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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 SEPTEMBER 30, 2003
COMMISSION FILE NO. 333-42293
333-89194-01
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CRESCENT FINANCE COMPANY*
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2531304
DELAWARE 42-1536518
- ----------------------------------- ---------------------------------------
(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 _______
* Crescent Finance Company meets the conditions set forth in General Instruction
H (1) (a) and (b) of Form 10-Q and therefore is filing this form with the
reduced disclosure format
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2003 (unaudited) and December 31, 2002
(unaudited)........................................................................... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002 (unaudited)............................................... 4
Consolidated Statement of Partners' Capital for the nine months ended
September 30, 2003 (unaudited)........................................................ 5
Consolidated Statements of Cash Flows for the nine months ended September 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......................................................................... 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 65
Item 4. Controls and Procedures................................................................ 65
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................... 66
PART I
ITEM 1. FINANCIAL STATEMENTS
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -----------
ASSETS:
Investments in real estate:
Land $ 315,479 $ 292,970
Building and improvements, net of accumulated depreciation of $734,370
and $655,168 at September 30, 2003 and December 31, 2002,
respectively 2,201,657 2,185,070
Furniture, fixtures and equipment, net of accumulated depreciation
of $69,487 and $58,468 at September 30, 2003 and December 31, 2002,
respectively 62,682 56,682
Land held for investment or development 470,813 447,778
Properties held for disposition, net 87,701 116,336
----------- -----------
Net investment in real estate $ 3,138,332 $ 3,098,836
Cash and cash equivalents $ 59,623 $ 75,418
Restricted cash and cash equivalents 106,675 105,786
Accounts receivable, net 39,878 41,999
Deferred rent receivable 62,474 60,973
Investments in unconsolidated companies 543,259 562,643
Notes receivable, net 108,971 115,494
Income tax asset-current and deferred, net 54,496 39,709
Other assets, net 180,025 184,251
----------- -----------
Total assets $ 4,293,733 $ 4,285,109
=========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 314,500 $ 164,000
Notes payable 2,261,969 2,218,910
Accounts payable, accrued expenses and other liabilities 346,042 373,020
----------- -----------
Total liabilities $ 2,922,511 $ 2,755,930
----------- -----------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS: $ 37,694 $ 43,972
----------- -----------
PARTNERS' CAPITAL:
Series A Convertible Cumulative Preferred Units,
liquidation preference $25.00 per unit,
10,800,000 units issued and outstanding
at September 30, 2003 and December 31, 2002 $ 248,160 $ 248,160
Series B Cumulative Preferred Units,
liquidation preference of $25.00 per unit,
3,400,000 units issued and outstanding
at September 30, 2003 and December 31, 2002 81,923 81,923
Units of Partnership Interest, 58,459,035 and 58,484,396 issued
and outstanding at September 30, 2003 and December 31, 2002,
respectively:
General partner - outstanding 584,590 and 584,844 10,482 12,097
Limited partners - outstanding 57,874,445 and 57,899,552 1,010,455 1,170,279
Accumulated other comprehensive income (17,492) (27,252)
----------- -----------
Total partners' capital $ 1,333,528 $ 1,485,207
----------- -----------
Total liabilities and partners' capital $ 4,293,733 $ 4,285,109
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUE:
Office Property $ 127,044 $ 140,840 $ 375,996 $ 411,067
Resort/Hotel Property 54,769 56,110 170,122 148,157
Residential Development Property 29,808 41,832 119,380 168,372
--------- --------- --------- ---------
Total Property revenue 211,621 238,782 665,498 727,596
--------- --------- --------- ---------
EXPENSE:
Office Property real estate taxes 15,523 17,229 50,663 56,690
Office Property operating expenses 43,976 42,624 129,116 124,613
Resort/Hotel Property expense 44,926 44,599 137,325 110,701
Residential Development Property expense 29,723 39,306 110,483 152,983
--------- --------- --------- ---------
Total Property expense 134,148 143,758 427,587 444,987
--------- --------- --------- ---------
Income from Property Operations 77,473 95,024 237,911 282,609
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Income from investment land sales, net 11,334 5,452 12,961 5,528
Gain on joint venture of properties, net - 17,710 100 17,710
Interest and other income 1,319 3,579 4,172 18,487
Corporate general and administrative (7,926) (8,121) (20,526) (19,846)
Interest expense (43,044) (47,121) (129,298) (135,678)
Amortization of deferred financing costs (2,783) (2,701) (7,751) (7,722)
Depreciation and amortization (37,728) (36,726) (110,947) (101,914)
Impairment charges related to real estate assets - - (1,200) (1,000)
Other expenses (130) - (1,042) -
Equity in net income (loss) of unconsolidated companies:
Office Properties 5,475 874 8,797 3,655
Resort/Hotel Properties (89) (91) 2,036 (91)
Residential Development Properties 1,725 4,272 4,235 22,934
Temperature-Controlled Logistics Properties (949) (3,101) 152 (3,828)
Other (864) (755) (1,679) (5,281)
--------- --------- --------- ---------
Total Other Income (Expense) (73,660) (66,729) (239,990) (207,046)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY
INTERESTS AND INCOME TAXES 3,813 28,295 (2,079) 75,563
Minority interests (298) (1,119) (722) (9,413)
Income tax benefit (provision) 4,940 2,534 10,545 6,543
--------- --------- --------- ---------
INCOME BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 8,455 29,710 7,744 72,693
Net (loss) income from discontinued operations (2,221) 1,703 1,273 5,115
(Loss) gain on real estate from discontinued operations (2,379) 1,632 (19,585) 5,683
Cumulative effect of a change in accounting principle - - - (10,327)
--------- --------- --------- ---------
NET INCOME (LOSS) 3,855 33,045 (10,568) 73,164
Series A Preferred Unit distributions (4,556) (4,556) (13,668) (12,146)
Series B Preferred Unit distributions (2,019) (2,019) (6,057) (3,028)
--------- --------- --------- ---------
NET (LOSS) INCOME AVAILABLE TO PARTNERS $ (2,720) $ 26,470 $ (30,293) $ 57,990
========= ========= ========= =========
BASIC EARNINGS PER UNIT DATA:
Net income (loss) before discontinued operations and
