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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 March 31, 2004
COMMISSION FILE NO. 1-13038
CRESCENT REAL ESTATE EQUITIES COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 52-1862813
- --------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
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 April 30, 2004.
Series A Convertible Cumulative Preferred Shares, par value $0.01 per share: 14,200,000
Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share: 3,400,000
Common Shares, par value $0.01 per share: 99,393,143
CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2004 (unaudited) and December 31, 2003
(unaudited)........................................................................... 3
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003 (unaudited)................................................... 4
Consolidated Statement of Shareholders' Equity for the three months ended
March 31, 2004 (unaudited)............................................................ 5
Consolidated Statements of Cash Flows for the three months ended March 31, 2004
and 2003 (unaudited).................................................................. 6
Notes to Consolidated Financial Statements............................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 53
Item 4. Controls and Procedures............................................................... 53
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................. 54
Item 6. Exhibits and Reports on Form 8-K...................................................... 54
PART I
ITEM 1. FINANCIAL STATEMENTS
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
MARCH 31, DECEMBER 31,
2004 2003
------------- -------------
ASSETS:
Investments in real estate:
Land $ 256,011 $ 235,608
Land improvements, net of accumulated depreciation of $20,177 and $19,256 at
March 31, 2004 and December 31, 2003, respectively 108,842 105,232
Building and improvements, net of accumulated depreciation of $620,750 and
$596,535 at March 31, 2004 and December 31, 2003, respectively 2,377,770 2,187,368
Furniture, fixtures and equipment, net of accumulated depreciation of $48,097 and
$44,074 at March 31, 2004 and December 31, 2003, respectively 50,375 51,160
Land held for investment or development 465,502 450,279
Properties held for disposition, net 95,947 127,915
------------- -------------
Net investment in real estate 3,354,447 3,157,562
Cash and cash equivalents 64,494 78,052
Restricted cash and cash equivalents 69,495 217,329
Defeasance investments 177,552 9,620
Accounts receivable, net 48,974 40,480
Deferred rent receivable 66,053 62,184
Investments in unconsolidated companies 358,106 443,974
Notes receivable, net 74,242 78,453
Income tax asset-current and deferred 21,324 17,506
Other assets, net 244,364 208,209
------------- -------------
Total assets $ 4,479,051 $ 4,313,369
============= =============
LIABILITIES:
Borrowings under Credit Facility $ 169,000 $ 239,000
Notes payable 2,601,593 2,319,699
Accounts payable, accrued expenses and other liabilities 326,074 369,042
Current income tax payable -- 7,995
------------- -------------
Total liabilities $ 3,096,667 $ 2,935,736
------------- -------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS:
Operating partnership, 8,864,311 and 8,873,347 units, at March 31, 2004
and December 31, 2003, respectively $ 100,173 $ 108,706
Consolidated real estate partnerships 44,916 47,123
------------- -------------
Total minority interests $ 145,089 $ 155,829
------------- -------------
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,
14,200,000 and 10,800,000 shares issued and outstanding
at March 31, 2004 and December 31, 2003, respectively $ 319,166 $ 248,160
Series B Cumulative Preferred Shares,
liquidation preference of $25.00 per share,
3,400,000 shares issued and outstanding
at March 31, 2004 and December 31, 2003 81,923 81,923
Common shares, $0.01 par value, authorized 250,000,000 shares,
124,426,976 and 124,396,168 shares issued and outstanding
at March 31, 2004 and December 31, 2003, respectively 1,237 1,237
Additional paid-in capital 2,245,795 2,245,683
Deferred compensation on restricted shares (3,776) (4,102)
Accumulated deficit (932,979) (877,120)
Accumulated other comprehensive income (13,923) (13,829)
------------- -------------
$ 1,697,443 $ 1,681,952
Less - shares held in treasury, at cost, 25,121,863
common shares at March 31, 2004 and December 31, 2003 (460,148) (460,148)
------------- -------------
Total shareholders' equity $ 1,237,295 $ 1,221,804
------------- -------------
Total liabilities and shareholders' equity $ 4,479,051 $ 4,313,369
============= =============
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
ENDED MARCH 31,
----------------------
REVENUE: 2004 2003
--------- ---------
Office Property $ 123,450 $ 120,715
Resort/Hotel Property 61,396 63,721
Residential Development Property 47,688 43,721
--------- ---------
Total Property revenue $ 232,534 $ 228,157
--------- ---------
EXPENSE:
Office Property real estate taxes $ 17,071 $ 17,102
Office Property operating expenses 41,864 40,530
Resort/Hotel Property expense 49,343 49,740
Residential Development Property expense 40,562 41,430
--------- ---------
Total Property expense $ 148,840 $ 148,802
--------- ---------
Income from Property Operations $ 83,694 $ 79,355
--------- ---------
OTHER INCOME (EXPENSE):
Gain on joint venture of properties, net $ -- $ 100
Interest and other income 2,764 1,455
Corporate general and administrative (6,917) (6,090)
Interest expense (45,008) (43,208)
Amortization of deferred financing costs (3,714) (2,424)
Extinguishment of debt (1,939) --
Depreciation and amortization (40,987) (36,597)
Impairment charges related to real estate assets -- (1,200)
Other expenses (55) (127)
Equity in net income (loss) of unconsolidated companies:
Office Properties 942 1,458
Resort/Hotel Properties (231) 743
Residential Development Properties 87 970
Temperature-Controlled Logistics Properties (901) 1,507
Other (67) (1,029)
--------- ---------
Total other income (expense) $ (96,026) $ (84,442)
--------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY
INTERESTS AND INCOME TAXES $ (12,332) $ (5,087)
Minority interests 1,699 1,425
Income tax benefit 1,613 2,528
--------- ---------
LOSS BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ (9,020) $ (1,134)
Income from discontinued operations, net of minority interests 597 2,092
Impairment charges related to real estate assets from discontinued operations,
net of minority interests (1,994) (13,425)
Loss on real estate from discontinued operations, net of minority interests (47) (288)
Cumulative effect of a change in accounting principle, net of minority interests (363) --
--------- ---------
NET LOSS $ (10,827) $ (12,755)
Series A Preferred Share distributions (5,751) (4,556)
Series B Preferred Share distributions (2,019) (2,019)
--------- ---------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (18,597) $ (19,330)
========= =========
BASIC EARNINGS PER SHARE DATA:
Loss available to common shareholders before discontinued operations and
cumulative effect of a change in accounting principle $ (0.18) $ (0.07)
Income from discontinued operations, net of minority interests 0.01 0.02
Impairment charges related to real estate assets from discontinued operations,
net of minority interests (0.02) (0.14)
Loss on real estate from discontinued operations, net of minority interests -- --
Cumulative effect of a change in accounting principle, net of minority interests -- --
--------- ---------
Net loss available to common shareholders - basic $ (0.19) $ (0.19)
========= =========
DILUTED EARNINGS PER SHARE DATA:
Loss available to common shareholders before discontinued operations and
