)
Temperature-Controlled Logistics Properties (5,486) (5,790) (10,996) (11,501)
Other 104 (3,130) 82 (5,776)
Unitholder minority interest (105) (1,508) 2,190 (4,513)
Series A Preferred share distributions 4,556 4,215 9,112 7,590
Series B Preferred share distributions 2,019 1,009 4,038 1,009
--------- --------- --------- ---------
Net Income (Loss) $ 522 $ 11,951 $ (12,233) $ 25,912
========= ========= ========= =========
4. DISCONTINUED OPERATIONS
In August 2001, the FASB issued SFAS No. 144, which requires that the
results of operations of assets sold or held for sale, and any gains or losses
recognized on assets sold and held for sale, be disclosed separately in the
Company's Consolidated Statements of Operations. The Company adopted SFAS No.
144 on January 1, 2002. In accordance with SFAS No. 144, the results of
operations of the assets sold or held for sale have been presented as
"Discontinued operations - income (loss) on assets sold and held for sale," and
gain or loss and impairments in the assets sold or held for sale have been
presented as "Discontinued operations - (loss) gain on assets sold and held for
sale" in the accompanying Consolidated Statements of Operations for the three
and six months ended June 30, 2003 and 2002. The impairment charges represent
the difference between the carrying value of assets sold or held for sale and
the actual or estimated sales price, less costs of sale. The carrying value of
the assets held for sale has been reflected as "Properties held for disposition,
net" in the accompanying Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002.
ASSETS HELD FOR SALE
OFFICE SEGMENT
As of June 30, 2003, the 1800 West Loop South Office Property located
in the West Loop/Galleria submarket in Houston, Texas was held for sale. During
the six months ended June 30, 2003, the Company recognized an approximately
$12.7 million impairment charge, net of minority interests, on the 1800 West
Loop South Office Property.
As of June 30, 2003, the Company determined that the North Dallas
Athletic Club, a building adjacent to the Stanford Corporate Centre Office
Property in the Far North Dallas submarket in Dallas, Texas was no longer held
for sale due to the Company's negotiations to contract a new operator. The
Property has been reclassified from "Properties held for disposition, net" to
"Building and improvements," "Furniture, fixtures and equipment" and
"Accumulated depreciation" in the accompanying Consolidated Balance Sheets with
a book value of $0.6 million, net of accumulated depreciation of $0.8 million.
The impairment charge of $1.0 million, net of minority interest, recorded during
the first quarter of 2003, has been reclassified from "Discontinued operations -
(loss) gain on assets sold and held for sale" to "Impairment and other charges
related to real estate assets" in the accompanying Consolidated Statement of
Operations.
17
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BEHAVIORAL HEALTHCARE PROPERTIES
On February 27, 2003, the Company sold a behavioral healthcare property
for $2.0 million, consisting of $1.3 million in cash and a $0.7 million note
receivable. The Company recognized a loss on the sale of this property of
approximately $0.3 million. A $2.3 million impairment charge, net of minority
interest, had been recognized during 2002 related to this property.
On May 2, 2003, the Company sold one additional behavioral healthcare
property for $2.1 million. The Company recognized a loss on the sale of this
property of approximately $0.1 million. A $0.7 million impairment charge, net of
minority interest, was recognized during the first quarter of 2003 related to
this property.
The Company also recognized a $0.8 million impairment charge, net of
minority interest, during the second quarter of 2003 on a behavioral healthcare
property held for sale and under contract for sale at June 30, 2003. This
property was sold on July 10, 2003.
As of June 30, 2003, the Company owned five behavioral healthcare
properties.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major classes of assets of the
Properties held for sale.
(in thousands) JUNE 30, 2003(1) DECEMBER 31, 2002
-------------- ---------------- -----------------
Land $ 9,523 $ 12,802
Buildings and improvements 39,291 56,875
Furniture, fixture and equipment 935 1,665
Accumulated depreciation (8,847) (9,873)
-------- --------
Net investment in real estate $ 40,902 $ 61,469
======== ========
- ---------
(1) Includes the 1800 West Loop South Office Property and five behavioral
healthcare properties.
The following table presents rental revenue, operating expenses,
depreciation and amortization, net income and impairments for the six months
ended June 30, 2003 and 2002 for Properties held for sale as of June 30, 2003.
FOR THE SIX MONTHS ENDED JUNE 30,
DEPRECIATION
OPERATING AND NET
REVENUE(1) EXPENSES(1) AMORTIZATION(1) INCOME(1) IMPAIRMENTS(2)
---------- ----------- --------------- --------- --------------
(in thousands)
--------------
2003 $2,889 $1,548 $303 $1,038 $16,818
2002 2,802 1,623 819 360 --
- ---------
(1) Includes the 1800 West Loop South Office Property.
(2) Includes impairments of 1800 West Loop South and two behavioral healthcare
properties, before minority interests of $2.6 million.