cumulative effect of a change in accounting principle $ 0.03 $ 0.36 $ (0.20) $ 0.88
Net (loss) income from discontinued operations (0.04) 0.03 0.02 0.08
(Loss) gain on real estate from discontinued operations (0.04) 0.03 (0.34) 0.09
Cumulative effect of a change in accounting principle - - - (0.16)
--------- --------- --------- ---------
Net (loss) income available to partners - basic $ (0.05) $ 0.42 $ (0.52) $ 0.89
========= ========= ========= =========
DILUTED EARNINGS PER UNIT DATA:
Net income (loss) before discontinued operations and
cumulative effect of a change in accounting principle $ 0.03 $ 0.36 $ (0.20) $ 0.87
Net (loss) income from discontinued operations (0.04) 0.03 0.02 0.08
(Loss) gain on real estate from discontinued operations (0.04) 0.03 (0.34) 0.09
Cumulative effect of a change in accounting principle - - - (0.16)
--------- --------- --------- ---------
Net (loss) income available to partners - diluted $ (0.05) $ 0.42 $ (0.52) $ 0.88
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
4
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(dollars in thousands)
(unaudited)
Preferred General Limited Accumulated Other Total
Partners' Partners' Partners' Comprehensive Partners'
Capital Capital Capital Income Capital
----------- ----------- ----------- ----------- -----------
PARTNERS' CAPITAL, December 31, 2002 $ 330,083 $ 12,097 $ 1,170,279 $ (27,252) $ 1,485,207
Contributions, net - 1 145 - 146
Distributions - (1,313) (129,979) - (131,292)
Net (Loss) Income - (303) (29,990) - (30,293)
Unrealized Gain on Marketable Securities - - - 3,761 3,761
Unrealized Net Gain on Cash Flow Hedges - - - 5,999 5,999
----------- ----------- ----------- ----------- -----------
PARTNERS' CAPITAL, September 30, 2003 $ 330,083 $ 10,482 $ 1,010,455 $ (17,492) $ 1,333,528
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
5
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (10,568) $ 73,164
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization 118,698 109,636
Residential Development cost of sales 66,658 114,039
Residential Development capital expenditures (98,506) (65,958)
Discontinued operations - loss (gain) on real estate, net of minority 19,585 (5,683)
interests
Discontinued operations - depreciation and minority interests 6,751 6,810
Impairment charges related to real estate assets 1,200 1,000
Income from investment in land sales, net (12,961) (5,528)
Gain on joint venture of properties, net (100) (17,710)
Minority interests 722 9,413
Cumulative effect of a change in accounting principle - 10,327
Non-cash compensation - -
Distributions received in excess of earnings from unconsolidated
companies:
Office Properties 239 -
Resort/Hotel Properties - 416
Temperature-Controlled Logistics Properties - 7,828
Other 2,531 6,255
Equity in (earnings) loss net of distributions received from
unconsolidated companies:
Office Properties - (990)
Resort/Hotel Properties (2,036) -
Residential Development Properties (4,189) (9,642)
Temperature-Controlled Logistics Properties (152) -
Change in assets and liabilities, net of effects of consolidations and
acquisitions:
Restricted cash and cash equivalents 602 2,771
Accounts receivable 4,865 11,712
Deferred rent receivable (1,501) 4,508
Income tax asset - current and deferred (11,223) (15,339)
Other assets 4,573 8,511
Accounts payable, accrued expenses and other liabilities (31,735) (56,081)
--------- ---------
Net cash provided by operating activities $ 53,453 $ 189,459
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of DBL consolidation/COPI transaction $ 11,374 $ 38,226
Proceeds from property sales 16,030 76,582
Proceeds from joint venture transactions - 164,067
Acquisition of rental properties (14,802) (97,373)
Development of investment properties (3,612) (1,669)
Property improvements - Office Properties (11,342) (11,619)
Property improvements - Resort/Hotel Properties (7,097) (13,720)
Tenant improvement and leasing costs - Office Properties (51,114) (36,602)
Residential Development Properties Investments (28,696) (21,910)
(Increase) decrease in restricted cash and cash equivalents (835) 12,668
Return of investment in unconsolidated companies:
Office Properties 7,721 1,660
Residential Development Properties 227 10,011
Temperature-Controlled Logistics Properties 3,201 -
Other 5,428 -
Investment in unconsolidated companies:
Office Properties (85) -
Residential Development Properties (4,738) (27,732)
Temperature-Controlled Logistics Properties (897) (242)
Other (1,419) (425)
Decrease (increase) in notes receivable 19,098 (4,203)
--------- ---------
Net cash (used in) provided by investing activities $ (61,558) $ 87,719
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs $ (2,603) $ (8,591)
Borrowings under Credit Facility 284,500 372,000
Payments under Credit Facility (134,000) (476,000)
Notes payable proceeds 100,435 375,000
Notes payable payments (97,164) (171,549)
Residential Development Properties notes payable borrowings 57,516 54,698
Residential Development Properties notes payable payments (56,042) (84,856)
Purchase of GMAC preferred interest - (218,423)
Capital distributions - joint venture partner (9,461) (4,451)
Capital distributions - joint venture preferred equity - (6,967)
Capital contributions to the Operating Partnership 146 2,106
Issuance of preferred units - Series A - 48,160
Issuance of preferred units - Series B - 81,923
Series A Preferred Unit distributions (13,668) (12,146)
Series B Preferred Unit distributions (6,057) (3,028)
Dividends and unitholder distributions (131,292) (177,183)
--------- ---------
Net cash used in financing activities $ (7,690) $(229,307)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (15,795) $ 47,871
CASH AND CASH EQUIVALENTS,
Beginning of period 75,418 31,644
--------- ---------
CASH AND CASH EQUIVALENTS,
End of Period $ 59,623 $ 79,515
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
6
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP" and, together with its direct and indirect ownership
interests in limited partnerships, corporations and limited liability companies,
the "Operating Partnership"), was formed under the terms of a limited
partnership agreement dated February 9, 1994. The Operating Partnership is
controlled by Crescent Real Estate Equities Company, a Texas real estate
investment trust (the "Company"), through the Company's ownership of all of the
outstanding stock of Crescent Real Estate Equities, Ltd., a Delaware corporation
("the General Partner"), which owns a 1% general partner interest in the
Operating Partnership. In addition, the Company owns an approximately 84%
limited partner interest in the Operating Partnership, with the remaining
approximately 15% limited partner interest held by other limited partners.