cumulative effect of a change in accounting principle $ (0.18) $ (0.07)
Income from discontinued operations, net of minority interests 0.01 0.02
Impairment charges related to real estate assets from discontinued operations,
net of minority interests (0.02) (0.14)
Loss on real estate from discontinued operations, net of minority interests -- --
Cumulative effect of a change in accounting principle, net of minority interests -- --
--------- ---------
Net loss available to common shareholders - diluted $ (0.19) $ (0.19)
========= =========
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, 2003 10,800,000 $ 248,160 3,400,000 $ 81,923 25,121,863 $(460,148)
Issuance of Common Shares -- -- -- -- -- --
Exercise of Common Share Options -- -- -- -- -- --
Accretion of Discount on Employee
Stock Option Notes -- -- -- -- -- --
Issuance of Shares in Exchange for Operating
Partnership Units -- -- -- -- -- --
Preferred Equity Issuance 3,400,000 71,006 -- -- -- --
Stock Option Grants -- -- -- -- -- --
Amortization of Deferred Compensation
on Restricted Shares -- -- -- -- -- --
Dividends Paid -- -- -- -- -- --
Net Loss Available to Common Shareholders -- -- -- -- -- --
Unrealized Gain on Marketable Securities -- -- -- -- -- --
Unrealized Net Loss on Cash Flow Hedges -- -- -- -- -- --
---------- --------- --------- --------- ---------- ---------
SHAREHOLDERS' EQUITY, March 31, 2004 14,200,000 $ 319,166 3,400,000 $ 81,923 25,121,863 $(460,148)
========== ========= ========= ========= ========== ==========
Deferred
Common Shares Additional Compensation
------------------------ Paid-in on Restricted Accumulated
Shares Par Value Capital Shares (Deficit)
------------ --------- ---------- ------------- -----------
SHAREHOLDERS' EQUITY, December 31, 2003 124,396,168 $ 1,237 $2,245,683 $ (4,102) $ (877,120)
Issuance of Common Shares 1,836 -- 32 -- --
Exercise of Common Share Options 10,900 -- 173 -- --
Accretion of Discount on Employee
Stock Option Notes -- -- (63) -- --
Issuance of Shares in Exchange for Operating
Partnership Units 18,072 -- -- -- --
Preferred Equity Issuance -- -- -- -- --
Stock Option Grants -- -- (30) -- --
Amortization of Deferred Compensation
on Restricted Shares -- -- -- 326 --
Dividends Paid -- -- -- -- (37,262)
Net Loss Available to Common Shareholders -- -- -- -- (18,597)
Unrealized Gain on Marketable Securities -- -- -- -- --
Unrealized Net Loss on Cash Flow Hedges -- -- -- --
------------ --------- ---------- ------------- -----------
SHAREHOLDERS' EQUITY, March 31, 2004 124,426,976 $ 1,237 $2,245,795 $ (3,776) $ (932,979)
============ ========= ========== ============= ===========
Accumulated
Other
Comprehensive
Income Total
------------- -----------
SHAREHOLDERS' EQUITY, December 31, 2003 $ (13,829) $1,221,804
Issuance of Common Shares -- 32
Exercise of Common Share Options -- 173
Accretion of Discount on Employee
Stock Option Notes -- (63)
Issuance of Shares in Exchange for Operating
Partnership Units -- --
Preferred Equity Issuance -- 71,006
Stock Option Grants -- (30)
Amortization of Deferred Compensation
on Restricted Shares -- 326
Dividends Paid -- (37,262)
Net Loss Available to Common Shareholders -- (18,597)
Unrealized Gain on Marketable Securities 903 903
Unrealized Net Loss on Cash Flow Hedges (997) (997)
------------- ----------
SHAREHOLDERS' EQUITY, March 31, 2004 $ (13,923) $1,237,295
============= ==========
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 THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,827) $ (12,755)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 44,701 39,021
Residential Development cost of sales 17,169 13,591
Residential Development capital expenditures (24,319) (16,664)
Impairment charges related to real estate assets from discontinued 1,994 13,425
operations, net of minority interests
Loss on real estate from discontinued operations, net of minority
interests 47 288
Discontinued operations - depreciation and minority interests 612 3,101
Extinguishment of debt 1,939 --
Impairment charges related to real estate assets -- 1,200
Gain on joint venture of properties, net -- (100)
Minority interests (1,699) (1,425)
Cumulative effect of a change in accounting principle, net of 363 --
minority interests
Non-cash compensation 265 62
Equity in (earnings) loss from unconsolidated companies:
Office Properties (942) (1,458)
Resort/Hotel Properties 231 (743)
Residential Development Properties (87) (970)
Temperature-Controlled Logistics Properties 901 (1,507)
Other 67 1,029
Distributions received from unconsolidated companies:
Office Properties 758 565
Residential Development Properties -- 35
Other 284 --
Change in assets and liabilities, net of consolidations and
acquisitions:
Restricted cash and cash equivalents 47,977 19,204
Accounts receivable (5,784) 1,063
Deferred rent receivable (3,897) (817)
Income tax asset - current and deferred, net (12,087) (2,578)
Other assets (11,503) 1,591
Accounts payable, accrued expenses and other liabilities (46,802) (66,430)
--------- ---------
Net cash used in operating activities $ (639) $ (11,272)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of consolidation of previously consolidated entities $ 334 $ 11,374
Proceeds from property sales 30,659 1,116
Acquisition of investment properties (146,100) (2,000)
Development of investment properties (1,201) (522)
Property improvements - Office Properties (1,852) (2,211)
Property improvements - Resort/Hotel Properties (8,454) (2,404)
Tenant improvement and leasing costs - Office Properties (24,192) (12,456)
Residential Development Properties Investments (5,804) (7,064)
Decrease (increase) in restricted cash and cash equivalents 101,371 (1,341)
Defeasance investments (167,932) --
Return of investment in unconsolidated companies:
Office Properties 340 287
Resort/Hotel Properties 612 --
Temperature-Controlled Logistics Properties 90,000 --
Other 39 4,651
Investment in unconsolidated companies:
Office Properties (12) (52)
Resort/Hotel Properties -- (2)
Residential Development Properties (621) (1,038)
Temperature-Controlled Logistics Properties (2,403) (828)
(Increase) decrease in notes receivable (152) 16,743
--------- ---------
Net cash (used in) provided by investing activities $(135,368) $ 4,253
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs $ (4,343) $ (68)
Borrowings under Credit Facility 141,500 136,000
Payments under Credit Facility (211,500) (15,000)
Notes payable proceeds 280,035 10,000
Notes payable payments (108,958) (66,750)
Residential Development Properties notes payable borrowings 15,939 17,529
Residential Development Properties notes payable payments (7,429) (20,724)
Capital distributions - joint venture partner (2,562) (5,471)
Capital contributions - joint venture partner 508 132
Proceeds from exercise of share options 173 (9)
Common share repurchases held in Treasury -- (823)
Issuance of preferred shares - Series A 71,006 --
Series A Preferred Share distributions (5,991) (4,556)
Series B Preferred Share distributions (2,019) (2,019)
Dividends and unitholder distributions (43,910) (43,871)
--------- ---------
Net cash provided by financing activities $ 122,449 $ 4,370
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS $ (13,558) $ (2,649)
CASH AND CASH EQUIVALENTS,
Beginning of period 78,052 78,444
--------- ---------
CASH AND CASH EQUIVALENTS,
End of Period $ 64,494 $ 75,795
========= =========
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 March 31,
2004 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 are the consolidated subsidiaries of the Company that
owned or had an interest in real estate assets as of March 31, 2004: Operating
Partnership; Crescent Real Estate Funding I, L.P. ("Funding I"); Crescent Real
Estate Funding III, IV, and V, L.P. ("Funding III, IV, and V"); Crescent Real
Estate Funding VI, L.P. ("Funding VI"); Crescent Real Estate Funding VIII, L.P.