5. OTHER ASSET DISPOSITIONS
INVESTMENT LAND DISPOSITIONS
On April 24, 2003, the Company completed the sale of approximately
one-half acre of undeveloped land located in Dallas, Texas. The sale generated
net proceeds and a net gain of approximately $0.3 million. This land was
wholly-owned by the Company.
On May 15, 2003, the Company completed the sale of approximately 24.8
acres of undeveloped land located in Coppell, Texas. The sale generated net
proceeds of $3.0 million and a net gain of approximately $1.1 million. This land
was wholly-owned by the Company.
18
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2003, the Company sold approximately 3.5 acres of
undeveloped land located in Houston, Texas. Subsequent to the end of the second
quarter, the sale agreement was modified. Under the terms of the modified sale
agreement, the Company generated proceeds of $2.1 million, net of closing costs,
and a note receivable in the amount of $11.8 million, with annual installments
of principal and interest payments beginning June 27, 2004 through maturity on
June 27, 2010. The principal payment amounts are calculated based upon a 20-year
amortization and the interest rate is 4% for the first two years and thereafter
the prime rate, as defined in the note, through maturity. Based on the terms of
the modified sale agreement, the Company will fully recognize a net gain of
approximately $8.9 million in the third quarter of 2003. This land was
wholly-owned by the Company.
6. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of June 30, 2003, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 88 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 441.5 million cubic feet (17.5 million square feet) of warehouse
space.
The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
Crescent Operating, Inc. ("COPI"). The Company has no economic interest in
AmeriCold Logistics. See Note 15, "COPI," for information on the proposed
acquisition of COPI's 40% interest in AmeriCold Logistics by a new entity to be
owned by the Company's shareholders.
AmeriCold Logistics, as sole lessee of the Temperature-Controlled
Logistics Properties, leases the Temperature-Controlled Logistics Properties
from the Temperature-Controlled Logistics Corporation under three triple-net
master leases, as amended. On February 22, 2001, the Temperature-Controlled
Logistics Corporation and AmeriCold Logistics agreed to restructure certain
financial terms of the leases, including a reduction of the rental obligation
for 2001 and 2002, the increase of the Temperature-Controlled Logistics
Corporation's share of capital expenditures for the maintenance of the
properties (effective January 1, 2000) and the extension of the date on which
deferred rent is required to be paid to December 31, 2003. On March 7, 2003, the
Temperature-Controlled Logistics Corporation and AmeriCold Logistics amended the
leases to further extend the date on which deferred rent is required to be paid
to December 31, 2004.
AmeriCold Logistics deferred $18.5 million of the total $76.4 million
of rent payable for the six months ended June 30, 2003. The Company's share of
the deferred rent was $7.4 million. The Company recognizes rental income from
the Temperature-Controlled Logistics Properties when earned and collected and
has not recognized the $7.4 million of deferred rent in equity in net income of
the Temperature-Controlled Logistics Properties for the six months ended June
30, 2003. As of June 30, 2003, the Temperature-Controlled Logistics
Corporation's deferred rent and valuation allowance from AmeriCold Logistics
were $59.1 million and $52.8 million, respectively, of which the Company's
portions were $23.6 million and $21.1 million, respectively.
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.
As of June 30, 2003, the Company held a 56% interest in Vornado
Crescent Carthage and KC Quarry, L.L.C. ("VCQ"). The assets of VCQ include two
quarries and the related land. The Company accounts for this investment as an
unconsolidated equity investment because the Company does not control the joint
venture.
On December 31, 2002, VCQ purchased $5.7 million of trade receivables
from AmeriCold Logistics at a 2% discount. The Company contributed approximately
$3.1 million to VCQ for the purchase of the trade receivables. The receivables
were collected during the three months ended March 31, 2003.
On March 28, 2003, VCQ purchased $6.6 million of trade receivables from
AmeriCold Logistics at a 2% discount. VCQ used cash from collection of trade
receivables previously purchased from AmeriCold Logistics and a $2.0 million
contribution from its owners, of which approximately $0.8 million represented
the Company's contribution, for the purchase of the trade receivables. The
receivables were collected during the three months ended June 30, 2003.
On May 22, 2003, VCQ distributed cash of $3.2 million to the Company.
19
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES
The Company has investments of 20% to 50% in seven unconsolidated joint
ventures that own seven Office Properties. The Company does not have control of
these joint ventures, and therefore, these investments are accounted for using
the equity method of accounting.
The Company, through ownership interests of 50% or less, or ownership
of non-voting interests only, has other unconsolidated investments which it does
not control; these investments are accounted for using the equity method of
accounting.
The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and equity investments as of June 30, 2003.