All of the limited partners of the Operating Partnership, other than
the Company, own, in addition to limited partner interests, units. Each unit
entitles the holder to exchange the unit (and the related limited partner
interest) for two common shares of the Company or, at the Company's option, an
equivalent amount of cash. For purposes of this report, the term "unit" or "unit
of partnership interest" refers to the limited partner interest and, if
applicable, related units held by a limited partner. Accordingly, as of
September 30, 2003, the Company's approximately 84% limited partner interest has
been treated as equivalent, for purposes of this report, to 49,001,098 units and
the remaining approximately 15% limited partner interest has been treated as
equivalent, for purposes of this report, to 8,873,347 units. In addition, the
Company's 1% general partner interest has been treated as equivalent, for
purposes of this report, to 584,590 units.
The Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
limited partnership agreement of the Operating Partnership acknowledges that all
of the Company's operating expenses are incurred for the benefit of the
Operating Partnership and provides that the Operating Partnership shall
reimburse the Company for all such expenses. Accordingly, expenses of the
Company are reimbursed by the Operating Partnership.
Crescent Finance Company, a Delaware corporation wholly-owned by the
Operating Partnership, was organized in March 2002 for the sole purpose of
acting as co-issuer with the Operating Partnership of $375.0 million aggregate
principal amount of 9.25% senior notes due 2009. Crescent Finance Company does
not conduct operations of its own.
The following table shows, by consolidated entity, the real estate
assets that the Operating Partnership owned or had an interest in as of
September 30, 2003
Operating Partnership Wholly-owned assets - The Avallon IV, Datran
Center (two office properties), Houston
Center (three office properties and the Houston
Center Shops). These properties are included in
the Operating Partnership's Office Segment.
Joint Venture assets, consolidated - 301 Congress
Avenue (50% interest) and The Woodlands Office
Properties (85.6% interest) (four office
properties). These properties are included in the
Operating Partnership's Office Segment. Sonoma
Mission Inn & Spa (80.1% interest), included in
the Operating Partnership's Resort/Hotel Segment.
Non wholly-owned assets, 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 Operating
Partnership's Office Segment. Ritz Carlton Palm
Beach (50% interest), included in the Operating
Partnership's Resort/Hotel Segment. The
temperature-controlled logistics properties (40%
interest in 87 properties). These properties are
included in the Operating Partnership's
Temperature-Controlled Logistics Segment.
Crescent Real Estate Wholly-owned assets - The Aberdeen, The Avallon I,
Funding I, L.P. II & III, Carter Burgess Plaza, The Citadel, The
("Funding I") Crescent Atrium, The Crescent Office Towers,
Regency Plaza One, Waterside Commons and 125 E.
John Carpenter Freeway. These properties are
included in the Operating Partnership's Office
Segment.
Crescent Real Estate Wholly-owned assets - Albuquerque Plaza, Barton
Funding II, L.P. Oaks Plaza One, Briargate Office and Research
("Funding II") Center, Las Colinas Plaza, Liberty Plaza I & II,
MacArthur Center I & II, Ptarmigan Place, Stanford
Corporate Centre, Two Renaissance Square and 12404
Park Central. These properties are included in the
Operating Partnership's Office Segment. The Hyatt
Regency Albuquerque and the Park Hyatt Beaver
Creek Resort & Spa. These properties are included
in the Operating Partnership's Resort/Hotel
Segment.
7
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crescent Real Estate Wholly-owned assets - Greenway Plaza Office
Funding III, IV and V, Properties (ten office properties). These
L.P. ("Funding III, properties are included in the Operating
IV and V")(1) Partnership's Office Segment. Renaissance Houston
Hotel is included in the Operating Partnership's
Resort/Hotel Segment.
Crescent Real Estate Wholly-owned asset - Canyon Ranch - Lenox,
Funding VI, L.P. included in the Operating Partnership's
("Funding VI") Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Four behavioral healthcare
Funding VII, L.P. properties.
("Funding VII")
Crescent Real Estate Wholly-owned assets - The Addison, Addison Tower,
Funding VIII, L.P. Austin Centre, The Avallon V, Chancellor Park,
("Funding VIII") Frost Bank Plaza, Greenway I and IA (two office
properties), Greenway II, Johns Manville Plaza,
Palisades Central I, Palisades Central II,
Stemmons Place, Trammell Crow Center(2), 3333 Lee
Parkway, 1800 West Loop South, 5050 Quorum, 44
Cook and 55 Madison. These properties are included
in the Operating Partnership's Office Segment. The
Canyon Ranch - Tucson, Omni Austin Hotel, and
Ventana Inn & Spa, all of which are included in
the Operating Partnership's Resort/Hotel Segment.
Crescent 707 17th Wholly-owned assets - 707 17th Street, included in
Street, L.L.C. the Operating Partnership's Office Segment, and
The Denver Marriott City Center, included in the
Operating Partnership's Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Fountain Place and Post Oak
Funding X, L.P. Central (three office properties), all of which
("Funding X") are included in the Operating Partnership's Office
Segment.
Crescent Spectrum Wholly-owned asset - Spectrum Center, included in
Center, L.P. the Operating Partnership's Office Segment.
Crescent Colonnade, Wholly-owned asset - The BAC Colonnade Building
L.L.C. ("The Colonnade"), included in the Operating
Partnership's Office Segment.
Mira Vista Development Non wholly-owned asset, consolidated - Mira Vista
Corp. ("MVDC") (98% interest), included in the Operating
Partnership's Residential Development Segment.
Houston Area Development Non wholly-owned assets, consolidated - Falcon
Corp. ("HADC") Point (98% interest), Falcon Landing (98%
interest) and Spring Lakes (98% interest). These
properties are included in the Operating
Partnership's Residential Development Segment.
Desert Mountain Non wholly-owned asset, consolidated - Desert
Development Mountain (93% interest), included in the Operating
Corporation ("DMDC") Partnership's Residential Development Segment.
The Woodlands Land Non wholly-owned asset, unconsolidated - The
Company ("TWLC") Woodlands (42.5% interest) (3), included in the
Operating Partnership's Residential Development
Segment.
Crescent Resort Non wholly-owned assets, consolidated - Eagle
Development Inc. Ranch (60% interest), Main Street Junction (30%
("CRDI") 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), Delgany Lofts (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 Operating Partnership's
Residential Development Segment.
Non wholly-owned assets, unconsolidated - Blue
River Land Company, L.L.C. - Three Peaks (30%
interest), included in the Operating Partnership's
Residential Development Segment.
Crescent TRS Holdings Non wholly-owned assets, unconsolidated - two
Corp. quarries (56% interest). These properties are
included in the Operating Partnership's
Temperature-Controlled Logistics 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) The Operating Partnership 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.