("Funding VIII"); Crescent Real Estate Funding X, L.P. ("Funding X"); Crescent
Real Estate Funding XII, L.P. ("Funding XII"); Crescent 707 17th Street, L.L.C.;
Crescent Spectrum Center, L.P.; Crescent Colonnade, L.L.C.; Mira Vista
Development Corp. ("MVDC"); Houston Area Development Corp. ("HADC"); Desert
Mountain Development Corporation ("DMDC"); Crescent Resort Development Inc.
("CRDI"); Crescent TRS Holdings Corp.
See Note 7, "Investments in Unconsolidated Companies," for a table that
lists the Company's ownership in significant unconsolidated joint ventures and
investments as of March 31, 2004.
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.
SEGMENTS
The assets and operations of the Company were divided into four
investment segments at March 31, 2004, 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 March 31, 2004:
o OFFICE SEGMENT consisted of 77 office properties (collectively
referred to as the "Office Properties"), located in 28
metropolitan submarkets in seven states, with an aggregate of
approximately 30.7 million net rentable square feet. Sixty seven
of the Office Properties are wholly-owned and ten are owned
through joint ventures, two of which are consolidated and eight
of which are unconsolidated.
o RESORT/HOTEL SEGMENT consisted of five luxury and destination
fitness resorts and spas with a total of 1,036 rooms/guest nights
and four upscale business-class hotel properties with a total of
1,771 rooms (collectively referred to as the "Resort/Hotel
Properties"). Eight of the Resort/Hotel Properties are
wholly-owned and one is owned through a joint venture that is
consolidated.
7
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of common stock representing interests of 98% to 100%
in four residential development corporations (collectively
referred to as the "Residential Development Corporations"), which
in turn, through partnership arrangements, owned in whole or in
part 25 upscale residential development properties (collectively
referred to as the "Residential Development Properties").
o TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in Vornado Crescent Portland Partnership
(the "Temperature-Controlled Logistics Partnership") and a 56%
non-controlling interest in the Vornado Crescent Carthage and KC
Quarry L.L.C. ("VCQ"). The Temperature-Controlled Logistics
Partnership owns all of the common stock, representing
substantially all of the economic interest, of AmeriCold
Realty Trust (the "Temperature-Controlled Logistics
Corporation"), a REIT. As of March 31, 2004, 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 March 31, 2004,
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 entities.
See Note 3, "Segment Reporting," for a table showing selected financial
information for each of these investment segments for the three months ended
March 31, 2004 and 2003, and total assets, consolidated property level
financing, consolidated other liabilities, and minority interests for each of
these investment segments at March 31, 2004 and December 31, 2003.
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with accounting principles generally accepted 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, 2003.
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, 2003.
ADOPTION OF NEW ACCOUNTING STANDARDS
FASB INTERPRETATION 46. On January 15, 2003, the FASB approved the
issuance of Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), as amended, 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 for financial periods ending after March 15, 2004, except for
Special Purpose Entities which had to be consolidated by December 31, 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
expected losses of the VIE's activities or entitled to receive a majority of the
entity's expected residual returns or both.
The adoption of FIN 46 did not have a material impact to the Company's
financial condition or results of operations. Due to the adoption of this
Interpretation and management's assumptions in application of the guidelines
stated in the Interpretation, the Company has consolidated GDW LLC, a subsidiary
of DMDC, as of December 31, 2003 and Elijah
8
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fulcrum Fund Partners, L.P. ("Elijah") as of January 1, 2004. Elijah is a
limited partnership whose purpose is to invest in the SunTx Fulcrum Fund, L.P.
SunTx Fulcrum Fund, L.P.'s objective is to invest in a portfolio of acquisitions
that offer the potential for substantial capital appreciation. While it was
determined that one of the Company's unconsolidated joint ventures, Main Street
Partners, L.P., and its investments in Canyon Ranch Las Vegas, L.L.C., CR
License, L.L.C. and CR License II, L.L.C. ("Canyon Ranch Entities") are VIEs
under FIN 46, the Company is not the primary beneficiary and is not required to
consolidate these entities under other GAAP. The Company's maximum exposure to
loss is limited to its equity investment of approximately $53.3 million in Main
Street Partners, L.P. and $5.1 million in the Canyon Ranch Entities at March 31,
2004.
Further, in connection with the Hughes Center acquisition, the Company
entered into an exchange agreement with a third party intermediary for six of
the Office Properties and the nine retail parcels. This agreement is for a
maximum term of 180 days and allows the Company to pursue favorable tax
treatment on other properties sold by the Company within this period. During the
180-day period, which will end on June 28, 2004, the third party intermediary is
the legal owner of the properties, although the Company controls the properties,
retains all of the economic benefits and risks associated with these properties
and indemnifies the third party intermediary and, therefore, the Company is
fully consolidating these properties. On the expiration of the 180-day period,
the Company will take legal ownership of the properties.
SIGNIFICANT ACCOUNTING POLICIES
STOCK-BASED COMPENSATION. Effective January 1, 2003, the Company
adopted the fair value expense recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," on a prospective basis as permitted
by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which requires that the fair value of stock options at the date of
grant be amortized ratably into expense over the appropriate vesting period.
During the three months ended March 31, 2004, 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"). Had compensation cost been determined based on the fair value at the
grant dates for awards under the Plans consistent with SFAS No. 123, the
Company's net loss and loss per share would have been reduced to the following
pro forma amounts:
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
(in thousands, except per share amounts) 2004 2003
- ---------------------------------------- -------- --------
Net loss available to common shareholders, as reported $(18,597) $(19,330)
Add: Stock-based employee compensation expense included in
reported net income 350 1
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of minority interest (859) (715)
-------- --------
Pro forma net loss $(19,106) $(20,044)
(Loss) earnings per share:
Basic/Diluted - as reported $ (0.19) $ (0.19)
Basic/Diluted - pro forma $ (0.19) $ (0.20)
MARKETABLE SECURITIES. The Company has classified and recorded its
marketable securities in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Realized gains or losses on the sale
of securities are recorded based on average cost. When a decline in the fair
value of marketable securities is determined to be other-than-temporary, the
cost basis is written down to fair value and the amount of the write-down is
included in earnings for the applicable period. A decline in the fair value of a
marketable security is deemed other-than-temporary if its cost basis has
exceeded its fair value for a period of six to nine months. Investments in
securities of non-publicly traded companies are reported at cost, as they are
not considered marketable under SFAS No. 115, and total $6.0 million and $6.1
million at March 31, 2004 and December 31, 2003, respectively.
9
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the carrying value, fair value and
unrealized gains and losses in Accumulated Other Comprehensive Income ("OCI") as
of March 31, 2004 and December 31, 2003 and the realized gains, unrecognized
holding losses and change in OCI for the three months ended March 31, 2004 and
2003 for the Company's marketable securities.