COMPANY'S OWNERSHIP
ENTITY CLASSIFICATION AS OF JUNE 30, 2003
- -------------------------------------------------------- ------------------------------------ -------------------------
Joint Ventures
Main Street Partners, L.P. Office (Bank One Center - Dallas) 50.0% (1)
Crescent Miami Center, L.L.C. Office (Miami Center - Miami) 40.0% (2)
Crescent 5 Houston Center, L.P. Office (5 Houston Center - Houston) 25.0% (3)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower - Austin) 20.0% (4)
Houston PT Four Westlake Park Office Limited Partnership Office (Four Westlake Park - Houston) 20.0% (4)
Houston PT Three Westlake Park Office Limited Partnership Office (Three Westlake Park - Houston) 20.0% (4)
Crescent Five Post Oak Park L.P. Office (Five Post Oak - Houston) 30.0% (5)
Equity Investments
The Woodlands Land Development Company, L.P. Residential Development 42.5% (6)(7)
Blue River Land Company, L.L.C. Residential Development 50.0% (8)
Manalapan Hotel Partners, L.L.C. Resort/Hotel (Ritz Carlton Palm Beach) 50.0% (9)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0% (10)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0% (11)
The Woodlands Commercial Properties Company, L.P. Office 42.5% (6)(7)
CR License, L.L.C. Other 30.0% (12)
The Woodlands Operating Company, L.P. Other 42.5% (6)(7)
Canyon Ranch Las Vegas, L.L.C. Other 65.0% (13)
SunTx Fulcrum Fund, L.P. Other 28.1% (14)
G2 Opportunity Fund, L.P. Other 12.5% (15)
- ---------
(1) The remaining 50% interest in Main Street Partners, L.P. is owned by
Trizec Properties, Inc.
(2) The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by
an affiliate of a fund managed by JP Morgan Fleming Asset Management,
Inc.
(3) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned
by a pension fund advised by JP Morgan Fleming Asset Management, Inc.
(4) The remaining 80% interest in each of Austin PT BK One Tower Office
Limited Partnership, Houston PT Three Westlake Park Office Limited
Partnership and Houston PT Four Westlake Park Office Limited
Partnership is owned by an affiliate of General Electric Pension Trust.
(5) The remaining 70% interest in Crescent Five Post Oak Park L.P. is owned
by an affiliate of General Electric Pension Trust.
(6) The remaining 57.5% interest in each of the Woodlands Land Development
Company, L.P. ("WLDC"), The Woodlands Commercial Properties Company,
L.P. ("Woodlands CPC") and The Woodlands Operating Company, L.P. is
owned by an affiliate of Morgan Stanley.
(7) Distributions are made to partners based on specified payout
percentages. During the six months ended June 30, 2003, the payout
percentage to the Company was 52.5%.
(8) The remaining 50% interest in Blue River Land Company, L.L.C. is owned
by parties unrelated to the Company.
(9) The remaining 50% interest in Manalapan Hotel Partners, L.L.C.
("Manalapan") is owned by WB Palm Beach Investors, L.L.C.
(10) The remaining 60% interest in Vornado Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.
(11) The remaining 44% in Vornado Crescent Carthage and KC Quarry, L.L.C. is
owned by Vornado Realty Trust, L.P.
(12) The remaining 70% interest in CR License, L.L.C. is owned by an
affiliate of the management company of two of the Company's
Resort/Hotel Properties.
(13) The remaining 35% interest in Canyon Ranch Las Vegas, L.L.C. is owned
by an affiliate of the management company of two of the Company's
Resort/Hotel Properties.
20
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) The SunTx Fulcrum Fund, L.P.'s ("SunTx") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial
capital appreciation. The remaining 71.9% of SunTx is owned by a group
of individuals unrelated to the Company. The Company's ownership
percentage will decline by the closing date of SunTx as capital
commitments from third parties are secured. The Company's projected
ownership interest at the closing of SunTx is approximately 7.5% based
on SunTx manager's expectations for the final SunTx capitalization. The
Company accounts for its investment in SunTx under the cost method. The
Company's investment at June 30, 2003 was $6.3 million.
(15) G2 Opportunity Fund, L.P. ("G2") was formed for the purpose of
investing in commercial mortgage backed securities and other commercial
real estate investments. Goff-Moore Strategic Partners, L.P. ("GMSP")
and GMACCM each own 21.875% of G2, with the remaining 43.75% owned by
parties unrelated to the Company. See Note 14, "Related Party
Transactions," for information regarding the ownership interests of
trust managers and officers of the Company in GMSP.
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 in 2002 prior to February 14, 2002 are consolidated in the June 30,
2003 financial statements. Additionally, certain unconsolidated subsidiaries of
the newly consolidated entities are now shown separately as unconsolidated
entities of the Company. As a result of the Company's January 2, 2003 purchase
of the remaining 2.56% economic interest, representing 100% of the voting stock,
in DBL Holdings, Inc. ("DBL"), DBL is consolidated in the June 30, 2003
financial statements. Because DBL owns a majority of the voting stock of MVDC
and HADC, these two Residential Development Corporations are consolidated in the
June 30, 2003 financial statements.
The unconsolidated entities that are included under the headings on the
following tables are summarized below.
Balance Sheets as of June 30, 2003:
o WLDC;
o Other Residential Development - This includes the
Blue River Land Company, L.L.C.;
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