(3) Distributions are made to partners based on specified payout percentages.
During the nine months ended September 30, 2003, the Operating
Partnership's payout percentage and economic interest were 52.5%.
8
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 8, "Investments in Unconsolidated Companies," for a table that
lists the Operating Partnership's ownership in significant unconsolidated joint
ventures and investments as of September 30, 2003.
See Note 9, "Notes Payable and Borrowings Under Credit Facility," for a
list of certain other subsidiaries of the Operating Partnership and the Company,
all of which are consolidated by the Operating Partnership or the Company in the
Operating Partnership's or the Company's financial statements and were formed
primarily for the purpose of obtaining secured debt or joint venture financing.
SEGMENTS
The assets and operations of the Operating Partnership were divided
into four investment segments at September 30, 2003, as follows:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
Within these segments, the Operating Partnership owned in whole or in
part the following real estate assets (the "Properties") as of September 30,
2003:
- OFFICE SEGMENT consisted of 74 office properties, including three
retail properties (collectively referred to as the "Office
Properties"), located in 26 metropolitan submarkets in six states,
with an aggregate of approximately 29.7 million net rentable square
feet. 62 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.
- 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.
- RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Operating
Partnership'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").
- TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the Operating
Partnership'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 September 30, 2003, the
Temperature-Controlled Logistics Corporation directly or indirectly
owned 87 temperature-controlled logistics properties (collectively
referred to as the "Temperature-Controlled Logistics Properties")
with an aggregate of approximately 440.7 million cubic feet (17.5
million square feet) of warehouse space. As of September 30, 2003,
the Vornado Crescent Carthage and KC Quarry, L.L.C. owned two
quarries and the related land. The Operating Partnership 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 income from
property operations, total other income and expenses, equity in net income
(loss) of unconsolidated companies and funds from operations for each of these
investment segments for the three and nine months ended September 30, 2003 and
2002, and total assets, consolidated property level financing, consolidated
other liabilities, and minority interests for each of these investment segments
at September 30, 2003 and December 31, 2002.
9
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Operating Partnership 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 Operating Partnership's
"Investment Sector."
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 Operating Partnership'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 Operating Partnership's significant accounting
policies contained in the Operating Partnership'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 Operating Partnership adopted
this Statement for fiscal year 2003 and expects no impact in 2003 beyond the
classification of costs related to early extinguishments of debt, which were
shown in the Operating Partnership'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 Operating Partnership 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 nine months ended September 30, 2003, the Company
10
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and the Operating Partnership granted stock and unit options and recognized
compensation expense that was not significant to results of operations. With
respect to the Company's stock options and the Operating Partnership's unit
options which were granted prior to 2003, the Operating Partnership 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 (doubled for unit options) 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 nine
months ended September 30, 2003, no compensation cost was recognized for grants
of stock options or unit options made prior to 2003 under the Company and
Operating Partnership stock and unit option plans ("the Plans") because the
Company's and the Operating Partnership's policy is to grant stock options and
unit options with an exercise price equal to the quoted closing market price of
the Company's common shares (doubled for unit options) on the grant date. Had
compensation cost for the Plans been determined based on the fair value at the
grant dates for awards under the Plans consistent with SFAS No. 123, the
Operating Partnership's net (loss) income and (loss) earnings per unit would
have been reduced to the following pro forma amounts:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------------------
(in thousands, except per unit amounts) 2003 2002 2003 2002
- --------------------------------------- --------- ---------- ---------- ----------
Net (loss) income available to partners,
as reported $ (2,720) $ 26,470 $ (30,293) $ 57,990
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards (700) (1,011) (2,301) (3,087)
--------- ---------- ---------- ----------
Pro forma net (loss) income $ (3,420) $ 25,459 $ (32,594) $ 54,903
(Loss) earnings per unit:
Basic - as reported $ (0.05) $ 0.42 $ (0.52) $ 0.89
Basic - pro forma $ (0.06) $ 0.40 $ (0.56) $ 0.84
Diluted - as reported $ (0.05) $ 0.42 $ (0.52) $ 0.88
Diluted - pro forma $ (0.06) $ 0.40 $ (0.56) $ 0.84
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 Operating Partnership
adopted SFAS 149 effective July 1, 2003. The adoption of this Statement did not
have a material impact on the Operating Partnership'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. Most provisions of this Statement were 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. On October 29, 2003, the FASB agreed to
defer indefinitely the application of the provisions of SFAS No. 150 to
noncontrolling interests in limited life subsidiaries.
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 11, "Commitments and Contingencies," for disclosure of the Operating
Partnership's guarantees at September 30, 2003. The Operating Partnership
adopted FIN 45 effective January 1, 2003.
11
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 previously
existing VIEs for financial periods ending after December 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 other entities such as VIEs. FIN 46 requires VIEs 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 disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the VIEs were
established. These disclosure requirements are as follows: (a) the nature,
purpose, size, and activities of the VIE; and, (b) the enterprise's maximum
exposure to loss as a result of its involvement with the VIEs. 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 Operating Partnership 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 Operating Partnership did not create any VIEs subsequent to
January 31, 2003.
SIGNIFICANT ACCOUNTING POLICIES
ACQUISITION OF OPERATING PROPERTIES. The Operating Partnership
allocates the purchase price of acquired properties to tangible and identified
intangible assets acquired based on their fair values in accordance with SFAS
No. 141, "Business Combinations."
In making estimates of fair value for purposes of allocating purchase
price, management utilizes sources, including, but not limited to, independent
value consulting services, independent appraisals that may be obtained in
connection with financing the respective property, and other market data.
Management also considers information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.
The aggregate value of the tangible assets acquired is measured based
on the sum of (i) the value of the property as if it were vacant and available
to lease at the purchase date and (ii) the present value of the amortized
in-place tenant improvement allowances over the remaining term of each lease.
Management's estimates of the value of the property are made using models
similar to those used by independent appraisers. Factors considered by
management in its analysis include an estimate of carrying costs such as real
estate taxes, insurance and other operating expenses and estimates of lost
rentals during the expected lease-up period assuming current market conditions.
The value of the property is then allocated among building, land, site
improvements and equipment. The contributory value of tenant improvements is
separately estimated due to the different depreciable lives.
The aggregate value of intangible assets acquired is measured based on
the difference between (i) the purchase price and (ii) the value of the tangible
assets acquired as defined above. This value is then allocated among
above-market and below-market in-place lease values, costs to execute similar
leases (including leasing commissions, legal expenses and other related
expenses), in-place lease values and customer relationship values.