AS OF MARCH 31, 2004 AS OF DECEMBER 31, 2003
------------------------------------ ------------------------------------
(in thousands)
FAIR UNREALIZED FAIR UNREALIZED
TYPE OF SECURITY COST VALUE GAIN/(LOSS) COST VALUE GAIN/(LOSS)
- --------------------- ---------- ---------- ---------- ---------- ---------- ----------
Held to maturity(1) $ 177,552 $ 177,827 $ 275 $ 9,620 $ 9,621 $ 1
Trading(2) 7,895 8,168 N/A 4,473 4,714 N/A
Available for sale(3) 5,883 6,046 163 2,278 2,278 --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 191,330 $ 192,041 $ 438 $ 16,371 $ 16,613 $ 1
========== ========== ========== ========== ========== ==========
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------------------- --------------------------
(in thousands)
REALIZED CHANGE REALIZED CHANGE
TYPE OF SECURITY GAIN IN OCI GAIN IN OCI
-------- -------- -------- --------
Held to maturity(1) $ -- $ N/A $ -- $ N/A
Trading(2) 70 N/A -- N/A
Available for sale(3) -- 163 -- (79)
-------- -------- -------- --------
Total $ 70 $ 163 $ -- $ (79)
======== ======== ======== ========
- ----------
(1) Held to maturity securities are carried at unamortized cost and consist of
U.S. Treasury and government sponsored agency securities purchased for the
sole purpose of funding debt service payments on the LaSalle Note II. See
Note 8, "Notes Payable and Borrowings Under Credit Facility," for additional
information on the defeasance of LaSalle Note II.
(2) Trading securities consist of marketable securities purchased in connection
with the Company's dividend incentive unit program. These securities are
marked to market value on a monthly basis with the change in fair value
recognized in earnings.
(3) Available for sale securities consist of marketable securities which the
Company intends to hold for an indefinite period of time. These securities
are marked to market value on a monthly basis with the corresponding
unrealized gain or loss recorded in OCI.
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 months ended
March 31, 2004 and 2003 of basic and diluted earnings per share from "Loss
before discontinued operations and cumulative effect of a change in accounting
principle" to "Net loss available to common shareholders." The table also
includes weighted average shares on a basic and diluted basis.
FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------
2004 2003
-------------------------------- --------------------------------
Per Wtd. Per
Income Wtd. Avg. Share Income Avg. Share
(in thousands, except per share amounts) (Loss) Shares(1) Amount (Loss) Shares(1) Amount
- ---------------------------------------- -------- -------- -------- -------- -------- --------
BASIC/DILUTED EPS -
Loss before discontinued operations and cumulative
effect of a change in accounting principle $ (9,020) 98,993 $ (1,134) 99,218
Series A Preferred Share distributions (5,751) (4,556)
Series B Preferred Share distributions (2,019) (2,019)
-------- -------- -------- -------- -------- --------
Net loss available to common shareholders
before discontinued operations and cumulative
effect of a change in accounting principle $(16,790) 98,993 (0.18) $ (7,709) 99,218 (0.07)
Income from discontinued operations,
net of minority interests 597 0.01 2,092 0.02
Impairment charges related to real estate assets from
discontinued operations, net of minority interests (1,994) (0.02) (13,425) (0.14)
Loss on real estate from discontinued operations,
net of minority interests (47) -- (288) --
Cumulative effect of a change in accounting principle (363) -- -- --
-------- -------- -------- -------- -------- --------
Net loss available to common shareholders $(18,597) 98,993 (0.19) $(19,330) 99,218 (0.19)
======== ======== ======== ======== ======== ========
(1) Anti-dilutive shares not included are 554 and 4 for the three months ended
March 31, 2004 and 2003, respectively.
10
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This table presents supplemental cash flow disclosures for the three
months ended March 31, 2004 and 2003.
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: --------------------------
(in thousands) 2004 2003
-------------------------------------------------- --------- ----------
Interest paid on debt $ 36,946 $ 34,661
Interest capitalized - Resort/Hotel 75 --
Interest capitalized - Residential Development 3,829 4,239
Additional interest paid in conjunction with cash flow hedges 3,816 5,590
--------- ---------
Total interest paid $ 44,666 $ 44,490
========= =========
Cash paid for income taxes $ 9,950 $ 223
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH 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 $ 1 $ 7
Assumption of debt in conjunction with acquisitions of Office
Properties and undeveloped land 102,307 --
Amortization of debt premium 418 --
Non-cash compensation 319 --
SUPPLEMENTAL SCHEDULE OF 2003 CONSOLIDATION OF DBL, MVDC, HADC, AND 2004
CONSOLIDATION OF ELIJAH:
Net investment in real estate $ -- $ (9,692)
Accounts receivable, net (848) (3,057)
Investments in unconsolidated companies (2,478) 13,552
Notes receivable, net 4,363 (25)
Income tax asset - current and deferred, net (274) (3,564)
Other assets, net -- (820)
Notes payable -- 312
Accounts payable, accrued expenses and other liabilities -- 12,696
Minority interest - consolidated real estate partnerships (140) 1,972
Other comprehensive income, net of tax 139 --
Cumulative effect of a change in accounting principle (428) --
--------- ---------
Increase in cash $ 334 $ 11,374
========= =========
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 accordance with GAAP;
o excluding gains (losses) from sales of depreciable operating
property;
o excluding extraordinary items (as defined by GAAP);
o plus depreciation and amortization of real estate assets; and
o after adjustments for unconsolidated partnerships and joint
ventures.
The Company calculates FFO - diluted in the same
manner, except that Net Income (Loss) is replaced by Net Income (Loss) Available
to Common Shareholders and the Company includes the effect of operating
partnership unitholder minority interests.
11
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 -
diluted and FFO appropriate measures of performance for an equity REIT and for
its investment segments. However, FFO - diluted and FFO should not be considered
as alternatives to net income determined in accordance with GAAP as an
indication of the Company's operating performance.
The Company's measures of FFO - diluted and 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
months ended March 31, 2004 and 2003, and total assets, consolidated property
level financing, consolidated other liabilities, and minority interests for each
of the segments at March 31, 2004 and December 31, 2003, are presented below:
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED MARCH 31, 2004
--------------------------------------------------------------------------------------
TEMPERATURE
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(IN THOUSANDS) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
- ----------------------------------------- --------- ------------ ----------- ----------- ----------- ---------
Total Property revenue $ 123,450 $ 61,396 $ 47,688 $ -- $ -- $ 232,534
Total Property expense 58,935 49,343 40,562 -- -- 148,840
--------- ------------ ----------- ----------- ----------- ---------
Income from Property Operations $ 64,515 $ 12,053 $ 7,126 $ -- $ -- $ 83,694
Total other income (expense) (29,402) (6,849) (3,050) (901) (55,824)(3) (96,026)
Minority interests and income taxes (432) 1,466 1,236 -- 1,042 3,312
Discontinued operations -income, loss
on real estate and impairment charges
related to real estate assets (1,402) -- 38 -- (80) (1,444)
Cumulative effect of a change in
accounting principle -- -- -- -- (363) (363)
--------- ------------ ----------- ----------- ----------- ---------
Net income (loss) $ 33,279 $ 6,670 $ 5,350 $ (901) $ (55,225) $ (10,827)
--------- ------------ ----------- ----------- ----------- ---------
Depreciation and amortization of real
estate assets $ 30,223 $ 6,360 $ 1,401 $ -- $ 57 $ 38,041
(Gain) loss on property sales, net (289) -- -- -- 345 56
Impairment charges related to real
estate assets 2,351 -- -- -- -- 2,351
Adjustments for investment in
unconsolidated companies 2,408 -- (577) 5,795 -- 7,626
Unitholder minority interest -- -- -- -- (1,938) (1,938)
Series A Preferred share distributions -- -- -- -- (5,751) (5,751)
Series B Preferred share distributions -- -- -- -- (2,019) (2,019)
--------- ------------ ----------- ----------- ----------- ---------
Adjustments to reconcile net income
(loss) to funds from operations -
diluted $ 34,693 $ 6,360 $ 824 $ 5,795 $ (9,306) $ 38,366
--------- ------------ ----------- ----------- ----------- ---------
Funds from operations before
impairment charges related to real
estate assets - diluted $ 67,972 $ 13,030 $ 6,174 $ 4,894 $ (64,531) $ 27,539
Impairment charges related to real
estate assets (2,351) -- -- -- -- (2,351)
--------- ------------ ----------- ----------- ----------- ---------
Funds from operations after impairment
charges related to real estate
assets - diluted $ 65,621 $ 13,030 $ 6,174 $ 4,894 $ (64,531) $ 25,188
========= ============ =========== =========== =========== =========
See footnotes to the following table.