Above-market and below-market in-place lease values for acquired
properties are calculated based on the present value (using a market interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease for above-market leases and the initial term
plus the term of the below-market fixed rate renewal option, if any, for
below-market leases. The Operating Partnership performs this analysis on a lease
by lease basis. The capitalized above-market lease values are amortized as a
reduction to rental income over the remaining non-cancelable terms of the
respective leases. The capitalized below-market lease values are amortized as an
increase to rental income over the initial term plus the term of the
below-market fixed rate renewal option, if any, of the respective leases.
Management estimates costs to execute leases similar to those acquired
at the property at acquisition based on current market conditions. These costs
are recorded based on the present value of the amortized in-place leasing costs
on a lease by lease basis over the remaining term of each lease.
12
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and the Operating Partnership's overall relationship with that respective
customer. Characteristics considered by management in allocating these values
include the nature and extent of the Operating Partnership's existing business
relationships with the customer, growth prospects for developing new business
with the customer, the customer's credit quality and the expectation of lease
renewals, among other factors. The in-place lease value and customer
relationship value are both amortized to expense over the initial term and any
renewal periods in the respective leases, but in no event does the amortization
period for the intangible assets exceed the remaining depreciable life of the
building. Should a tenant terminate its lease, the unamortized portion of the
in-place lease value and the customer relationship value would be charged to
expense.
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 Operating Partnership presents both basic and diluted earnings per
unit.
The following tables present reconciliations for the three and nine
months ended September 30, 2003 and 2002 of basic and diluted earnings per unit
from "Income before discontinued operations and cumulative effect of a change in
accounting principle" to "Net (loss) income available to partners." The table
also includes weighted average units on a basic and diluted basis.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
2003 2002
--------------------------------------- ---------------------------------
Income Wtd. Avg. Per Unit Income Wtd . Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units Amount (Loss) Units Amount
- --------------------------------------- --------------------------------------- ---------------------------------
BASIC EPS -
Income before discontinued operations $ 8,455 58,460 $ 29,710 63,350
Series A Preferred Unit distributions (4,556) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
--------------------------------------- ---------------------------------
Net income available to partners $ 1,880 58,460 $ 0.03 $ 23,135 63,350 $ 0.36
before discontinued operations
Net (loss) income from discontinued
operations (2,221) (0.04) 1,703 0.03
(Loss) gain on real estate from
discontinued operations (2,379) (0.04) 1,632 0.03
--------------------------------------- ---------------------------------
Net (loss) income available to partners $ (2,720) 58,460 $ (0.05) $ 26,470 63,350 $ 0.42
======================================= =================================
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
2003 2002
--------------------------------------- ---------------------------------
Income Wtd. Avg. Per Unit Income Wtd . Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units Amount (Loss) Units Amount
- --------------------------------------- --------------------------------------- ---------------------------------
DILUTED EPS -
Income before discontinued operations $ 8,455 58,460 $ 29,710 63,350
Series A Preferred Unit distributions (4,556) (4,556)
Series B Preferred Unit distributions (2,019) (2,019)
--------------------------------------- ----------------------------------
Effect of dilutive securities:
Additional units relating to
unit options 4 60
Net income available to partners
before discontinued operations $ 1,880 58,464 $ 0.03 $ 23,135 63,410 $ 0.36
Net (loss) income from discontinued
operations (2,221) (0.04) 1,703 0.03
(Loss) gain on real estate from
discontinued operations (2,379) (0.04) 1,632 0.03
---------------------------------------- ---------------------------------
Net (loss) income available to partners $ (2,720) 58,464 $ (0.05) $ 26,470 63,410 $ 0.42
======================================= =================================
13
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
2003 2002
--------------------------------------- ---------------------------------
Income Wtd. Avg. Per Unit Income Wtd. Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units Amount (Loss) Units Amount
- --------------------------------------- --------------------------------------- ---------------------------------
BASIC EPS -
Income before discontinued operations
and cumulative effect of a change in
accounting principle $ 7,744 58,468 $ 72,693 65,295
Series A Preferred Unit distributions (13,668) (12,146)
Series B Preferred Unit distributions (6,057) (3,028)
--------------------------------------- ---------------------------------
Net (loss) income available to
partners before discontinued
operations and cumulative
effect of a change in accounting
principle $ (11,981) 58,468 $ (0.20) $ 57,519 65,295 $ 0.88
Net income from discontinued operations 1,273 0.02 5,115 0.08
(Loss) gain on real estate from
discontinued operations (19,585) (0.34) 5,683 0.09
Cumulative effect of a change in
accounting principle - - (10,327) (0.16)
--------------------------------------- ---------------------------------
Net (loss) income available to partners $ (30,293) 58,468 $ (0.52) $ 57,990 65,295 $ 0.89
======================================= =================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
2003 2002
--------------------------------------- ---------------------------------
Income Wtd. Avg. Per Unit Income Wtd . Avg. Per Unit
(in thousands, except per unit amounts) (Loss) Units Amount (Loss) Units Amount
- --------------------------------------- --------------------------------------- ---------------------------------
DILUTED EPS -
Income before discontinued operations
and cumulative effect of a change in
accounting principle $ 7,744 58,468 $ 72,693 65,295
Series A Preferred Unit distributions (13,668) (12,146)
Series B Preferred Unit distributions (6,057) (3,028)
--------------------------------------- ---------------------------------
Effect of dilutive securities:
Additional units relating to
unit options 2 257
Net (loss) income available to partners
before discontinued operations and
cumulative effect of a change in
accounting principle $ (11,981) 58,470 $ (0.20) $ 57,519 65,552 $ 0.87
Net income from discontinued operations 1,273 0.02 5,115 0.08
(Loss) gain on real estate from
discontinued operations (19,585) (0.34) 5,683 0.09
Cumulative effect of a change in
accounting principle - - (10,327) (0.16)
--------------------------------------- ---------------------------------
Net (loss) income available to partners $ (30,293) 58,470 $ (0.52) $ 57,990 65,552 $ 0.88
======================================= =================================
14
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This table presents supplemental cash flows disclosures for the nine
months ended September 30, 2003 and 2002.
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
(in thousands) 2003 2002
- ------------------------------------------------------------- --------- ---------
Interest paid on debt $ 110,670 $ 106,969
Interest capitalized - Office Properties - 118
Interest capitalized - Residential Development Properties 13,896 9,591
Additional interest paid in conjunction with cash flow hedges 15,472 18,028
--------- ---------
Total interest paid $ 140,038 $ 134,706
========= =========
Cash paid for income taxes $ 1,954 $ 10,200
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING
ACTIVITIES:
Unrealized gain (loss) on marketable securities $ 3,761 $ (1,814)
Impairment charges related to real estate assets 20,374 5,902
Assumption of debt in conjunction with acquisition of an Office
Property 38,000 -
Unrealized net gain on cash flow hedges 5,999 3,083
Non-cash compensation 147 1,990
Financed sale of land parcel 11,800 7,520
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 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
Operating Partnership 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 Operating Partnership 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:
- Net Income (Loss) - determined in conformity with
GAAP;
- excluding gains (losses) from sales of depreciable
operating property;
- excluding extraordinary items (as defined by GAAP);
- including depreciation and amortization of real
estate assets; and
- after adjusting for unconsolidated partnerships and
joint ventures.
The Operating Partnership calculates FFO available to partners in the
same manner, except that Net Income (Loss) is replaced by Net Income (Loss)
Available to Partners.
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 Operating Partnership
considers FFO available to partners an appropriate measure of performance for an
operating partnership of an equity REIT
15
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and FFO an appropriate measure of performance for its investment segments.
However, FFO available to partners and FFO should not be considered as
alternatives to net income determined in accordance with GAAP as an indication
of the Operating Partnership's operating performance.
The Operating Partnership's measures of FFO available to partners and
FFO may not be comparable to similarly titled measures of operating partnerships
of REITs (other than the Company) if those REITs apply the definition of FFO in
a different manner than the Operating Partnership.
Selected financial information related to each segment for the three
and nine months ended September 30, 2003 and 2002, and total assets,
consolidated property level financing, consolidated other liabilities, and
minority interests for each of the segments at September 30, 2003 and December
31, 2002, are presented below:
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- ---------------------------- ----------- ------------ ------------ ----------- ----------- ---------
Property revenue $ 127,044 (1) $ 54,769 $ 29,808 $ - $ - $ 211,621
Property expense (59,499) (44,926) (29,723) - - (134,148)
----------- ----------- ------------ ----------- ----------- ---------
Income from property
operations $ 67,545 $ 9,843 $ 85 $ - $ - $ 77,473
=========== =========== ============ =========== =========== =========
Other income $ - $ - $ - - $ 12,653 $ 12,653
Other expense - - - $ - (91,611) (91,611)
----------- ----------- ------------ ----------- ----------- ---------
Total other income
(expense) $ - $ - $ - $ - $ (78,958) (2) $ (78,958)
=========== =========== ============ =========== =========== =========
Equity in net income (loss)
of unconsolidated
companies $ 5,475 $ (89) $ 1,725 $ (949) $ (864) $ 5,298
=========== =========== ============ =========== =========== =========
Funds from operations
before impairment charges
related to real estate
assets $ 73,855 $ 11,471 $ 2,773 $ 4,198 $ (48,834) $ 43,463 (5)
----------- ----------- ------------ ----------- ----------- ---------
Impairment charges related
to real estate assets $ - $ - $ - $ - $ (2,356) $ (2,356)
----------- ----------- ------------ ----------- ----------- ---------
Funds from operations after
impairment charges
related to real estate
assets $ 73,855 $ 11,471 $ 2,773 $ 4,198 $ (51,190) $ 41,107 (5 )
=========== =========== ============ =========== =========== =========
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
-------------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- ------------------------------ --------- ------------ ------------ ----------- ------------ ---------
Property revenue $ 140,840 (1) $ 56,110 $ 41,832 $ - $ - $ 238,782
Property expense (59,853) (44,599) (39,306) - - (143,758)
--------- ------------ ----------- ----------- ----------- ---------
Income from property operations $ 80,987 $ 11,511 $ 2,526 $ - $ - $ 95,024
========= ============ =========== =========== ============ =========
Other income $ - $ - $ - $ - $ 26,741 $ 26,741
Other expense - - - - (94,669) (94,669)
--------- ------------ ----------- ----------- ----------- ---------
Total other income (expense) $ - $ - $ - $ - $ (67,928) (2) $ (67,928)
========= ============ =========== =========== ============ =========
Equity in net income (loss)
of unconsolidated
companies $ 874 $ (91) $ 4,272 $ (3,101) $ (755) $ 1,199
========= ============ =========== =========== ============ =========
Funds from operations
before and after
impairment charges related
to real estate assets $ 88,045 $ 13,593 $ 4,319 $ 3,675 $ (57,815) $ 51,817 (5)
========= ============ =========== =========== ============ =========
16
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION: FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------------------------------------------------
RESIDENTIAL TEMPERATURE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- ---------------------------- --------- ------------ ------------ ------------ ----------- ---------
Property revenue $ 375,996 (1) $ 170,122 $ 119,380 $ - $ - $ 665,498
Property expense (179,779) (137,325) (110,483) - - (427,587)
--------- ----------- ------------ ------------ ---------- ---------
Income from property $ 196,217 $ 32,797 $ 8,897 $ - $ - 237,911
========= =========== ============ ============ ========== =========
Other income $ - $ - $ - $ - $ 17,233 $ 17,233
Other expense - - - - (270,764) (270,764)
--------- ----------- ------------ ------------ ---------- ---------
Total other
income (expense) $ - $ - $ - $ - $ (253,531) (2) $(253,531)
========= =========== ============ ============ ========== =========
Equity in net income (loss)
of unconsolidated
companies $ 8,797 $ 2,036 $ 4,235 $ 152 $ (1,679) $ 13,541
========= =========== ============ ============ ========== =========
Funds from operations
before impairment charges
related to real estate
assets $ 216,126 $ 39,458 $ 13,766 $ 16,294 $ (164,323) $ 121,321 (5)
--------- ----------- ------------ ------------ ---------- ---------
Impairment charges related
to real estate assets $ - $ - $ - $ - $ (20,374) $ (20,374)
--------- ----------- ------------ ------------ ---------- ---------
Funds from operations after
impairment charges
related to real estate
assets $ 216,126 $ 39,458 $ 13,766 $ 16,294 $ (184,697) $ 100,947 (5)
========= =========== ============ ============ ========== =========
SELECTED FINANCIAL INFORMATION: FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------------------------------------------
RESIDENTIAL TEMPERATURE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER TOTAL
- ------------------------------ ---------- ------------ ------------ ----------- ----------- ---------
Property revenue $ 411,067 (1) $ 148,157 $ 168,372 $ - $ - $ 727,596
Property expense $(181,303) (110,701) (152,983) - $ - (444,987)
---------- ---------- ------------ ----------- ----------- ---------
Income from property $ 229,764 $ 37,456 $ 15,389 $ - $ - $ 282,609
========== ========== ============ =========== =========== =========
Other income $ - $ - $ - $ - $ 41,725 $ 41,725
Other expense - - - - $ (266,160) (266,160)
---------- ---------- ------------ ----------- ----------- ---------
Total other
income (expense) $ - $ - $ - $ - $ (224,435)(2) $(224,435)
========== ========== ============ =========== =========== ---------
Equity in net income (loss) of
unconsolidated companies $ 3,655 $ (91) $ 22,934 $ (3,828) $ (5,281) $ 17,389
========== ========== ============ =========== =========== =========
Funds from operations before
impairment charges related
to real estate assets $ 249,119 $ 47,140 $ 32,354 $ 14,450 $ (163,065) $ 179,998 (5)
---------- ---------- ------------ ----------- ----------- ---------
Impairment charges related to
real estate assets $ - $ - $ - $ - $ (2,048) $ (2,048)
---------- ---------- ------------ ----------- ----------- ---------
Funds from operations after
impairment charges related
to real estate assets $ 249,119 $ 47,140 $ 32,354 $ 14,450 $ (165,113) $ 177,950 (5)
========== ========== ============ ========== =========== =========
- ----------------------
See footnotes to the following table.