12
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION: FOR THE THREE MONTHS ENDED MARCH 31, 2003
--------------------------------------------------------------------------------
TEMPERATURE
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(IN THOUSANDS) SEGMENT(1) SEGMENT SEGMENT(2) SEGMENT AND OTHER TOTAL
- ----------------------------------------- ---------- ------------ ----------- ----------- ----------- --------
Total Property revenue $ 120,715 $ 63,721 $ 43,721 $ -- $ -- $228,157
Total Property expense 57,632 49,740 41,430 -- -- 148,802
---------- ------------ ----------- ----------- ----------- --------
Income from Property Operations $ 63,083 $ 13,981 $ 2,291 $ -- $ -- $ 79,355
Total other income (expense) (25,398) (5,250) (1,674) 1,507 (53,627)(3) (84,442)
Minority interests and income taxes (154) 762 2,794 -- 551 3,953
Discontinued operations -income, loss
on real estate and impairment charges
related to real estate assets (12,793) -- 20 -- 1,152 (11,621)
---------- ------------ ----------- ----------- ----------- --------
Net income (loss) $ 24,738 $ 9,493 $ 3,431 $ 1,507 $ (51,924) $(12,755)
---------- ------------ ----------- ----------- ----------- --------
Depreciation and amortization of real
estate assets $ 29,439 $ 5,744 $ 1,118 $ -- $ -- $ 36,301
(Gain) loss on property sales, net (64) -- -- -- 290 226
Impairment charges related to real
estate assets 15,000 -- -- -- 2,028 17,028
Adjustments for investment in
unconsolidated companies 2,822 394 739 5,510 22 9,487
Unitholder minority interest -- -- -- -- (2,295) (2,295)
Series A Preferred share distributions -- -- -- -- (4,556) (4,556)
Series B Preferred share distributions -- -- -- -- (2,019) (2,019)
---------- ------------ ----------- ----------- ----------- --------
Adjustments to reconcile net income
(loss) to funds from operations -
diluted $ 47,197 $ 6,138 $ 1,857 $ 5,510 $ (6,530) $ 54,172
---------- ------------ ----------- ----------- ----------- --------
Funds from operations before
impairment charges related to real
estate assets - diluted $ 71,935 $ 15,631 $ 5,288 $ 7,017 $ (58,454) $ 41,417
Impairment charges related to real
estate assets (15,000) -- -- -- (2,028) (17,028)
---------- ------------ ----------- ----------- ----------- --------
Funds from operations after impairment
charges related to real estate
assets - diluted $ 56,935 $ 15,631 $ 5,288 $ 7,017 $ (60,482) $ 24,389
========== ============ =========== =========== =========== ========
See footnotes to the following table.
TEMPERATURE
RESIDENTIAL CONTROLLED
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS CORPORATE
(IN MILLIONS) SEGMENT SEGMENT SEGMENT(4) SEGMENT AND OTHER TOTAL
- -------------------------------------------- ------- ------------ ----------- ----------- ----------- -------
TOTAL ASSETS BY SEGMENT:(5)
Balance at March 31, 2004 $ 2,663 $ 495 $ 757 $ 212 $ 352(6) $ 4,479
Balance at December 31, 2003 2,502 468 707 300 336 4,313
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at March 31, 2004 (1,513) (133) (96) -- (1,029)(7) (2,771)
Balance at December 31, 2003 (1,459) (138) (88) -- (874)(7) (2,559)
CONSOLIDATED OTHER LIABILITIES:
Balance at March 31, 2004 (76) (44) (143) -- (63) (326)
Balance at December 31, 2003 (119) (27) (109) -- (122) (377)
MINORITY INTERESTS:
Balance at March 31, 2004 (9) (6) (30) -- (100) (145)
Balance at December 31, 2003 (9) (7) (31) -- (109) (156)
- ----------
(1) The property revenue includes lease termination fees (net of the write-off
of deferred rent receivables) of approximately $1.3 million and $2.0
million for the three months ended March 31, 2004 and 2003, respectively.
(2) The Company sold its interest in The Woodlands Land Development Company,
L.P. on December 31, 2003.
(3) For purposes of this Note, Corporate and Other includes the total of:
interest and other income, corporate general and administrative expense,
interest expense, amortization of deferred financing costs, extinguishment
of debt, other expenses, and equity in net income of unconsolidated
companies-other.
(4) The Company's net book value for the Residential Segment includes total
assets, consolidated property level financing, consolidated other
liabilities and minority interest totaling $488 million at March 31, 2004.
The primary components of net book value are $319 million for CRDI,
consisting of Tahoe Mountain Resort properties of $171 million, Denver
development properties of $60 million and Colorado Mountain development
properties of $88 million , $138 million for Desert Mountain and $31
million for other land development properties.
(5) Total assets by segment are inclusive of investments in unconsolidated
companies.
(6) Includes non-income producing land held for investment or development of
$80.8 million and U.S. Treasury and government sponsored agency securities
of $177.6 million.
(7) Inclusive of Corporate bonds, credit facility, the $75 million Fleet Term
Loan and Funding II defeasance.
13
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ASSET ACQUISITIONS
OFFICE PROPERTIES
During January and February 2004, in accordance with the original
purchase contract, the Company acquired an additional five Class A Office
Properties and seven retail parcels located within Hughes Center in Las Vegas,
Nevada from the Rouse Company. One of these Office Properties is owned through a
joint venture in which the Company acquired a 67% interest. The remaining four
Office Properties are wholly-owned by the Company. The Company acquired these
five Office Properties and seven retail parcels for approximately $175.3
million, funded by the Company's assumption of approximately $85.4 million in
mortgage loans and by a portion of the proceeds from the sale of the Company's
interests in The Woodlands on December 31, 2003. The Company recorded the loans
assumed at their fair value of approximately $93.2 million, which includes $7.8
million of premium. The five Office properties are included in the Company's
Office Segment.
On March 31, 2004, the Company acquired Dupont Centre, a 250,000 square
foot Class A office property, located in the John Wayne Airport submarket of
Irvine, California. The Company acquired the Office Property for approximately
$54.3 million, funded by a draw on the Company's credit facility. This Office
Property is wholly-owned and included in the Company's Office Segment.