17
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TEMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(IN MILLIONS) SEGMENT SEGMENT SEGMENT SEGMENT OTHER TOTAL
- --------------------------------------- ------- ------------ ----------- ------------ --------- ----------
TOTAL ASSETS BY SEGMENT: (3)
Balance at September 30, 2003 $ 2,583 $ 492 801 $ 302 116 4,294
Balance at December 31, 2002 2,624 492 729 305 135 4,285
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at September 30, 2003 $(1,402) $ (132) (95) $ - (947) (4) $ (2,576)
Balance at December 31, 2002 (1,371) (130) (93) - (789) (4) (2,383)
CONSOLIDATED OTHER LIABILITIES:
Balance at September 30, 2003 (107) $ (40) $ (138) $ - (61) (346)
Balance at December 31, 2002 (135) (44) (125) - (69) (373)
MINORITY INTERESTS:
Balance at September 30, 2003 $ (8) $ (7) $ (23) $ - $ - $ (38)
Balance at December 31, 2002 (11) (8) (25) - - (44)
- -------------
(1) Includes lease termination fees (net of the write-off of deferred rent
receivables) of approximately $5.3 million and $3.0 million for the three
months ended September 30, 2003 and 2002, respectively and $8.3 million
and $4.8 million for the nine months ended September 30, 2003 and 2002,
respectively.
(2) For purposes of this Note, Corporate and Other includes income from
investment land sales, net, gain on joint venture of properties, net,
interest and other income, corporate 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 distributions, impairment
charges and other expenses.
(3) Total assets by segment is inclusive of investments in unconsolidated
companies, net of unconsolidated debt.
(4) Inclusive of Corporate bonds and credit facility.
(5) Total funds from operations represents funds from operations available to
partners. The following table presents a reconciliation of Consolidated
Funds from Operations Available to Partners to Net Income (Loss).
RECONCILIATION OF CONSOLIDATED FUNDS FROM OPERATIONS AVAILABLE TO PARTNERS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
(in thousands) 2003 2002 2003 2002
- ---------------------------------------- -------- -------- -------- --------
Consolidated Funds From Operations
Available to Partners After Impairment
Charges Related to Real Estate Assets $ 41,107 $ 51,817 $100,947 $177,950
Impairment charges related to real
estate assets 2,356 - 20,374 2,048
-------- -------- -------- --------
Consolidated Funds from Operations 43,463 51,817 121,321 179,998
-------- -------- -------- --------
Adjustments to reconcile Consolidated
Funds from
Operations Available to Partners
Before Impairment Charges Related to
Real Estate Assets to Net Income
(Loss):
Depreciation and amortization of
real estate assets (39,617) (36,419) (109,017) (102,088)
(Loss) gain on property sales, net (14) 19,646 (719) 25,311
Impairment charges related to real
estate assets (2,356) - (20,374) (2,048)
Cumulative effect of a change in - - - (10,327)
accounting principle
Adjustment for investments in
unconsolidated companies:
Office Properties 1,613 (1,946) (3,805) (5,997)
Resort/Hotel Properties (394) (370) (1,143) (370)
Residential Development
Properties (8) 615 (235) (2,339)
Temperature-Controlled (5,147) (6,777) (16,143) (18,278)
Logistics Properties
Other (260) (96) (178) (5,872)
Series A Preferred unit
distributions 4,556 4,556 13,668 12,146
Series B Preferred unit
distributions 2,019 2,019 6,057 3,028
-------- -------- -------- --------
Net Income (Loss) $ 3,855 $ 33,045 $(10,568) $ 73,164
======== ======== ======== ========
18
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ASSET ACQUISITIONS
OFFICE PROPERTIES
On August 26, 2003, the Operating Partnership acquired The Colonnade,
an 11-story, 216,000 square foot Class A office tower, located in the Coral
Gables submarket of Miami, Florida. The Operating Partnership acquired the
Office Property for approximately $51.4 million, funded by the Operating
Partnership's assumption of a $38 million loan from Bank of America and a draw
on the Operating Partnership's credit facility. The Office Property is
wholly-owned and included in the Operating Partnership's Office Segment.
JOINT VENTURES
On October 8, 2003, the Operating Partnership entered into a joint
venture, Crescent One Briar Lake L.P., with affiliates of J.P. Morgan Fleming
Asset Management, Inc. The joint venture purchased One Briar Lake Plaza, located
in the Westchase submarket of Houston, Texas, for approximately $74.4 million.
The Property is a 20 story, 502,000 square foot Class A office building. The
affiliates of J.P. Morgan Fleming Asset Management, Inc. own a 70% interest, and
the Operating Partnership owns a 30% interest, in the joint venture. The initial
cash equity contribution to the joint venture was $24.4 million, of which the
Operating Partnership's portion was $7.3 million. The Operating Partnership's
equity contribution and an additional working capital contribution of $0.5
million were funded primarily through a draw under the Operating Partnership's
credit facility. The remainder of the purchase price of the Property was funded
by a secured loan to the joint venture in the amount of $50.0 million. None of
the mortgage financing at the joint venture level is guaranteed by the Operating
Partnership. The Operating Partnership manages and leases the Office Property on
a fee basis. The Office Property is an unconsolidated investment and will be
included in the Operating Partnership's Office Segment.
RESIDENTIAL DEVELOPMENT PROPERTIES
On August 14, 2003, CRDI, a consolidated subsidiary of the Operating
Partnership, completed the purchase of a tract of undeveloped land in Eagle
County, Colorado for approximately $15.5 million, funded by a draw on the
Operating Partnership's credit facility.
5. 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
Operating Partnership's Consolidated Statements of Operations. The Operating
Partnership 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 "Net (loss) income from discontinued operations, net of minority
interests," and gain or loss and impairments in the assets sold or held for sale
have been presented as "(Loss) gain on real estate from discontinued operations,
net of minority interests" in the accompanying Consolidated Statements of
Operations for the three and nine months ended September 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 September 30, 2003 and December 31, 2002.
ASSETS HELD FOR SALE
OFFICE SEGMENT
As of September 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 first quarter of 2003, the Operating Partnership recognized an
approximately $15.0 million impairment charge on the 1800 West Loop South Office
Property.
In addition, as of September 30, 2003, the Las Colinas Plaza retail
property, located in the Las Colinas submarket in Dallas, Texas, the Liberty
Plaza Office Property located in the Far North Dallas submarket in Dallas,
Texas, the 12404 Park Central Office Property located in the LBJ Freeway
submarket in Dallas, Texas and the four Woodlands Office Properties located in
The Woodlands submarket in Houston, Texas were held for sale.
BEHAVIORAL HEALTHCARE PROPERTIES
19
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 27, 2003, the Operating Partnership sold a behavioral
healthcare property for $2.0 million, consisting of $1.3 million in cash and a
$0.7 million note receivable. The Operating Partnership recognized a loss on the
sale of this property of approximately $0.3 million. A $2.6 million impairment
charge had been recognized during 2002 related to this property.
On May 2, 2003, the Operating Partnership sold a behavioral healthcare
property for $2.1 million. The Operating Partnership recognized a loss on the
sale of this property of approximately $0.1 million. A $0.8 million impairment
charge was recognized during the first quarter of 2003 related to this property.
On July 10, 2003, the Operating Partnership sold a behavioral
healthcare property for $2.3 million and recognized a minimal gain on the sale.
A $1.0 million impairment charge was recognized during the second quarter of
2003 related to this property.
As of September 30, 2003, the Operating Partnership owned four
behavioral healthcare properties. Impairment charges of approximately $2.4
million were recognized during the third quarter related to three of these four
remaining properties. Two of these properties were sold on October 15, 2003.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major classes of assets of the
Properties held for sale.
(in thousands) SEPTEMBER 30, 2003(1) DECEMBER 31, 2002
- -------------------------------- --------------------- -----------------
Land $ 18,507 $ 24,151
Buildings and improvements 101,007 119,881
Furniture, fixture and equipment 548 1,713
Accumulated depreciation (32,361) (29,409)
-------------- ------------
Net investment in real estate $ 87,701 $ 116,336
============== ============
- -----------------------------
(1) Includes seven office properties, one retail property and four
behavioral healthcare properties.
The following tables present rental revenues, operating and other
expenses, depreciation and amortization, minority interests, net income, and
impairments for the nine months ended September 30, 2003 and 2002, for
properties included in discontinued operations as of September 30, 2003.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
(in thousands) 2003 2002
- ----------------------------------------------------------------------------------------
Total revenues 14,486 31,082
Operating and other expenses (6,811) (19,575)
Depreciation and amortization (6,402) (6,392)
------- --------
Net income from discontinued operations 1,273 5,115
======= ========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
(in thousands) 2003 2002
- ----------------------------------------------------------------------------------------
Loss on impairment of real estate (19,174) (1,449)
Realized (loss) gain on sale of properties (411) 7,132
------- --------
(Loss) gain on real estate from discontinued operations (19,585) 5,683
======= ========
20
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6.OTHER ASSET DISPOSITIONS
INVESTMENT LAND DISPOSITIONS
On April 24, 2003, the Operating Partnership 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 Operating Partnership.
On May 15, 2003, the Operating Partnership 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 Operating Partnership.
On June 27, 2003, the Operating Partnership sold approximately 3.5
acres of undeveloped land located in Houston, Texas. The sale 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. Due to a modification of the sales
agreement after June 30, 2003, the Operating Partnership recognized a net gain
on the sale of this land of approximately $8.9 million in the third quarter of
2003. This land was wholly-owned by the Operating Partnership.
On September 30, 2003, the Operating Partnership completed the sale of
approximately 3.1 acres of undeveloped land located in the Greenway Plaza office
complex of Houston, Texas. The sale generated net proceeds of approximately $5.3
million and a net gain of approximately $2.4 million. This land was wholly-owned
by the Operating Partnership.
7. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of September 30, 2003, the Operating Partnership held a 40% interest
in the Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 87 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 440.7 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 Operating Partnership has no economic
interest in AmeriCold Logistics. See Note 16, "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 and the Operating Partnership's
unitholders.
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 $32.5 million of the total $115.1 million
of rent payable for the nine months ended September 30, 2003. The Operating
Partnership's share of the deferred rent was $13.0 million. The Operating
Partnership recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected and has not recognized the $13.0 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the nine months ended September 30, 2003. As of September 30,
2003, the Temperature-Controlled Logistics Corporation's deferred rent and
valuation allowance from AmeriCold Logistics were $73.1 million and $66.8
million, respectively, of which the Operating Partnership's portions were $29.2
million and $26.7 million, respectively.
The Operating Partnership and Vornado Realty Trust, L.P. have engaged
underwriters to explore additional debt financing alternatives for the
Temperature-Controlled Logistics Corporation. It is anticipated that this
financing will be a non-
21
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recourse, secured term loan in an amount in excess of $200 million. If this
financing is obtained, the expected use of proceeds will allow the Operating
Partnership to make a reduction in its investment in this business and will
provide the business with additional financing for expansion.
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.
As of September 30, 2003, the Operating Partnership 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 Operating Partnership accounts
for this investment as an unconsolidated equity investment.
On December 31, 2002, VCQ purchased $5.7 million of trade receivables
from AmeriCold Logistics at a 2% discount. The Operating Partnership 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 ap