UNDEVELOPED LAND
On March 1, 2004, in accordance with the agreement to acquire the
Hughes Center Properties, the Company completed the purchase of two tracts of
undeveloped land in Hughes Center from the Rouse Company for $10.0 million. The
purchase was funded by a $7.5 million loan from the Rouse Company and a draw on
the Company's credit facility.
5. DISCONTINUED OPERATIONS
In accordance with SFAS No. 144,"Accounting for the Impairment or
Disposal of Long-Lived Assets," the results of operations of the assets sold or
held for sale have been presented as "Income from discontinued operations, net
of minority interests," gain or loss on the assets sold or held for sale have
been presented as "Loss on real estate from discontinued operations, net of
minority interests" and impairments on the assets sold or held for sale have
been presented as "Impairment charges related to real estate assets from
discontinued operations, net of minority interests" in the accompanying
Consolidated Statements of Operations for the three months ended March 31, 2004
and 2003. 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 March 31, 2004 and December 31, 2003.
ASSETS SOLD
On March 23, 2004, the Company completed the sale of the 1800 West Loop
South Office Property in Houston, Texas. The sale generated net proceeds of
approximately $28.2 million and a net gain of approximately $0.2 million, net of
minority interests. The Company previously recorded an impairment charge of
approximately $13.9 million, net of minority interest, during the year ended
December 31, 2003. The proceeds from the sale were used primarily to pay down
the Company's credit facility. This property was wholly-owned.
On March 31, 2004, the Company sold its last remaining behavioral
healthcare property. The sale generated net proceeds of approximately $2.0
million and a net loss of approximately $0.3 million, net of minority interests.
ASSETS HELD FOR SALE
OFFICE SEGMENT
The following Office Properties are classified as held for sale as of
March 31, 2004.
PROPERTY LOCATION
-------- --------
Liberty Plaza(1) Dallas, Texas
12404 Park Central Dallas, Texas
3333 Lee Parkway Dallas, Texas
5050 Quorum(2) Dallas, Texas
Addison Tower(2) Dallas, Texas
Ptarmigan Place(2) Denver, Colorado
- ----------
(1) This property was sold on April 13, 2004.
(2) The Company has entered into contracts to sell these properties. The sales
are expected to close in the second quarter of 2004.
14
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major asset classes of the properties
held for sale.
(in thousands) MARCH 31, 2004(1) DECEMBER 31, 2003(2)
------------------------------------------ -------------------- --------------------
Land $ 10,320 $ 15,291
Buildings and improvements 105,873 138,017
Accumulated depreciation (23,558) (29,754)
Other assets, net 3,312 4,361
-------------------- --------------------
Net investment in real estate $ 95,947 $ 127,915
==================== ====================
- ----------
(1) Includes six Office Properties and other assets.
(2) Includes seven Office Properties, one behavioral healthcare property and
other assets.
The following tables present total revenues, operating and other expenses,
depreciation and amortization, unitholder minority interests, impairments of
real estate assets and realized loss on sale of properties for the three months
ended March 31, 2004 and 2003, for properties included in discontinued
operations.
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------------
(in thousands) 2004 2003
-------------- --------------- ---------------
Total revenues $ 4,462 $ 9,367
Operating and other expenses (3,280) (4,271)
Depreciation and amortization (478) (2,630)
Unitholder minority interests (107) (374)
--------------- ---------------
Income from discontinued operations, net of minority interests $ 597 $ 2,092
=============== ===============
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------------
(in thousands) 2004 2003
-------------- --------------- ---------------
Impairment charges related to real estate assets $ (2,351) $ (15,828)
Unitholder minority interests 357 2,403
--------------- ---------------
Impairment charges related to real estate assets from discontinued
operations, net of minority interests $ (1,994) $ (13,425)
=============== ===============
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------------
(in thousands) 2004 2003
-------------- --------------- ---------------
Realized loss on sale of properties $ (56) $ (339)
Unitholder minority interests 9 51
--------------- ---------------
Loss on sale of real estate from discontinued operations, net of
minority interests $ (47) $ (288)
=============== ===============
15
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
AmeriCold Logistics, a limited liability company owned 60% by Vornado
Operating L.P. and 40% by a subsidiary of Crescent Operating, Inc. ("COPI"), 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 March
2, 2004, the Temperature-Controlled Logistics Corporation and AmeriCold
Logistics amended the leases to further extend the deferred rent period to
December 31, 2005, from December 31, 2004. The parties previously extended the
deferred rent period to December 31, 2004 from December 31, 2003, on March 7,
2003.
Under terms of the leases, AmeriCold Logistics elected to defer $10.8
million of the total $38.9 million of rent payable for the three months ended
March 31, 2004. The Company's share of the deferred rent was $4.3 million. The
Company recognizes rental income from the Temperature-Controlled Logistics
Properties when earned and collected and has not recognized the $4.3 million of
deferred rent in equity in net income of the Temperature-Controlled Logistics
Properties for the three months ended March 31, 2004. As of March 31, 2004, the
Temperature-Controlled Logistics Corporation's deferred rent and valuation
allowance from AmeriCold Logistics were $93.2 million and $85.1 million,
respectively, of which the Company's portions were $37.3 million and $34.0
million, respectively.
On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a $254.4 million mortgage financing with Morgan Stanley Mortgage
Capital Inc., secured by 21 of its owned and seven of its leased
temperature-controlled logistics properties. The loan matures in April 2009,
bears interest at LIBOR plus 295 basis points (with a LIBOR floor of 1.5% with
respect to $54.4 million of the loan) and requires principal payments of $5.0
million annually. The net proceeds to the Temperature-Controlled Logistics
Corporation were approximately $225.0 million, after closing costs and the
repayment of approximately $12.9 million in existing mortgages. On February 6,
2004, the Temperature-Controlled Logistics Corporation distributed cash of
approximately $90.0 million to the Company.
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.
On January 20, 2004, VCQ purchased $6.1 million of trade receivables
from Americold Logistics at a 2% discount. VCQ used cash from a $6.0 million
contribution from its owners, of which approximately $2.4 million represented
the Company's contribution for the purchase of the trade receivables. The
receivables were collected during the first quarter of 2004. On March 29, 2004,
VCQ purchased an additional $4.1 million of receivables from AmeriCold Logistics
at a 2% discount. VCQ used cash from collection of the trade receivables
previously purchased. The remaining $2.0 million was distributed to its owners,
of which $0.8 million was received by the Company on April 1, 2004.
16
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVESTMENTS IN UNCONSOLIDATED COMPANIES
The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and investments as of March 31, 2004.
COMPANY'S OWNERSHIP
ENTITY CLASSIFICATION AS OF MARCH 31, 2004
- ------------------------------------------------------- ------------------------------------ -------------------------
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 Five Post Oak Park L.P. Office (Five Post Oak - Houston) 30.0%(3)
Crescent One BriarLake Plaza, L.P. Office (BriarLake Plaza - Houston) 30.0%(4)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0%(5)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower-Austin) 20.0%(6)
Houston PT Three Westlake Office Limited Partnership Office (Three Westlake Park - Houston) 20.0%(6)
Houston PT Four Westlake Office Limited Partnership Office (Four Westlake Park-Houston) 20.0%(6)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0%(7)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0%(8)
Blue River Land Company, L.L.C. Other 50.0%(9)
Canyon Ranch Las Vegas, L.L.C. Other 50.0%(10)
EW Deer Valley, L.L.C. Other 41.7%(11)
CR License, L.L.C. Other 30.0%(12)
CR License II, L.L.C. Other 30.0%(13)
SunTx Fulcrum Fund, L.P. Other 23.5%(14)
SunTx Capital Partners, L.P. Other 14.4%(15)
G2 Opportunity Fund, L.P. ("G2") Other 12.5%(16)
- ----------
(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 70% interest in Crescent Five Post Oak Park, L.P. is owned
by an affiliate of General Electric Pension Fund Trust.
(4) The remaining 70% interest in Crescent One BriarLake Plaza, L.P. is owned
by affiliates of JP Morgan Fleming Asset Management, Inc.
(5) 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.
(6) The remaining 80% interest in each of Austin PT BK One Tower Office
Limited Partnership, Houston PT Three Westlake Office Limited Partnership
and Houston PT Four Westlake Office Limited Partnership is owned by an
affiliate of General Electric Pension Fund Trust.
(7) The remaining 44% in Vornado Crescent Carthage and KC Quarry, L.L.C. is
owned by Vornado Realty Trust, L.P.
(8) The remaining 60% interest in Vornado Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.
(9) The remaining 50% interest in Blue River Land Company, L.L.C. is owned by
parties unrelated to the Company.
(10) Of the remaining 50% interest in Canyon Ranch Las Vegas, L.L.C., 35% is
owned by an affiliate of the management company of two of the Company's
Resort/Hotel Properties and 15% is owned by the Company through its
investment in CR License II, L.L.C.
(11) The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
unrelated to the Company. EW Deer Valley, L.L.C. was formed to acquire,
hold and dispose of its 3.3% ownership interest in Empire Mountain
Village, L.L.C.
(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 70% interest in CR License II, L.L.C is owned by an
affiliate of the management company of two of the Company's Resort/Hotel
Properties.
(14) SunTx Fulcrum Fund, L.P.'s objective is to invest in a portfolio of
acquisitions that offer the potential for substantial capital
appreciation. Of the remaining 76.5% of SunTx Fulcrum Fund, L.P., 37.1% is
owned by SunTx Capital Partners, L.P. and the remaining 39.4% is owned by
a group of individuals unrelated to the Company.
(15) The remaining 85.6% interest in SunTx Capital Partners, L.P. is owned by
parties unrelated to the Company.
(16) G2 was formed for the purpose of investing in commercial mortgage backed
securities and other commercial real estate investments. The remaining
87.5% interest in G2 is owned by Goff-Moore Strategic Partners, L.P.
("GMSPLP") and by parties unrelated to the Company. G2 is managed and
controlled by an entity that is owned equally by GMSPLP and GMAC
Commercial Mortgage Corporation ("GMACCM"). The ownership structure of
GMSLP consists of an approximately 86% limited partnership interest owned
directly and indirectly by Richard E. Rainwater, Chairman of the Board of
Trust Managers of the Company, and an approximately 14% general
partnership interest, of which approximately 6% is owned by Darla Moore,
who is married to Mr. Rainwater, and approximately 6% is owned by John C.
Goff, Vice-Chairman of the Company's Board of Trust Managers and Chief
Executive Officer of the Company. The remaining approximately 2% general
partnership interest is owned by unrelated parties.
17
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The unconsolidated entities that are included under the headings on
the following tables are summarized below.
Balance Sheets as of March 31, 2004:
o Office - This includes Main Street Partners, L.P., Houston PT Three
Westlake Office Limited Partnership, Houston PT Four Westlake Office
Limited Partnership, Austin PT BK One Tower Office Limited
Partnership, Crescent 5 Houston Center, L.P., Crescent Miami Center,
L.L.C., Crescent Five Post Oak Park L.P. and Crescent One BriarLake
Plaza, L.P.;
o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ; and
o Other - This includes Manalapan Hotel Partners, L.L.C., Blue River
Land Company, L.L.C., EW Deer Valley, L.L.C., CR License, L.L.C., CR
License II, L.L.C., Canyon Ranch Las Vegas, L.L.C., SunTx Fulcrum
Fund, L.P., SunTx Capital Partners, L.P. and G2.
Balance Sheets as of December 31, 2003:
o Office - This includes Main Street Partners, L.P., Houston PT Three
Westlake Office Limited Partnership, Houston PT Four Westlake Office
Limited Partnership, Austin PT BK One Tower Office Limited
Partnership, Crescent 5 Houston Center, L.P., Crescent Miami Center,
L.L.C., Crescent Five Post Oak Park L.P. and Crescent One BriarLake
Plaza, L.P.;
o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ; and
o Other - This includes Manalapan Hotel Partners, L.L.C., Blue River
Land Company, L.L.C., EW Deer Valley, L.L.C., CR License, L.L.C., CR
License II, L.L.C., Canyon Ranch Las Vegas, L.L.C., SunTx Fulcrum
Fund, L.P. and G2.
Summary Statements of Operations for the three months ended March 31,
2004:
o Office - This includes Main Street Partners, L.P., Houston PT Three
Westlake Office Limited Partnership, Houston PT Four Westlake Office
Limited Partnership, Austin PT BK One Tower Office Limited
Partnership, Crescent 5 Houston Center, L.P., Crescent Miami Center,
L.L.C., Crescent Five Post Oak Park L.P. and Crescent One BriarLake
Plaza, L.P.;
o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ; and
o Other - This includes the Blue River Land Company, L.L.C., EW Deer
Valley, L.L.C., CR License, L.L.C., CR License II, L.L.C., Canyon
Ranch Las Vegas, L.L.C., SunTx Fulcrum Fund, L.P., SunTx Capital
Partners, L.P. and G2.
Summary Statements of Operations for the three months ended March 31,
2003:
o Office - This includes Main Street Partners, L.P., Houston PT Three
Westlake Office Limited Partnership, Houston PT Four Westlake Office
Limited Partnership, Austin PT BK One Tower Office Limited
Partnership, Crescent 5 Houston Center, L.P., Crescent Miami Center,
L.L.C, Crescent Five Post Oak Park L.P. and Woodlands CPC;
o Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;
o Other - This includes Manalapan Hotel Partners, L.L.C., the
Woodlands Land Development Company, L.P., Blue River Land Company,
L.L.C., CR License, L.L.C., CR License II, L.L.C., the Woodlands
Operating Company and Canyon Ranch Las Vegas, L.L.C., SunTx Fulcrum
Fund, L.P. and G2.
18
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS:
AS OF MARCH 31, 2004
---------------------------------------------------------------
TEMPERATURE-
CONTROLLED
(IN THOUSANDS) OFFICE LOGISTICS OTHER TOTAL
- ----------------------------------- ------------ ------------ ------------ ------------
Real estate, net $ 750,874 $ 1,172,980
Cash 24,344 20,501
Other assets 53,830 110,677
------------ ------------
Total assets $ 829,048 $ 1,304,158
============ ============
Notes payable $ 514,153 $ 785,861
Notes payable to the Company -- --
Other liabilities 21,062 7,179
Equity 293,833 511,118
------------ ------------
Total liabilities and equity $ 829,048 $ 1,304,158
============ ============
Company's share of
unconsolidated debt $ 172,018 $ 314,344 $ 2,357 $ 488,719
============ ============ ============ ============
Company's investments
in unconsolidated
companies $ 102,555 $ 212,392 $ 43,159 $ 358,106
============ ============ ============ ============
BALANCE SHEETS:
AS OF December 31, 2003
---------------------------------------------------------------
TEMPERATURE-
CONTROLLED
(IN THOUSANDS) OFFICE LOGISTICS OTHER TOTAL
- ----------------------------------- ------------ ------------ ------------ ------------
Real estate, net $ 754,882 $ 1,187,387
Cash 31,309 12,439
Other assets 51,219 88,668
------------ ------------
Total assets $ 837,410 $ 1,288,494
============ ============
Notes payable $ 515,047 $ 548,776
Notes payable to the Company -- --
Other liabilities 29,746 11,084
Equity 292,617 728,634
------------ ------------
Total liabilities and equity $ 837,410 $ 1,288,494
============ ============
Company's share of
unconsolidated debt $ 172,376 $ 219,511 $ 2,495 $ 394,382
============ ============ ============ ============
Company's investments
in unconsolidated
companies $ 102,519 $ 300,917 $ 40,538 $ 443,974
============ ============ ============ ============
19
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY STATEMENTS OF OPERATIONS:
For the three months ended MARCH 31, 2004
---------------------------------------------------------------
TEMPERATURE-
CONTROLLED
(IN THOUSANDS) OFFICE LOGISTICS OTHER(1) TOTAL
- ----------------------------------- ------------ ------------ ------------ ------------
Total revenues $ 26,893 $ 30,433
Expenses:
Operating expense 11,247 6,072(2)
Interest expense 6,305 12,512
Depreciation and amortization 5,551 14,610
Other (income) expense -- (863)
------------ ------------
Total expenses $ 23,103 $ 32,331
------------ ------------
Net income, impairments and
gain (loss) on real estate
from discontinued operations $ 3,790 $ (1,898) $ (52)
============ ============ ============
Company's equity in net
income (loss) of
unconsolidated companies $ 942 $ (901) $ (211) $ (170)
============ ============ ============ ============
SUMMARY STATEMENTS OF OPERATIONS:
For the three months ended MARCH 31, 2003
---------------------------------------------------------------
TEMPERATURE-
CONTROLLED
(IN THOUSANDS) OFFICE LOGISTICS OTHER(1) TOTAL
- ----------------------------------- ------------ ------------ ------------ ------------
Total revenues $ 34,373 $ 34,032
Expenses:
Operating expense 14,708 6,008(2)
Interest expense 6,194 10,244
Depreciation and amortization 7,865 14,643
Other (income) expense -- (615)
------------ ------------
Total expenses $ 28,767 $ 30,280
------------ ------------
Net income, impairments and
gain (loss) on real estate
from discontinued operations $ 5,606 $ 3,752 $ 3,351
============ ============ ============
Company's equity in net
income (loss) of
unconsolidated companies $ 1,458 $ 1,507 $ 684 $ 3,649
============ ============ ============ ============
- ----------
(1) The Company sold its interest in The Woodlands Land Development Company,
L.P. on December 31, 2003.
(2) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the total combined assets).
20
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNCONSOLIDATED DEBT ANALYSIS
The following table shows, as of March 31, 2004, information about the
Company's share of unconsolidated fixed and variable rate debt and does not take
into account any extension options, hedge arrangements or the entities'
anticipated pay-off dates.
COMPANY
BALANCE SHARE OF INTEREST
OUTSTANDING BALANCE AT RATE AT
MARCH 31, MARCH 31, MARCH 31, FIXED/VARIABLE
DESCRIPTION 2004 2004 2004 MATURITY DATE SECURED/UNSECURED
- ----------- ------------- ---------- ------------- ------------- -----------------
(in thousands)
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent-Portland Partnership - 40% Company
Goldman Sachs (1) $ 492,997 $ 197,199 6.89% 5/11/2023 Fixed/Secured
Morgan Stanley (2) 253,957 101,583 4.04% 4/9/2009 Variable/Secured
Various Capital Leases 35,857 14,342 4.84 to 13.63% 6/1/2006 to Fixed/Secured
4/1/2017
Various Mortgage Notes 3,050 1,220 7.00 to 12.88% 4/1/2004 to Fixed/Secured
---------- ------- 4/1/2009
$ 785,861 $ 314,344
---------- -------
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Company (3)(4) $ 129,961 $ 64,980 5.47% 12/1/2004 Variable/Secured
Crescent 5 Houston Center, L.P. - 25% Company 90,000 22,500 5.00% 10/1/2008 Fixed/Secured
Crescent Miami Center, LLC - 40% Company 81,000 32,400 5.04% 9/25/2007 Fixed/Secured
Crescent One BriarLake Plaza, L.P. - 30% Company 50,000 15,000 5.40% 11/1/2010 Fixed/Secured
Houston PT Four Westlake Office Limited Partnership -
20% Company 47,921 9,584 7.13% 8/1/2006 Fixed/Secured
Crescent Five Post Oak Park, L.P. - 30% Company 45,000 13,500 4.82% 1/1/2008 Fixed/Secured
Austin PT BK One Tower Office Limited Partnership -
20% Company
37,272 7,454 7.13% 8/1/2006 Fixed/Secured
Houston PT Three Westlake Office Limited Partnership -
20% Company 33,000 6,600 5.61% 9/1/2007 Fixed/Secured
---------- ----------
$ 514,154 $ 172,018
---------- ----------
RESIDENTIAL SEGMENT:
Blue River Land Company, L.L.C. - 50% Company (5) $ 4,714 $ 2,357 4.10% 6/30/2004 Variable/Secured
========== ==========
TOTAL UNCONSOLIDATED DEBT $1,304,729 $ 488,719
========== ==========
FIXED RATE/WEIGHTED AVERAGE 6.63% 13.8 years
VARIABLE RATE/WEIGHTED AVERAGE 4.59% 3.3 years
------------- ----------
TOTAL WEIGHTED AVERAGE 5.93% 10.2 years
============= ==========
- ---------
(1) URS Real Estate, L.P. and AmeriCold Real Estate, L.P., subsidiaries of the
Temperature-Controlled Logistics Corporation, expect to repay this note on
the Optional Prepayment Date of April 11, 2008. The overall weighted
average maturity would be 3.98 years based on this date.
(2) On February 5, 2004, the Temperature-Controlled Logistics Corporation
completed a mortgage financing with Morgan Stanley Mortgage Capital, Inc.,
secured by twenty-one of its owned and seven of its leased properties. The
loan bears interest at LIBOR + 295 basis points (with a LIBOR floor of 1.5%
with respect to $54.4 million of the loan) and requires principal payments
of $5.0 million annually.
(3) Senior Note - Note A: $81.8 million at variable interest rate, LIBOR + 189
basis points, $4.8 million at variable interest rate, LIBOR + 250 basis
points with a LIBOR floor of 2.50%. Note B: $24.1 million at variable
interest rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%.
Mezzanine Note - $19.3 million at variable interest rate, LIBOR + 890 basis
points with a LIBOR floor of 3.0%. Interest-rate cap agreement maximum
LIBOR of 4.52% on all notes. All notes amortized based on a 25-year
schedule.
(4) The Company and its joint venture partner obtained separate Letters
of Credit to guarantee the repayment of u